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Rosneft Readies Yearly Fuel Dump Just as Demand Is Set to Crater

Rosneft Readies Yearly Fuel Dump Just as Demand Is Set to Crater

(Bloomberg) -- Russian oil giant Rosneft just issued its yearly tender to sell millions of tons of highly sulfurous waste oil through next year. There’s just one catch: demand is set to crater because the world’s shipowners are about to stop buying.

The supply on offer, high-sulfur fuel oil, is a byproduct of the refining process. About 3.5 million barrels a day of the stuff -- roughly half of the world’s total fuel oil production -- today gets burned in ships’ engines. From Jan. 1, the majority of the fleet will be forced by new environmental rules to stop buying.

That’s a big challenge for producers like Rosneft, one of the world’s largest suppliers. The Russian giant just tendered to sell approximately 380,000 barrels a day of fuel oil in 2020.

"It will find a home,” said Jan-Jaap Verschoor, director of Oil Analytics, a firm that tracks margins across the global refining industry. “They’re hydrocarbons."

Nevertheless, supplies of HSFO, as it’s known in the market, will have to be heavily discounted to lure buyers, he said.

To some extent that’s already happened. In Europe, HSFO’s discount to crude reached the widest in at least eight years earlier this week. A similar story is playing out in Singapore, the world’s biggest ship-fuel hub.

Rosneft Readies Yearly Fuel Dump Just as Demand Is Set to Crater

With the collapse in demand from shipping, there are questions about where Rosneft’s fuel will end up and at what price. Of the nearly 22 million tons offered in the recent tenders, the vast majority has a sulfur content of 3% to 3.5%, while the rest is 1.5% -- still well above the limit posed by the new environmental rule.

Some could make its way into refineries for further upgrading into more valuable fuels. Vessels that have installed special fuel-cleaning equipment known as scrubbers can also keep burning the cheaper, sulfur-laced fuel next year and beyond.

The other potential sink for the material is power generation. Next year will see 8.5 gigawatts of oil burning plants coming online in Saudi Arabia and Bangladesh, according to Mohith Velamala, an oil analyst at BloombergNEF. Together with the 1.5GW coming online this year in those countries, he says, that creates more than 250,000 barrels a day of HSFO demand. Not enough to consume all of Rosneft’s HSFO but a start.

"The typical guys that would take this will still take this," said Verschoor. The big companies that Rosneft deals with have been preparing for the impact of the environmental regulations for years, he said. It will now depend on what investments they’ve made in their refineries, and what supply contracts they’ve signed with shipping companies.

"At the right price there’s a home for it," said Verschoor. "It will just price itself into the system."

--With assistance from Mohith Velamala and Olivia Konotey-Ahulu.

To contact the reporter on this story: Jack Wittels in London at jwittels1@bloomberg.net

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net, Jack Wittels

©2019 Bloomberg L.P.