Industry experts say nearly a quarter of European demand for fuel oil could be snuffed out, as new regulations will likely force the shipping industry to switch to cleaner fuel by 2015.
Industry experts say nearly a quarter of European demand for fuel oil could be snuffed out, as new regulations will likely force the shipping industry to switch to cleaner fuel by 2015. New sulphur content specifications for ships operating in the Baltic, the North Sea and the English Channel will be revised down from 1.5 percent to 1 percent next July under legislation voted in by the United Nations' International Maritime Organization (IMO). In those key transport channels, shipping fuel (known as bunker fuel) demand makes up nearly a quarter of the European fuel oil market. Once a 0.1 percent cap is introduced in the original Emission Control Area (ECA) in Europe from January 2015, demand in the region for even the lightest fuel oil grades could collapse as shipping firms switch to lighter gas oil.
Colin Birch, vice president of energy consulting group Purvin and Gertz, said they are expecting a steep change in the gas oil market, as the quantity of fuel oil consumed in the ECA is estimated at 20 million metric tons.
?Material is potentially going to shift to the 0.1 percent market,? he said.
The global sulphur cap will be reduced from 4.5 percent to 3.5 percent in 2012 and eventually fixed at 0.50 percent in 2020.
Birch said that in the long run, it would take away the main outlet for material coming from high sulphur crude since they can no longer use the residue from those crudes to make bunker fuels.
He called it another large potential reduction in fuel oil demand.
Some 40 percent of the 90 million metric ton a year fuel oil market in Europe comes from shipping, while the rest comes from the manufacturing and power generation sectors.
However, they too are turning to cleaner natural gas or lighter oil grades.
In order to meet the potential surge in gas oil demand in 2015, European refiners will need to start investing in upgrades soon.
But many refineries are hesitant to commit funds as the differential of gas oil to crude oil -- known as the crack spread ? is languishing near five-year lows.
Stefka Ilieva, fuel oil analyst at energy consulting group Poten and Partners, said it is unlikely that refiners will see a long-term incentive to invest in residual fuel desulphurization capacity.
Purvin and Gertz estimate that with current refining capacity and planned upgrades, bunker costs could soar by about $300 a metric ton as a result of the switch to gas oil.
Although analysts were unsure of the costs involved, some suggest that one option would be for the shipping sector to fit devices known as scrubbers to remove sulphur from fuel oil onboard instead of during the refining process.
The 1 percent sulphur cap next year could boost European demand for low-sulphur grades by a profitable 15 million metric tons a year.
Traders expect diminishing demand in the high-sulphur market to send more exports to Singapore, the world's top refueling port.
Despite environmental legislation, demand for heavy products in Asia is set to rise since the region is not classified as an ECA -- it is only subject to more general global caps.