HSFO demand in Mideast Gulf

A mere eleven months remain before the International Maritime Organisation (IMO)’s new global sulphur cap for bunker fuels kicks in and drastically reduces high-sulphur fuel oil (HSFO) demand. At the same time, the expected oversupply of HSFO presents opportunities for the utility sector, particularly in the Mideast Gulf.

To recap, the global sulphur cap on marine bunkers is being reduced from 3.5% to a maximum of 0.5%. Global marine bunker demand is roughly 4m b/d (225m mt/yr) and of that, around 80% is estimated to be HSFO. This could mean in the region of up to 3.2m b/d (180m mt/yr) of demand loss. Some of the of the overhang will be consumed by vessels installed with scrubber technology-but what can we expect to happen to the rest of it?

Fuel oil demand in Saudi Arabia rising

The expected oversupply of HSFO after January 2020 will benefit major importer of the product, Saudi Arabia, who consumes it for domestic power generation and desalination plants. While the Kingdom also exports fuel oil, it is overall net short. It buys via spot and term tenders, with a significant uptick in imports during the summer.

Vitol, Trafigura and Socar are some of the regular suppliers into the area, as are Saudi Aramco themselves via trading subsidiary, ATC.

The more relaxed Saudi import specification has a density of .992d max, 380cst and 3.7% sulphur so they can look at varied HSFO grades. This means that they can import and burn the very high 4.00% (maximum) sulphur fuel from Greek refiner Hellenic Petroleum, loaded out of Aspropyrgos.

Overall Saudi fuel oil imports in 2018 were observed to be over 10.3m mt, up from around 7.9m mt the previous year, off the back of lower crude oil use in direct burn and increased need for fuel oil in expanding power plant and desalination facilities.

The UAE, home to the bunkering hub of Fujairah, took top spot in Saudi Arabia’s observed fuel oil import mix last year with a 20% share, just ahead of Greece, which took around 17%. The Kingdom also imports from a slate of other sources including RMG and M100 from the ARA region, as well as high density Mazeikiai fuel oil from Lithuania.

Last year’s year-on-year rise in imports brought with it a diversification of sources. Intake from ports in Russia rose by around 50% on the year, while volumes loaded from ARA region ports soared to 1.66m mt, from only a handful of cargoes over the previous two years. Saudi Arabia also imported a rare cargo of fuel oil from the US, and at least two further cargoes made the journey from Caribbean ports.

Trends in Middle East and North Africa

Egypt, too, has historically been a net importer of HSFO for the domestic utility market, though this has been steadily diminishing in the last few years as they increasingly switch to domestic liquified natural gas (LNG).

Egypt’s import specification is that of RMG-380, but with low viscosity-100 to 180cst, and a low vanadium count of 100ppm. This has usually been supplied from the US or Mediterranean, with key suppliers being AOT, Trafigura and BB Energy into Alexandria.

But the decline of fuel oil imports into Egypt is clear to see in flow trends (see below), and the country instead began exporting larger quantities itself from the first quarter of last year onwards.

When combining HSFO imports across the Middle East, to include smaller outlets such as Oman and Qatar, the seasonality of the burning is very apparent:

In North Africa meanwhile, we should continue to see HSFO imports into countries such as Morocco, Libya and Tunisia, which combined could account for 150,000- 200,000 mt of demand each month.

Algeria, who exports its low sulphur straight-run fuel oil-much of which heads to the US- also occasionally imports small clips of HSFO.

HSFO demand elsewhere

In Asia-Pacific, whilst China has the infrastructure to burn HSFO for power generation, the domestic sulphur cap of 1% (maximum) which applies to oil (and coal) emissions may limit intake. This means there would be no HSFO burning in 2020 unless there was a regulatory change. Prior to that, HSFO would need to price itself to parity with coal, which is much cheaper.

The report by consultancy CE-Delft, which informed the IMO’s decision, estimated that 3,800 vessels would have scrubbers by 2020, which would mean 610,000 b/d of HSFO demand- 36m mt annually.

Invariably there will be some non-compliance to the new regulations-especially in less regulated areas-which will mean some continued HSFO burning, though this is hard to quantify. It does however mean that there will be an ongoing demand factor.

There will also be continued heavy refinery investment in tertiary units such as cokers and visbreakers-these units eliminate HSFO exports by converting the molecules into more valuable gasoline and distillate blending components. In this way, the global refining complex will continue to reduce HSFO from the supply side as demand declines.

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