The Road to 2020 and the 0.5% Sulphur Limit

For Marine Fuel

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EnSys Energy and Navigistics ConsultingPresented by David St. Amand (Navigistics)

EGCSANew York

27-28 February 2018

Proprie

tary

Topics• EnSys & Navigistics in overview • MARPOL Annex VI Global Sulphur Rule / Why it’s different• The Maritime Perspective

• Bunker Fuel Demand in 2020• Scrubbers / LNG / “Switch Volumes”

• Refining Issues / Fuel Availability / Regional Imbalances• Crude Oil & Refining 101 • Global Liquids Demand Outlook• Refining Capacity Outlook• Market Impacts 2020 and After• Regional Imbalances

• Implementation• Enforcement / Compliance / FONARs• Strategic Options

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Agenda Questions

• An update on bunker fuel demand in 2020 and forecast

pricing.

That will be in the main body of our presentation

• Would 2025 make any difference?

Yes, it would have been a lot worse as demand from

competing fuel uses continued to grow. Ask yourselves,

how many of you would have survived to 2025?

• Will fuel shortages delay implementation of 2020?

Absolutely not. That ship sailed in October 2016 at IMO’s

MEPC 70 meeting.

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Navigistics ConsultingSpecialists in:• Maritime Industry - issues in global and

U.S. domestic shipping, markets, logistics, economics, energy efficiency, and regulations. All sectors (tankers, bulkers, containerships, tugs, ports, terminals, dredging, etc.)

• Global marine fuel assessments (market, demand, efficiency, and emissions).

• North America marine/pipeline/terminal oil logistics specialists.

• Wilson Gillette Report covering the Jones Act Product Tanker Market.

• Global and US domestic focus has brought wide range of clients including oil companies, tanker owners, financial institutions, governments, and industry associations.

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EnSys EnergySpecialists in:• Strategic and regulatory

issues in global refining, markets & logistics

• Refining economics and fuels assessments

• North America logistics

• Global focus has brought wide range of clients

• WORLD – Global integrated oil industryLP-based model

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EnSys-Navigistics Joint Marine StudiesExtensive marine fuels projects experience:

• 2006/7/8 EPA, API/IPIECA, IMO: • Developed rigorous fleet & trade based marine fuels demand projections (Navigistics)• Evaluated alternative fuels compliance scenarios (WORLD)• Worked closely with IMO’s Expert Group on inputs to Annex VI • Provided fuels supply analysis for USA ECA submission

• 2009 Major chemical company:• Developed rigorous assessment of marine fuels additives market

• 2015: Initial studies on potential impacts of 0.5% sulfur global standard – ICS/BIMCO and oil companies

• 2016: IPIECA, BIMCO, Concawe/Fuels Europe, Canadian Fuels, PAJ:• Supplemental Fuel Availability Study• Submitted to IMO July 2016 and presented at MEPC70

• 2016 Canadian Shipowner’s Association – HFO availability after 2020• 2016 Oil Company Marine Scrubber Study• 2017 onwards – 2020 Marine Fuels Advisory Service

• Quarterly reports on the IMO’s 2020 0.5% Sulphur Rule• Covering implementation, enforcement, and impacts.

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For refiners Annex VI is not a typical fuel rule• Refining sector has a long history of complying with fuels/emissions

regulations but Annex VI Global Sulphur Rule is atypical:• “Regulatory uncertainties” in Annex VI make it difficult for ship-owners

and refiners to prepare (i.e., invest)• 2020 vs 2025 - now settled – less than two years away

• Little/no incentive for any party to pre-invest (except perhaps “beat the queue” for scrubbers)

• Shipping sectors in difficult financial state and having to deal with ballast water rule

• Still four compliance options1. Compliant fuel - 0.5% refined fuel (MGO or HFO blends)2. Scrubbers - 3.5% residual fuel + EGSC 3. Alternative fuel (LNG, Methane, other)4. Non-Compliance - Fuel Oil Non-Availability (the FONAR exemption)

• High probability of 0.5% demand/price spike with high compliance• Leading some to expect wide scrubber adoption post 2020• Scrubber/FONAR options limits justification for refinery investments in sulphur plant or

cokers

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No Regulatory Control Over

Refiners’ Actions

Refiners’ Perspective- Annex VI is not a typical rule• ‘Normal’ rules are precise in terms of geography, fuel type/specs and usually

strategically essential• Inherent regulatory uncertainties make Annex VI difficult for refiners and ship-

owners to prepare (i.e. invest)• Implementation date 2020 vs 2025 - now settled

• Little/no incentive for refiners or shipowners to pre-invest - only 2 years left• But still

• Four compliance options• 0.5% fuel formulation options – any ISO 8217 grade – opportunities but also concerns• Plus prospect (short-term) of non-compliance (FONAR’s)

• Geography of production and purchasing potentially variable• International marine bunkers liftings can ‘move’, e.g. Rotterdam versus Singapore

• Marine fuels not a strategic product for many refineries• Hence the active blending / bunkering sector

• Potential for partial reversion to HSHFO (Scrubbers) = deterrent to invest• Plus longer term alternative fuels (LNG)

• For both refining and shipping, a mixture of proactive and ‘do nothing’ strategies evident

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Major Changes to Sulphur Limits for Over-the-Road Fuels Were Handled on a Different Timescale

• IMO Rule undertakes a massive sulphur reduction (at 100% compliance) in a short period (10ppm v. 5,000ppm)

• Raises required sulphur recovery from ~69,000 st/d to ~79,000 st/d (~15%) plus ~4,500 st/d into pet coke in an industry that grows ~1% p.a.

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Sulphur reduction to meet ULS

standards ppm

Timescale Stages?

Gasoline / petrol

100 – 1000 10 – 20 years

Yes

Diesel 1000 – 10000 10 – 20 years

Yes

Annex VI 20000 - 35000 3 years No - overnight

Net effect is neither sector fully investing to meet the Annex VI Sulfur Rule

• The ‘shipping’ solution of scrubbers likely to fill only 5-6% of compliance need in 2020 leaving the primary burden on refiners

• Navigistics projects a needed 2020 “switch volume” to 0.5% fuel of 3-4 mb/d (150-200 mtpa) to achieve full compliance• Level depends in part on vessel speed response

• “Only” 3-4% of global liquids demand but a shock to the system • Nearly halves total residual fuel demand• Being demanded ‘overnight’ • Exacerbated if switch is mainly to distillate – likely early on

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All happening ‘overnight’ (Happy New Year 2020)

EnSys- Navigistics Methodology

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Net demand for 0.50% S fuel

(switch volume)

Overall marine fuel demand assessment

Scrubber and LNG penetration

Refining capacity assessment 2020

WORLD Model Base case 2020 (no global S cap)

WORLD Model Global S cap cases

Critical review of WORLD Model

resultsGlobal supply /

demand / quality

Projected Global Marine Fuel Demand in 2020

• IMO’s 3rd GHG Study (2014) – 320 mtpa (average all scenarios) –baseline 2012 – AIS based analysis

• ICCT (October 2017) – Used AIS analysis for 2013-2015

• 2016 IMO Fuel Avails Study (CE Delft) and EnSys/Navigistcs’sSupplemental Fuel Avails Studies –2020 projection

• 2017 CE Delft GHG Projection to 2050 for BIMCO

• 2017 (November) – Navigistics 2020 and beyond update based on UNCTAD trade projections.

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Reasonable Consensus of about 310 to 338 million tons per year of all fuel types in 2020

0

50

100

150

200

250

300

350

400

450

500

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

Glo

bal M

arin

e Fu

el C

onsu

mpt

ion,

M-T

ons/

yr

3rd GHG Study

ICCT (AIS based)

Forecast (Nav-2020)

Forecast (Nav-UNCTAD)

Forecast - 2030 (CE-Delft-BIMCO)ICCT-CE Delft (BIMCO)

3rd GHG

ICCT

CE Delft(BIMCO)

UNCTADGrowth inTrade

2020

GHG CapUNCTAD CAGR

2.6%Except IEA still too low(265 mtpa in 2015)

Scrubbers Cover only Fraction of 2020 Demand

• 2016 - Detailed scrubber

manufacturer survey plus

penetration projection (S-

Curve for 2015 ECA) and

future manufacturing capacity

• Led to close to projected ~ 48

mtpa <20% of required global fuel by 2020

• Scrubber market has been

extremely “slow” developing

• Regulatory concerns – wash

water discharge

• Dependability / Durability

• Impact on crew workload

(chemist?)

• Another “magic pipe”

opportunity?

• Port State Control concerns

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Latest Navigistics estimate of scrubber penetration in 2020

18 mtpa – Newbuilds Retrofits

Scrubber Fuel % 2020 2020 %

IMO 3rd GHG 192 60%

CE Delft (2016) 36 11.1%

Navigistics (2016) 48 14.8%

Meech 11 3.4%

BofA ML (10/2017) 48 14.8%

Navigistics (11/2017) 18 5.5%

Vessel TypeCurrent >2004 Orderbook 2019-20

Tot. Resid/Year,

mtpa

Containership >6k TEUs 1,046 45 27

Capesize 1,453 66 21

VLCCs 506 36 11

# of Ships 3,005 147 59 Potential

2-year payback ($5M/$200) 30% Penetration

Built after 2004 Scrubber Fuel, mtpa 18 2020

Based on ICCT data # of ships

# Ships SS Due 2019

Residual Fuel

Scrubbed Fuel

Chemicals 4,486 897 13 1

Oil 6,411 1,282 33 4

Container 5,164 1,033 62 7

Dry Bulk 10,931 2,186 53 6

Total 26,992 5,398 18

Half of

Special

Survey

Ships in

2019

0%

20%

40%

60%

80%

20

10

20

13

20

16

20

19

20

22

20

25

20

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New Expected “Switch Volumes” ~4.0 MBDs

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Prior Range was 3.6 to 4.2 MBDs in Supplemental Fuel Avails Report (2016)

Navigistics Derived Case – 2020 Ship Efficiency IncreaseNavigistics Scenario No 0.5% No 0.5% With 0.5% With 0.5% Switch Switch No 0.5% With 0.5%Weight Basis - Metric (MJ/kg) MJs/Ton 2020 2020 Scrubbers 2020 2020 2020 2020 2020 2020Residual Fuel 41,030 223 9,144,655 738,540 738,540 18 3.87 0.31 Distillate Fuel 43,555 88 3,832,840 12,238,955 281 193 4.0 1.81 5.79 LNG 51,919 11 571,109 571,109 11 0.44 0.44

322 13,548,604 13,548,604 310

mTons/yr MJs/Year MJs/Year MJs/Year mTons/yrmTons/y

r mB/d mB/d mB/d

• There is a significant potential impact on marine fuel demand of the increase in fuel costs through reduction in “economic” speed (could fall to 3.0 MBDs if freight rates stay low).

Topics• EnSys & Navigistics in overview • MARPOL Annex VI Global Sulphur Rule / Why it’s different• The Maritime Perspective

• Bunker Fuel Demand in 2020• Scrubbers / LNG / “Switch Volumes”

• Refining Issues / Fuel Availability / Regional Imbalances• Refining 101 • Global liquids demand outlook• Refining capacity outlook• Market impacts 2020 and After• Regional imbalances

• Implementation• Enforcement / Compliance / FONARs• Strategic Options

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Crude Oil 101

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• Crude Oils are classified as Heavy, Medium or Light

• Heavy < 24° API

• Medium 24 to 31° API

• Light >31° API.

• Crude Oil is also classified by Sulfur Content as either Sweet (<0.5%) or Sour (>0.5%).

• In general, the lighter and sweeter a crude oil the more valuable.

• Crude Oils can be too light (e.g., Condensates).

Not all crude oils are created equal, API � and S%Crude Oil Brent WTI LLS WTS Bakken WCS DillbitAPI∘ 38.6 39.6 38.7 32.8 40-42 20.3 19-23Sulfur % 0.4 0.3 0.4 2.0 0.2 3.4 ~3.3Basin North Sea Permian Louisiana Permian Williston WCSB WCSBCrude Oil Mars Eagle Ford ANS Arab Light Bonny Light Maya Bach 13API∘ 28.8 47-58 32.1 33.0 33.9 21.3 13Sulfur % 1.8 0.1 0.9 2.0 0.5 3.6 2.4 Basin GOM Western Gulf Alaska Saudi Nigeria Mexico Venezuela

Refining 101

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• Simple Refineries are referred to as “teapots” (if small) or “Hydroskimmers” (the diagram above is of a Hydroskimming refinery).

• Even simpler “refineries” are called “Topping Units” (simplest – usually to extract gas or other very light parts of the crude oil) and “Splitters” (a simpler distillation tower)

Not all refineries are created equal, Conversion capability

Source:

Refining 101

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• The more “complex” a refinery the more high value products produced (e.g., gasoline, diesel, jet kero) all else equal.

• A high conversion (complex) refinery can produce a similar amount of products from a heavier (cheaper) barrel of crude oil.

Higher conversion capability is achieved through more refinery complexity (more conversion units)

Source:

Refining 101

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Put Them All Together – High Conversion Refinery

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EnSys Approach – Integrated Analysis of Global Liquids System (WORLD) Model

• Recent increases in projected 2020 onstream refining capacity• Only limited instances of refiners investing for the Rule

• But also increases in global liquids demand (lower oil prices)• Annex VI leads to expected very tight market especially 1H 2020• Scrubber success could revert market after 3-4 years• Scrubber none-success could extend tightness

• High degree of bottom up detail

• Needed to get realistic representation / avoid over optimisation

• Proven over nearly 30 years of use

WORLD Model 23 Region Breakdown

Market Differentials / Strains Under Different ScenariosCapacity

Addition

mb/cd

Switch Volume High MDO/Low MDO

mb/d

Base (0) Low (2.0) Mid (3.0) High/Full (3.7)

High (5.0) n.r Minor High/ModerateHigh

Mid (4.15) NormalHigh Severe/High

Infeasible

Low (3.75) NormalHigh

Infeasible /

Severe Infeasible

V Low (3.35) n.r. Infeasible Infeasible Infeasible

Note: coloring/impacts based on gasoline/distillate versus HS HFO average differentials across

3 major-regions (USGC, Northwest Europe, Singapore). Left hand indicators are for High 0.5%

MDO vs heavy 0.5% fuels (90:10) and right hand for Low MDO (50:50).

2017 WORLD simulations indicate global refining industry likely able to meet ~ 3 mb/d initial switch at ~101.7 mb/d

global liquids demand in 2020

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Source: EnSys-Navigistics Marine Fuels 2020 Assessment Service Q2 2017 Report

No Global Rule Normal

Year

~3 mb/d switch looks to be max

Potential for non-

compliance dependent

on total needed

switch 3-4 mb/d

Market impacts sensitive to

switch volume, available refinery

capacity, global liquids demand, distillate/heavy 0.5% fuel mix

Global Fuels and Refinery Production 2020“Switch Volume” ~4% of Demand

• IEA says 101.7 mb/d (Oil 2017 Medium Term Outlook)• U.S. EIA says 100.8 mb/d (Annual Energy Outlook 2017

Reference Case)• OPEC Says: 102.3 mb/d OPEC World Oil Outlook 2017

Reference Case (allows for Annex VI impacts)

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• While 4% sounds small refineries have very limited ability to switch from residual to distillate production.

• Sustainable refinery capacity is below “name plate” capacity and available “spare” capacity is very limited

Market Impacts

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• Refining is coproduct industry – production economics of all products closely inter-related

• The 0.5% Rule impacts all petroleum products across all regions• Major products: gasoline, jet, inland diesel, heating oil• Minor products: asphalt, lubes, anode & fuel grade coke

• Crude oil differentials correspondingly impacted• Refining and oil trade adaptation will take months/year not

days/weeks• No mechanism / incentive for starting early

However the IEA says:Can’t be done even at 2.5 MBD Switch Volume

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• Have projected major challenges to refining industry in last 3 medium term reports

• February 2017 outlook shows approx50% 2020 LS fuel deficit ~ 2 mb/d

deficit

• 100% compliance looks an unrealistic target for 2020

• What is really going to happen?

Reproduced from Oil 2017 with permission of IEA

IEA Medium Term Oil Market Report “Oil 2017”

Back to 2020 - IMO says:Don’t Worry Be Happy

• MEPC 71 rejected any perceived attempts to reconsider IMO’s Fuel Avails Study by CE Delft

• PPR 5 - Implementation Plan likely approved at MEPC 74 in 2019

• Carriage Ban – Requires amendment to Annex VI• Battle over wording – cargo v. fuel v. bunkers• Earliest possible March 2020

• Anything adopted at PPR Intersessional Meeting July 2018• Earliest possible Summer 2021

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EnSys Approach - World Oil Refining

Logistics Demand (WORLD) Model• Highly detailed

• 23 modelled regions & 35 refining groups

• 30+ products, each with multiple specifications

• 200+ crudes

• Detailed non-crudes supply (NGL’s, biofuels, CTL/GTL etc.)

• Detail needed to get realistic representation / avoid over optimisation

• Proven over nearly 30 years of use

WORLD 23 Region Breakdown

Refining Capacity - Crude price drop has impacted timing of refining investments

• EnSys sees a surge in refinery additions in 2019 but IEA has this later adding a concern over 2020 available capacity

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EnSys surge 2019

IEA surge 2021

Enforcement

• Largely unknown at this point as many proposals brought

forward at PPR and MEPC.

• What is known:

• In coastal waters of IMO Member States that have ratified Annex

VI and, therefore have laws regarding the 2020 0.5% Sulphur

Marine Fuel Rule, can enforce their own laws.

• On the high seas – violations enforced by Flag-States

• Proposals include:

• Enhanced Port State Control (PSC) powers (e.g., the Carriage

Ban).

• Continuous Stack monitors.

• Ability for PSC to require de-bunkering of non-compliant fuel on a

vessel not equipped with a scrubber.

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ComplianceThe IMO maintains a database of countries that have properly implemented each of its conventions etc. • To date 88 member states have contracted (signature,

ratification, acceptance, approval, and accession) with Annex VI (although one contracting state is no longer listed as an IMO member - Niue). • The 88 Contracting States have combined merchant fleets constituting

96.16% of the gross tonnage of the world’s merchant fleet. • Therefore, 3.84% of the world’s merchant fleet (based on gross tonnage)

is registered (flag) in countries that have not contracted to enforce Annex VI and, therefore, the 2020 0.5% sulphur marine fuel rule.

• Non-ratifiers (as of July 31, 2017) included Mexico, New Zealand, Egypt, Algeria, Libya, Iraq, Oman, Qatar, Philippines, Argentina, Columbia, Venezuela, Ecuador, Thailand, and a long-list of smaller or non-major maritime trading countries.

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ComplianceThe IMO has an “unused” mechanism for reporting violations of ECA fuel oil sulphur content• The IMO’s Global Integrated Shipping Information System (GISIS) has

no reported “detection of violations and enforcement” as of 8/9/2017Denmark provided information on its experience with enforcement in the North Sea and Baltic ECAs for 2015 (“Danish Enforcement of the SulphurRegulation – Towards the 0,5% Limit” presented at the 2020 Global Sulphur Challenge on 3/21/2017)

• The Danish Paper concluded that the Baltic and North Sea ECAs had a 95% compliance rate in 2015

• Good luck getting information on the North American ECAs

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Totals and % calculated

by Navigistics

Compliance

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Routing and Enforcement Gaps

Our first “Estimate at Compliance”

~30% non-compliance in 2020 Note: the inclusion of FONARs in non-compliance

Compliance

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This level of use of “Non-

Compliant” fuel is required to get down to the 3

MBD “Feasible” switch volume

FONARs - How extensively will they be used?Fuel Oil Non-Availability Report or FONARs are a form of compliance with the 0.5% Sulphur Marine Fuel Rule When compliant fuel is not available• Vessels are not required to deviate from their intended

voyage to obtain compliant fuel• FONARs will likely be based on the U.S. system developed

for the North American Emission Control Area• Remember current over-the-road diesel in the U.S. and

Europe (with a 10 ppm or 0.001% sulphur limit) is not an IMO compliant fuel as it has a 52˚ C Flash Point specification (v 60˚ C for marine fuel).

• FONAR use can be estimated based on global refining “gap” with an upward adjustment for regional availability.• FONARs are required to make the 2020 0.5% Rule feasible

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Strategic Options for 20201. Do Nothing (Buy compliant fuels) – Viable

• Really do nothing

• Hedge everything until things settle down

• Fuel contracts

2. Install Scrubber (Retrofit and/or Newbuilds)

3. Ignore and use IF-380 (HSHFO) - pay fines

4. Hunt for FONARs

5. Hope for delay – Total Fantasy

6. New Technology?

• Onboard desulphurization?

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Summary• Global Sulphur Rule represents major challenges to refiners,

bunkers suppliers, shipowners, and charterers worldwide• A lot of “moving parts”• Key parameters still evolving

• Crude slate, demand, scrubbers, alternative fuels, refinery capacity• Uncertainties will remain to and through 2020

• Immediate 100% implementation / compliance unlikely• Market strains – impacting crudes and all products not just marine• How IMO handles implementation important factor

• Countries that have ratified Annex VI represent >96% of vessel gross tonnage

• But over 100 countries have not ratified Annex VI and they possess 15 mb/d of refining capacity, plus 34 mb/d of refining capacity is inland

• Investment is needed for longer term resolution of the market• Refineries, ships (scrubbers), alternative fuels / LNG – ships and

shore• The market will adapt but strains may linger

• Developments/dimensions can be tracked and evaluated35

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Questions?

David St. AmandNavigistics Consulting

1740 Massachusetts AvenueBoxborough, MA 01719 USA

978-266-1882DaveSt@Navigistics.com

www.Navigistics.com

Martin TallettEnSys Energy

1775 Massachusetts Avenue, Suite 3ALexington, MA 02420 USA

781-274-8454MartinTallett@EnSysEnergy.com

www.EnSysEnergy.com