Special Presentation 2020 IMO Regulations A Refined View ... · PDF fileMiddle East Africa North America ... Approximate Contributing Factors to 0.5% Fuel Oil Production in 2020

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.

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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


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).


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


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


-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


Product demand is set to increase by over 1 million b/d each year, driven largely by the transportation sector (land, air)


-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


Gasoil/Diesel demand is set to grow by around 300,000 b/d between 2017 and 2020, due largely to the transport sector


-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


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.


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


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.


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


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


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).


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


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.


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5







Total







previous years)


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).


-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]


Equivalent to +84 million bbl y-o-y

stockbuild in HSFO


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.


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


The beauty of the SR answer is that myriad crude streams can be used and they don’t all have to be sweet


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5







Total







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%)


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.


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.


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)


-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.


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


Fuel Oil Outlook & 2020 Bunker Study

Fuel Oil Outlook & 2020 Bunker Study

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Documents

Special Presentation 2020 IMO Regulations A Refined View ... · PDF fileMiddle East Africa North America ... Approximate Contributing Factors to 0.5% Fuel Oil Production in 2020