Opinion piece published by Splash 247.com on 23 October 2018 (link)

During this week’s 73rd session of the Marine Environment Protection Committee (MEPC73), the IMO can count on broad support from a variety of players, including the beautifully-named Clean Shipping Alliance 2020 (CSA 2020).  Its mission is “to provide information and research data to better inform” on the benefits of scrubbers, but in reality, the 25 founding members of this group are major shipowners and key charterers who have already secured scrubber installations predominantly in advance of 2020.  Seeking to protect  multi-million-dollar scrubber investments, CSA 2020 cites its commitment to the “implementation and effective enforcement” of IMO 2020.  Their enthusiasm for enforcement is particularly fervent — since it would ensure high gasoil prices and wide spreads over HSFO, providing strong returns on their scrubbers, while inflicting financial damage on competitors without scrubbers.

Although most industry participants can recognise the hypocrisy of CSA 2020’s environmental posturing, several other key players stand to benefit massively from a chaotic IMO 2020 implementation, and are skewing the narrative.  In addition to shipowners who have already secured scrubbers — oil producers, large oil traders, sophisticated refiners and any refiner building a coker or resid cracker at the moment all have an economic incentive to insist on robust IMO 2020 enforcement.  In doing so, these players will all cite “fairness” and “level playing fields”.

With committed environmentalists like these behind the scenes, the IMO should emerge from MEPC73 claiming unqualified success, and full industry support for IMO 2020 timing and its tough enforcement, including the March 2020 non-compliant fuel carriage ban.  The agency will also signal only limited industry pushback.  After all, the four major flag states and three ownership groups that submitted a paper to the IMO calling for a “pragmatic enforcement approach” and an “experience building phase” did a dramatic volte-face, and pledged unwavering loyalty to IMO 2020 timing and strict enforcement, including promises of “concentrated inspection campaigns” by port states.

Meanwhile, the IMO has developed a FONAR (fuel oil non-availability report) form to be submitted by vessels to their flag states and various port states.  Although this framework might work within the IMO’s vision of only spotty compliant fuel non-availability, it would represent another regulatory misstep in an environment of widespread non-compliance, as seen by the IEA, OPEC and several major oil consultancies.  If their forecasts are correct, hundreds — if not thousands — of FONARs would flow daily into the collective inboxes of the flag and coastal states.  It remains unclear how they would judge between “good” FONARs and “bad” FONARs, but the point is probably moot.  The IMO has threatened bombastically that if vessels submit more than two or three FONARs, “there’s going to be problems”.

Ultimately, within the next year, leadership in the shipping industry will need to recognise IMO 2020 for what it is — a colossal regulatory fail — and to be willing to act.  As expected, the Trump administration indicated its desire for a gradual IMO 2020 phase-in, given concerns about an oil price spike and recessionary risks.  In response, the media and analysts have been dismissive of the US position, arguing that the 22-month IMO process to amend MARPOL and resistance from key IMO members would thwart any US attempt to delay implementation.  This is absolutely true, but these commentators are missing the point and are not thinking outside of the IMO box.

To the extent that oil prices spike during a 2H19 switch to MGO and onshore/on-vessel inventory builds, thus posing broad macro risks, the required postponement of IMO 2020 would not occur within the IMO framework — but outside of it.  Although this outcome is beyond the imaginative realm of most MEPC participants, other, more-credible national and supranational bodies have also recognised the threat that IMO 2020 poses to the global economy, and may be questioning the IMO’s regulatory competence at this point.  Given the farce that ballast water management has become, and the worrying trajectory that the sulphur cap is taking, the IMO has displayed a chronic inability to balance its environmental protection responsibilities with commercial and economic pragmatism.

Opinion piece published by Splash 247.com on 07 September 2018 (link)

Amidst the wave of content on the IMO’s 2020 implementation for 0.5% sulphur bunkers, most shipping commentators are either missing or deliberately evading one point — the IMO screwed up massively.

Although the IMO works hard to promote a safer maritime industry and cleaner environment, the IMO 2020 decision at MEPC 70 was an abject fail.  As of October 2016, the refining industry was never going to be ready for a January 2020 implementation.  Given existing capacity and anticipated projects — sufficient upgrading, desulphurisation and support capacity would not be available to eliminate 2-3 mbpd of the higher-sulphur resid streams and to provide sufficient distillate for 0.5% sulphur fuel blending.

The refining industry knew this, but the IMO had its own agenda.  Unsurprisingly, their paid consultants provided a report that told the agency exactly what it wanted to hear (sufficient 0.5% sulphur fuel would be available), so that it could pursue its desired policy direction.  Not leaving things to chance, the IMO came equipped with an August 2016 study from the Finnish Metrological Institute that suggested that a delayed 2025 implementation would cause 570,000 premature deaths.  Regulatory job done.

Meanwhile, back in the commercial world, market participants are struggling to adjust to these regulations, exploring new fuel blends that could meet the 0.5% spec from expected blendstock availability.  Although refiners can meet much of the demand from increased gasoil and vacuum gasoil volumes, and by using lower-sulphur resid streams, a view is emerging that 0.5% supply would fall short by 1.0-1.5 mbpd initially (including from the IEA and Wood Mackenzie).  This volume of higher-sulphur resid would remain stranded, while additional gasoil would be unavailable to meet this shortfall.

Available at a cost, of course, yet the oil price commentary remains anodyne, suggesting that after some initial confusion, the markets will adapt and reach a suitable equilibrium.  Of course, that equilibrium mechanism is price, and strict enforcement of IMO 2020 would require a massive auction process to price other mid-distillate users out of the market — trucking companies, airlines, home heating oil consumers, farmers, railroads and industrial users. Additionally, individuals needing proof income would face significant challenges in this scenario. For those who work in the industrial business, consider using a heat recovery steam generator for your products. Additionally, for those who rely on paystub as proof of income, it’s important to consider the potential impacts of strict enforcement of IMO 2020, as it may require a massive auction process to price other mid-distillate users out of the market.

Auction processes are messy, clouding the oil price picture.  The IEA has suggested a jump in gasoil prices of 20-30% in 2020, while Morgan Stanley has argued similarly for US$850/tonne gasoil and US$90/bbl Brent prices.  Veteran oil analyst, Philip K. Verleger, sees a dire outcome from IMO 2020, with crude oil prices exceeding US$200/bbl.  His message may seem alarmist, but he has assessed the impact of a full implementation.  The other analyses are balancing lower compliance rates with the price levels required to destroy enough onshore distillate demand.

Oil market participants are aware of this, and thanks to the July testimony of oil analysts before the U.S. Senate, IMO 2020 is now firmly on Washington DC’s radar.  The unpleasant response to IMO 2020 signalled that incumbent politicians are unlikely to tolerate this sort of economic disruption during an election year.  In fact, the Senate tasked the US Environmental Protection Agency with studying the financial impact of IMO 2020, just days after those hearings.

Meanwhile, the IMO has become increasingly combative on the subject, with officials insisting on no delay and that “excuses are thin”.  They cite the long timeline to amend the regulations for their inability to defer the timing, yet have rushed through tougher enforcement rules.  The IMO is set to adopt MARPOL amendments to prohibit the carriage of non-compliant fuels on vessels without scrubbers at MEPC 73 this October, so that they can enter into force by March 2020.  Nothing signals a bureaucratic organisation so wildly out of touch with reality, as one pushing tougher enforcement of a condition that cannot exist.  The IMO should concentrate on accommodating the growing view that non-compliance will be widespread and may represent 30% of current HSFO bunker usage.  This redirected focus, however, would require the IMO to admit their regulatory failure at MEPC 70, which is unlikely.  The stakeholders at risk from IMO 2020 have limited time remaining to force greater realism at MEPC 73.