New low-sulphur shipping rules now expected to be 'non-event' for Canadian heavy oil

Canada’s heavy oil producers have been through too much to be distressed by the International Maritime Organization’s new rules limiting sulphur content in marine fuels, particularly as demand for their barrels surges on the U.S. Gulf Coast, says MEG Energy CEO Derek Evans.

IMO 2020, as it is known, takes effect January 1, 2020, dropping the allowed sulphur content limit of shipping fuel from 3.5 percent to 0.5 percent.

Just this week an energy analyst told CNBC that the regulations are “the biggest change in oil market history.”

The new rules were considered potentially catastrophic for Canada’s heavy oil industry as recently as last year, but the view that could be more of a non-event, TD Securities’ Menno Hulshof said during the firm’s Calgary Energy Conference last week.

Evans agreed, as did Athabasca Oil Corporation Rob Broen, who was on the same panel.

“I think we all went through what a catastrophic event could be in December and November of last year. That put IMO 2020 into perspective,” Evans said, referencing the record breaking spread between WCS and WTI, which resulted in Alberta’s oil curtailment.

“There used to be these wonderful academic discussions about whether IMO was going to have a $3 impact or a $5 impact. When the differential blew out to $40 it really became somewhat inconsequential,” Evans said.

“As you think about IMO 2020 and you think about the U.S. Gulf Coast and you think about the lack of supply there, I just don’t see it having much impact.”

Alberta’s oil curtailment has helped shrink the light-heavy price spread to approximately $10 currently, but the bigger factor is the tremendous pull from the U.S. Gulf Coast for heavy barrels following U.S. sanctions on Venezuela, he said.

“You saw a massive pull as Venezuela effectively went out of business; they’re down significantly something like 600,000 or 700,000 bbls/d year over year. That’s creating a big vacuum and a world premium pricing market for any barrels you can get to that market today, and we don’t see that changing in the long term. We see that continuing on.”

The U.S. Gulf Coast is the world’s most sophisticated refining complex and should have no problem managing the IMO 2020 regulations, Evans said.

“They have the capability and the capacity to break those barrels down and create marine fuel that will meet the spec, but it isn’t a big part of the market,” he said, adding that the market could see a run-up in the price of Brent as demand increases as a blending fuel for European refineries that don’t have the same ability to crack the bottom of the barrel, with could in turn could boost prices for WTI.

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