- The first signs of IMO 2020 are affecting the oil market leading MPC to invested in complex refineries.
- High sulfur residual fuel estimated to become nearly worthless as the transition of marine fuels to low sulfur fuel oil. However, straight run fuel oil with 0.5% sulfur is now more expensive than Brent crude in northwest Europe for the first time in five years.
- Refiners operating complex plants with hydrocrackers and hydrotreaters can remove the high sulfur to produce IMO-compliant marine fuels.
A recent Seeking Alpha article describes a comprehensive but concise analysis of Marathon’s business, mentioning the potential impact of IMO 2020.
First Signs of IMO 2020 Impact
The transition to low sulfur fuel oil has already begun and refiners have begun building inventories of low sulfur fuel in the U.S.
As of the week ending June 28, 2019, stocks were 9 % higher than a year ago. It was estimated that the value of high sulfur residual fuel would become nearly worthless as the transition of marine fuels to low sulfur fuel oil.
However, straight run fuel oil with 0.5% sulfur is now more expensive than Brent crude in northwest Europe for the first time in five years.
IMO-compliant marine fuels
Refiners operating complex plants with hydrocrackers and hydrotreaters can remove the high sulfur to produce IMO-compliant marine fuels.
Engineered Marine Fuels
ExxonMobil recently announced it is ready to supply a new range of low-sulfur Engineered Marine Fuels to help ship operators comply with the rule.
Well-Positioned Among U.S. Refiners
Marathon Petroleum Corp (MPC) Chief Executive Gary Heminger said the switch to ultra-low sulfur diesel fuel for ships would not be a shock to the global oil refining industry.
He mentioned that the Garyville coker match project remains on schedule to complete the first phase in the fourth quarter of 2019 and the second phase in the first quarter of 2020 to take advantage of the new IMO bunker fuel requirements.
He also said, “The LARIC project at our Los Angeles refinery remains on track to be completed in early 2020 and will increase our ability to produce higher value distillates.”
Marathon Galveston Bay
Marathon Galveston Bay claims to be the second largest refinery in the U.S. with a Nelson Complexity index ranking above 15. It is type of facility Platts expects will ramp up distillate output after IMO 2020.
In its corporate presentation, MPC claims to be well-positioned for the new regs. It has more Resid Upgrading and Distillate Hydrotreating Capacity than its peers.
Tudor Pickering, Holt & Co (TPH) said in a March report that demand for low-sulfur fuels could double earnings in 2020 from 2017 levels for complex refiners like Marathon and Valero Energy Corp, (VLO).
However, MPC has diversified away from refining. In the June presentation, it shows that 50% of EBITDA. This implies that the benefit of a refining gain due to IMO 2020 will be more limited on its share price.
In addition, many of its refineries are inland. This limits supplying and exporting the marine-compliant fuel as well.
Conclusions
MPC is well-positioned to profit from IMO 2020, as they claim. However, though the diversification of the business may be very positive overall, it will limit the Company’s EBIDA impact from refining, limiting its refining capacity at seaports.
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Source: Seeking Alpha
