Marpol Annex VI

13 March 2017

About SAPIA

The South African Petroleum Industry Association (SAPIA) represents the

collective interests of the South African petroleum industry. The Association

plays a strategic role in addressing a range of common issues relating to the

refining, distribution and marketing of petroleum products, as well as

promoting the industry’s environmental and socio-economic progress. SAPIA

fulfils this role by contributing to the development of regulation in certain areas

of South African policy; proactively engaging with key stakeholders; sharing

research information; providing expert advice; and communicating the

industry’s views to government, members of the public and the media.

November 2016

The annex is about GHGs (efficiency)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2000 2005 2010 2015 2020 2025

Su

lph

ur

Co

nte

nt

% (

w/w

)

Sulphur cap of fuel oil used on board ships – MARPOL Annex VI Reg 14

Sulphur limit requirement in

emission control areas

All shipping subject to IMO

Regulations

Limit enforced by 2020

worldwide

• Annex VI first adopted in 1997 and focused on the prevention of air pollution from ships

and to limit SOx, NOx, ODS and VOCs - subsequently expanded to include energy

efficiency measures for shipping

• S14 (1) regulates the maximum sulphur content for fuel oil used on board ships

• At Marine Environmental Committee Protection Committee (MEPC 70) a sulphur cap of

0.5% from 1 January 2020 was mandated

• Decision based after studies to assess the fuel oil availability in terms of S14 (8)

• Terms of reference drawn up and contract awarded to CE Delft / Stratas consortium

• Supplementary study following the same terms conducted by Ensys / Navigistics

Options for compliance

Scrubbers

Ultra low

sulphur fuel oil

Alternative

fuels

Decommission

• Annex VI provides for the use of scrubbers

• ROI ? – vessel size / price delta / installation capacity

• Not all ex - ECA ships ready by 2020 (penetration ~20%)

• Requires plot space (cargo, stability, power impacts)

• Availability would be an issue by 2020 (Ensys study)

• New market potential for ULSFO at significant margins

• Supply may increase with investments if margin sustained

• LNG holds potential but significant investment for

conversion of the existing fleet and provision of port

infrastructure required in areas where LNG available• Other alternatives (biofuels) not considered viable

• Decommission for older vessels - hasten phase out

• Increase in number of eco ships with improved efficiencies

• Likely upward push to freight rates

Fuel Oil / Bunker quality

• Fuel Oil quality is a direct consequence of the processing route chosen to

upgrade residue

• Crude oil also obviously has a major impact - South Africa’s crude oil diet has

been ‘sour’ – high sulphur originating from the Middle East

– Middle East crudes formed original basis of design

– Changed over the years to include ‘sweeter’ West African grades for lower sulphur

transportation fuels production

• Result - South African heavy fuel oil tends to be high sulphur

– Sulphur content has reduced over the years due to the processing of West African

crudes – but insufficient to met the sulphur cap

• Distillate bunker fuels - sulphur quality varies

– Dependent on each facility and local plant / port logistics

– But not seen as a major stumbling block to Annex VI implementation (replacement with

current diesel quality – road fuels supply impacts ?)

Sulphur handling

• South African imported crude diet is now ~50% ME / ~50% WAF

• Sulphur is distributed unevenly throughout crude oil with the highest levels in the

heavier components making up the bulk of heavy fuel oil

– Requires targeted refining to remove sulphur - else it remains in the product

• Heavy oil treatment has generally followed two paths worldwide

– Coking – conversion to solid coke for use in alternate markets

– Visbreaking – reduction of fuel oil viscosity

– Dependent on local and regional markets for coke and fuel oil

• Further sulphur reduction of heavy oils by hydrodesulphurisation techniques are

typically used

– Treatment with hydrogen at pressure and temperature over a catalyst

– Expensive and uneconomic in the current environment ($1 billion)

– Uncertainty as to whether SA oil refinery’s are able to meet the sulphur cap for HFO –

potential for closures ?

– Likely major switch to distillates – potential for regional shortfalls ?

Heavy oil treatment

• Residue hydrotreating (short / long residues) prompts further configuration questions –

fuel oil only ? RFCC ? distillate production ? hydrogen availability ? sulphur plant ?…

• Solvent deasphalting also available but often used in conjunction with base oil plants –

processing options for DAO ? pitch quality / production ?

• Likely SA refiners will not respond by reconfiguration of facilities but will wait and see

• Severe thermal cracking of residue into

solid coke and liquid fractions

• Liquid fractions require upgrading

• Coke aimed to two primary markets

• Fuel – cement / boilers

• Anode – metallurgical (Al, Fe etc)

• Coke calcining dependent on markets

• Most of the deleterious products (sulphur

etc) end up in the solid coke

• ‘Primary’ route chosen by US Gulf Coast

refineries to upgrade residual crude oil -

domestic demand for coke

• Mild thermal cracking of residue to reduce

FO viscosity and produce lighter fractions

• Liquid fractions require upgrading

• Reduces the amount of high quality fuel

(diesel) to be blended into fuel oil to meet

specifications

• Deleterious products remain in the fuel oil

• ‘Primary’ route chosen by European

refiners to meet demand for bunker fuels

in Europe

• All SA refiners followed this processing

scheme in original designs and retained

VisbreakingCoking

Options for production

• Shift to increased WAF processing to balance fuel oil sulphur requirements ?

– Availability of types of WAF could be insufficient to meet demand

– Capability of refineries to process increased WAF not proven (acid ?)

– WAF not great for other products – distillates, bitumen and base oils

– Unlikely that sulphur cap will still be met for HFO

• Design and install units for fuel oil to meet sulphur requirements – unlikely

• Potential for blending back quantities of distillate into HFO to meet sulphur cap

– Large volumes could result in flash, viscosity, stability issues

• Export high sulphur fuel oil to international markets while maintain throughput

– Likely export into a long market at low prices

– Export infrastructure required for large scale exports of fuel oil

– Heavy fuel oil bunkering market significantly reduced unless imported

• Cut back refinery throughput to balance fuel oil production / sulphur / qualities?

– Throughput reduction would need to be met by increased imports for all fuels – port

logistics ?

Refinery ops globally (Ensys)

• Crude runs would increase

– Higher rates due to increased intensity and associated higher F&L

– CO2e emissions will rise

• Lower sulphur FCC feedstock could be an attractive marine fuel blendstock

– FCC could then use high sulphur streams but will require addition of scrubbers to

control emissions

– However major investment requiring several years for planning and construction

• Higher hydrocracker utilisation – availability crucial

• Expected increase in catalytic reformer rates / severity – to address hydrogen

deficit but will impact gasoline and LPG pools

• Likely to be insufficient sulphur plant and hydrogen production capacity

– Incremental sulphur recovery estimated at ~15%

• Changes to regional crude runs and shifts in crude flows expected

• Initial compliance option open to shippers is a switch to marine distillates

– Potential for disruption to other distillate markets

– Safety / performance issues ?

Focus shifting to implementation

• At MEPC 70 resolved that further consideration on what additional measures may

be developed to promote consistent implementation of the 0.50% global sulphur

limit to be considered at MEPC 71 in May 2017

• Joint submission by ICS, BIMCO, INTERTANKO et al to PPR (PPR 4/20/3)

suggest these should be grouped into four areas;

– Initial transitional issues arising from shift from 3.50% S to 0.50% S ‘overnight’

– Machinery impact with fuel oils of 0.50% S max and especially potential safety concerns

that may arise from the use of new fuel sources and blends;

– Verification - mechanisms necessary to ensure a level commercial landscape

– Any regulatory amendments or guidelines necessary to address these issues and

promote consistent implementation of the 0.50% m/m sulphur limit.

• Submission by IPIECA to PPR notes that not all ships for which scrubbers are

economic will be equipped by 2020

– Will cause transitional issues Initial transitional issues arising from shift from 3.50% S to

0.50% S ‘overnight’

– Machinery impact with fuel oils of 0.50% S max and especially potential safety concerns

that may arise from the use of new fuel sources and blends;

Sources: PPR 4/20/3; PPR 4/20/7

South African activities

• South Africa is one of 10 pilot countries1 to implement the provisions of Annex VI

under the Global Maritime Energy Efficiency Partnership

• GloMEEP aimed at supporting the uptake of energy efficient measures for

shipping and supports the pilot countries through

– Advising on legal, policy and institutional reform

– Awareness raising and capacity building

– Establishment of public private partnerships to encourage technology transfer

• Local steering committee formed to implement aspects of Annex VI with

objectives, among others

– Domestication of Annex VI into local law

– Development of capacity for effective flag and port state control

– Reduction of atmospheric emissions from shipping

– Collection and sharing of data

– Improving energy efficiency of vessels

– Increased investment in R&D

• To date two steering committees have been held

1. Other countries: Argentina, China, Georgia, India, Jamaica, Malaysia, Morocco, Panama, Phillipines

Conclusions

• The 0.5% S cap is set to be enforced from 2020

• Concerns by bunkering and ship owning industry

– Availability of compliant fuel

– Anticipated increased costs to shipping – distillate costs and / or scrubbing

– Safety / blending stability

– Installation / availability of scrubbers

• Likely to cause disruption to distillate and marine fuel oil markets

– Potential for major surplus of high sulphur fuel oil that will be required to be cleared into

other markets

• Will likely affect refining operations – changes to throughput and increased

severities with consequent shift in product pools

– Further potential for shift to sweeter crudes increasing sweet / sour differential

– Short term compliance operation is the increased supply of marine distillates

– Locally expect a wait and see approach

• The focus is now on transitioning to the 0.5% S cap

What takes precedence ?

• Major focus in Africa to improve air

quality and reduce the incidence of

non-communicable chronic

diseases

• UNEP objective is to have

significant penetration of 50 ppm S

diesel by 2020 and 10 ppm S by

2025 across Africa

• Will require significant investment in

African refining infrastructure to

achieve this ambition – short of

closing refineries

• Priorities now lie where –

addressing the road transporting

issue or marine ?

End

Thank you

Dankie

Ngiyathokoza

Ke a leboha

Ke a leboga

Ke a leboga

Siyabonga

Inkomu

Ndo livhuwa

Enkosi

Ngiyabonga