S&P Global Platts Analytics Spotlight

IMO 2020 now on U.S. administration’s radar but that is unlikely to delay implementation

Despite recent reports that the Trump administration is seeking to delay/ease the rollout of tighter global bunker fuel specifications set to go into effect on January 1st, 2020, we do not think that the implementation timing will change. Consequently, much wider crude and product price differentials and disruptive operational changes are still very likely to occur as discussed in our recent studies and seminars.

The underlying reason for limited U.S. influence in this situation is that the specs apply outside of U.S. jurisdiction and enforcement is largely outside of U.S. control. Furthermore, the specs were agreed to by the roughly 100 nations who are members of the International Marine Organization (IMO) over 10 years ago and to change that agreement would require a 2/3 majority vote – and each country has only one vote. The test of this will come at the October 22-26 meeting of the IMO’s Marine Environment Protection Committee (MEPC). At that meeting, there is a proposal to include an “experience building” phase as part of the implementation schedule. Effectively, it is a plea for lax enforcement initially. But how could that work, who would decide which ship-owner gets to use inexpensive fuel and who would be forced to use expensive low sulfur grades? As a practical matter, it would seem difficult to implement. Preliminary indications are that the proposal was not approved.

In addition, the rules under which the IMO operates require a significant comment/review period – a minimum of 22 months after submitting a proposal – before it could go into force. So it is too late to enact a change that would affect the January 1st 2020 date. The only exception to this appears to be if there is a finding of unsafe operations, not economics, and that case has not been effectively made.

In public and in private, IMO officials have said there is essentially zero chance for a delay.

Given all that, what could the Trump administration do that would help balance markets or reduce pump prices (something that is likely of concern in an election year)?

  • Release sweet crude from the SPR: The SPR as of July had 255 million barrels of sweet and 405 million barrels of sour; current plans are to sell off 290 million barrels over the next decade. This would displace sour crude on the margin, help to restrain sweet crude flat price upward movement, and add revenue for the Federal budget.
  • Release heating oil from the strategic reserve: Doing so during the winter would help Northeast voters heat their homes but the volume is small (1 million barrels).
  • Relax the 0.1% S Emission Control Area (ECA) currently in effect around the US: Only marginally helpful, but sounds impressive.
  • Choose to not enforce the ban on US flagged Ships (Jones Act vessels):  Very few vessels are flagged in the US, so the impact would be minimal. Furthermore, most US vessels operate largely within the US ECA with its own tighter specs.
  • Temporarily relax refinery sulfur emission limits: This would allow FCCs to run higher sulfur feeds (there is an additional issue of the split between Federal non-attainment and State level control).
  • Store high sulfur HFO in now empty SPR facilities??? (We have not evaluated the technical feasibility of this – but it is a thought).

What could the U.S. Administration do in reaction to IMO 2020 that would be unhelpful, difficult or counterproductive?

  • Derail the IMO implementation: Very hard to do as it requires the cooperation of many nations.
  • Ban U.S. diesel exports: Counter-productive globally; but the Executive branch has authority to do so under section 232 of the Trade Expansion Act. After a finding by the Secretary of Commerce that imports/exports impair U.S. national security, the President can prohibit trade. That would reduce U.S. diesel/jet price crack spreads but refinery runs would fall and that would probably raise U.S. gasoline prices. And it would also spike global prices for sweet crude and products as others scramble to cover. The net effect might actually hurt U.S. pump prices.
  • Impose a “Windfall Profit” tax on refiners”: Possible, but requires an act of Congress.

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