Anticipating New Business Opportunities
The Korean oil industry, which is going through difficulties due to a sharp drop in oil prices and sluggish demand, is counting on IMO 2020, an environmental regulation pushed by the International Maritime Organization (IMO), for a favorable change in their business environment. The new regulation is intended to reduce the sulfur content of fuel oil for ships from the current 3.5% to 0.5% beginning from 2020.
Analysts in the oil refinery and chemical industries said on Dec. 26 that Korea’s three major oil refiners -- SK Innovation, S-Oil, and GS Caltex -- are hoping that the implementation of the new sulfur cap brings a favorable change in their business environment.
Energy Intelligence, a market research organization, recently released a forecast that oil demand growth will be below 1 million barrels a day due to intensifying trade disputes between the United States and China next year. When IMO 2020 is implemented, it is not possible to use the existing high-sulfur bunker oil as a marine transportation fuel. The options for shippers include the use of low-sulfur oil, installation of scrubbers, and conversion to vessels powered by liquefied natural gas (LNG).
However, installation of scrubbers, which reduce sulfur content of exhaust gas, is forecast to be limited to about 5,000 vessels by 2025 due to limited installation service and the high costs involved.
Conversion to LNG-fueled vessels is not easy either due to high costs and the need to expand fuel storage space. By 2030, only about 6% of the existing vessels will be converted to LNG-fueled carriers
For these reasons, most shipping vessels are expected to choose the option of using low-sulfur oil. Currently, 5 million barrels of petroleum (5 percent of the world's total oil consumption) is consumed as ship fuel per day, with about two-thirds of them using high-sulfur oil. This means that oil refiners will be able to enjoy expanding margins from 3.2 million barrels of fuel oil used by shippers per day.
Goldman Sachs said that when shippers comply with the IMO 2020 sulfur cap 100%, the shipping industry’s sales are expected to reach US$240 billion thanks to higher freight costs, a result from shippers’ use of expensive low-sulfur oil.
However, oil industry analysts project the actual compliance rate to stand around 80%, as the regulation is highly likely not to be applied during maritime transportation between developing countries.
Korean oil refiners are also trying to produce high-value-added products including low-sulfur oil. This year, S-OIL is tentatively producing low-sulfur oil through a residue upgrading complex (RUC) and olefin downstream (ODC) facilities. The company invested 4.8 trillion won into these facilities, which will be operated on a full scale next year.
Hyundai Oilbank has been operating a solvent deasphalting (SDA) process costing 240 billion won in Daesan Plant in Seosan, South Chungcheong Province. SK Innovation is planning to build a vacuum residue desulfurization (VRDS) facility in the Ulsan Complex by 2020 by investing about one trillion won.
Competition among oil refineries is also expected to intensify in order to expand the supply of low-sulfur oil. "We are focusing on increasing oil refining margins by raising the oil refining segment's upgrade rate to 40.6%,” a Hyundai Oilbank official said. “We will prepare for a spike in demand by establishing a sales network capable of supplying low sulfur heavy oil by next October."