…How Low Sulphur Fuels will Affect the Oil Industry…
Fracking has been the most important energy event of this century, freeing billions of barrels of oil for use by mankind.
Recently, while not of the same magnitude of importance as fracking, Saudi Arabia has worked to limit the output of oil by OPEC and Russia, which has eliminated the overhang of stored oil, putting supply and demand into a tenuous balance.
The next important event could be the International Maritime Organization’s (IMO) mandate to reduce the sulphur content of fuels used by the shipping industry by 2020.
By one estimate, a single cruise ship is currently releasing as much SOx into the atmosphere as do 380 million automobiles. While the shipping industry only uses 5% of the world’s oil supply, it produces 40% of the sulphur emissions.
The maritime shipping industry has three alternatives for cutting SOx emissions. The first is to install scrubbers, but this is very expensive. The second is to switch to LNG, but this is also expensive and has other limitations that make it an unlikely choice for most ships.
The third alternative is to switch from high sulphur distillate fuels to distillate fuels having a very low sulphur content. (I.e., low sulphur diesel oil.)
Switching to very low sulphur fuels will affect the oil industry in several ways.
The first effect is to potentially increase the importance of crude oil, as distinct from shale oil, which could put an upward pressure on the price of traditional crude oil. This could further increase the spread between Brent and WTI prices.
The light oil being produced from shale is frequently very light and close to condensate. Shale oil, therefore, tends to have short hydrocarbon chains unsuitable for making the low sulphur distillate fuels being required by the maritime industry. (Short hydrocarbon chains are difficult to combine to make longer chains.)
Refineries will need to use traditional crude with long hydrocarbon chains that can be easily split to produce low sulphur distillates. (Please refer to chemical engineering texts for details on this subject as the author is not a chemical engineer.)
The second effect will be on refineries. Some refineries are well positioned to handle traditional or heavy crudes. Shale oil, i.e., light crude, is in demand by many refineries and should not be affected by this change. Refineries using heavy crude may not have sufficient capacity to accommodate the proposed mandate for sulphur-free fuels.
Finally, there will be a surplus of high sulphur fuels and a demand for low sulphur fuels that will affect market prices.
If there is insufficient refinery capacity among those capable of handling heavy crude, it could result in shortages of low sulphur distillates. This could result in higher prices.
The IMO mandate will be very beneficial for the environment. It will, however, have an effect on the oil industry over the next few years.
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