2020 Regulation: The evolution of an Industry

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In a year, the mandatory 0.5% m/m sulphur fuel limit globally, outside of dedicated emission control zones (ECAs), “a steep drop from the previous 3.5% m/m” limit will come into effect. All regulations have their complexities and cost, but the catch with the 2020 sulphur cap is that any decision is essentially predicated on unknowns, such as compliant fuel prices, quality, and availability. The complexity of weighing up the several fuel compliance options available means that some shipowners remain undecided, reports Girija Shettar in an article published on MPropulsion.

How does the compliance options fare?

Compliance options are being weighed for their impact on competitiveness, operations, and return on investment, which in turn depends on sector (container, tanker, bulk, etc), ship type and size, routes transited, and business models, such as charter, voyage, spot; also in the balance is harmony with current and future environmental regulations.

“2020 marks the first time in a long time that there has been no consensus across [the] industry on how to deal with a new regulation,” Bureau Veritas Marine Marketing and Sales Director, Gijsbert de Jong said.

The options available to shipowners are essentially three-fold: install exhaust gas cleaning systems (scrubbers) powered by high sulphur heavy fuel oil (HFO); switch to a compliant fuel, such as distillates or low sulphur blends; or switch to liquified natural gas (LNG) or liquified petroleum gas (LPG).

Most of the global merchant fleet of 95,000 ships is expected to opt for compliant fuel, particularly the cheaper blends. However, this option runs the risk of off-specification fuel, the potential for engine failure and port state penalties, not to mention supply and price constraints.

How to address the fuel concerns?

Fuel testing services will be “instrumental” during the switchover, said Mr de Jong, who noted owners should take independent specialist advice, “talk to fuel suppliers, understand the low sulphur fuels they produce, and test them, preferably in advance”.

Fuel quality concerns have prompted industry bodies to issue numerous comments. The International Organization for Standardization (ISO) has said that while its standard ISO 8217, which specifies requirements for marine fuels prior to use, does address the new fuel blends, it will provide further guidance on the application of this standard.

In addition, owners and charterers will be protected by an agreement on fuel testing agreed by IMO, where a 95% confidence factor will be applied to on-board fuel samples, while an “absolute 0.5% limit” will be maintained for supplier samples taken during bunkering.

“Eco-friendly investment propositions, provided the business case is sound, get a very good audience in the financial markets”

Agreement for Non-compliance Tests

International Chamber of Shipping technical director John Bradshaw said this will mean that a ship will not be held for non-compliance based on test results which vary because different labs testing the same fuel often achieve different results. The new agreement allows for a margin to account for this anomaly.

“Until now this has not been a problem,” said Mr Bradshaw. “The range of sulphur is about 2.3% in HFO, which is well within the 3.5% limit. But as we go into 2020, the blenders are going to blend to the 0.5% limit, so the margins industry has enjoyed suddenly disappear and puts you in the area where a test result may be found to be slightly over 0.5%,” he said.

Addressing operations, the international bunker industry association has submitted guidance to IMO on the impact of blends on fuel and machinery systems, and regarding handling, storage, and use of blends. Fuel management safety under the 2020 cap will be addressed by IMO in October 2018.

The Scrubbers Solution

Fuel concerns have resulted in a steady stream of owners opting for scrubbers, including Maersk, which had previously rejected the option.

Scrubbers require significant capital investment for retrofit or conversion, and other expenses include maintenance, crew training, technical risks, and future regulatory restrictions.

The choice of scrubber is essentially a gamble on the low price of HFO post-2020, and the associated return on investment. Conditional on HFO availability at the required ports, payback for owners who have installed scrubbers pre-2020 is in the region of one to three years, depending on ship size, according to classification society DNV GL’s 2018 report Global Sulphur Cap 2020.

Open-loop scrubbers however, which discharge waste into the sea, are restricted by some regional regulatory regimes and more may follow suit.

Current restrictions include Belgium and Germany under the EU Water Framework Directive, and California, where scrubber use is disallowed within 24 nautical miles of the coast (exemptions for research purposes must be applied for in advance). Due to this regulatory threat, the majority of scrubbers being fitted are hybrids, combining open- and closed-loop systems.

Scrubber installations per ship type

Source DNV GL

Deciding among the options for compliance is proving extremely challenging, as evidenced by the fact that established, pro-environmental shipowners, just 20 months from the deadline, remain undecided on their course of action. One such company is Korean container line, Hyundai Merchant Marine (HMM).

Scrubbers were installed on two recently launched 11,000 TEU sister ships, HMM Promise and HMM Blessing. But, for 20 on-order “eco-friendly mega containerships”, the company said that, following IMO’s announcement of the 2020 deadline, a decision on compliance for these had been delayed.

“HMM will opt for either installing scrubbers or LNG bunkering for all the new vessels after thorough discussions with shipbuilders,” the company said.

The Present Compliance Scenario

The option, of scrubbers or LNG, reflects the industry’s current position; it is at a fork in the road that ultimately leads towards IMO’s ultimate aim of a zero-emission future.

IMO’s Initial Greenhouse Gas (GHG) Strategy aims to reduce GHG emissions from international shipping “as a matter of urgency” and to “phase them out as soon as possible in this century”.

The strategy has “two main objectives” explained Mr de Jong: to cut GHG emissions for the whole sector, and to improve the overall energy efficiency of the fleet.

Using 2008 emission levels as its baseline of comparison (as per IMO’s second CO2 study), IMO aims to cut overall CO2 emissions from the industry 50% by 2050 and to improve the fleet’s energy efficiency (per tonne mile) 40% by 2030 and 70% by 2050.

“CO2 emissions ‘per tonne/mile’ is a measure of how much CO2 will be emitted to move one tonne of cargo one mile” and is the way IMO measures ships’ energy efficiency, Niels Bjorn Mortensen, former director of regulatory affairs at Maersk Maritime Technology noted.

“This [measure] also makes it possible to compare the energy efficiency between ships,” added Mr de Jong.

Not High Enough

However, environmentalists, such as Rocky Mountain Institute (RMI) managing director Ned Harvey – RMI incorporates Richard Branson’s Carbon War Room – said these goals are “probably not high enough”, albeit conceding they were a “major step in terms of ambition”.

“Efficiency has driven our choice of fuels; the environment was not a key consideration. But now, the driver for fuel change is environmental”

Unfortunately for those advocates of the scrubber option, the reality is that these devices have more in common with the past than the future.

Dependent on 2%-5% higher levels of polluting HFO, scrubbers emit CO2. As such, they stand in contradiction to the goal of reducing CO2. They are also inconsistent with IMO’s Energy Efficiency Design Index and Ship Energy Efficiency Management Plan.

Indeed, Mr de Jong stated that when considering measures to help shipowners “achieve a continuous cycle of improvement through measuring fuel consumption and emissions, similar to ISO 9000 thinking”, scrubber installation leads to “an uptick [in fuel use and emissions] rather than a down tick.”

DNV GL estimates that “less than 10% of fuel consumption will correspond to ships with scrubbers.” But the organisation also noted that owners who install scrubbers “are aware of the risk” of future IMO rules that may demand a “significant reduction in GHG emissions”.

“Scrubbers are solving the 2020 goal, but certainly not the decarbonisation goal,” said Mr de Jong.

“Shipping has two environmental challenges: emissions affecting human health, and global warming. Their solutions are not always aligned, but if you take the decarbonisation route, you solve both. A decarbonised ship would, by definition, be a 2020-compliant ship,” he said.

Scrubber systems – pros and cons

1. Open-loop Pros: Few components (lower cost); utilises seawater directly from the sea, no hazardous chemicals are required

Cons: Not allowed in some ports and areas; unsuitable in brackish and fresh waters; US VGP pH compliance requires a “dilution” pump

2. Closed-loop/Hybrid Pros: Increased flexibility; can operate in all areas regardless of seawater alkalinity or temperature

Cons: Increased complexity (higher costs); requires a constant supply of an alkaline medium (NaOH is hazardous and requires special handling)

Open loop and hybrid scrubbers constitute 84% of confirmed scrubber projects. Most smaller oil tankers fitted with a scrubber chose a hybrid system. Among large tankers, there is a trend for using open-loop scrubbers and switching to sulphur-compliant fuels when needed. (Source: DNV GL)

The shift towards LNG

For large merchant ships, in the absence of scalable clean fuel options such as electricity and hydrogen, LNG straddles past and future and DNV GL sees LNG and bio-fuels as taking the “larger share over time”.

LNG is still a fossil fuel that emits a degree of the GHG, methane, and significant quantities of CO2 in its production and storage. But, it offers the complete removal of sulphur oxide and particulate emissions, a reduction of nitrous oxide emissions of up to 85%, and a reduction of GHG emissions by 10% to 20%, depending on engine technology.

Eero Vanaale, LNG business development executive with engineering consultancy Royal Haskoning, puts LNG at the current apex of a fuel evolution. From sail, to coal, to oil, and now LNG, the latter signals a change in the driver of fuel choice, from economics to environment.

“Efficiency has driven our choice of fuels; the environment was not a key consideration. But now, perhaps for the first time, the driver for fuel change is environmental,” Mr Vanaale said.

If viable alternatives appear, LNG could be a “relatively short-term” event. Otherwise “there is an abundance of natural gas reserves, and for 2020 LNG is one of the best options to comply,” he added.

It would take between four and five years, DNV GL estimates, for a shipowner to recoup their investment in LNG and some owners, such as container liners Hapag-Lloyd and CMA CGM, have now committed to this option.

How to find the optimum solution?

Owners must now find what DNV GL calls an “optimum solution”, that depends “not only on payback time” but also on “GHG emissions, environmental profile, and long-term value creation potential”.

“2020 will effect a degree of slow steaming” and a “better utilised” fleet, said DNV GL. The expected reduction in supply “could also lead to higher charter rates on average”, with fuel-efficient ships with scrubbers gaining competitive advantage.

Marine Capital CEO-CIO Tony Foster calls LNG a “future-proofed eco-solution”, which he defines as a solution offering “a return over 10 years and that will not fall foul of future regulatory changes”. He added: “Eco-friendly investment propositions, provided the business case is sound, get a very good audience in the financial markets.”

In the long run, environmental measures are expected to save owners money from reduced fuel consumption and operating costs. Indeed, RMI’s Mr Harvey noted that structural changes in finance will start constraining owners that do not invest in greener ships.

“Energy efficiency in ships is similar to that in buildings,” said Mr Harvey. “Every percentage improvement in efficiency saves somebody some money.”

Shipping energy mix 2050

By 2050, only 47% of energy for shipping will be from oil-based fuels. The share of gas in the fuel mix will rise to 32%. More than a fifth will be provided by carbon neutral sources, such as biofuel and electricity (source: DNV GL).

2020: Options for compliance

1. Distillate fuel

Pros: Useable for most engine configurations

Cons: Higher fuel cost; may create operational issues due to low viscosity of the fuel

2. New compliant fuels

Pros: Useable for most engine configurations

Cons: Unknown fuel cost; no track record as per September 2018; uncertain availability; may create operation issues due to off-spec fuel or incompatibility

3. HSFO with scrubber

Pros: Can use conventional HSFO; possible for retrofit; reduces particulate matter as well as SOx; attractive business case for certain ship types

Cons: Initial investment (US$2M-US$10M); 3-5% fuel penalty; requires space for scrubber tower and supporting systems; requires chemicals (closed loop); requires integration with ship’s power management system; requires monitoring

4. LNG as fuel

Pros: Good environmental performance; can reach NOx Tier III requirements; positive impact on EEDI

Cons: High investment cost (US$3M-US$30M); costly to retrofit; large regional variation in LNG price; methane slip in exhaust; requires space for tank; some engine types need additional systems to reach NOx Tier III.

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Source: Marine Propulsion & Auxiliary Machinery

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