With the IMO 2020 sulphur regulations set to go into effect from next year, the price difference between bunker C oil, a type of residue oil, and gasoline, kerosene and diesel is widening. Demand for bunker C oil, a fuel with a high sulphur content, is sharply decreasing in the marine fuel market.
According to Petronet on Nov 10, the price of diesel (sulphur content of 0.5 percent) stood at US$75.51 per barrel on Nov. 7 while that of bunker C oil (sulphur content of 3.5 percent 380cst) was US$43.76, more than 30 dollars lower than that of diesel. The price difference between diesel and bunker C oil decreased to around US$4 in September from about US$8 in July this year and then began to increase sharply in October. The price of bunker C oil fluctuated more rapidly than that of diesel. Bunker C oil, which was between US$40 to 50 in August, steadily rose throughout September, reaching US$79.81. But it soon began to decline and has never exceeded US$50 since Oct. 2.
This is explained by the recent sharp drop in sales of high sulphur bunker C oil in the marine fuel market. Industry watchers say that the proportion of high sulphur bunker C oil, which reached 94 percent last year in Singapore, the world's largest marine fuel market, dropped to 85 percent this September. The change results from the IMO’s decision to sharply lower the global sulphur cap for marine fuels from 3.5 percent to 0.5 percent from Jan. 1, 2020.
Analysts say that South Korean oil refineries are expected to benefit from IMO 2020. Korean oil refineries are equipped with upgrading facilities which process residue oil such as bunker C oil into high-value products such as gasoline, kerosene and diesel. This helps South Korean oil refineries make more profits than their Japanese and Chinese competitors, which have relatively smaller refinery upgrading capacity, when the price of bunker C oil declines.
Especially SK Innovation, which invested one trillion won in vacuum residue desulphurization (VRDS) in preparation for the IMO 2020 regulations, is likely to become a direct beneficiary of the regulatory change. The company can reprocess high sulphur bunker C oil into low sulphur fuel oil (LSFO) or kerosene. Once the company’s VRDS facilities are completed next year, its LSFO supply can reach up to 38,000 barrels per day.
S-Oil is also expected to post an improved profitability as it completed its new residue upgrading complex (RUC) in November last year,
The pace of scrubber installations in ships is slower than expected, heightening the anticipation of the refinery industry. It was highly expected that shipping companies would install scrubbers in their ships, rather than purchasing expensive LSFO, to reducing sulphur emissions. In this case, demand for bunker C oil would not decrease and South Korean refineries would see a decline in profitability. However, the number of vessels retrofitted with scrubbers by the end of this year will be fewer than 3000 vessels, about half of what was expected by the refinery industry.
Some say that it remains to be seen whether the new IMO regulations will improve the profitability of South Korean oil refineries. “As some nations are opposing the regulations and other unpredicted circumstances could occur, it is difficult to tell whether the regulations will benefit the domestic oil refining industry,” said an industry insider, adding that it is hard to predict until next year how the newly emerged LSFO market will go.