IMO 2020 is a big change to the refining industry, but clearly it is just the start. The shipping industry is already talking about next steps for reducing its environmental impact (CO2 reductions, NOx emissions). This is on top of a background of geopolitical issues, low investment in South American refining, motor fuel demand shifting away from diesel, and some 1.5 million barrels of refining capacity at risk. With the market uncertainty and this continual regulatory impact, looking at the longer term and doing fundamental business strategies well is the only play.
KBC sees a future where high sulphur transportation fuels don’t exist, be it on land or on the water. The abundance today and in the future of heavy sour crudes suggests investment in the right asset mix; firstly, to process discounted crudes and secondly to maximize their margin potential.
It is well reported that sour crudes (Colombia, Ecuador, Venezuela, Canada, etc) are going to be discounted against the index crudes: WTI and Brent. Countries that are exporters of sour crude and importers of high-priced clean product will see export revenue decline and import cash spend increase resulting in a large drain on its balance of trade. There are probably good deals to be done for those that can run sour crude!
For maximizing margin, refiners will need to adjust to higher output of petrochemicals, balanced with the right mix of liquid transport fuels. In the longer term, this means eliminating the need for residue bunker fuel. For the shipping industry, residue bunker demand is in a steady terminal decline. Shipowners will be looking to keep costs low and operations efficient. When CO2 has a higher cost and shipping faces more stringent environmental controls, bunkering will evolve to a mix of liquefied natural gas (LNG) and cleaner distillates, especially for smaller ships.
Clean products and petrochemicals are the future. A refiner that installs assets to utilize cheap high sulphur material to make clean products like FCC feed, diesel and gasoline and petrochemicals, will see durable returns. The US refiners didn’t install cokers to stop making bunker, they did it because high sulphur crudes were cheap and the margins for refining them were exceptional. Today the same dynamic exists, with Canadian crudes trading at up to $35 per barrel below WTI, which is in turn already $10 per barrel lower than Brent. There is big money to be made from the right refinery configuration.
Some in the industry have focused on the IMO regulations as an end, rather than considering 2020 to be the start of a new era. Forward-looking refiners will use this as a stepping stone on the path ahead. Strong cash flow from efficient operation can be reinvested to drive further automation, clean fuels production and operational excellence. Post IMO 2020, refiners need a clear line of sight for the digital future. A resilient configuration and a robust technology platform are the best places to start.
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