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US refiner stocks took a big hit on Friday after a Wall Street Journal report that the Trump Administration was seeking a delay of a new low-sulfur shipping fuel standard set to be implemented in 2020.
Since the North American industry is already low-sulfur compliant, US refiners stand ready to benefit from the expected high demand for the cleaner shipping fuel after the new rule goes into effect.
We view the article as a head-fake to the market. While we agree that Trump will likely be a chief critic of the standard set to be implemented ahead his own re-election year, there is little that the administration can do to delay or reverse the rule.
The market seemed to overlook this important fact but it’s not surprising considering the IMO is an obscure international organization and mission. So we provide some relevant background below.
International Maritime Organization (IMO) Global Low-Sulfur Standard
The US signed a treaty in 1950 to become a member of the International Maritime Organization (IMO), which is a United Nations agency responsible for international shipping regulations. The fact that it’s a treaty ratified by Congress means the US must abide by the group’s decisions (in contrast to the Paris Climate Agreement which was not a treaty).
In 2008 the IMO adopted cleaner fuel standards that would reduce sulfur content in shipping fuel distillates from 3.50 percent mass by mass (m/m) today to 0.50 percent m/m on January 1, 2020.
The international regulation provided an option for a delay to 2025 if an agency review determined a lack of sufficient availability of the lower-sulfur content fuel. But in 2016 the IMO decided to adhere to the 2020 implementation date. Click here for an FAQ on the IMO 2020 Global Sulfur Limit.
There has been tremendous press attention to the rule set to take effect in 15 months. Nearly all of the press coverage has pointed to the rule sending prices for crude, distillates and gasoline sky high. The International Energy Agency (IEA) estimated that the rule will increase demand for the low-sulfur fuel by about 1.0 million barrels a day b/d at the expense of heavy sour crudes.
Interagency Committee: Support Enforcement Delay & Study Economic Impacts
We are aware that that a White House interagency committee led by the National Economic Council had decided to support a request by a small group of international shippers to delay enforcement of the 2020 standard. These shippers are careful to describe their effort as not a delay of the cleaner fuel standard itself but rather just a delay of enforcement. The delay is being coined as an “Experience Building Phase (EBP)” to assess the impact of the new standard after it goes into effect. See this Shipping Watch article that explains more about the EPB effort.
The EPB request faces an uphill battle but even if it were to be approved, the EBP would only amount to a delay in enforcement of about 3-4 months.
The US interagency committee tasked the State Department and Coast Guard to begin discussion with counterparts in the IMO to encourage diplomatic support for an EBP enforcement delay. It also asked DOE and EIA to conduct an immediate study of the economic impacts of the new standard. The committee also ordered an administration game plan to encourage more integration of US LNG into the transportation sector.
So far it appears that the IMO standard is just on the radar of Trump’s advisors but not the President himself. Moreover, we do not believe Trump has been briefed on the IMO standard or the interagency committee’s decisions. However, press coverage of the impending standard will certainly provide the President with an opportunity to become aware.
As we said before, Trump’s instincts will be to oppose the standard if he thinks oil, gasoline and diesel prices will rise. To make matters worse, the IMO standard goes into effect in 2020 just in time for Trump’s reelection campaign. We tweeted our view that Trump may make the IMO the new OPEC punching bag.
US Unilateral Action Would Be Meaningless in Shipping World
But the US is just one party to the agreement and the Europeans and others will be loathe to delay the standard or its enforcement. We suppose Trump could decide to pull out of the agreement (although as a treaty any pull out would have major legal problems) or decide unilaterally not to enforce it at US ports. IMO rules provide for enforcement and fines to be left up to the individual members states. The Obama administration had set US fines to be some of the highest in the world – even authorizing the Coast Guard to seize ships in non-compliance. So Trump could also decide to gut the strong Obama penalties.
However, the end result of unilateral US action here would be meaningless. Ships go from one port to a second or multiple ports. If just one country doesn’t enforce the standard but the others do, the ship is forced to comply with the higher standard.
On Second Thought – A Trump Embrace?
Once this realization sets in, we see a scenario where Trump could even embrace the new standard as it checks several other boxes of administration priorities. Since the US is already compliant with the new standard, it sets up nicely with Trump’s energy dominance theme as the US will be exporting light low-sulfur crudes and products around the globe. It also provides another edge to US competitiveness with China. And it provides another big market for LNG exports. We can see Trump giving a speech calling for the world’s shippers to start using “beautiful US LNG.”
