Home > Uncategorized > NEFI Advises Administration on ‘IMO 2020’

NEFI Advises Administration on ‘IMO 2020’

A new international regulation requiring low-sulfur marine fuel could affect the U.S. distillate market, including prices for heating oil, the New England Fuel Institute and other trade groups wrote the Trump administration. The regulation goes into effect at the end of this year.

At issue is a global regulation established by the International Maritime Organization (IMO) under treaty that requires ocean-going vessels to use marine fuel with a sulfur content of no more than 5,000 parts-per-million, down from 35,000 parts-per-million, NEFI reported in its newsletter, NEFI Energy Online News, or NEON. The regulation, known as “IMO 2020,” goes into effect on Jan. 1, 2020. Experts, including some within the administration, believe the regulation will impact global demand for low sulfur distillates in general and could affect prices for diesel fuel and jet fuel as well as home heating oil.

Joining NEFI in the letter were the Airlines for America and American Trucking Associations, which represent the airline and trucking industries, respectively. The letter was sent as a follow-up to a meeting between the three groups and White House officials earlier this year.

According to the U.S. Energy Information Administration (EIA), shifts in distillate pricing begin as early as mid-to-late 2019, with the most acute effects in 2020, NEON noted. “For 2020, [the EIA] is currently modeling IMO-related increases of 28 cents-per-gallon for diesel and 18 cents-per-gallon for jet fuel,” states the letter from the trade groups. The effects on low-sulfur blends of home heating oil are expected to be comparable to diesel fuel. The projection of a 28 cents-per-gallon impact on diesel and heating oil generally fall in the mid-range of expert forecasts, according to the NEON report.

NEFI, ATA, and A4A stated that while there is reason to believe there will be only nominal affects, the Trump administration should “prepare for any and all outcomes as it relates to the IMO 2020 transition, including the possibility of market disruptions.” The groups listed six recommendations that “can help ensure a smooth transition and protect American trucking companies, air transportation and home heating fuel consumers.”

Among these recommendations is the off-season restoration of the Northeast Home Heating Oil Reserve from its current storage of one million barrels (42 million gallons) to its statutory limit of two million barrels (84 million gallons). Releases from the heating oil reserve, as well as crude oil from the Strategic Petroleum Reserve, could be used to address any market dislocations should they occur. The groups advised the administration that it should maintain close communication with them and other stakeholders before, during, and after the transition period, which is to occur during the 2019-2020 winter period.

“The effects of IMO 2020 on our industry are not yet known, and expert opinions on the matter vary widely,” NEFI President and CEO Sean Cota said. “Still, President Trump wants to be prepared for any outcome, and rightly so… we hope our recommendations provide the tools necessary to aide in this effort.”

Here is the text of the letter:

Our organizations represent most of the distillate fuel consumed in the nation’s transportation and home heating sectors. We write regarding the International Maritime Organization’s rule to significantly lower the sulfur content of global marine fuel effective on January 1, 2020, commonly known as “IMO 2020.”

The American Trucking Associations (ATA) is the national association of the trucking industry, comprising motor carriers, state trucking association and national trucking conferences, created to promote and protect the interests of the trucking industry. ATA’s direct membership includes over 1,800 trucking companies and industry suppliers of equipment and services and, in conjunction with its affiliated organizations, represents over 30,000 motor carriers encompassing every type and class of motor carrier operation.

Airlines for America (A4A) advocates on behalf of the American airline industry. Annually, commercial aviation helps drive $1.5 trillion in U.S. economic activity and more than 10 million U.S. jobs. U.S. airlines fly 2.4 million passengers and more than 58,000 tons of cargo each day. Our industry does this while also operating as a model of safety, and with noteworthy environmental stewardship. Indeed, in addition to flying aircraft subject to rigorous regulatory controls on emissions that can affect local air quality, the U.S. airlines have a tremendous track record of fuel efficiency improvement and greenhouse gas emissions savings. A4A and its members are part of a global aviation coalition with aggressive carbon emission reduction goals going forward.

NEFI is the nation’s largest home heating oil trade association. These small, mostly family-owned and operated Main Street businesses deliver five billion gallons annually to more than six million homes. 90 percent of all heating oil gallons consumed in the United States are delivered to homes and businesses in the Northeast and Mid-Atlantic regions. Nearly all this fuel is now ultra-low sulfur and is often blended with American biodiesel. This results in significantly reduced emissions and increased efficiencies and consumer cost-savings.

The IMO 2020 rule was ratified by participating countries more than 10 years ago and reaffirmed in 2016. Since that time, our associations have been in close communication with our members to ensure they are aware of and are prepared for implementation of IMO 2020. We remain hopeful that we will experience an uneventful transition and minimal market disruptions.

Unanswered questions remain, however. The foremost of these is the total number of vessels that will either: (a) use on-board scrubbers, which will enable them to keep using high-sulfur fuel; or (b) utilize more expensive low-sulfur fuel. Rates of compliance and enforcement are also unclear and may vary from country-to-country, as well as whether all countries will accept the use of open-loop scrubbers. Ultimately, these factors create significant uncertainty regarding the demand for compliant and non-compliant fuels. As a result, disagreement remains among experts as to the extent to which IMO 2020 will impact markets for other distillates including diesel, jet and home heating fuels.

There is consensus, however, that our industries will be negatively affected by IMO 2020 pricing pressure. The U.S. Energy Information Administration (EIA) expects that shifts in petroleum product pricing may begin as early as mid-to-late 2019, with the most acute effects in 2020. For 2020, it is currently modeling IMO-related increases of 28 cents-per-gallon for diesel and 18 cents-per-gallon for jet fuel. For the effects on low-sulfur blends of heating oil are expected to be comparable to diesel. EIA also indicates that its projections generally fall in the middle of those put forth by various consultancies, energy analysts and investment banks.

It is important that the U.S. prepare for any and all outcomes as it relates to the IMO 2020 transition, including the possibility of market disruptions. We believe there are tools at the administration’s disposal that can help ensure a smooth transition and protect American trucking companies, air transportation and home heating fuel consumers. It is reasonable and appropriate for this administration to take steps to ensure that trucking companies, airlines and heating fuel consumers do not bear the cost of the maritime industry’s somewhat-belated efforts to lessen the environmental impact of its operations. For example, with the recent run-up in prices, the six largest U.S. passenger carriers alone expect 2019 fuel expenses to be approximately $2 billion higher, in total, than forecast just three months ago. While by no means solely attributable to IMO 2020, the impact of its implementation will extend this pain into 2020. Since petroleum markets will likely be strained by diminished output from Venezuela, and Libya, we would welcome any steps that could soften the incremental pressure from IMO 2020.

Therefore, we recommend the administration:

1. Solicit feedback from stakeholder industries, including the transportation and home heating fuel sectors and their respective trade associations, throughout the IMO 2020 transition. This might include regular stakeholder meetings and conference calls.

2. Immediately restore the Northeast Home Heating Oil Reserve from one million barrels to its statutory limit of two million barrels through the end of 2020 to provide a back-stop in the unlikely event of a market dislocation. A one-time exchange or sale of crude oil from the Strategic Petroleum Reserve (SPR) during a non-peak period could replenish the Northeast reserve.

3. Stand ready to release fuel from the Northeast Home Heating Oil Reserve and, if appropriate, additional oil from the SPR in order to address market disruptions that may arise during the transition.

4. Monitor the actions of OPEC throughout the IMO 2020 transition to ensure that any changes in the cartel’s output do not exacerbate adverse market impacts.

5. Continue to improve outreach and communication with industry stakeholders during the initial years of rule implementation.

6. Take additional steps as necessary to preserve American economic and energy security interests and minimize consumer impacts, while also fulfilling the nation’s obligation to implement and enforce the IMO 2020 rule. This may include, but is not limited to, actions to lower the cost of transporting crude oil and refined products. Thank you in advance for your consideration.

Leave a Reply

Your email address will not be published. Required fields are marked *

*