WoodMac: IMO rules to cut LNG contract prices

Implementation of IMO 2020 regulation is just eight months away and its implications will be felt beyond refining and shipping. 

Analysts from the the consultancy group Wood Mackenzie noted that, because of the IMO regulation, a stronger gasoil (S<0.5 wt %) and a weaker high-sulphur fuel oil (HSFO) crack (the price difference to crude) is expected, meaning wider light-heavy and sweet-sour differentials, which in turn translate to knock on effect on crude price differentials.

“So heavier and high sulphur or sour crudes such as Dubai and Maya which produce more HSFO will depreciate in value and lighter and low sulphur crude such as Bonny Light will appreciate in value in the early 2020s,” according to WoodMac’s Sushant Gupta.

“Of particular interest to LNG pricing is the Japanese JCC crude benchmark. JCC represents 90% of Middle Eastern medium sour crudes and hence follows the trend for Dubai crude,” he said.

Potential cost savings for North East Asian LNG contracts

IMO impacts LNG in two main ways: shipping and contracting.

WoodMac’s Nicholas Browne, explained, “the first impact is on LNG bunkering, and we expect global LNG bunkering demand to reach 9 mtpa by 2025. It is also leading to more LNG fuelled ships being built.”

“The second impact is the value of LNG within contracts. The Japanese crude cocktail is used for around 40% of LNG contracts. Its value will fall relative to Brent. For North East Asian buyers this could mean a saving of approximately US$2.5 billion in 2020 alone,” Browne said.