Brazil and Argentina: Winning on IMO 2020Tags: Argentina, brazil, Escalante, IMO 2020, ostra, Vaca Muerta
We noted recently that Mexico and Venezuela will lose out once the marine fuel sulfur cap goes into force in January. Next we turn our focus to Argentina and Brazil, which can expect to reap the rewards of the IMO’s spec change. Beginning in January, the sulfur cap for marine fuels will change from 3.5 percent to 0.5 percent to comply with international environmental standards. As a result, high sulfur fuel oil (HSFO) will fall out of favor, opening a bigger market for low sulfur fuel oil (LSFO).
The shift will have a dramatic impact on Latin American oil flows. The price, and to a certain extent the demand, for heavy-sour crude oil grades that yield greater quantities of HSFO will be affected by IMO 2020, delivering a blow to heavy-sour producers like Mexico and Venezuela. Simple refiners that do not have the capacity to reduce the sulfur content of heavy-sour oil grades will shift their slates to heavy-sweet crudes in search of greater yields for 0.5 percent sulfur marine fuels.
At the other end of the spectrum, producers of heavy-sweet grades, which yield LSFO, will see an increase in demand as the world changes its marine fuel specs. Therefore, producers of heavy-sweet oil like Brazil and Argentina will benefit from this new global policy.
Brazilian heavy-sweet Ostra grade will be among the winners of IMO 2020. Through October, Brazil has exported Ostra at a pace of 35,000 barrels per day, about 3,000 bpd higher than the average of the same months in 2018. Nevertheless, this crude grade only represents a tiny fraction of the country’s exports.
The Brazilian government has launched a campaign to open its energy market to international investors with the auction of fields, pipelines and refineries. Heavy-sweet Ostra grade, for its part, could also open Brazil to new markets in search of crude grades to create IMO-compliant fuel oil. The tight grip that Petrobras has over the energy sector, however, could discourage investors, as was the case in a recent offshore auction.
Nevertheless, Argentina is currently going through a severe economic crisis that has emptied its national coffers. The government of president-elect Alberto Fernandez will likely rely on the energy industry to boost the country’s battered economy and harvest much-needed foreign currency. IMO 2020 and Escalante grade could be key for the financial improvement of Buenos Aires.
About The Author
Amir Richani is a geopolitical analyst focused on Latin America. His research focus is on political, economic and social developments that could have an impact on global flows. Amir holds a BA in political studies from the American University of Beirut. He was the lead analyst at Eqlim prior to joining ClipperData.