International regulations limiting sulfur in fuels for ocean-going vessels will increase uncertainty for crude oil and petroleum product price formation in both the short and long term, the US Energy Information Administration (EIA) said.

(IMO), the 171-member state United Nations agency that sets standards for shipping, decided to reduce the maximum amount of sulfur content in marine fuels used on the open seas from 3.5 percent to 0.5 percent by 2020. These regulations are intended to reduce sulfur dioxide, nitrogen oxides and other pollutants from global ship exhaust.

On Friday, EIA said that the upcoming IMO regulations pose a significant challenge for global petroleum refineries, which will have to figure out how to increase the supply of low sulfur products for use in marine applications and minimize the output of high sulfur oils.

EIA said that one approach refineries could pursue is to divert more low sulfur distillate fuel into the bunker fuel market. This means that ocean-going ships would be competing with trucks, heavy equipment, trains and planes for supplies of distillate fuels at a time when global demand for distillate is already high. To respond to extra demand for distillate fuels, refineries can increase the rate they process crude oil or invest and build more refinery capacity to produce distillate fuels.

Refineries could also process crude oils that are lower in sulfur and yield a greater amount of distillates and lower amounts of residual oils, which currently make up the largest component of marine fuels used by large ocean-going vessels.

Vessel operators also have several choices to comply with the new sulfur limits. One option is to switch to a lower-sulfur fuel compliant with the new rules. Another option is to utilize scrubbers to remove pollutants from ships' exhaust, allowing them to continue to use higher-sulfur fuels. Ships have the option to switch to nonpetroleum-based fuels as well.

The decisions refiners and shippers make in response to the IMO regulations heavily influence one another, adding to uncertainty and complexity, according to EIA.

When burned, the sulfur in marine fuel produces sulfur dioxide, a precursor to acid rain. The sulfur content of transportation fuels has been declining for many years because of increasingly strict regulations implemented by individual countries or groups of countries.

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