Tough Low Sulfur Rules on Maritime Fuels To Cut Global Pollution Starting in 2020

By January 1, 2020, the International Maritime Organization's new rules will force the sulfur content for “bunker” fuel used in shipping to cut from the current 3.5 percent to less than 0.5 percent. There are costs for this, however, as Canada is beginning to understand.

A cargo ship in dock. With new low sulfur fuels required in vessels like this starting in 2020, the amount of greenhouse gas emissions and other pollutants they produce will drop dramatically.

For the Canadian petroleum industry this will come at a significant cost, since its oilsands produce precisely the high-sulfur content fuels targeted by the new regulations. Fuel from Canadian oilsands represents about 50% of total oil production in the country, which is currently running at about 4.4 million barrels per day. “Bunker fuel”, the high sulfur residue left after cleaner, lighter oil used for gasoline and diesel are extracted, has in the past been sold in large quantities to the maritime industry.

With the new restrictions in place, industry analysts point to the potential for even wider price drops than the current US$30 a barrel discount which producers suffered through earlier this year.

Although the implementation date is still over 18 months away for the new rules, they are already affecting oil production and refinery planning across the board. The discount for bitumen-blend Western Canadian Select had gone from a mid-teens’ number to the current US$30 value. It was more than enough for Canadian Natural Resources Ltd. to cut back on its own bitumen production. It also caused Husky Energy to buy oil from others because it cost less to do that than producing it directly. Cenovus Energy, a Calgary-based company, is looking at what to do about its 360,000 barrels a day of production of high-sulfur bitumen from its oilsands in northern Alberta. That production represents 91% percent of its overall production, so cutbacks in demand and price are a major concern for the company.

As tighter pollution rules go into effect for the fuels, the refinery upgrade industry is one that will see a positive impact. The need for upgrades is expected to push overall upgrade investments by an incremental US $60 billion over what it would have been without the new rules. Those upgrades will also tend to help reduce pollution globally as well, since they will help all such fossil fuels to be cleaner. It is not as good as completely eliminating the need for such fuels, but it is a start.

For those able to efficiently offer oil which is compliant with the new requirements, the change will represent a major boom. Because of the quick turnaround required for the new rules, it is anticipated that despite demand for bunker fuels reaching 5.3 million barrels in 2020, the available world supply will only be about 1.2 million bpd. That should drive prices of low-sulfur fuels higher.

Calgary-based Suncor Oil is one of those companies which sees a net benefit from the changing regulations. They have a strong flow of diesel production from their plants, plus have their own refineries to process their own bitumen stocks more efficiently. As Suncor CEO Steve Williams said about the 2020 situation in a recent interview, “Overall, the impact for Suncor is a positive one.”

What the new rules will also do is drive demand to complete the Trans Mountain Pipeline to Canada’s west coast and to encourage further pipeline construction heading south. Both will feed the continuing growing demand for petroleum products in the United States, a region where the higher sulfur content may still be tolerated. Despite the Canadian government having bought the Trans Mountain Pipeline to make sure the second line will go through to British Columbia as planned, many experts expect continuing battles between environmental groups, local businesses and provincial governments to block or slow construction of further pipelines.

Putting the whole situation together, although there may be some places where the situation will not be so dire, as the calendar moves on closer to 2020 Canadian oil prices will likely drop on average. Some companies will also likely postpone new investments in oilsand bitumen production or perhaps close down entire operations. Pollution from such fuels will drop significantly, though, which of course is why the new rules on maritime bunker fuels were passed in the first place.