The What and Why of IMO 2020

Published on 12 Dec, 2019

The proposed implementation of IMO 2020 on January 01, 2020, has thrown maritime companies in a tizzy as they prepare to comply with the new regulation. It is expected to bring about a massive shift in the industry, paving the way for either modification of vessels or changes in fuel requirements. The impact on shipping industry would be substantial with the demand-supply dynamics of fuel getting affected significantly. This article looks at possible changes on the part of maritime players and potential effect on the market.

IMO 2020 mandates the use of lower content sulfur fuel in ships in the maritime transport industry. To be effective from January 01, 2020, it will require shippers to adopt more eco-friendly methods to run their fleets. The new rule restricts ships from using fuels having more than 0.5% sulfur content, down 80% from 3.5% currently that will be in use until December 31, 2019.

Compliance requires rapid modification in the bunker oil supply chain globally. IMO recently stated that there would be no grace or testing period, implying the rule would take effect on the pre-decided date.

The objective behind IMO 2020 is to contain harmful emissions from the marine sector, largely in the form of sulfur oxides (SOX), nitrous oxides and other particulate substances. HFO, a heavy oil, is the primary fuel for ships. It is derived as a residue from the distillation of crude oil. Crude oil contains sulfur, which oxidizes during combustion in engines, resulting in the release of SOX in the atmosphere. These emissions are harmful to human health, capable of destroying wildlife, agri-produce, and aquatic species.

Approximately 90% of global trade is carried out via 50,000 ships that consume around 2.1 billion barrels of fuel annually. According to research, by burning HFO, the maritime industry alone is responsible for almost 90% of the SOX emissions globally—the largest 15 vessels emit more sulfur than the combined total of all the vehicles in the world.

IMO 2020 has been formulated by the International Maritime Organization (IMO), a United Nations agency for setting up safety, security and environmental performance standard for the international shipping industry.

The proposed regulation is expected to have a huge impact on shipping and oil refining industries, and may likely disrupt the bunker fuel market. The key sectors expected to take the hit and the steps taken to address these are listed below.

Shipping Industry
On implementation, the following options will be available to shippers for compliance:

  • Switch to low-sulfur fuels: Companies could use very low sulfur fuel oil (VLSFO), marine gas oil (MGO), low-sulfur distillates OR a blend of high sulfur fuel oil (HSFO) and low sulfur fuel.
  • Continue to use HSFO, but install scrubbing equipment to eliminate sulfur from the exhaust system: Shipping major, Maersk, has announced to adopt this option, disclosing a committed capex of around USD 0.3 billion for scrubber installation until date.
  • Use alternative fuels like liquefied natural gas (LNG) or methanol: Exxon Mobile estimates that around 12% of the fuel used in 2040 will be LNG, implying significant demand in the coming years.
  • Penalty/waiver: The last option available is to not comply with the regulations and pay a penalty for non-compliance OR take waivers where the compliant fuel is not available (shippers would be required to present evidence for the efforts taken to source compliant fuel).

Different studies suggest most shippers will switch to low-sulfur fuels. Scrubbers may not be a popular choice mostly due to the time taken for installation and high upfront cost involved. Depending on the vessel, installation takes four to six weeks, while the cost per vessel is estimated at USD 2–10 million. Switching vessels to LNG also does not seem feasible, considering the high initial cost related to structural changes required in ships for storage of gas, among other things. A bigger constraint for LNG is its limited availability as a bunker fuel in current times.

Irrespective of the options, the new environmental regulations are expected to escalate fuel costs as well as pose operational challenges for industry players.

  • Significant rise in fuel cost: IMO-compliant fuel is expected to be costly due to increase in demand vis-à-vis supply as the refining industry is still in the adjustment phase for producing the compliant fuel as well as its availability at various ports. The estimated price difference between currently used bunker fuel and new fuel options on introduction of IMO 2020 are depicted in the table below. The price differential is expected to ease with gradual surge in supply.

    New IMO-compliant Fuel

    Price Differential


    ~USD 250 – USD 400 per metric tonne

    HSFO to MGO

    ~USD 350 per metric tonne during early 2020

    At current consumption of 5.8 million barrels of HSFO per day by the maritime industry, the total cost is expected to escalate by ~USD 30–60 billion annually.
  • Operational challenges: Shippers will have to select marine fuel wisely, considering factors such as availability of various fuels at different ports, age of vessels and plying routes. There may be fuel compatibility issues as well as inconsistencies arising due to compliant fuels being produced by different refiners.
  • Impact on global supply chain: Higher fuel bill for shippers will have a cascading impact across the global supply chain, prompting them to look for ways to pass on the additional cost to customers.

Oil Refining Industry
Refiners will have to keep up with the rising demand for VLSFO and MGO. Analysis indicates that it will largely be skewed toward low-sulfur alternatives. Refineries that can convert HSFO to LSFO, including VLSFO, and maximize their production of distillates, that can be used to produce compliant fuel, would see their gross refining margins (GRM) go up. Simple refineries that majorly produce HSFO and have lower distillate yields will have difficulty in maintaining their GRM.

Further refiners may struggle with falling demand for HSFO, leading to oversupply. A supply glut will put pressure on these companies to reduce the price of HSFO to a level that it can compete with the price of natural gas to be consumed as a fuel for power generation. Drastic price reductions would dent refining margins. However, the effects are expected to be offset by higher market prices of VLSFO and middle distillates, likely to command a premium pricing amid increased demand and limited supply.

Most refiners, particularly complex refiners on the US Gulf Coast, are expected to record substantially better margins than they did before the introduction of IMO 2020.

Oil and Gas Market
IMO 2020 will impact the overall fuel oil market. Demand for high-sulfur bunker oil contributes almost 50% to the total global demand for residual fuel oil. Currently, of the total demand for bunker oil globally, HSFO accounts for 70%, diesel or MGO 28%, and other fuels such as LNG, gasoline, or kerosene 2%.

For producing IMO-compliant fuel, refiners would prefer to buy and process sweet crude with low sulfur content as processing it is easier. This could alter the demand for different grades of crude and increase volatility in the oil market. These developments would further boost the demand for sweet crude, driving price higher. Meanwhile, the cost of refining sour crudes with high sulfur content could be greater than its realized price following the implementation of IMO 2020, reducing its demand as well as price.

As mentioned earlier, given that installation of scrubbers and making vessels LNG-compliant are both time- and capital-consuming, shippers will mostly opt for switching either to VLSFO or MGO, at least in the beginning. However, the definite mix remains a question as of now. VLSFO is expected to be cheaper than MGO but may pose a bigger risk in terms of engine compatibility and bunkering availability, especially if ship owners decide to go for a single brand.

In the wake of the drastic changes complying with the regulation entails, IMO has been coordinating with member states and the general industry to create a favorable ground for compliance. Complying with the regulations is the responsibility of member states to Annex VI of the MARPOL treaty (also known as International Convention for the Prevention of Pollution from Ships). With the deadline nearing, it will be interesting to watch how the scene unfolds.

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