Pollution Rule Is Boon for Richest Refiners, Blow for Weakest

By Christopher M. Matthews and Christopher Alessi Features Dow Jones Newswires

The refining industry is facing its biggest disruption in years from a looming international air-pollution regulation aimed at slashing the amount of sulfur in marine fuel for oceangoing ships.

Continue Reading Below

The regulation doesn't go into effect until 2020, but its reverberations are already being felt. Analysts predict it will widen the gap between the refining world's winners and losers, making some richer while pushing others to the brink.

Some larger companies, including ExxonMobil Corp., Total SA and Repsol SA have invested billions in recent years to upgrade refineries, which will allow them to produce more lower-sulfur fuel and other products. They say they are prepared for the regulations, which are set by the International Maritime Organization and meant to reduce emissions that health officials blame for respiratory and heart diseases.

Some smaller companies, including Philadelphia Energy Solutions, the largest refinery on the U.S. East Coast, haven't yet begun to make the costly improvements.

"It's the biggest change to hit the industry in a while," said Clint Follette of Boston Consulting Group. "At this point, it's too late for most companies to put in those kinds of investments before 2020."

The International Maritime Organization, the United Nations' shipping regulator, last year mandated that oceangoing vessels cut the sulfur content in their fuel by more than 85% starting in 2020. The world's 50,000 merchant ships can either undergo costly retrofits to their exhaust systems, or use cleaner fuels such as low-sulfur diesel.

Continue Reading Below

Most large ships now use what is known as bunker fuel, a thick, sulfurous type of fuel that is often composed of residual oils, or the leftovers after diesel and gasoline have been separated from crude oil through refining.

Shipping companies are expected to opt for cleaner fuels, which will shrink the market for bunker fuel. Shippers consume as much as 4 million barrels a day of bunker fuel, and the regulation could cut demand by as much as half, analysts say.

That is bad news for simpler refineries in Europe and the U.S. East Coast that aren't able to process the dregs of the barrel into more valuable fuels and which will be stuck with a glut of high-sulfur fuel leftovers they will be forced to sell at huge discount, Mr. Follette said.

It is good news for the U.S. Gulf Coast, already the moneymaking center of the American refining industry. Many refineries there are more complex, meaning that they have technology that can take heavy and sour crude and turn it into more profitable, light products, in addition to bunker fuel.

Companies including ExxonMobil, Chevron Corp., Marathon Petroleum Corp. and Valero Energy Corp. have some of the nation's most complex refineries, according to Stratas Advisors global refinery rankings.

In addition to its existing assets on the Gulf, Exxon, in anticipation of the new rules, is investing more than $1 billion in new equipment that will be able to produce lower-sulfur fuels at a refinery in Antwerp, Belgium.

Others in Europe are also investing. Total has invested $1.31 billion at its refinery complex in Antwerp to increase its diesel capabilities and cut heavy- oil production.

Dario Scaffardi, executive vice president at Saras, said "small and unsophisticated" refiners will "all have a problem" in 2020, because "high sulfur fuel oil will be a product without a home."

The change comes at a bad time for the beleaguered East Coast refining sector, where many refineries have shut down in recent years.

Philadelphia Energy Solutions, a joint venture of private-equity firm Carlyle Group LP and Sunoco Inc., is one of the least complex major refineries in the U.S., according to Stratas Advisors.

The facility processes 335,000 barrels a day and primarily makes gasoline. It is already mired in debt, due to higher costs to secure crude on the East Coast than elsewhere in the U.S., declining gasoline consumption and millions it had to spend to comply with earlier regulations to blend ethanol into their fuels.

The company played down the impact of the new rule, saying the U.S. is producing more of oil it uses -- a less sulfurous, sweeter crude -- which will dampen the impact of the reduced market for bunker fuel and make it less expensive for the company to make cleaner fuels.

"The IMO 2020 regulation will create new demand for diesel until the shipping industry adapts to the new regulation," it said in a statement.

Write to Christopher M. Matthews at christopher.matthews@wsj.com and Christopher Alessi at christopher.alessi@wsj.com

(END) Dow Jones Newswires

November 07, 2017 10:53 ET (15:53 GMT)