There is no single path for refiners preparing for the IMO’s upcoming global sulfur cap, which will take effect on January 1. Options range from pursuing expensive modernization projects that will further process high sulfur fuel oil (HSFO) and produce more IMO-compliant fuels, to proceeding with a business-as-usual approach and hoping the market takes care of the IMO problem.
While there are multiple paths refiners can take to address the sulfur cap, one option in particularly has stood out as a potential cure-all for IMO 2020 woes.
What is that cure-all you ask?
(Drum Roll Please)
Why it is none other than heavy-sweet crude.
In a sense, heavy-sweet crude is the holy grail of IMO 2020. These crudes have high yields of diesel and low sulfur fuel oil, both of which will find large refining margins in a max 0.5%S world.
While refiners would ideally like to get their hands on these heavy-sweet crudes, there is simply not enough supply to satiate global appetites. Actually, nowhere near enough. According to our data, heavy-sweet only made up 1.3 percent of global crude loadings in 2018.
The largest source of heavy-sweet crude in 2018 was West Africa, which exported 351,000 bpd of heavy-sweet crude. China has been the biggest beneficiary: it has accounted for some 112,000 bpd - or nearly a third - of all West African heavy sweet barrels.
This strength to China is driven by it locking in long-term contracts of heavy-sweet crude, ensuring a predictable flow of West African heavy-sweet crude to Chinese refineries.
The most prominent heavy-sweet crude emerging from West Africa is Dalia from Angola. Dalia made up 34 percent of all heavy-sweet crude exports in 2018. Nearly a half of Dalia exports are directed towards China, with 43,000 bpd imported into CNOOC’s Huizhou refinery. Other large takers include Spain, India and the United States.
Other prominent West African crudes include Doba and Lokele, both of which consistently travel east towards Asia.
The other source for heavy-sweet crude is Latin America, specifically from Argentina and Brazil. Argentina keeps most of its heavy-sweet Escalante crude within its borders, though exports are likely to increase in the coming years. Argentinian exports of Escalante stood at 50,000 bpd in 2018, double 2017's level. China is again a significant buyer, with the East Asian nation taking 20,000 bpd of Escalante last year.
Exports of Brazilian heavy-sweet Ostra crude stood at 40,000 bpd in 2018. Roughly a third were directed to South Asia, while the US also accounted for a third of flows. Offtake destinations vary, but include Shell’s Deer Park and Martinez refineries, as well as Valero’s Port Arthur refinery.
Latin American and West African heavy-sweet crude make up nearly 90 percent of global heavy-sweet supply. While more heavy-sweet crude will come on line in the coming years, supply will likely be incremental at best. Because there is a lack of supply, refiners will instead try to procure light-sweet crudes with minimal fuel oil yields. Lighter and sweeter crudes will be able to reduce fuel oil yields and produce greater quantities of higher-end light products.