New IMO emission standards to bring more woes for refinery sector

KARACHI: From Jan 2020, International Maritime Organization (IMO) will enforce new emissions standards to curb pollution i.e. ships are required to use fuel oil with a sulfur content of less than 0.5 percent compared to the existing 3.5 percent; this would impact refineries’ off-take as local refineries produce fuel oil containing sulfur content in range of 3.5 percent to 1.0 percent.

“The global marine sector consumes 4.0 million bpd of high sulfur (HSFO) and Low sulfur furnace oil (LSFO) combined; however, 3.0 million bpd of this demand could virtually evaporate overnight according to market forecasts once IMO 2020 sulfur fuel cap of 0.5 percent comes into effect,” Arsalan Ahmed at JS Global Capital said.

The margins of higher sulfur content petroleum products (Furnace Oil) will weaken significantly, and winners in this scenario will be highly complex refineries and refiners with deep conversion/distillate-oriented configurations, unfortunately none of these exist in Pakistan.

Local refineries are based on a less complex hydro skimming technology, giving an output with 25 percent of FO as a percentage of total production. “This poses a massive challenge for local refineries since FO margins could fall significantly. Local refineries sell FO to IPPs, while in winter they are expected to export excess FO in international markets. In either case, it is bad news for local refineries since margins will deteriorate further from an already challenging position,” Ahmed added.

To recall, local refineries are already facing numerous problems, which include Ministry of Energy imposing ban on use of manganese content in Motor Gasoline (MS) from April 2019, which will limit benefits of Isomerization plant; government decision to rely more heavily on gas-based power production would result in significantly slower off-takes of FO.

Kuwait Petroleum Company (KPC) – Pakistan’s largest fuel supplier has demanded phasing out of low quality high speed diesel — Euro-II — by Dec 2020. This is because KPC would shift to production of Euro-V diesel. “In this context, domestic refineries would eventually have to make another round of significant investments in upgrades to meet the new standards”.

Recent up gradation projects by local refineries have yet to deliver in terms of their desired returns given weak fundamentals and deemed duty sticking to 7.5 percent rather than the agreed 9.0 percent.

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