One scenario that has hung over the implementation of IMO 2020 is the possibility that the Trump administration, faced with rising gasoline and diesel costs that could be attributed all or in part to the new regulation, decides to pull the U.S. out of the pact.
The setup would fit the current political landscape – a multilateral organization with an international treaty of which the U.S. is just one of many signatories, so the whole issue of sovereignty can be raised; and reaffirming that sovereignty by pulling out of the treaty. The rule goes back to a 2008 decision by the International Maritime Organization (IMO), an agency of the United Nations that can be portrayed as a multilateral villain; rising oil prices hitting the average gasoline consumer; and in particular, increasing diesel prices affecting over-the-road truck drivers who would properly be seen as part of the demographic that makes up President Trump's base.
A diverse group that includes oil producers and independent refiners has issued a report under the auspices of Charles River Associates (CRA) that in effect says about a possible withdrawal from IMO 2020 – don't bother. It isn't going to make any difference.
The group that commissioned CRA to do the report is the Coalition for American Energy Security. It appears to have no other issue on its agenda except implementation of IMO 2020. It includes the U.S. trade association for refiners (American Fuel and Petrochemical Manufacturers, or AFPM), the biggest group of independent U.S. oil producers (the Independent Petroleum Association of America) and the cross-industry behemoth the American Petroleum Institute. The United Steelworkers, which represents many refinery workers, also is a member.
IMO 2020 is a rule being implemented by the multinational IMO, first agreed upon in 2008 and affirmed in 2016, to reduce the sulfur content of marine fuel. The first reduction was from no limit to 3.5 percent sulfur. The IMO 2020 rule limits sulfur to 0.5 percent on January 1, though changes to get ready for it are expected by fall.
IMO 2020 is expected to produce greater demand for an existing diesel product that is used in marine applications – marine gasoil – or a diversion of a diesel intermediate product, vacuum gasoil, that now goes to make over-the-road diesel (or gasoline).
The thrust of the report can be found in a series of points that most observers have been making for awhile about a possible U.S. withdrawal from IMO 2020.
– The U.S. is not that big a deal in the market for marine fuels, also known as bunker fuels. U.S.-flagged vessels are only about 1 percent of all merchant ships measured by volume. Sales of bunker fuels in the U.S. account for about 7 percent of global sales.
– A potential goal that a U.S.-opt out would have would be to encourage ships of other nations calling on U.S. ports to also be in non-compliance. "Flag States' control over compliance is
limited since Port States can enforce compliance on any ship entering their ports and waterways," the report says. "It is therefore highly unlikely that significant levels of non-compliance would be driven by Flag State non-enforcement."
– If the U.S. wanted to encourage ships to come into its ports and be non-compliant, it couldn't do it alone. "Such an arrangement alone would only have a minor impact on global non-compliance given the U.S. position in global bunker fuel sales and the high percentage of ships leaving the U.S. for countries that would not be willing partners in a non-compliance scheme," the report says.
– Other countries with significant ports have no intention of allowing IMO 2020 violations. To the contrary, Singapore, as the report notes, is threatening prison terms of up to two years for the captain of any ships coming to port there that are not in compliance. Rotterdam pushed for IMO 2020. The United Arab Emirates is not a member of MARPOL, the original treaty that led to IMO 2020. But one of its key ports, Fujairah, is demanding compliance from ships stopping there.
– This is not an issue where too many ship owners want to find themselves out of the mainstream. Companies already have sustainability goals, the report said, and they wish to "avoid negative customer perceptions." Some insurance companies have signaled that they may withhold coverage from non-compliant vessels.
– The U.S. may want to pull out because it doesn't want to be part of an international effort, but according to the report, it would need an international effort to have any impact. There would need to be a "coalition of IMO 2020 non-compliance trade partners" to have any significant shift away from MGO or VLSFO and back into HSFO. Such a grouping could use its breadth to try to force some ports to begin accepting non-compliant ships. There are several major countries that have not signed on with compliance for IMO 2020, including China. But Japan, the Netherlands and Singapore have, and given those countries' key roles in international trade, an effort to undercut IMO 2020 would face a formidable challenge if ships needed to avoid those ports of call.
The report is optimistic about the ability of the refining sector to meet the new demands, but that would be expected in a report funded in part by the AFPM and such larger refiners as Valero. The report also cites the increased production in the U.S. of low sulfur crude oil as a boost to the U.S. ability to produce compliant fuel.
But the crude oil from shale, while also being low sulfur, has a gravity that is considered "light" and does not produce a high yield of fuel oil. That is normally a benefit for most refiners, but not to meet the challenges of making VLSFO. (One market reaction from the preparation for IMO 2020 has been that crudes that are low-sulfur and heavy – an unusual combination – have increased sharply in value relative to other grades of crude oil.)
The report also doesn't see a significant change in price as a result of IMO 2020. It cites the Energy Information Administration report that sees the U.S. government agency projecting a 5 percent increase in diesel prices between 2019 and 2020. But the Charles River report itself sees only a change of about 4 cents/gallon; in other words, less than the price of diesel might move in a week.
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