Venezuela Faces Fresh Blow With Ship-Fuel Rules Threatening Exports

Venezuela Faces Fresh Blow With Ship-Fuel Rules Threatening Exports
Members of Venezuelan migrant family Mendoza Landinez wait for the buses provided by Ecuadoran authorities to take them to the border with Peru, outside the Ecuadoran migrations office at the Rumichaca International Bridge, in Tulcan, Ecuador, border with Colombia on Aug. 24, 2018. - On foot, by bus, on the backs of juddering trucks, like tens of thousands of others they slogged for days along the Pan-American highway through Colombia and Ecuador. Grubby and sleepless, their goal was to reach Peru, a sanctuary of sorts for a desperate Venezuelan family. Exhausted and swept by the endless wash of traffic noise on the highway's shoulder, the Mendoza Landinez family had the additional pressure of a deadline: to enter Peru before new rules required them to produce a passport. (By Luis Robayo/AFP/Getty Images)
9/27/2018
Updated:
9/28/2018

New rules forcing ships to use cleaner marine fuels may deal yet another blow to cash-strapped Petroleos de Venezuela SA (PDVSA), an exporter of high-sulfur fuel oil.

From Jan. 1, 2020, vessels will have to switch to less-polluting bunker fuel or be fitted with equipment to curb emissions, under new International Maritime Organization (IMO) rules. That’s expected to weaken demand for the high-sulfur residual fuel oil produced by PDVSA, pushing prices lower at the same time that the cost of importing clean fuels rises, said Mel Larson, a consultant at KBC Advanced Technologies Inc. of Houston.

As refiners prepare to produce IMO-compliant fuels that rely on low-sulfur crude oils, sour crude produced by Venezuela and Mexico may be sold at deeper discounts. Meanwhile, demand for lighter distillates, including diesel, is expected to increase. That ultimately will take a toll on the economies of Venezuela, Mexico, and Ecuador, which rely on imported diesel and gasoline.

“IMO 2020 has the potential to hurt GDP growth in most Latin American economies, especially the ones that subsidize fuel prices,” Larson said by email. “As the cost of imported fuels rise, subsidizing gasoline and diesel will only serve to expand a country’s or company’s debt load.”

Most refiners in Latin America haven’t invested in units that can remove sulfur or crack residuals into more valuable molecules. That puts them at a disadvantage ahead of the rule, which is expected to slash global demand for high-sulfur bunker fuel to as low as 1 million barrels daily, from 4 million barrels currently.

By this measure, Petroleos Mexicanos of Mexico and PDVSA, respectively Latin America’s largest and second-largest exporters of fuel oil, are the ones who have the most to lose.

Petrobras of Brazil, on the other hand, is set to take advantage of the fuel shift, according to Guilherme Franca, executive manager of commercialization. Petrobras already exports IMO-compliant fuels and is exploring the re-opening of fuel oil storage tanks in Singapore to better supply bunker fuel markets in Asia.

By Lucia Kassai
From Bloomberg