INDUSTRY INSIGHTThought Leadership

Bunker fuels in 2020 and their impact on the petrochemical industry

By Kurt Barrow – VP Oil Markets, Midstream and Downstream, IHS Markit, and Dave Witte – SVP IHS Markit, Division Head – Energy & Chemicals

Quality changes to global ship fuels will cause a scramble in the refining and waterborne shipping industries as producers and consumers become impacted by a significant disruption in fuel pricing. The petrochemical supply chain costs will be affected as will other supply chains around the globe.

The International Maritime Organization (IMO), which is the international body devoted to shipping matters, is calling for a reduction of the maximum sulphur content in marine bunker fuel from 3.50% to 0.50% in January 2020. Current global demand for high sulphur bunker fuel, consumed mostly on medium and large vessels, is approximately 3.4 million B/D with another 0.8 million B/D of gasoils used on smaller vessels and for auxiliary engines on large ships.
From a shipping perspective, IHS Markit estimates that about 55,000 ships—of a total fleet of around 110,000 vessels—burn high sulphur fuel oil bunkers and that roughly 30,000 of these ships account for approximately 80% of global fuel oil bunker use.
Compliance with the new fuel specification will involve significant costs for the refining and shipping industries; it will also influence all shippers. Crude producers will see changes in refined product spreads affect their sales netbacks, while chemical producers will see the cost of their oil-based feedstocks change.

  • Naphtha
  • Gasoline
  • Gasoil
  • High-sulphur Fuel Oil

Compliance pathways

The reduction in ship stack sulphur emissions can be met through three pathways. 1) Through purchase of low-sulphur bunker fuel with no change needed on the vessel. 2) By installing on-board exhaust gas cleaning systems, known as scrubbers, to remove sulphur dioxide emissions from the ship exhaust allowing continued burning of high-sulphur bunkers. 3) By making vessel modifications for alternative fuels such as liquefied natural gas (LNG) bunkers.

The first option drives up demand for low-sulphur fuels and complicates the disposition of surplus high-sulphur residue. The second option will be less disruptive for the refining industry and more aligned with the current refinery product slate but comes at a high initial investment and some operating cost for vessel owners. The third option will reduce demand for both gasoil and fuel oil and lower fuel costs, but the retrofit investment is even more costly for ship owners.

Several factors, including vessel ownership, type, route, size, design, and age, will determine the preferred compliance pathway. Smaller ships, such as chemical tankers that consume less fuel, are expected to burn low-sulphur bunker fuel.

Large ships account for most bunker fuel demand, and IHS Markit expects that scrubbers will be the preferred solution for much of the current fleet due to a payback within a year or two provided by the lower-cost high-sulphur bunker.  Currently, less than 500 vessels have installed or ordered scrubbers as there is no economic incentive until 2020 and uncertainty about enforcement and compliance remains.

LNG will be applied mostly to newly built vessels, particularly those that operate on fixed, predictable routes; within a geographic area; or in an Emission Control Area (ECA), which are already in place in some coastal zones. The current infrastructure for LNG bunkering is limited and will need to rapidly expand if LNG bunkers are to become more common for the largest consumers.

There are only about 267 ships in service (or under construction) that are fitted for LNG fuel, with another approximately 147 deemed LNG-ready. Investment in LNG option lowers ship carbon emissions and reduces fuel cost, However, LNG bunker consumption share is projected to remain small.

Compliance with the new fuel specification will involve significant costs for the refining and shipping industries; it will also influence all shippers.”


Beyond the three pathways, some level of non-compliance must be expected. There is uncertainty regarding the enforcement framework, and policing the sulphur cap on the high seas is not practical. The IMO is a treaty organization with no legal powers of its own, and its member states implement new legislation individually. Flag states (where the ship is registered) have jurisdiction over violations in international waters, while port states can only fine vessels breaching IMO rules in their territorial waters.

Still, the enforcement approach—mostly imposed at ports—is slowly becoming clearer after an agreement was reached within the IMO to prohibit the carriage of high sulphur fuel oil for use on board ships not equipped with exhaust gas cleaning systems.  Compliance in the ECAs has been relatively high.  IHS Markit assumes reasonably high compliance in 2020, equivalent to 85% of residual bunker demand.

Bunker supply

Overall, the IMO specification change will increase demand for various types of low-sulphur bunkers and erode high-sulphur fuel consumption. Refining utilization rates will rise, and an increase in overall crude runs is needed, but based on IHS Markit’s analysis, there will be enough refining capacity to meet increased demand for low-sulphur bunker fuels in 2020.

The real difficulty for refiners, however, is the relative inability to dispose of excess production of high-sulphur residuals.  There is also a limited ability to place high-sulphur fuel oil into non-bunker markets, at least without a significantly discounted price.  Although deep conversion units exist in refineries today (most being fully utilized), new units take several years to design and build—far too long for a start-up by 2020.

As a result, IHS Markit projects that the refining industry will produce an excess volume of high-sulphur residual fuel oil in 2020. In the short term, a significant portion of this surplus would have to clear into lower price tiers, such as oil-fired power generation—at prices which could be as low as thermal parity with coal.

Impact on petrochemical markets

These bunker fuel changes will impact the petrochemical industry’s feedstock pricing and freight rates.  The aromatics and olefins chains are closely connected to the refining chain, and the IMO bunker quality changes are significant enough to substantively move refined product price relationships.

First, the market price for crude oil and naphtha feedstocks are likely to rise as the refining system increases crude runs to supply the additional demand for distillate bunker fuels and also “pushes” some volume of high-sulphur fuel oil to the power sector.  IHS Markit estimates another 0.5 million B/D of crude runs in 2020 above base demand growth, which has averaged around 1.2 million B/D over the past five years

Second, fluid catalytic cracker unit operating rates are expected to reduce in 2020 as low-sulphur FCC feedstocks (i.e., vacuum gas oils) become an attractive blendstock for the low-sulphur bunker pool.  While the degree of utilization decline is probably moderate, the gasoline crack spread, and associated naphtha to crude crack spread, is projected to increase, and FCC propylene production is likely to decline.  Due to changes in gasoline operations—and concurrent Chinese and Russian gasoline specification changes—octane values in 2020 are projected to increase by approximately 40% compared to 2017, to price levels not seen since 2012. These changes will also affect the global-linked gasoline and aromatics markets.

Finally, freight rates for petrochemical—and all—shippers will increase during 2020 and remain higher than traditional levels due to increased fuel cost.  While a portion of the market is projected to install scrubbers, and to a lesser degree LNG, there will remain a significant portion of ship classes that will need to purchase higher priced bunker fuel (option 1).  These are the ships projected to influence shipping rates.

Most chemical tankers will purchase low-sulphur bunker fuel while large container carriers may have installed scrubbers.  Regardless, shipping rates are estimated to increase by 10-20% due to the higher low-sulphur bunker fuel price.  This will influence relative differentials on both the feedstock and product sides of the supply chain.  The affect will be different depending on the dynamics present in each value chain and market.

While petrochemical companies do not generally consider refining of residual streams, bunker fuels, or even shipping to be a core element of their business, these will nonetheless have a strong influence over the coming years.

“Freight rates for petrochemical—and all—shippers will increase during 2020 and remain higher than traditional levels due to increased fuel cost.”