New IMO emission standards to increase woes of refineries

KARACHI: International Maritime Organisation (IMO) will enforce new emissions standards requiring ships to use fuel oil with a sulphur content of less than 0.5 percent compared to the current 3.5 percent, which will impact sales of local refineries producing fuel oil with sulphur in range of 3.5 to 1.0 percent.

The new standards would be implemented from January 2020.

Arsalan Ahmed at JS Global Capital said, “The global marine sector consumes 4.0 million bpd of high sulphur (HSFO) and low sulphur furnace oil (LSFO) combined; however, 3.0 million bpd of this demand could virtually evaporate overnight according to market forecasts once IMO 2020 sulphur fuel cap of 0.5 percent comes into effect.”

The margins of higher sulphur content petroleum products (furnace oil) would weaken significantly, and winners in this scenario would be highly complex refineries and refiners with deep conversion/distillate-oriented configurations. Unfortunately, none of these exist in Pakistan.

Local refineries are based on a less complex hydro skimming technology, giving an output with 25 percent of furnace oil as a percentage of total production.

“This poses a massive challenge for local refineries, since furnace oil margins can fall significantly. Local refineries sell furnace oil to IPPs, while in winter they are expected to export excess furnace oil in international markets. In either case, it is bad news for local refineries since margins will deteriorate further from an already challenging position,” Ahmed added.

To recall, local refineries were already facing numerous problems, which include Ministry of Energy’s ban on use of manganese content in Motor Gasoline (MS) from April 2019.

The ban would limit benefits of Isomerisation plant, and government decision to rely more heavily on gas-based power production would result in significantly slower off-takes of furnace oil.

Kuwait Petroleum Company (KPC) – Pakistan’s largest fuel supplier has demanded phasing out of low quality high speed diesel — Euro-II — by Dec 2020.

This is because KPC would shift to production of Euro-V diesel. “In this context, domestic refineries would eventually have to make another round of significant investments in upgrades to meet the new standards.”

Recent up gradation projects by local refineries have yet to deliver in terms of their desired returns given weak fundamentals and deemed duty sticking to 7.5 percent rather than the agreed 9.0 percent.