Wednesday, September 25, 2019 / 11:10AM / By
CSL Research/ Header Image Credit: Petroleum Economist
The refining industry is on the brink of a major shift as the International Maritime Organization (IMO) 2020 deadline is fast approaching. The new IMO regulations limits sulfur content of bunker fuel to 0.5% (down from 3.5%) and will take effect on January 1, 2020.
According to Logistics Management, a renowned global logistics information company, about 90% of global trade moves in the approximately 51,000 ships composing the world fleet. The fleet majorly run on High Sulphur Fuel Oil (HSFO) which, according to a Goldman-Sachs study, accounts for almost 90% of all sulfur emissions globally. These emissions have become a major environmental concern and prompted the adoption of the IMO 2020 regulation.
The implementation of the regulation will leave fleet with two options: convert to pricey low-sulphur oil or blend of high-sulphur and low-sulfur oils to meet the emission standards. This will create more demand for Low-Sulphur Fuel Oils (LSFO) like Nigeria's crude grades. The sulphur content in Nigeria's crude grades range from 0.1% to 0.2%, which makes them IMO 2020 compliant.
Since October 2016 when the new regulation was agreed upon, the premium on Nigeria's crude grades against the spot price of Brent- the global benchmark has been trending upwards. The rise in premium has been stronger in 2019 as the new rules draw closer. Year-to-date, bonny light has traded at an average premium of US$1.5/bbl compared to a US$0.9/bbl average premium at which it traded in 2018.
In our opinion, implementing the new IMO 2020 rules will give Nigeria an edge with the pricing of its crude grades in the global market. This will be particularly positive for the already strained government purse. However, consumers might need to bear the brunt of the higher shipping cost that will come with implementing the new regulation. Being an import dependent economy, an upward review in global shipping charges will feed into consumer prices and intensify domestic inflationary pressure, in the face of expectations of an upward revision in VAT and electricity tariffs.