IMO2020 — Good for the planet, good for the global economy. How oil is going to help us save the world.
This is a follow up to my previous post on #IMO2020, an environmental protection regulation change that sets new standards around the type of fuel that merchant ships burn. My initial reaction was, wow, this is going to be total chaos. Supply chains are going to be disrupted. There could be fuel shortages and all kinds of madness. Regulators don’t fully understand it. No one knows what will happen. Anxiety. Uncertainty. Risk. That’s all still true. It’s a gigantic cluster fuck.
We have modeled a wide variety of scenarios and can imagine a disruption lasting anywhere from one year to more than five years, generating significant costs for many businesses — Boston Consulting Group
It’s also an opportunity to create an incredible amount of wealth and make the planet a much better place, for us and for the rest of earth’s inhabitants. I think it’s a good thing that is happening and that we should all get behind.
“This is the largest regulatory change in the oil space ever and it will have a massive effect far outside of shipping,” Kenneth Tveter, Svelland Capital
A single large cargo ship can emit as much sulphur oxide as tens of millions of cars. #IMO2020 lowers allowable sulphur emissions by more than 85%. It will reduce acid rain and marine pollution. Acid rain is responsible for species extinction and endangerment. It will save tens of thousands of lives every year, as sulphur oxides are among the leading cause of respiratory illnesses.
I’m all for alternative energy, but wind and sun are not going to fill the need to transport 90% of the world’s products any time soon. Why wait for future panaceas when we can make a massive incremental improvement now? The most ambitious plan in world history to curb human impacts on the environment is underway now, and it is spearheaded by the IMO, the Shipping Industry, and the Oil & Gas industry.
I am by nature skeptical of ALL regulatory bodies, but I do think the IMO has actually done an exceptional job as regulations go. They’ve even taken flak from governments for working too closely with industry. Bravo, IMO.
High sulphur fuel oil, the main fuel ships currently burn while in the open sea, is a byproduct of other refined products. It’s a waste oil. It will only be burned going forward if there are capabilities in place to remove the sulphur before it goes into the atmosphere.
The world has to produce an additional 3.5 million barrels per day of low sulphur marine fuel.
In order to pull this off, we have to transport more crude oil, refine more crude oil, and transport and store more refined petroleum products. The US has some of the most advanced refineries in the world as well as the highest total refining capacity on the planet. However, this is truly an international collaboration enabled by raw resources, shipping companies, and refining capacity from all over the world.
I want you to seriously consider getting in on some part of this value chain. It’s the most important change to energy markets in all of human history. It will change lives for the better, after (a lot) of initial confusion. We have to work through it.
Sourcing the crude oil
The “best” crude oil on the planet for producing refined products that are low in sulphur are located in the United States, the Urals, the North Sea, and Nigeria. The Permian Basin (west Texas) has been absolutely starved of investment for years. US Permian production is slowing down just when we need it the most. Consider investing in west Texas oil producers. I recently bought stock in Occidental Petroleum ($OXY), but I will admit I have not thoroughly screened the options. Shell ($RDS.A, $RDS.B) and Total $TOT both have strong presences in the North Sea. I’m sure are many other good options.
These standards are poised to strengthen the local economies of so many communities throughout Texas and across the United States. Implementing IMO 2020 on time is a win-win for our workers, our environment and our energy security. — Todd Staples, President, Texas Oil & Gas Association
The fact that ships will no longer be powered by a byproduct means a higher demand worldwide for crude oil, especially light crudes from places like Texas, Nigeria and the North Sea. This will lengthen global shipping routes. VLCC (very large crud carrier) ships, for example, are too big to go through the Panama canal, so they will have to go around the horn of Africa to transport crude oil to Asian refineries. Changing routes have already transformed the supply dynamics and will continue to do so.
Some of the names I own in the space include:
$EURN, $TNK, $FRO, $INSW and $DHT
Tanker companies operate on charter rates, which is basically a day rate for hiring the ship. Above a generally fixed opex level (fuel and debt payments are usually the largest expenses) it’s pure profit. These companies have struggled in recent years.
In the run up to #IMO2020, their day rates have improved greatly and these companies are going to return a lot of money to shareholders in the transition. Many of these companies have appreciated a lot this year, but are coming off of all time lows.
Crude oil carriers, or dirty tankers, are an integral part of global crude oil transportation, marketing and pricing. And in addition to burning fuel oil, they also carry it. So the ongoing changes in crude slates at refineries around the world, as well as displacement of high-sulfur fuel oil caused by IMO 2020, may have a profound influence on trade routes for dirty tankers, affecting ton-mile demand in unexpected ways. — Alex Younevitch, Managing Editor, Freight Markets
Oil refineries are ultimately the driver of demand for crude oil. They are the ones that purchase it from traders, speculators, producers, and SPRs (strategic petroleum reserves). They are the most complex, and arguably important part of the value chain in providing fuels to end users.
Refineries are graded based on a scale called Nelson Complexity. More complex refineries can produce a wider range of refined products from a wider range of crude inputs. The most complex refineries in the United States are $PBF and $HFC. $PSX, $VLO, and $MPC are also major players, and $XOM owns complex assets worldwide. S-Oil in Korea runs Asia’s most complex refineries.
The U.S. refining industry has invested more than $100 billion over the past decade to provide cleaner fuels, including ultra-low sulfur diesel and IMO 2020-compliant marine fuels, and many of these facilities are based in Texas. — Todd Staples, President, Texas Oil & Gas Association
Producing enough compliant fuel is mostly constrained by refiner capacity. There are fewer operating refineries in the United States today than there were 5 years ago, and capacity has only increased by 4.8% in that time. Refineries currently do not have enough capacity world wide to produce enough compliant fuel, diesel fuel, gasoline, jet fuel, and heating oil.
At least one of these refined products is going to get a LOT more expensive next year. The transportation industries are already bracing for it.
Complex refineries will be running near full capacity for the next few years, and additional refining capacity will need to be added for them to even meet demand. These are likely great investments and share prices have already appreciated some since mid year. However, valuations are still attractive.
The refining industry is on the brink of a major shift in the demand structure of bunker fuels, and refiners are making plans to meet changing product demand brought about by the IMO 2020 deadline.
The initial effect will be to create a huge disposition issue for some 3 million barrels per day (b/d) of high sulfur fuel oil (HSFO), globally. That volume will need be replaced by low sulfur fuel oil (LSFO), marine gasoil (MGO) and various low sulfur blends of gasoil and residuals, with some volumes absorbed by the power sector with the expected drop of HSFO prices. — S&P Global Platts
Refined product transportation
Once products are refined. they need to go to the fuel depots where they are needed. These are installations all over the world that store fuel that ships can use. The main US traded companies who transport these refined products are $STNG, $DSSI, and $INSW.
These ships are going to be running overtime, possibly for years, in order to move all of the new fuel in addition to moving existing refined products. Their day rates are currently very high and their order books quite deep. These companies will likely be excellent investments for the next two years.
These companies have already appreciated a lot this year, but I believe there is more to come.
“Shipping loves massive change in a short period of time. It just eats up capacity,” — Craig H. Stevenson, Diamond S Shipping
Bunkering and raw materials
Finally, we also do not have enough global storage capacity to store the old fuel (which can still be burned safely if a ship has a mini refinery on board that removes some of the sulphur) as well as the multiple, more environmentally new fuels, and our fuels like diesel, gasoline, and jet fuel.
We will need to mine and transport steel. Steel is fully recyclable and by far one of the most environmentally friendly building solutions. It produces safe, sound structures more quickly than almost all other building techniques. Steel is made by combining iron and coal (Surprise! We need coal!).
Fuel supply networks are already being stretched by the switchover to lower sulphur. The panelists pointed to various inefficiencies emerging in the fuel supply marketplace. Marc Holm, who runs Maersk’s fuel trading operations in North America, quipped that “being long steel is a good idea right now”, referring to looming shortages of fuel barges and landside storage capacity as the fuel markets begin to grapple with shifts in supply logistics. He noted, later on, that Maersk seeks to control its supply chain all the way through. — Barry Parker, Seatrade Maritime News
Companies that mine, process, and transport raw components, and then refine steel, are necessary to build the infrastructure needed for #IMO2020.
“there is not enough market and storage capacity in tanks to have everything necessary for the three degrees” — Rasmus Jacobsen, Monjasa Panama
Do your own research, don’t invest more than you can afford to lose, and good luck! You’ll learn a lot.
This fuel shift is definitely happening. The US has decided it’s in its best economic interest (it’s part of the US energy dominance strategy). Asia has also largely fully embraced the plan. In Singapore, starting Jan 1st 2020, you will face up to 2 years in jail time for using non-compliant fuel.
Things are going to get really crazy next year. I hope you can all get on board with doing something, enabled by private enterprise, that will help us become wealthier at the same time that we improve our planet. Thank you for reading!
Required disclaimer: I’m not a financial advisor, invest at your own risk. You shouldn’t listen to me. I’m an idiot and I don’t know what I’m talking about. These are my opinions only.