Multiple marine fuel choices fracture impact forecasts from new sulphur limits

CALGARY — A new wave of cold water is about to hit Canada’s much-buffeted oilsands industry but whether it will be a perfect storm or a tempest in a teapot is yet to be seen.

Tighter pollution rules by the International Maritime Organization are set to take effect Jan. 1. The new guidelines, dubbed IMO 2020, will limit the sulphur content of “bunker” fuel on ships to just 0.5 per cent, down from the current 3.5 per cent.

The deadline has been in place for years, but the change is still expected to wallop prices for heavy oil containing high levels of sulphur, such as raw bitumen from the Alberta oilsands. Bitumen makes up about half of Canada’s 4.6 million barrels per day of crude oil production.

The discount on Western Canadian Select bitumen blend crude prices versus North American benchmark West Texas Intermediate could almost double in January, said Alan Gelder, vice-president, refining, for consultancy Wood Mackenzie.

“In October, we’ve got the WTI-WCS differential at about US$16 per barrel. And we’ve got that widening out to the high-$20s in January,” he said in a recent interview from London.

He added the differential should moderate to about US$23 or $24 by the middle of 2020.

The price difference between WTI and WCS is a closely watched figure because it dictates oilsands profitability and royalties paid to the provincial government. When the differential widened to as much as US$52 a barrel at the end of 2018, a development blamed on pipeline capacity failing to keep up with oilsands growth, the Alberta government introduced production curtailments in a successful bid to narrow the spread. The production limits have since been reduced but not cancelled.

Analyst Phil Skolnick of Eight Capital says there was little evidence of a major jump in WCS differentials pricing for January crude oil trades that started in early December.

The impact of the new pollution rules is being softened by disruptions in the flow of competing heavy oil from Venezuela and Mexico into the U.S., as well as new petrochemical projects in Asia that need heavy oil as feedstock, he said.

“Canada is benefiting because of Venezuela, Mexico. With that, combined with the pull from these new petrochemical plants that are consuming medium and heavy oil, it’s helping to offset the risks of IMO 2020,” said Skolnick.

Companies that own refineries or oilsands upgraders are expected to benefit as the new standards will increase demand for refined low-sulphur fuels.

At its recent investor day, chief financial officer Dan Lyons of Calgary-based Imperial Oil Ltd. said it will offer four options for marine fuel customers at its Vancouver terminal — 3.5 per cent sulphur, 0.5 per cent, 0.1 per cent and blends made to order.

An expansion at its Lloydminster Upgrader on the Alberta-Saskatchewan border will help Calgary-based Husky Energy Inc. benefit from IMO 2020 as its diesel output will jump to 10,000 bpd from 6,000 bpd, said spokeswoman Kim Guttormson.

The company also produces diesel at its Lima Refinery in Ohio, which has been reconfigured to use more heavy oil.

Saint John-based Irving Oil Ltd. produces VLSFO (very low sulphur fuel oil) and marine gas oil at its Whitegate refinery in Ireland and is offering IMO-compliant fuels in New Brunswick through its expanded bunker operations, said spokeswoman Candice MacLean in an email. It also offers marine fuel oil in St. John’s, N.L., and Halifax, she added.

Most of the five million barrels per day of bunker fuel currently burned on ships is derived from the crude residue that remains after more valuable fuels such as gasoline and diesel have been removed in a refinery.

Following combustion, the sulphur in the fuel becomes sulphur oxide, a pollutant that causes respiratory problems and lung disease as well as acid rain. IMO 2020 is expected to prevent 8.5 million tonnes per year of sulphur oxide from entering the atmosphere.

The IMO first began restricting emissions in 2005 and its limits on sulphur in bunker fuel have been progressively tightened. Four “emission control areas” in Europe and North America already have a 0.1 per cent limit.

About 3.5 million bpd of bunker fuels consumed in 2019 are considered high-sulphur fuel oil. That is expected to fall to about 1.3 million bpd in January, according to Wood Mackenzie, as most ships will switch to alternatives including VLSFO and marine gas oil.

About 15 per cent of ships will have added ”scrubbers” by then to capture sulphur from their smokestacks and allow them to continue to burn high-sulphur crude.

Full compliance is not expected on Jan. 1. Some ships will be allowed to continue to burn high-sulphur fuel by citing safety concerns about switching to new fuel blends or because their scrubbers haven’t arrived yet.

Refiners are expected to be able to deliver about 1.4 million bpd of VLSFO in 2020, while demand for marine gas oil, a refined product similar to diesel, is expected to jump to about one million bpd in 2020 and gradually grow to about 2.4 million bpd.

The new fuel standard could eventually boost demand for liquefied natural gas, with Wood Mackenzie forecasting 22 million tonnes per year of LNG demand from shipping by 2030.

The high cost of switching to LNG means it will likely only be installed on new ships, said Gelder.

Not everyone is satisfied with the higher standards under IMO 2020.

Environmental groups including have called on the cruise and shipping industries to ban the use of scrubbers as they allow the continued burning of high-sulphur fuels.

They also call LNG a “false solution” that won’t help the industry reduce its greenhouse gas emissions.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Jason Aquino has been adding to his front lawn Halloween display for the past five years. “I wanted to do it big this year, because even in the pandemic, we can still enjoy Halloween,” says the Red Deer father.
Halloween spookiness rises to new level

Rare astronomical occurrence caps off a strange holiday

Alberta Health Services' central zone jumped from 162 active COVID-19 cases to 178 on Friday. Five additional deaths were reported provincewide, bringing the toll to 323. THE CANADIAN PRESS/Graham Hughes
622 new COVID-19 cases set another daily high Friday

Province confirmed 622 additional cases Friday

Advocate file photo
Man awaiting murder trial facing two new trials for breaching release conditions

Quentin Strawberry going to trial in March in connection with 2019 murder

Ecole La Prairie students and teachers dressed up in Halloween costumes and paraded by Barrett Kiwanis Place, while waving at the building’s residents in Red Deer on Friday. (Photo by Sean McIntosh/Advocate staff)
Ecole La Prairie students parade in Halloween costumes for Red Deer seniors

Dozens of Red Deer students put on their Halloween costumes to spread… Continue reading

Advocate file photo
Preliminary hearing set for Walmart shooting suspect

Chase Freed facing second-degree murder and attempted murder charges

Over the years, Janice Blackie-Goodine’s home in Summerland has featured elaborate Halloween displays and decorations each October. (File photo)
QUIZ: How much do you really know about Halloween?

Oct. 31 is a night of frights. How much do you know about Halloween customs and traditions?

Grand Chief Arlen Dumas of the Assembly of Manitoba Chiefs speaks in Ottawa on Thursday, December 7, 2017. Dumas says he's concerned about the growing number of COVID-19 cases First Nation communities. THE CANADIAN PRESS/Fred Chartrand
The family of Allan Landrie, shown in a family handout photo, is disappointed the Saskatchewan Coroners Service isn’t considering an inquest into the 72-year-old's hospital death. Landrie's death in September 2019 was ruled a suicide. More than three days had passed before his body was discovered locked in a hospital bathroom in Saskatoon. THE CANADIAN PRESS/HO
‘He was so sick,’ says daughter of Saskatoon man who committed suicide in hospital

Allan Landrie’s body was discovered three days after his death

Imagining the origins of Halloween

Long ago and far away, a small assemblage of English people gathered… Continue reading

Red Deer College president Peter Nunoda. (Photo by contributed)
Peter Nunoda: Winter term will be busier on RDC campus

In my column last month, I shared details about Red Deer College’s… Continue reading

FILE - In this Jan. 23, 1987 file photo, actor Sean Connery holds a rose in his hand as he talks about his new movie "The Name of the Rose" at a news conference in London. Scottish actor Sean Connery, considered by many to have been the best James Bond, has died aged 90, according to an announcement from his family. (AP Photo/Gerald Penny, File)
Actor Sean Connery, the ‘original’ James Bond, dies at 90

He died peacefully in his sleep overnight in the Bahamas

A man runs across the Carcross Dunes in Carcross, Yukon, on July 2, 2018. THE CANADIAN PRESS/Darryl Dyck
‘No manual or checklist:’ Yukon ditching fall time change this year

The territory decided to adopt year-round daylight time in March

Innovation Minister Navdeep Bains makes an announcement regarding vaccine procurement, in Toronto, on Wednesday, Aug., 5, 2020. Despite its status as an artificial intelligence hub, Canada has yet to develop a regulatory regime to deal with issues of privacy, discrimination and accountability to which AI systems are prone, prompting calls for regulation from businesses and experts. THE CANADIAN PRESS/Christopher Katsarov
Canada crawling toward AI regulatory regime, but experts say reform is urgent

5 million images of shoppers collected without consent at Canadian malls

Canada Artistic Swimming plans to ‘rip off the band-aid’ to create better environment

Canada Artistic Swimming plans to ‘rip off the band-aid’ to create better environment

Most Read