Russia Considering Postponing Adoption of IMO 2020 Fuel Rules

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By Evgenia Pismennaya, Dina Khrennikova and Jack Wittels (Bloomberg) –Russia, one of the largest producers of the world’s favorite ship fuel, may delay local adoption of more stringent rules targeting air pollution from commercial vessels.

Ship owners and operators worldwide are preparing to switch to using fuel oil with a sulfur content of no more than 0.5% starting Jan. 1, when the new International Maritime Organization rules take effect. But Russia’s energy and transportation ministries are looking to postpone the stricter standards for vessels operating within the country and four other former Soviet republics until 2024, Energy Minister Alexander Novak said in response to questions sent by Bloomberg.

The new rules, known as IMO 2020, “will lead to a sharp hike in the price of fuel for the river fleet and river-sea vessels, which operate mainly in Russia’s territorial waters,” Novak said. The energy and transportation ministries are seeking “to prevent a higher financial pressure on the nation’s shipowners,” he said. However, Russia will comply with IMO 2020 standards in international waters, Novak said.

The potential delay would affect the five-member Eurasian Economic Union, which also includes Kazakhstan, Kyrgyzstan, Belarus and Armenia. Of the five countries, only Russia and Kazakhstan are coastal states.

Russia’s delayed adoption of IMO 2020 rules would support the domestic price and demand for high-sulfur fuel oil, giving a financial boost to the nation’s refiners. Russia’s refiners produce about 16 tons of fuel oil for every 100 tons of crude they process, in spite of steps they’ve take to upgrade their plants. The delay under consideration would also free up low-sulfur fuel oil for export, possibly putting downward pressure on international prices for IMO-compliant fuel.

‘Corrective Action Plan’

A spokeswoman for the IMO said she was not aware of the organization receiving any communication on Russia potentially delaying adoption of the sulfur cap locally.

The regulation’s enforcement is down to signatory countries — of which Russia is one — rather than the IMO itself, the spokeswoman said. There is an audit mechanism whereby a non-complying country can be issued with a “corrective action plan,” but punitive measures are not included.

The IMO’s 0.5% sulfur limit applies to all ships, including those on “domestic voyages, solely within the waters of a Party to the MARPOL Annex,” according to the IMO’s website.

Not Prepared

While the direct market impact would be negligible, a delay would demonstrate the strain that both shipping and refining industries face in conforming to them.

As well as being an oil-producing giant, Russia is also a big refiner of crude. Yet, its plants aren’t fully ready for the new regulations, and some will be selling non-compliant fuel next year. A delay would help those companies.

The nation’s refinery industry “currently does not have the technical expertise and capacities to produce the necessary volumes of low-sulfur fuel oil,” the Russian Association of Marine and River Bunker Suppliers said in an October letter to the Energy Ministry. “As of now, the oil companies practically don’t produce low-sulfur shipping fuel fully-compliant with the new regulations, especially when it comes to viscosity,” it said.

Russia produced 33.2 million tons of fuel oil in the first nine months of this year, with exports reaching about 22.8 million tons, according to data from the Energy Ministry’s CDU-TEK unit. In September, the bulk of fuel oil produced in the country had a sulfur content of 2.5% to 3.5%, well above the level permitted under the IMO’s new rules, the data showed.

Russia’s second-largest oil producer Lukoil PJSC started output of IMO-compliant fuel this month at its Volgograd refinery. Gazprom Neft PJSC, the oil unit of natural gas giant Gazprom PJSC, sees full conversion to low-sulfur products by 2024, while the nation’s largest producer Rosneft PJSC is targeting a full adoption of all the necessary upgrades “in the next several years.”

Russia isn’t the only country to have considered shunning the IMO’s requirements for cleaner fuel. In July, Indonesia said it wouldn’t enforce the new rules, arguing that compliance would be too expensive. The Asian country later changed its plans and pledged its commitment to the IMO 2020 standards.

–With assistance from Alaric Nightingale.

© 2019 Bloomberg L.P