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2020 IMO Regulations – A Refined View
StocExpo Europe
04 April 2017
Eugene LindellJBC Energy
Special Presentation
Disclaimer
All statements other than statements of historical fact are, or may be deemed to be, forward-lookingstatements. Forward-looking statements (including those depicted in graphical form) are statements offuture expectations that are based on JBC Energy’s current expectations and assumptions and involve knownand unknown risks and uncertainties that could cause actual results, performance or events to differmaterially from those expressed or implied in these statements. Forward-looking statements include, amongother things statements expressing JBC Energy’s expectations, beliefs, estimates, forecasts, projections andassumptions. These forward-looking statements are identified by their use of terms and phrases such as‘‘anticipate’’, ‘‘believe’’, ‘‘could’’, ‘‘estimate’’, ‘‘expect’’, ‘‘intend’’, ‘‘may’’, ‘‘plan’’, ‘‘objectives’’, ‘‘outlook’’,‘‘probably’’, ‘‘project’’, ‘‘will’’, “forecast”, “predict”, “think”, ‘‘seek’’, ‘‘target’’, ‘‘risks’’, ‘‘goals’’, ‘‘should’’ andsimilar terms and phrases. All forward-looking statements contained in this speech/presentation areexpressly qualified in their entirety by the cautionary statements contained or referred to in this section.Readers/audience should not place undue reliance on forward-looking statements. Each forward-lookingstatement speaks only as of the date of this presentation. Neither JBC Energy nor any of its subsidiariesundertake any obligation to publicly update or revise any forward-looking statement as a result of newinformation, future events or other information. In light of these risks, results could differ materially fromthose stated, implied or inferred from the forward-looking statements contained in this speech/presentation.Any persons acting on information contained in this presentation does so solely at their own risk.JBC Energy is not responsible for the accuracy of data collected from external sources and will not be heldliable for any errors or omissions in facts or analysis contained in this presentation. JBC’s third party sourcesprovide data to JBC on an “as-is” basis and accept no responsibility and disclaim any liability relating toreliance on or use of their data by any party. Data sourced as SuDeP (JBC’s in-house Supply-Demand-Priceforecasting model) or JBC Derived Data may be partly based on EIA and various national statistical entities;JODI; the MODS, ADS or MGDS (http://data.iea.org) services developed by the IEA, © OECD/IEA 2016; OPEC;and other industry sources, but the resulting work has been prepared by JBC Energy and does notnecessarily reflect the views of the original data providers. To the extent that JBC Energy comments or opineson data obtained from third party sources, these comments or opinions shall be understood as JBC Energy’sown comments or opinions unless a third party is quoted as their source.
Tuesday, 04 April 2017 www.jbcenergy.com Slide 2
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Products & Services
Tuesday, 04 April 2017 www.jbcenergy.com Slide 3
Agenda
• The IMO’s Brave New World for Bunkering
• Why Compliant Gasoil Isn’t the Best Answer
• JBC’s Proposal to Solve the Bunker Riddle
• Oil Balance and Stocks
• Conclusions
Tuesday, 04 April 2017 www.jbcenergy.com Slide 4
Brave New World
The 2020 bunker fuel legislation (fuel or emissions from ships around the world are limited to 0.5% sulphur) will pose a huge challenge to the market, with various options for the shipping industry and no need for the refining industry to react (unlike national spec changes).
Tuesday, 04 April 2017 www.jbcenergy.com Slide 5
Post-2020 Options for Ship Operators
IMO Sulphur Cap 0.5%
Compliance
Non-compliance
Compliant Gas Oil Compliant Fuel OilEmission Abatement
TechnologiesAlternative fuels (LNG, methane)
Source: JBC Energy
Brave New World
The volumes in question are huge: fuel oil’s share of bunker demand in 2019 will amount to over 3 million b/d—some 15x higher than the 2015 ECA shift
Tuesday, 04 April 2017 www.jbcenergy.com Slide 6
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2010 2012 2014 2016 2018 2020 2022 2024
Global ECA
ECA and Global Sulphur Limits in Marine Fuels [% Sulphur]
2020 shift will be massive potentially impacting
3.4 million b/d of HSFO!
Source: IMO, JBC Energy
Shift impacted only 0.2 million b/d
Shift impact marginal as most HSFO already <3.5%
Why Compliant Gasoil Isn’t the Best Answer
While there is further conversion capacity coming onstream, this is needed to meet growing non-bunker clean product demand
Tuesday, 04 April 2017 www.jbcenergy.com Slide 7
-200
0
200
400
600
800
1000
1200
2016 2017 2018 2019 2020 2021
CDU Additions
Coking
Catalytic cracking
Thermal
Hydrocracking
Global Conversion and CDU Capacity Change by Unit ['000 b/d]
SuDeP
Why Compliant Gasoil Isn’t the Best Answer
Product demand is set to increase by over 1 million b/d each year, driven largely by the transportation sector (land, air)
Tuesday, 04 April 2017 www.jbcenergy.com Slide 8
-0.5
0.0
0.5
1.0
1.5
2.0
2016 2017 2018 2019 2020
LPG Naphtha
Gasoline Jet/Kero
Gas Oil/Diesel Fuel Oil
Other Products
World Oil Demand Growth by Products [million b/d]
SuDeP
Why Compliant Gasoil Isn’t the Best Answer
Gasoil/Diesel demand is set to grow by around 300,000 b/d between 2017 and 2020, due largely to the transport sector
Tuesday, 04 April 2017 www.jbcenergy.com Slide 9
-400
-200
0
200
400
600
800
1000
1200
1400
1600
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Transport Residential Agri
Power Petchem Industry
Bunker Refining Fuel Other
Gasoil Demand in World by Sector (Y-o-Y Change) ['000 b/d]
SuDeP
Why Compliant Gasoil Isn’t the Best Answer
We assess global spare refining capacity to have tightened further in 2015 in line with strong demand, among other factors. We do not expect a reversal of this trend in 2016. CDU shutdowns of 6.8 million b/d over 2009-2015 have provided key support.
Tuesday, 04 April 2017 www.jbcenergy.com Slide 10
0 2000 4000 6000 8000 10000 12000 14000 16000
Theoretical Spare Capacity
Absent due to Maintenance
Seasonality
Non-Swing/Non-Operable
Available Spare Capacity
Europe
FSU
Asia
Middle East
Africa
North America
C&S America
Actual Spare Capacity in the Global Refining System in 2015 ['000 b/d]
SuDeP
Why Compliant Gasoil Isn’t the Best Answer
It takes 5 parts 0.1% Gas Oil to blend down 1 part 2.5% Fuel Oil; for ULSD the ratio is about 4:1. To supply 2 million b/d ofcompliant bunker fuel via ULSD blending would therefore require 1.6 million b/d ULSD and 0.4 million b/d 2.5% HSFO.
Tuesday, 04 April 2017 www.jbcenergy.com Slide 11
Gas Oil 0.1% S
Fuel Oil 2.5% S
Gas Oil 0.1% S
Gas Oil 0.1% S
Gas Oil 0.1% S
Gas Oil 0.1% S
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Suitable FOcomponents
Redirected SRFO(ARES)
Residualdesulphurisation
Higher refineryintake
Optimised crudeslate
Implied decline incutterstock use
Total
Approximate Contributing Factors to 0.5% Fuel Oil Production in 2020 [million b/d]
Cutter stock factor illustrates lower requirements for such
blending components due to the relative increased use of straight
run fuel oil streams for CBFO supply
Source: JBC Energy estimates
Total 0.5% fuel oil demand of some 3.18 million b/d in 2020 will be met by drawing stocks of approximately 150,000 b/d (from builds in
previous years)
ULSD 0.001% S
ULSD 0.001% S
ULSD 0.001% S
ULSD 0.001% S
Fuel Oil 2.5% S
Gas Oil Blending ULSD Blending
Why Compliant Gasoil Isn’t the Best Answer
Blending would, however, be an option to drain a growing overhang in stocks, but one would have to be willing to take a hit on price
Tuesday, 04 April 2017 www.jbcenergy.com Slide 12
600
620
640
660
680
700
720
740
760
780
800
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5-Year Range 5-Year Avg
2015 2016
2017
Global Product Stocks [million barrels]
900
950
1,000
1,050
1,100
1,150
1,200
1,250
1,300
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Middle DistillatesLight DistillatesSource: JBC derived data
JBC’s Proposal to Solve the Bunker Riddle
We are convinced that fuel oil will remain the solution in the short-term (primarily LSFO) and also in the long run (return to increasing volumes of HSFO).
Tuesday, 04 April 2017 www.jbcenergy.com Slide 13
0%
5%
9%
14%
18%
23%
27%
32%
36%
41%
45%
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
LNGGas Oil0.5% Fuel Oil3.5% Fuel OilScrubbers ShareLNG Share
Bunker Fuel Mix [million b/d, %]
Source: JBC Energy Estimates
JBC’s Proposal to Solve the Bunker Riddle
Providing low-sulphur fuel oil components to the bunker market is technically easy –it is just a question of what prices are required to adjust operations.
Tuesday, 04 April 2017 www.jbcenergy.com Slide 14
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Suitable FOcomponents
Redirected SRFO(ARES)
Residualdesulphurisation
Higher refineryintake
Optimised crudeslate
Implied decline incutterstock use
Total
Approximate Contributing Factors to 0.5% Fuel Oil Production in 2020 [million b/d]
Cutter stock factor illustrates lower requirements for such
blending components due to the relative increased use of straight
run fuel oil streams for CBFO supply
Source: JBC Energy estimates
Total 0.5% fuel oil demand of some 3.18 million b/d in 2020 will be met by drawing stocks of approximately 150,000 b/d (from builds in
previous years)
JBC’s Proposal to Solve the Bunker Riddle
The bigger challenge is what to do with any replaced volumes of high-sulphur fuel oil. As there cannot be much demand sensitivity, ultimately it will be the refining sector that will take care of the HSFO surplus (coking and cracking it).
Tuesday, 04 April 2017 www.jbcenergy.com Slide 15
-2.0
-1.5
-1.0
-0.5
0.0
Desulphurisation Coking HC/FCC AdditionalDemand (Power)
Stocks Total
Approximate Components of HSFO Balance Management 2020 (versus 2019) [million b/d]
Source: JBC Energy estimates
Equivalent to +84 million bbl y-o-y
stockbuild in HSFO
JBC’s Proposal to Solve the Bunker Riddle
The necessary price incentives to cope with the 2020 bunker challenge include deep discounts for HSFO and initially strong premiums for low-sulphur fuel oil, which nonetheless still prices significantly below marine gas oil.
Tuesday, 04 April 2017 www.jbcenergy.com Slide 16
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
2017 2018 2019 2020 2021 2022 2023 2024 2025
Dtd. Brent
MGO
0.5% CBFO
HSFO
LS SRFO
JBC Energy Price Forecast - NWE [$/bbl]
Source: JBC Energy
JBC’s Proposal to Solve the Bunker Riddle
The beauty of the SR answer is that myriad crude streams can be used and they don’t all have to be sweet
Tuesday, 04 April 2017 www.jbcenergy.com Slide 17
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Suitable FOcomponents
Redirected SRFO(ARES)
Residualdesulphurisation
Higher refineryintake
Optimised crudeslate
Implied decline incutterstock use
Total
Approximate Contributing Factors to 0.5% Fuel Oil Production in 2020 [million b/d]
Cutter stock factor illustrates lower requirements for such
blending components due to the relative increased use of straight
run fuel oil streams for CBFO supply
Source: JBC Energy estimates
Total 0.5% fuel oil demand of some 3.18 million b/d in 2020 will be met by drawing stocks of approximately 150,000 b/d (from builds in
previous years)
Fuel Oil Compliance
34% SR Doba Blend
SR Angolan Dalia(ARES S = 0.49%)
16% SR Urals NWE
50% SR Rabi Blend
SR Congolese Djeno
(ARES S = 0.48%)
JBC’s Proposal to Solve the Bunker Riddle
Something similar happened in ECA-2015: the refining sector came up with a new, cheaper compliant fuel within one year of the switch. If they can do that for 0.1% FO, 0.5% should be a cinch.
Tuesday, 04 April 2017 www.jbcenergy.com Slide 18
0%
13%
26%
39%
52%
65%
78%
91%
-150
-100
-50
0
50
100
150
200
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
Fuel Oil
Gas Oil/Diesel
Fuel Oil Share - rhs
Bunker Fuel Demand Growth in OECD Europe (Y-o-y) ['000 b/d]
Source: Based on IEA data from Monthly Oil Data Service © OECD/IEA [2016], www.iea.org/statistics, Licence: www.iea.org/t&c; as modified by JBC
Onset of ECA
To ensure a 34 days forward demand coverage @2.5 million b/d, stocks of 0.5% FO will have to build by some 85 million barrels by 2020 –If stockbuilds start 12-18 months prior to implementation, stocks will have to build by around 200,000 b/d.
Tuesday, 04 April 2017 www.jbcenergy.com Slide 19
Storage Plays Remain Part of Balancing Process
0.00
0.20
0.40
0.60
0.80
1.00
1.20
3 6 9 12 18 24
40
34 (Base Case)
30
25
20
0.5% Fuel Oil Stock Build Prior to IMO Implementation [million b/d]
X-Axis refers to months of stockbuilding prior to Jan 2020 to reach a particular forward cover levelDifferent scenarios represent set forward cover (Base Case is 34 days globally).All scenarios set at modelled demand for 0.5% fuel oil (annual average for 2020)
Source: JBC Energy calculations
Oil Balance and Stocks
Already see tremendous stockbuilds in 2018 (and beyond). 2018 stockbuild likely regardless of prolongation of the OPEC/non-OPEC deal (rollover implies higher shale rebound; no rollover implies higher OPEC output)
Tuesday, 04 April 2017 www.jbcenergy.com Slide 20
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 Q3 18
JBC EnergyIEAOPECEIA
Our JBC implied stockbuild is the difference between JBC assessments of global feedstocks supply and final product demand, using a country-
by-country and stream-by-stream approach. JBC Energy OPEC production estimates are used for IEA and OPEC figures as of Q1 2017.
Implied Global Stockbuild/draw [million b/d]
Source: JBC Energy, IEA, EIA, OPEC
Oil Balance and Stocks
Dirty storage already historically tight with more set to go on storage in 2018 while 2019 will see buildup of 80 million barrels of 0.5% FO; 2020 will then see another 85 million barrels of HSFO go on stock, facilitated by a deep contango.
Tuesday, 04 April 2017 www.jbcenergy.com Slide 21
2%
7%
12%
17%
22%
27%
3.7
4
4.3
4.6
4.9
5.2
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
Spare Capacity*Actual Stocks LevelSpare Capacity, %, r.s.
World Storage Capacity and Spare Capacity [billion barrels, %]
2%
7%
12%
17%
22%
27%
1.1
1.3
1.5
1.7
1.9
2.1
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
* Maximum storage capacity is defined as a sum of maximum
inventory levels per country in January 2012-present
Crude and Fuel Oil Gasoline and Middle Distillates
Source: JBC Derived Data
Conclusion
• Key Takeaways– Many ways to get to compliant bunker fuel
• MGO is perhaps the simplest solution • But 0.5% fuel oil is the cheaper and more efficient way• Gasoil/diesel blending requires massive distillate volumes
– Expect massive sulphur spreads in 2020-2021• Situation cannot be compared to 2015 ECA shift
– Refiners unlikely to invest in new kit• Time is quickly running out• Wider adoption of scrubbers will rapidly narrow the wide
MGO/0.5%FO premium over HSFO
– Storage preparation is key • Fuel oil stream separation (not all HSFO is high S)• 30+ days of forward bunker demand needs to be built
– Dirty storage could get pretty tight by 2020 given continued crude and fuel oil stockbuilds
Tuesday, 04 April 2017 www.jbcenergy.com Slide 22
Fuel Oil Outlook & 2020 Bunker Study
Fuel Oil Outlook & 2020 Bunker Study
Seminar: JBC Energy Matters
Tuesday, 04 April 2017 www.jbcenergy.com Slide 25
• The inaugural JBC “Energy Matters” 2 dayseminar will be held in Vienna on 21st - 22ndSeptember 2017
• In depth presentations and workshops on allmajor areas of our oil & gas markets andindustry research
• Face-to-face interaction with our analysts
• Unbiased and independent views on future developments of both the downstream and upstream industries.
• Explore the full complexity of the oil & gas market as well as JBC Energy’s in house Supply, Demand, and Pricing (SuDeP) Model.
• No media - Closed-door, seminar-style event
• Opportunity for networking and exchanging views
• Attractive social & cultural programme in and around Vienna.
• Price discounts to existing clients.
For more information or to register your attendance, please contact us at conference@jbcenergy.com or visit our website http://www.jbcenergy.com/seminar
Thank you!
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