May 2018

THIS SHIP HAS SAILED : Maritime vessels abandon heavy oil in favour of cleaner alternatives

DOMINIQUE BARKER, CFA, Portfolio Manager, Senior Analyst ESG and Real Estate

At CIBC Asset Management, we strive to be at the forefront To decrease sulphur emissions, shipping vessels have three of active money management. Every decision we make options: switch to low-sulphur fuel, install scrubbers on the is based on how to make money for our clients and we ships (an expensive option), or use alternative fuels such believe strongly in incorporating Environmental, Social, and as LNG (liquid natural gas), methanol and biofuels. These Governance (ESG) factors in our analysis. This provides us cleaner alternatives will eventually displace the demand for with better tools and insight into existing opportunities and bunker fuel, the fuel that is sourced from heavy oil. risks, and enables us to make better investment decisions. Unfortunately, produces mostly heavy oil³. The We recently published an article about how the demand price of heavy oil is already discounted, as measured by for oil is being disrupted by the coming electric vehicle the differential between WCS (Western Canadian Select) revolution (refer to “Oil–Will It Go the Way of Salt?”). In and the lighter oil standard price set by WTI in addition to the falling demand for oil from the electrifi cation . The wider the differential, or price difference, the of the vehicle fl eet, it’s worthwhile to point out a second less money Canadian producers make. As demand for heavy source of demand destruction—the maritime vessels fl eet. fuel oil is impacted by these new IMO regulations, Canadian The International Maritime Organization (IMO) recently heavy oil producers will likely feel the crunch more than reconfi rmed the timing of its rules to cut the amount of light oil producers. We are already seeing an impact in the sulfur emissions from ships worldwide, from 3.5% (current futures market, which is indicating wider differentials as a level) to 0.5% by 2020. These emissions come from the result of this rule. burning of bunker fuel, which contain SOx, NOx and particulates¹. The reason we raise these issues is to reinforce the concept of sustainability when making investment While maritime demand for oil may seem like a niche decisions. As we move towards a more carbon-constrained market, the global shipping industry currently consumes world, it is inevitable that demand for oil will fall. The around 5 million barrels per day² (bpd) of bunker fuel. Given IMO is implementing these regulations to reduce global that total oil demand globally is around 100 million bpd, emissions—evidence that supports our view that ESG the shipping industry is a material consumer of oil. factors are important to measure in the investment management process.

A fi nal point on the eventual waning interest in oil—on March 15, 2018, Statoil, Norway’s biggest company (market cap US$77b), changed its name to , “the global shipping industry thereby relinquishing the inclusion of oil in its name. In the currently consumes around press release announcing the change, Chairman Jon Erik Reinhardsen said, “The biggest transition our modern-day 5 million barrels per day² (bpd) energy systems have ever seen is underway, and we aim to of bunker fuel” be at the forefront of this development.” At CIBC Asset Management, we feel much the same way about the investments we make. For more information, visit: www.cibcam-institutional.com

¹ Sulphur Oxides (SOx), nitrogen oxides (NOx) and particulate matter are emissions that can have a significant negative impact on air quality. ² Source: Morgan Stanley, “Compliant Fuel Favoured for Shipping Sulphur Regs”, March 8, 2018 ³ Canada’s oil production totals approximately 4 MMbpd, 60% of which is from —which is heavy oil. The views expressed in this article are the personal views of Dominique Barker and should not be taken as the views of CIBC Asset Management Inc. This document is provided for general informational purposes only and does not constitute fi nancial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with his or her advisor. All opinions and estimates expressed in this article are as of the date of publication unless otherwise indicated, and are subject to change. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements. ®CIBC Asset Management and the CIBC logo are registered trademarks of Canadian Imperial Bank of Commerce (CIBC), used under license. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. 591

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