The energy front has been quiet for the past week since we entered that awkward period between Christmas and New Year’s where markets are technically open but most people are out of the office, so market activity is relatively low.
As we begin 2020, Mexicans wait to see how their president will conduct business after holding power for over a year. The excuse of inheriting a bad economy from the previous governments is not an argument that will hold much longer with citizens, meaning President López Obrador and his Morena party need to start taking responsibility for their decisions and avoid scapegoating, a tactic the party used multiple times last year.
Whether the party was right or wrong in its judgment, it is time for Morena to take the bull by its horns and steer the country under its agenda, taking full responsibility for the consequences of its actions.
Today I want to talk about a legal change in global fuel usage and legislation I briefly commented on in early December. Entering a new decade, the International Maritime Organization (IMO), an institution that governs maritime regulations and is a subsidiary agency of the United Nations, implemented IMO 2020. What is it and why is it relevant to the common Mexican and how will it affect Mexico?
In short, the IMO implemented a change effective January 1 forcing the shipping sector to reduce significantly their emissions, that is to say their carbon footprint, in international waters. As a result, tankers will now have to utilize a cleaner refined product fuel.
In essence, it will be a cleaner diesel than the dirty fuel oil they have used. The regulation means our seas will see an 80% reduction in sulfur emissions. When we talk about refined product fuel, we are referring to the production of separated fuels that are created when crude oil enters a refinery. The long-chain and higher-weight hydrocarbon makeup of crude oil converts to more widely used refined fuels such as gasoline, diesel and jet fuel.
Through this process, the cheapest of the refined fuel produced is known as heavy fuel/fuel oil or bunker fuel. There are subtle differences in the chemical makeup of these fuels but essentially they are the densest residual fuels created with the highest content of sulfur and dirt still in the fuel.
After the Great Depression and the Second World War, there was a move by shipping companies to stop burning coal for energy and turn to oil. Since fuel oil was “bottom of the barrel” and therefore cheap, it became common for ships to use it. There were financial and safety reasons for it too: ships literally burn tonnes of fuel and therefore a less expensive, highly sulfuric fuel is going to be cheaper to buy, and it has a higher flash point, reducing the danger of explosions.
The fuel’s higher energy content gave shippers more value for money in the low and medium speed engines used by ships that travel at much slower speeds than other forms of transportation.
IMO 2020 means that the current maximum fuel oil sulfur limit of 3.5 weight percent (wt%) will fall to 0.5.
How will this affect Mexican consumers?
Higher demand from shipping companies for low sulfur distillate fuels will push refineries worldwide to use middle distillates such as diesel-based marine gasoil (MGO), diesel (especially ultra-low sulfur diesel) and jet fuel to blend down HSFO (high sulfur fuel oil) and produce the compliant fuel. However, Pemex’s refineries do not produce the middle distillates, meaning that it and its trading subsidiaries will have to import diesel from the U.S. and other nations to be able to supply ships that enter Mexican ports.
From a pricing standpoint, if more diesel is used to produce MGO this will tighten supply in the refined fuels market, causing refinery margins – including jet and diesel fuel – to spike. This will have a knock-on effect for consumers in Mexico since there will be less availability of the aforementioned fuels in the U.S., meaning the cost of gasoline and diesel will increase since they are priced into an import pricing structure, given that Pemex also imports those fuels in large quantities.
Refineries with advanced processing flexibility could also decide to boost diesel yields at the expense of jet fuel production, adding the extra risk of lower jet fuel supply on the global market. But this is not an option for Pemex refineries that are heavy producers of fuel oil and, on average, are functioning at 30% capacity, which is why Pemex imports so much fuel.
How will this affect the Mexican environment?
Everyone in Mexico is fully aware of the contamination issues in some of its largest cities.
According to a report published by Nature Communications, “cleaner marine fuels will reduce related premature mortality and morbidity by 34% and 54% respectively, representing a ~ 2.6% global reduction in cardiovascular and lung cancer deaths and a ~3.6% global reduction in childhood asthma.” It has also been found that approximately 70% of ship emissions take place within 400 kilometers of land, waiting to dock at their respective ports.
In Mexico, a country that boasts 102 ports and 15 out-of-port terminals, this figure means a significant proportion of the population, especially communities that are perhaps unaware of the detrimental effects of sulfur oxides polluting the atmosphere.
IMO 2020 hopes to pave the way to less severe effects on respiratory systems and save marine life, reducing our carbon footprint in the world of commodity trading.
Shipping is the oldest form of merchandise trading and it is not a sector that is going anywhere so this type of law is essential to reducing emissions worldwide.
The writer is the founder of Indimex Group, a Mexico City company focused on the procurement, marketing, trading and optimizing of refined petroleum products as well as investing in and operating physical assets for the movement of fuels in Mexico and the United States. His bulletin about developments in the Mexican energy industry appears weekly on Mexico News Daily.