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IMO impact clouding your 2020 vision

December 18, 2019 Stephen George

It’s just days now until new global bunker fuel regulations IMO 2020 go live in January 2020. The bets are in, the money has been spent by both shipowners and refiners, the market is swinging and it’s time to grab the popcorn and see how this all plays out. It’s going to be a nervous few months.

For some who have chosen to ride the wave without investment, the market is already showing some cause for concern. High sulfur fuel oil cracks are more than $30/bbl below Brent, while differentials between HSFO and compliant VLSFO are more than $300 per tonne in Europe, which is still plenty of incentive for shipowners to consider the scrubber route – a trend we expect to continue in 2020. Gasoline cracks have weakened in recent weeks while distillate cracks have risen off recent lows, but still remain challenged on weaker demand occasioned by the sluggish state of global trade. This is not a good omen for less complex European and Russian refiners who are still producing high sulfur residue. Heavy sour crude refiners in Latin America and Asia are also facing the threat of potentially crippling margin erosion, with some run cuts already being announced.

Is it too late to act? There is possibly still time to mitigate the worst of the impact, if only by changing the crude diet to minimize the production of heavy high sulfur material. Lightening up the barrel could cut residue production and lessen the impact of that very negative HSFO crack, while heavy sweet crude is still not fully reflecting its market value and may provide some opportunities to produce lower sulfur residues profitably. US shale barrels are abundant and are finding an outlet in overseas markets, while US refiners are glad of the heavier barrels that help to fill their deep conversion units left starved of residue feedstock by sanctions and OPEC+ production cuts. A new equilibrium will take time – perhaps 6-8 months – to begin to emerge, with barrels being re-routed to where they add the most value, and demand patterns becoming more settled. What is key for refiners in this environment is to make sure they are around when the dust settles.

What else can be done? In a global market, refiners have no real control over the prices they receive for their products, but they do have control over their costs of production. We have clients who are looking at this low-margin environment as a (necessary) opportunity to tighten up their operations: improving yields, reducing energy cost, tuning up their organization structures and capabilities, planning strategic capital investment to deliver the benefits of digitalization, and meeting the first tier of objectives of the Energy Transition to 2030. A multi-stream operational excellence campaign (such as our OpX program) can lead to synergistic improvements across the organization that will make oil, gas and petrochemicals industry producers more fit for purpose to tackle the evolving marketplace of the 2020s.

Operational excellence is a one-way journey to sustainable performance improvement. It’s not a one-size-fits-all program, but rather is tailored to your organization, no matter where you sit on the maturity curve. It can yield some quick wins that help to sustain the cost of the campaign, and it will deliver lasting changes across an organization that is open to evolution. OpX is a great way to kickstart 2020 for those who plan to be around in 2030 and beyond.

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