IMO 2020 and its implications

What is IMO 2020?

International Maritime Organisation (IMO) is a specialised agency of the United Nations responsible
for regulating shipping. In order to slash marine sector emissions, IMO has made a major change in
fuel oil specifications - current maximum fuel oil sulphur limit of 3.5 weight percent (wt%) will fall to
0.5 wt% from 1st January 2020 onwards. IMO 2020 regulations will see the largest reduction in the
sulphur content of a transportation fuel undertaken at one time.

How can shipping lines comply?

There are two ways to comply:
1. Switching to cleaner fuels (very low sulphur fuel oil / middle distillates)
2. Installing SOx scrubbers on ships (however currently a small % of ships have these)

Impact on refining:
The marine sector, which consumed 3.8 million barrels per day of fuel oil in 2017, is responsible for
half of global fuel oil demand. IMO regulations can therefore increase spread between High Sulphur
Fuel Oil (HSFO) and Very Low Sulphur Fuel Oil (VLSFO). Growing demand for middle distillates could
result in upward price pressure on fuels such as diesel and jet fuel and will change FCC mode of
operations. Overall IMO 2020 is likely to boost margins for complex refineries.

Impact on Petrochemicals:
The petrochemicals industry will not be immune to this sea change as it will bring with it changes in
feedstock pricing and supply chain economics —
1. Impact on naphtha prices: Refiners will try to maximise middle distillates / gas oil in 2 ways:
a. Increase run rates & process lighter crudes  increase straight run naphtha supplies
b. Divert VGO from FCC feed to middle distillate pool  increased demand for straight
run naphtha and heavy naphtha as FCC feed  reduced availability for
Petrochemical producers  increase feed cost for naphtha-based crackers
2. Propylene supplies:
a. The change in operations to lower severity FCC (max distillate mode) will reduce the
availability of propylene from FCC production.
b. Global FCCs (constitute ~ 34% of propylene supplies) typically have a 6-7% propylene
yield and a reduction to 5-6% yield would reduce refinery propylene supply by 15%.
3. Rising freight rates:
a. Potentially higher freight rates (~10 - 30% increase) for very large crude carriers,
more bunker surcharges by container liners — for producers, who may be left with
no choice but to pass the extra burden to consumers in the end.
b. This may change trade flows to optimise freights.