IMO 2020 in Perspective:
IMO 2020, which will reduce the sulfur limit on bunker fuel from 3.5% to 0.5%, is expected to have a broad environmental and economic impact affecting the 90,000 vessels that make up the world’s shipping fleet. One year ago, energy market historian and Yale professor Philip K. Verleger, Jr. predicted that the IMO 2020 global environmental regulation could cause an economic collapse and drive oil prices to $200/barrel. In spite of Verleger’s warning and significant reporting on the matter, insufficient industrial preparation has occurred to address this critical environmental regulation.
Only a few hundred ships have converted to scrubbers which remove sulfur dioxide (SO2) from ships’ emissions. Major refineries, for whom significant re-tooling can cost upwards of $10 billion, have not undergone the requisite transformations to address the 3.5 million barrels per day (b/d) shortfall of low sulfur bunker fuel needed to replace the high sulfur fuel which will be prohibited commencing in the New Year.
With IMO 2020 now just six months away, Verleger’s market crash prediction does not appear likely; however, the regulation’s impact on the oil spreads are unmistakable. One year ago, the spread between low sulfur fuel oil (LSFO) and high sulfur fuel oil (HSFO) was about $100/ton (7.33 barrels/ton.) Now the LSFO-HSFO spread is $250/ton and expected to grow to $380/ton, according to Reuters. (In dollars per barrel, the LSFO-HSFO spread which was $13.65, is now $34.10 and should grow to $51.84). Since fuel costs are the largest operating expense for the shipping industry, this fuel regulation and industry impact is a major concern for shippers and a hurdle for the refining industry.
Regardless of your environmental political stripe, there is a broad acceptance that global economic growth and modernization has had a major environmental impact. Consequently, global regulations are being rolled out to reduce pollution and curtail global warming. IMO 2020 fits into this environmental regulatory transformation since the reduction in sulfur dioxide pollution has a major environmental and health impact. According to KPMG, the reduction in SO2from IMO 2020 should see a reduction in deaths by 150,000 annually.