Ship emissions -- the next boost for distillate prices?

While onshore transportation fuel emissions restrictions have tightened dramatically, with on-road diesel going from 500 ppm sulfur to just 15ppm in the US, and in Europe down to as low as 10ppm, emissions restrictions on ship fuel -- known as bunker fuel -- have lagged.

The International Maritime Organization has been taking steps to cut shipborne emissions, setting up Sulfur Emissions Control Areas in the North Sea and Baltic Sea, in which bunker fuel faces a 1.5% (15,000 ppm) sulfur limit, rather than the 4.5% in effect in the open sea.

But after those baby steps, the IMO could take a leap forward this week, as it meets to consider various options to cut deeply into ships' sulfur dioxide emissions.

The first option -- a 0.5% sulfur cap worldwide from 2015.
The second option -- a 0.1% sulfur cap in SECAs from 2012.
The third option -- a global 3% sulfur cap from 2012, and a 0.5% sulfur cap in SECAs from 2015, with some micro-emission control areas with a 0.1% sulfur limit.

No matter which option is enacted, the cost to shipowners will go up, as the amount of distillate blended with residual fuel to make on-spec bunker fuel will rise. The uptick in distillate demand won't be huge, and will be felt mostly in the higher-sulfur distillate grades. That is, unless the IMO goes full-tilt and puts in place requirements that ships only use distillate. That would have a much greater impact, naturally, and a much higher cost to the shipping industry.