The Middle East is well positioned to adapt to the biggest shift in the global shipping industry since the late 1800s — and it starts in just nine months. The International Maritime Organization’s (IMO) ruling to reduce sulphur in shipping fuel oil from today’s 3.5 per cent to 0.5 per cent from January 1, 2020 means Middle Eastern stakeholders dealing with high sulphur fuel oil (HSFO) are carving out a new game plan ... and quickly.

We forecast an immediate drop of more than 2 million barrels per day (bpd) of HSFO demand worldwide, as shippers switch to low sulphur fuel oil (LSFO), increasing global demand for diesel/gas oil by over 2 million bpd from January. In the short term, we estimate the cost of compliance for the entire shipping market to be $60 billion.

So, where is this surplus HSFO going to go? One avenue is power generation in parts of the world with less stringent sulphur restrictions and more innovation in wider industrial uses of fuel oil. Desalination plants in the Middle East — one of the world’s most arid regions and home to a soaring population — are already establishing a bulwark for this market.

And HSFO could play a vital role in helping the region address its chronic power shortage, especially as demand rises. Power capacity in the Middle East and North Africa (MENA) is expanding significantly to meet increasing demand, with about 10GW of new units burning HFO being built in Saudi Arabia alone. Plus, among other uses, shippers who choose to install scrubbers to remove the sulphur dioxide and dirtier particulates from their bunker fuel will still be able to use HSFO.

This presents additional demand opportunities in the Middle East, home to the world’s second largest bunkering hub, the UAE’s Port of Fujairah.

Who stands to benefit from IMO 2020? The winners will be modern refiners, whose margins will be elevated in order to incentivise increased production of distillates to meet demand. Clean oil product values will be elevated while dirty products, such as HSFO, will be cheaper to clear the volumes into power generation, displacing plants using natural gas or LNG today.

The Middle East is thus positioned to benefit from the IMO 2020 shock waves, having already invested considerable sums developing complex and more flexible refineries, such as the UAE’s 900,000 bpd Ruwais refinery and Kuwait’s 615,000 bpd Al Zour refinery (online in 2020). Both will rank among the world’s Top 10 largest facilities that offers Middle East refiners a flexibility that is envied by other regions such as Europe, with more traditional operations.

The direct impact of higher shipping costs on consumers appears to be limited. Running the numbers for a car carrier shifting 6,500 new Mercedes from Hamburg to Shanghai will consume around 1,050 million tons (mt) of fuel along the way, for example.

With a $425/mt spread, a consumer would expect to pay an extra $70 per purchase. But there’s a catch; consumers refuelling their cars will feel the estimated increase of $5-$7 a barrel in the price of Brent crude driven by increased refinery runs in 2020.

This could especially be felt in regions undergoing subsidy cuts, including Gulf countries. Depending on the severity of the rise in crude prices, balance-sheets in industry could be impacted and, subsequently, the global economy could slow, which would affect container ship profits as utilisation falls.

While these factors will be disruptive in 2020, the industry is remarkably resilient and will quickly adapt to the new circumstances.

Chris Midgley is Head of Analytics, S&P Global Platts, London.