IMO 2020 deadline is close – why Nigeria, OPEC should worry
Barely 35 days to the biggest shake-up to the shipping industry in decades, Nigeria and some Organization of Petroleum Exporting Countries (OPEC) members seem uncertain about what to do.
On January 1, 2020, the International Maritime Organization (IMO) will impose new emissions standards designed to significantly curb pollution produced by the world’s ships. The new regulation provides a 0.5percent global sulphur cap on fuel content, lowering from the present 3.5percent limit.
This new regulation in response to environmental concerns is the most impactful environmental regulation to date in the oil and gas sector and have far-reaching technical, commercial and operational consequences
At a breakfast event in Lagos, PricewaterhouseCoopers (PwC), a multinational professional services network with headquarters in London, said the regulation has serious implications for refiners, shippers and other stakeholders in the industry.
Implication for Nigeria
Tracking data published by Reuters said Nigeria’s biggest crude stream, Qua Iboe, is valued at a premium of $3.30 a barrel, the highest since 2013 while Refinitiv Eikon data showed Azeri Light, or BTC, has a premium of $5.10 to the benchmark, its highest since 2013.
Energy analysts said both crudes are valued especially highly by simple refineries as they are ideal for producing IMO-compliant bunker fuel oil as the focus now is on not producing high-sulphur fuel oil at all costs.
Steve Jones founding director at Energex partners said the new law will make Nigeria’s grade of crude oil (sweet crude) attractive in the export market due to its low sulphur content.
Jones also said that Asian countries could increase their demand for Nigeria’s sweet crude and Africa refiners will be the biggest gainers due to their close proximity to Nigeria.
Pedro Omontuemhen, energy utilities and resources leader at PwC Nigeria said, “The new law can be positive news if Nigeria can take advantage of the huge demand for its sweet crude in the export market however, it can be negative news if the impact of Nigeria’s fuel importation is maybe bigger than the impact of the increase in refined products.”
When asked if pump price of petrol will be affected, Omontuemhen said, “Clearly the new law will increase the price of shipping cost which will also lead to an increase in landing cost. So the government can decide whether to increase the price of retail petrol or bear the burden through the increase of under-recovery.”
Hameed Alaba, from US-based Downstream Advisors, said the new law is an economic incentive for Nigeria’s modular refineries to produce more sweet crude, because they would make better profit margins.
Nigeria as a net importer of petroleum products spent N766.1 billion to import petrol in half-year 2019, The Federal Government has said it will spend about N450 billion next year on fuel subsidy.
Implication for OPEC
Oil cartels like OPEC are likely to lose out given their over-reliance on heavy crude grades. In its World Oil Outlook, OPEC forecasted that compliance to the new law will be about 85percent in 2020 which will rise to almost 90percent by 2024 and to eventual near-full compliance.
Implication for shipping companies
The world’s two largest container shipping lines, Denmark based A.P. Moller-Maersk and Switzerland based Mediterranean Shipping Company (MSC) have both reportedly said they will incur extra costs of roughly $2 billion each by complying with the IMO rule.
“This is the opportunity of a lifetime for the shipping lines to jack up prices because the entire industry expects increased costs,” said Patrick Berglund, CEO of Xeneta, a Norwegian-based company that crowdsources freight data.
“My biggest concern is cost increases won’t be passed on. In a worst-case scenario, it could lead to another Hanjin situation,” he added, referring to the collapse of Hanjin Shipping in 2017, which had been the world’s seventh-largest container shipper prior to its financial demise.