Rising Gas Prices: The Structural Impact of Maritime Emissions Reductions Starting in 2020

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By Aurélien Schuller - Manager

The rise in road fuel prices is making headlines, with the impact of recent fluctuations in crude oil prices due to rising tensions in the Middle East Of course, but also the shadow of a The issue of raising the carbon tax has resurfaced following a statement by the Council on Mandatory Levies, an institution affiliated with the Court of Auditors [1]. It is worth noting here that the carbon tax has not been eliminated, as some have suggested, but that the tax rate has been frozen at its 2018 level, that is, €44.60 per metric ton of CO₂, even though a significant increase had been announced at the start of the five-year term; this was one of the components of the Climate Plan announced by Nicolas Hulot in July 2017, but it was very quickly criticized on the grounds of tax fairness because it was not accompanied by a redistribution mechanism.

These cyclical events have been widely discussed and commented on, but they have obscured a structural effect which could emerge in early 2020 and illustrates the systemic effects among the various sectors of the oil industry: the upward pressure that cleaner shipping is expected to exert on the price of road (and air) fuels [2]. Before we begin this story, let’s review the order of magnitude of petroleum product consumption across the various sectors. As shown in the graph below, Transportation—particularly road transport—accounts for the largest share of petroleum product consumption, representing nearly 60% of total consumption of refined products ; next comes industrial consumption, particularly in the petrochemical industry, followed by the use of fuel oil for heating or electricity generation.

How can the 4 million barrels per day used for marine bunkers have an impact on road fuels, which account for 10 times that volume? At the beginning of this story, there is the entry into force of International Maritime Organization (IMO) regulations on the sulfur content of marine fuels effective January 1, 2020. To adapt, shipowners have three options:

• Use the same fuel, but with an exhaust gas purification system called scrubbers;
• Use liquefied natural gas;
• Use petroleum products as we do today, but with less sulfur.

The third option is likely to be the most widely adopted, as it is currently the least operationally restrictive—even though the price is expected to double when comparing today’s standard heavy fuel oil to low-sulfur marine fuel oil. As a result, refineries will have to produce more low-sulfur fuels: we’re talking about approximately 3 million barrels per day, or ~3% of total demand for petroleum products (taking into account the fact that a portion of current consumption will not switch to this third option). The International Energy Agency sees this as “easily the biggest transformation ever seen in the petroleum products market.”. The effects on the petroleum products markets—however difficult they may be to assess—are, in principle, as follows:

• The Demand for crude oils that naturally have lower sulfur content (such as North Sea Brent) is set to increase, which will lead to an increase in the market price of oil, affecting all refined products, particularly road fuels and aviation fuels;
• Some refiners will have to modify their facilities to allow forincrease the share of low-sulfur products through investments in desulfurization systems of varying cost. This can also affect prices;
• Finally, and this is less well known, the Various refined products leaving the refinery (gasoline, diesel, kerosene, desulfurized marine fuel oil, etc.) are interdependent within a distillation column. To increase the proportion of kerosene, for example, you have to reduce the proportion of diesel or gasoline (kerosene is a refinery cut that falls between gasoline and diesel in the distillation column). If refiners have to To produce more desulfurized marine fuel, we will have to cut back on something else. This would likely affect heavy fuel oil, but it cannot be ruled out that it will also impact lighter distillates (primarily diesel and kerosene). These choices will result not only from technical constraints but also from economic trade-offs that favor buyers willing to pay more to obtain the fuel they need. Under these circumstances, it is unlikely that this will drive down the prices of refined products.

What about the future of residual sulfur-containing fuel oil? It may find new markets for use in power plants. Thus, there is potentially a pollution displacement effect (which, when it comes to air quality, may make sense, given that the impact depends as much on emissions as on the exposure of people and ecosystems to this pollution).

Article written by Aurélien Schuller - Manager

Sources: [1] Council on Compulsory Levies [2] Energy Literacy