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|13 December, 2018

Fujairah: How will it adapt to new maritime regulations?

Bora Bariman is Segment Head responsible for National Bank of Fujairah’s Energy & Marine sector coverage, focused on arranging finance for energy infrastructure, oil trading and bunkering, energy-related marine assets. Previously he was an oil and gas banker in London with Lloyds Bank and Bank of Scotland - active in arranging project finance, reserve based lending, and structured commodity finance. He started his career in finance with natural gas production and distribution companies in the US. He received a Master of Public Policy degree from Harvard University’s Kennedy School of Government where his work focused on development and regulation of large scale infrastructure.

Website: https://nbf.ae

The International Maritime Organization’s directives mean the UAE will have to review its business models and work with investors and bankers to create profitable solutions

Fujairah is an important crossroad in global maritime trade given its strategic location and world-class infrastructure which has emerged as the world’s second largest bunkering hub. As a major trading nation, the UAE will have a high profile in the maritime industry as the International Maritime Organization’s directive to reduce the sulphur content of marine fuels comes into effect in 2020. Global energy and marine industry players will be closely following how the Fujairah market will adapt and what regulation will come into effect to implement IMO 2020.

This important transition will require market participants in the UAE to review business models and work with their investors and bankers to create profitable solutions for a changing market. As National Bank of Fujairah works closely with the energy and marine industries in the UAE, we see strong evidence that creative solutions are being developed from key elements of the value chain spanning refineries, traders, storage terminals, physical bunkering service providers and vessel owners. Having solutions at every stage is crucial.

Refineries to a large extent determine the availability of various fuel grades depending on how they are configured to process crude oil. Traders then buy the refinery output and move products around the world according to demand. These products often flow via storage terminals that are important nodes for blending, quality assurance, and security of supply. Finally, physical bunkering service providers deliver to ships which are end-consumers.

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With its team of relationship managers who are industry specialists, NBF has an Energy & Marine unit which develops unique funding solutions for each of these segments. Many refineries in the region may require investment for new equipment and reconfiguration to focus on the low sulphur products and so-called light and middle distillates which offer higher margins. Some - typically the larger, newer refineries - can process low-sulphur product from high-sulphur crude. Others focus on servicing niche, high-value markets by obtaining low-sulphur crude which typically trades at a premium. Others which do not invest in upgrading will likely see their heavy distillate output trade at a significant discount in light of the IMO 2020 regulation.

As such, investment requirements of refining will be subject to the diligence of bankers and investment committees to ensure that the product will be relevant, given that the demand outlook landscape is changing significantly.

Reflecting these trends, the Port of Fujairah has seen a steady reduction of the heavy distillates portion of the inventories in the region. While fuel oil was once the main product in the market, we currently see that gasoil and other middle and light distillates are eclipsing the position of fuel oil. With the rising oil price environment, NBF observes a growing demand for commodity finance that which we actively support.

Which products prevail will depend on fluctuating market prices, end-user demand, and the actions of oil trading firms. Traders seek arbitrage opportunities by blending various grades of refined products obtain a product create a fuel specification that customers can profitably utilize. Viability of trading strategies can be driven by both technology – if the end-user vessel can actually run on a specific fuel grade fuel - and logistics (is the required fuel actually available on the market, and can it be imported at a reasonable rate).

Fujairah, with its storage terminal capacity of around 10.5 million tonnes, plays a strategic position the management of these product flows. Traders active in Fujairah seek arbitrage opportunities by blending different specifications from various sources to obtain a product that meets the market requirement. That said, blending is a highly technical process that requires sophisticated operational facilities.

In this context, each terminal facility in Fujairah will be in discussion with their customers (oil traders) to identify investments in facilities required to supply market demand. NBF strategy is to finance such investments based on the analysis of the rates which customers will be ready to realistically pay for storage and blending capacity.

Finally, physical bunker providers are the final link in the chain from refinery to the vessels. They will need to ensure the product which ships require is readily available. Vessels can comply with the regulation in a number of ways. For example, some vessel may continue to utilise traditional high-sulphur fuel oil as it will be very economically-priced. They will be able to do this using exhaust gas cleaning systems - ‘sulphur scrubbers’. Scrubbers have been perceived as an expensive solution that would be a challenge for vessel owners to afford. However, as 2020 draws nearer the types of marine technology providers who develop scrubbers are increasing price competitiveness.

From NBF’s perspective, we believe that all the above solutions can attract financing if companies engage bankers with realistic cash flow forecasts that reflect real market conditions. Even through the cyclical trough in shipping, finance is available for fleets and vessels that have a track record of employment with credit worthy charterers, perhaps benefitting from the diversification of a wider fleet that mitigates the risk of income interruption from any one vessel.
Shipping and its energy requirements are vital to world prosperity and these sectors merit close attention from investors. Fujairah as a key maritime hub and NBF’s home market will see innovative models deployed to finance the energy and shipping markets through 2020 and beyond.

Any opinions expressed here are the author’s own.

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

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