On this edition of the IR News Letter we are honored by Mr. Bundit Hansapaiboon, Executive Vice President, Planning and Trading Business, to analyze and discuss Bangchak’s view on the oil price situation and outlook when the ‘IMO 2020’ measures, which is expected to instigate monumental change for the oil market, with its date of enforcement approaching ever closer.
Q: During the current year, we would often hear analysts in the energy sector circle mention the IMO 2020 regulation, while some investors have yet to have the chance to look into the specifics about what this measure entails, to whom it will be enforced upon, as well as how. Would you [Mr. Bundit] explain about the measure a little, to help with our understanding?
A: The IMO 2020 measure is a product of the International Maritime Organization, also known as IMO, to enforce international convention to prevent pollutants generation from ships. The MARPOL ANNEX VI necessitate fuel oil (Bunker Fuel) used by ocean faring vessels to possess no more than 0.5% sulphur content in weight from the current 3.5%. This is to lower air pollution created by ships and will be enforced on the 1st of January, 2020 in respect to the resolution passed by the 70th Marine Environment Protection Committee in October 2016.
This compulsory measure will affect every ship with the size of 400 Tonnes Gross upwards, offshore gas and oil production platform both fixed and floating types, as well as all types of gas and crude oil drilling rig that will be passing through or remaining in the waters of the 93 countries that have accepted the convention (as of May 21st, 2019) from the 174 IMO member countries. The countries that have accepted the Marpol Annex VI convention are China, India, Japan, South Korea, Indonesia, Singapore, Malaysia, the Philippines, and Vietnam to name a few. As for Thai waters, this mandate has yet to be enforced as that Thailand have not currently agreed to this convention.
Q: Are there any anticipation and outlook, as to how this policy would affect the oil industry?
A: As for the effects on crude oil price, it has been forecasted that the enforcement of this new measure will alter the demands for the various types of crude oil in the world. It is expected that demand for crude oil with high Sulphur content (Sour Crude) will decline, due to refineries partially opting for crude oil with lower Sulphur content (Sweet Crude) as substitute; in order to produce fuel oil which comply the aforementioned IMO specification. This would increase the propensity for Sweet Crude price to be higher than that of Sour Crude’s due to its higher demand, or it can be said that Sweet Crude’s premium would increase.
As for effects on finished oil products price, prior to this, ship fleets were able to utilize high Sulphur fuel oil to operate their fleet; they would have to adapt to lower Sulphur content in the fuel that they are using to not exceed specified levels. They may go for the method of Fuel Oil Blending with other products to lower the Sulphur amount, and diesel would be used as part of the mixture for bunker fuel. This has led to speculations that Gasoil Crack Spread will adjust upward in accordance to higher demand for diesel fuel usage.
As for the impact on the oil refining industry, it is expected that refineries will invest in the construction of Residue Hydrotreating Units or Residue Cracking (a unit that rearranges the molecule structure of residues left from the fractional distillation unit into a product with added value) in order to lower the amount of fuel oil with high Sulphur content.
Q: As BCP operates a refinery business, what kind of effects do you think the measure will have on the company?
A: Bangchak anticipates that the IMO measure will positively affect the company. It is hypothesized that the GRM in the following year is likely to increase, following the trajectory of the Gasoil Crack Spread that improves, especially during the industry’s transition period in the first half of 2020. Bangchak refinery’s product yields higher portion of Diesel than any other products, allowing the company to benefit from increasing Gasoil Crack Spread. Furthermore, the company is capable of producing Low Sulphur Fuel Oil (LSFO) to be sold in the bunker fuel market (Bunker IMO) as well. 70 to 80% of Bangchak refinery product yield consists of the product with high value, these products are Diesel, Jet fuel (Middle Distillate products of which value roses following the rise in Gasoil Crack Spread), and Low Sulphur Fuel Oil which is sought after by the market made up of IMO members.
However, sweet crude price has a tendency to increase following its rising demand. In regard of the situation, Bangchak has already prepare alternative options in order to use other types of crude oil in the refining process.
Q: Would you [Mr. Bundit] kindly please tell us about the various steps that Bangchak refinery has taken to accommodate this measure which is going to be enforced next year?
A: The company will still be refining crude oil with the same quality as the ones we are using which yields large amounts of Middle Distillate Products and has low Sulphur, which would result in products that meet the requirement set forth by the IMO. Moreover, the company is moving forward in the market to look for customers who has demands for LSFO or acquiring additional partners. Also, we continuously monitor the value of the fuel oil product that can be currently produced, as well as making preparations to refine other types of crude oil as alternatives.
Q: Lastly, what is the company’s view on oil price, and finished product crack spread for next year?
A: Our view on Dubai crude price is that it would be moving within the 55-65 $/BBL range, pressured from the concerns of an economic recession due to the trade war between the US and China, which has a tendency to affect oil demand to subsequently recede as well. As such, the International Energy Agency (IEA) has adjusted its estimation of the 2020 global oil demand down to 1.2 million barrels per day, a decrease from the previous estimation of 1.4 million barrels per day. However, oil price is still supported by factors such as the conflicts between Iran and the US, which has resulted in unrests within the Middle East where the large oil producing countries of the world are located.
As for the Fuel Oil crack spread, it has a propensity to adjust downward in relative to the demand for High Sulphur Fuel Oil (HSFO) which is being replaced by Marine Gasoil and LSFO.
Whereas the Gasoil crack spread is likely to increase beyond the level of current year, due to surging demand with respect to the earlier explanation, especially during the transition period where the entire industry is making adjustments during the first half of 2020.
Mr. Bundit Hansapaiboon
Executive Vice President, Planning and Trading Business
Bangchak Corporation Public Company Limited