Challenges or opportunities for African refining: MARPOL regulations David Bleasdale ARA WEEK March 13th 2018 CITAC Africa Ltd The Downstream African Energy Specialist

Some history International Marine Organisation‘s (an UN body responsible for marine fuel regulations) Marine Environment Protection Committee (MEPC) in October 2016 approved a report on “Assessment of Fuel Oil Availability”: “In all scenarios, the supply of marine fuels (by 2020) with a sulphur content of 0.50% m/m or less…is projected to meet demand”

01.01.2020 MEPC in October 2016 decided that the sulphur content limits for fuel oil in regulation 14.1.3 of MARPOL Annex VI (i.e. 0.50% m/m) shall become effective on 1 January 2020 MEPC approved to permit continued supply of high sulphur fuel oils to ships fitted with approved Exhaust Gas Cleaning Systems

Expected changes in 2018/19 Agreement on amendments to existing Guidelines: 2009 Guidelines for Port State Control Agreement on the banning of carriage at sea of high sulphur fuel oil in bunker tanks? (April 2018) Agreement on new FONAR guidelines: information sharing and standard format for reporting on fuel oil non-availability reporting FONAR is not a Get Out of Jail Free Card card, but an admission of guilt

So how will MARPOL impact Africa?

The scale of change The International Energy Agency (IEA) stated in their 2017 mid-term oil outlook report: “Lowering the bunker fuel emissions cap from 3.5% to 0.5% is easily the most dramatic change in fuel specifications in any oil product market on such a large scale.” IEA Market Report Series: Oil 2017: Analysis and Forecasts to 2022© OECD/IEA 2017 Certainly, the biggest refining change in my lifetime: Feedstocks, components and intermediates (high/low sulphur streams, high/ low flash material, HCO, LCO, VGO, LSSR, and crude oil differentials) will be centre stage, not just fuel oil MARPOL will affect the value and composition of all products and the operation of nearly all refinery units

Why MARPOL matters for African refineries

MARPOL – the future? Price differentials will lead to incentive to cheat (15-30%?); Initially, VLSFO limited by supply; MDO will be initial default option; Scrubber uptake increases; LNG – penalised by weight and port availability.

Why Marpol matters? MARPOL will affect the value and composition of all products and the operation of nearly all refinery units FCC and HDC feeds can be expected to become relatively more expensive Many units will be under increased pressure All clean product prices can be expected to rise in consequence; impact on refining margins will depend on crude price differentials

Reality dawns There are no coordinated refinery plans and any refinery investment is aimed at reduce fuel oil production No refinery will want to produce compliant bunker fuel at current price differentials, so the pricing must change; and so will crude, feedstocks and intermediates pricing differentials; this is almost impossible to model Compliant bunkers will move closer to distillate pricing – until scrubbers recreate HFO market?

Reality dawns There will be different bunker qualities supplied around the world to meet shipping demand, leading to major risks of stability and compatibility problems; a major headache for ship-owners; Shipping companies are not aggressively fitting exhaust gas abatement systems despite the price incentive to do so: But will they post 2020? If they do, will the refiners by then have destroyed the high sulphur fuel oil that shipping looks to buy?

African fuel oil imports/exports North Africa typically exports very low sulphur fuel oil (<0.50S) Egypt can import for bunkers West Africa typically exports low sulphur (~0.50S) West and East Africa imports HFO for power and bunkers South Africa exports HFO (<3.50S)

Pressure points in Africa No refiner is investing to supply compliant bunker fuel oil; they are planning to invest in improving yields (reducing fuel oil) and to supply cleaner fuels for their domestic markets (desulphurisation and benzene extraction) Will LSSR in North Africa and West Africa go to bunkers or cracker feedstock? Sweet crude differentials will strengthen South Africa: compliant bunker supply will require crude feed switch or move to imported distillate. Logistic challenges?; growth in off-shore bunkers? West Africa: refiners will seek best value; little commitment to bunker market; growth in off-shore bunkers?

MARPOL challenges No refiner obligation to supply the shipping market Logistics: imports/exports; distillates/fuel oil Myriad number of players how to achieve common policy and procedures, especially on FONAR ? Control of off-shore bunkering? The temptation to cheat…

MARPOL opportunities? West African refiners to exploit low sulphur fuel and VGO production as VLSFO and feedstock cracks improve, subject to Flash and Viscosity? VLSFO producers increasing CDU throughput to meet inland domestic diesel demand, backed by VLSFO strength? High sulphur gasoil production to go into bunker pool as road fuel regulations improve to cleaner product (50ppm S), subject to 60◦C Flash? Higher distillate imports leading to arbitrage and logistic opportunities for importers (Africa is a net importer of distillate)?

There are still more questions than answers… Thank you

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