Back in March, ClipperData unveiled its first forecast for marine fuel demand between 2020 and 2025. In recent weeks, we have updated our projection ahead of the IMO’s forthcoming 0.5 percent sulfur cap.
In our initial projection, we forecasted that shipowners in 2020 would retreat from high sulfur fuel oil (HSFO) and move to marine gasoil (MGO). We expected MGO to account for around 40 percent of marine fuel demand in 2020, due to healthy demand in emission control areas (ECAs) as well as demand from shipowners put off by potential compatibility and stability concerns with low sulfur fuel oil (LSFO). Our concerns about compatibility, stability and availability of LSFO across global ports led us to forecast it would makeup 32 percent of marine fuel demand in 2020.
Our views on the MGO/LSFO breakdown have shifted in our updated analysis. We now project LSFO consumption will make up around 39 percent, or approximately 1.72 million barrels per day, of marine fuel demand come 2020, while MGO consumption will make up 33 percent of marine fuel demand, or 1.45mn bpd.
In our original forecast, we had been concerned about LSFO availability, and whether there would be sufficient volume to meet global demand. These fears have been partially assuaged by increased transparency from producers and suppliers, who have gradually shed light on where LSFO will be produced and marketed. While we had thought compatibility and stability concerns may hamper LSFO consumption, we increasingly believe shipowners will turn to LSFO despite its potentially adverse effects. And while clarity on LSFO-MGO price spreads remained elusive in Q1 2019, prices heading into 2020 are pointing to a spread that should favor LSFO consumption.
Our swing from MGO to LSFO as the most favored marine fuel in 2020 was not done without reservations. We still consider fuel quality to be a real concern, with just one incident triggering wide skepticism of LSFO blends. The rollout of a global LSFO supply network is filled with contamination hazards, and some compatibility or stability issue will undoubtedly occur in due time. We also continue to worry about whether global LSFO production can meet total marine bunker demand, and whether LSFO will be available in smaller ports in sufficient volumes. Still, our changing outlook reflects a broadening consensus among shipowners that LSFO will be the fuel of choice heading into next year.
On the question of noncompliance, ClipperData continues to take a more conservative approach relative to other estimates. ClipperData believes noncompliance in 2020 will hover around 10 percent of marine fuel demand, far below some of the more aggressive industry estimates. Our more conservative estimate reflects our belief that in addition to largely reliable enforcement from port states, shipowners – especially those that are publicly held – will be reluctant to engage in noncompliance for fear of commercial and legal repercussions.
Scrubbed HSFO consumption will make up around 17 percent of marine fuel consumption in 2020, while LNG use will be minimal at less than 1 percent.
By 2021, we expect shipowners will be increasingly comfortable with LSFO compatibility, as the industry will have had experience running the fuels and producers will have had time to adjust to industry contamination concerns. The result will be an increase in market share of LSFO consumption at the expense of MGO. We expect MGO consumption to fall to approximately 27 percent in 2021, while LSFO consumption increases to 41 percent. By 2025, we expect LSFO use to fall slightly to 40 percent, while MGO will creep up to 30 percent. One reason behind the rise in demand for MGO toward the middle of the next decade will be due to the likely emergence of a Mediterranean ECA zone.
ClipperData believes the share of vessels engaged in noncompliance will drop sharply in the years following 2020. The motivation to be noncompliant will in part be incentivized by the expected cheap price of HSFO once the sulfur cap is imposed. As the price of HSFO recovers after the first few years of the sulfur cap due in part to high scrubber acquisitions, the economic incentive to cheat will dissipate. We also expect enforcement to become increasingly robust after 2020 as best practices are shared and fines are levied and publicized.
After making up 17 percent of demand in 2020, we expect scrubbed HSFO to increase to 23 percent of marine fuel in 2021. We expect the economic incentive for scrubbers to lessen into 2021 as surplus HSFO is addressed. Further into the 2020s, we expect the rate of scrubber acquisitions to slow. ClipperData believes scrubbed HSFO will constitute 27 percent of marine fuel demand in 2025.
Like in 2020, we expect LNG to remain a fringe marine fuel throughout the five-year forecast. Its long-term viability will depend on a buildout of global bunkering infrastructure, as well as how many shippers opt for LNG or dual-fuel powered newbuilds. Potential complications to LNG as a long-term viable fuel – as well as for the continued use of other marine fuels – are future IMO CO2 regulations.