Maritime Industry Impact

• The ultra low sulfur distillates will displace around 3 million bpd of high sulfur fuel oil. A global shortfall of 1-1.5 million bpd of low sulfur fuels has been projected.
• Shipowners have the option of burning 0.5% ultra low sulfur fuels, installing stack scrubbers to capture sulfur in exhaust gas, or using LNG (liquefied natural gas) or MGO (marine gasoil).
• The industry’s cost of compliance has been estimated to be as high as $60 billion per year, resulting in increased freight costs across the board.

CRUDE SUPPLY and REFINING IMPACT

• IMO 2020 has created a premium on light sweet crudes.
• Since base oils and bright stock make up such a small percentage of a typical refinery’s overall production, production of fuels will drive crude selection process.
• Supplies of low sulfur residual fuel oil have not been sufficient to replace high sulfur residual volume used in fuel oil blending.
• Ergon’s refineries participate in the fuels market, but our primary focus continues to be excelling in specialty markets. Our production plans will see minimal impact from IMO 2020.

PRODUCT AVAILABILITY IMPACT

• The fuels market for high sulfur products has been reduced because of IMO 2020.
• Changes to processing and/or crude oil slates will be required. Low-complexity refineries without the ability to upgrade the bottom of the barrel may be facing significant challenges.
• Low viscosity products are being used in fuel oils, potentially creating market voids in some products such as transformer oils and drilling fluids.
• Ergon has been purpose built for production of lubes, with alternative outlets making up a small percentage of production. Our investment strategy has been to add technology that allows us to handle a wide slate of crudes and provide dependable, consistent naphthenic products.

PRODUCT DELIVERY IMPACT

• EIA 10/18 predicted a 10-20% increase in the cost of ground diesel, which will result in increased delivery costs.
• Gasoline/diesel crack spreads are expected to rise due to the change in regulations.
• As the January 1, 2020, deadline approaches, shipowners and refiners are formulating strategies to lessen the overall impact of IMO 2020, reducing the original predictions of widespread price hikes and limited supply. Most sources expect the market to readjust by 2025.

Shipowners and refiners have been working to formulate strategies to lessen the overall impact of IMO 2020 and to reduce the original predictions of widespread price hikes and limited supply. Most sources expect the market to readjust by 2025.