The International Energy Agency (IEA) released its latest five-year forecast for world oil production Monday and predicted that the International Maritime Organization’s (IMO) upcoming sulfur cap will be costly at first, but will not have the previously feared long-term price impact on global maritime carriers.
“The 2020 IMO marine regulation change is one of the most dramatic ever seen,” the IEA said. “We believe that industry players are in a strong position to adjust in the medium term. Prices for gasoil could rise at first as demand from the marine sector increases, but sluggish growth from inland sources of demand will limit the pressure.”
Gasoil is more expensive than high-sulfur diesel for the short term, but according to the IEA, the maritime industry will transition to very-low-sulfur fuel oil (VLSFO) in the medium term. The IEA predicts that VLSFO prices will be competitive in the future due to an increase in global supply and limited demand.
The IEA’s supply forecast shows U.S. oil production growing at an unprecedented pace, far surpassing previous expectations. The U.S. is now forecast to account for more than 70 percent of worldwide oil production growth from 2019 to 2024.
The chart below illustrates petroleum production in the United States, according to data pulled from the U.S. Energy Information Administration (EIA). In the past year alone, the U.S. has increased production by almost 2 million barrels per day. As of March, U.S. petroleum production stood at 12.03 million barrels per day, up 16.8 percent year-over-year.
“The second wave of the U.S. shale revolution is coming,” IEA Executive Director Fatih Birol said. “This will shake up international oil and gas trade flows, with profound implications for the geopolitics of energy.”
Birol said the shale revolution will lead to an additional 4 million barrels per day of production in the U.S. by 2024. This increase in production has been driven by technological innovations that allow companies to tap previously inaccessible reserves.
The shale revolution in the U.S. has unique implications on the maritime industry due to the sulfur content of shale oil. An average barrel of crude oil has a sulfur content of 1.2 percent, while an average barrel of shale oil has a sulfur content of only 0.3 percent.
When the IMO’s sulfur cap takes effect on Jan. 1, 2020, it will require carriers to use bunker fuel with no more than 0.5 percent sulfur content, compared to the current limit of 3.5 percent. With minimal refining, shale oil will be ready to use by the maritime industry at a reduced price due to the vast supply driven by U.S. production.
The shale revolution also will reduce bunker prices for areas with the most stringent environmental standards through the production of liquefied natural gas (LNG). The U.S. is currently the top producer of LNG in the world, according to the EIA, and production will continue to increase in the next five years.
The chart above illustrates U.S. growth in LNG production, according to data from the EIA. Similarly to petroleum production, 2018 was a year of exceptional growth for LNG extraction. For the full year of 2018, U.S. LNG production totaled 32.7 million cubic feet, up 12.1 percent from 2017.
The United States has elevated emission standards and requires vessels on its coasts to use fuel with a sulfur content of 0.1 percent or lower. LNG is a great option for the U.S. maritime industry as it is the cleanest emitting fossil fuel currently available.
BlueWater Reporting recently has seen an influx of LNG-powered vessels, especially in Jones Act trades. Using BlueWater Reporting’s Country to Country Transit Analysis by Service application, we can see that of the six Jones Act services from the U.S. to Puerto Rico, four of them have LNG-powered vessels.
These four LNG vessels are owned and operated by Crowley Maritime and Tote Maritime. Earlier this year, Bluewater Reporting was granted access to tour the Taino, an LNG-powered ConRo vessel operated by Crowley, before it set sail on its maiden voyage.
Looking ahead, the shale revolution will make the transition to low-sulfur fuel much cheaper for the maritime industry. The increased petroleum and LNG production by the U.S. will have profound effects on the international energy landscape in the future.