FAQ
Is it possible that IMO 2020 will be delayed or cancelled?
The International Maritime Organization (IMO) was established in 1948 as part of the United Nations and is headquartered in London. There are 174 member states that are part of the IMO and they only meet twice a year. In order for any new proposal to pass, a two-thirds majority of the members physically in the room have to approve it. Similarly, a two-thirds majority vote would be needed to overturn the new regulations that were passed on 22 October 2018.
The short answer is that IMO 2020 now has enormous institutional and procedural inertia protecting it, and industrial users of diesel/distillates should prepare for the reality that it will be implemented in full on 1 January 2020.
Why don’t shipowners just install scrubbers?
Scrubbers cost c. $2-5million per unit. This represents a material investment for vessel owners who already operate at relatively thin margins.
In addition, fitting a scrubber takes the vessel out of operation for 3-4 weeks and displaces up to 250 TEU of cargo capacity.
Since the vessels were not originally designed to have scrubbers onboard, their performance can be negatively impacted as well.
64% of all scrubbers fitted to date are the cheaper, less environmentally sound “open-loop” model, which flush the sulphur into the sea. Singapore and California have already decided to ban open-loop scrubbers, which makes a global ban a very realistic possibility.
Importantly, even if a vessel owner wanted to install a scrubber, global capacity is limited to 1,800 per annum, and almost all available dry-dock space has now been fully booked until late 1Q2020.
Can refineries switch from producing high sulphur fuel to low sulphur diesel?
There is minimal spare desulphurisation capacity currently available to process high sulphur products into low sulphur products. And all the low sulphur crude has been allocated.
That said, between now and end-2021 we forecast over 3.5mb/d of CDU and over 3.0mb/d upgrading (coking, FCC and HDC) capacity will come on-line to process crudes into low sulphur fuels. However, these capacity additions are back-end loaded towards early 2021 and located mainly in Asia (China).
With global oil demand growing over +1.3mb/d YoY, and factoring in higher IMO 2020 low-sulphur products demand, there will be insufficient supply to prevent a distillate-led spike in late 2019 and into 2020.
Are you confident that ship owners will comply?
Shipowners will be forced to comply with the new regulation for four reasons:
The carriage ban that goes into effect on 1 March 2020 will make it illegal to have high sulphur fuel on board without a scrubber. This additional regulation is significant as bunker fuel suppliers will not fill tanks with high sulphur fuels when there is no scrubber on board, and will not issue fraudulent receipts.
The IMO has given the port states the power to enforce the new regulations and to issue and collect the fines. Some countries have stated that fines will be up to $6m (i.e. Belgium).
Ships that are fined for non-compliance may lose their insurance.
Shipping companies risk major reputational damage if they are found to be in violation of the new regulations. Certainly the major listed companies will comply, and they will therefore lobby for strong global enforcement to make sure the playing field is even.
What is the Enerjen Capital IMO 2020 Note?
The Enerjen Capital IMO 2020 Note is a long-only hedging vehicle that gives corporates and strategic HNWIs the opportunity to hedge against an IMO 2020-induced diesel price spike.
Within the Note is a curated hedge basket that applies our specialty expertise in the crude oil and refined products markets with upside leverage to protect against a more general oil ‘spike’ risk to create an optimal hedging strategy for consumers.
Our solution allows corporates to hedge without the need for ISDAs;
Corporates can get the hedge in place regardless of credit rating;
The Note will sit on the balance sheet as Financial Notes/Securities and not as a derivatives hedge;
In many cases, banks will finance Note participation;
Having the hedge in place will protect counterparty margins and enhance credit worthiness.
How does it work?
Enerjen Capital will deploy funds raised from the Note offering to purchase the hedge basket throughout 2019, so that the hedge is fully placed by the end of 3Q19, which is when shipping companies will need to buy marine diesel for their fleets in order to be compliant on 1 January 2020.
Hedges will be implemented using the most liquid listed instruments and the hedge position will be strategically accumulated.
Initial principle and profit from the note will be distributed to participants at the end of 1Q 2021.
What is the timing?
Enerjen Capital’s IMO 2020 Note offering will close at the end of January 2019. We will then layer on the hedges through the end of 3Q19, so that participants will be protected against an IMO 2020-induced diesel price spike starting in 4Q2019.
Hedges will be kept in place through 2020 and then liquidated in 1Q 2021, when principle will be returned and profits distributed according to the performance.
How does my company participate in the offering?
Please contact us directly, or reach out to your representative at any of our partner banks to discuss Note participation/allocation.
Can Enerjen Capital help my company hedge other energy related risks?
100%. We are already preparing a note offering designed to help airlines prepare for the new ICAO sustainable aviation fuel regulations, and are more than happy to design bespoke hedging products.