IMO 2020 Compliance Constraints

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  • With only 13 months left, lot of uncertainty still around the new regulations and its impact.
  • The US and other nations want a ‘phase-in’ of the regulations and are seeking an ‘experience building phase’.
  • Dock availability for the global fleet of around 92,000 ships is a constraint and there are only a handful of suppliers of scrubbers.
  • The IMO study states that compliant fuel availability will not be a problem.
  • The new rule comes along with broader implications for the world economy.

Shipping industry faces several constraints on complying with IMO’s regulation on sulphur bunker fuel oil usage says an article by Anuj Agarwal for Financial Express. The IMO (International Maritime Organization) 2020 regulations have been in news for a while and its traction will only increase as the time passes.

Stringent regulation

IMO is an agency under the United Nations responsible for the regulatory framework for the global shipping industry. Ships account for around 4-5% of global oil demand.

As per the new regulations, starting January 1, 2020, ships will be allowed to use only 0.5% sulphur bunker fuel oil, which is 3.5% currently.

Amendment adopted

On October 26, the IMO adopted an amendment which prohibits even the carriage of non-compliant fuel oil for combustion purposes for propulsion or operation on board a ship—unless the ship has an exhaust gas cleaning system, or scrubber—fitted.

Prevailing uncertainty

With only 13 months left, there is still a lot of uncertainty around the new regulations and its impact. Countries including the US are now seeking to delay the implementation of the new regulations.

The US and other nations want a ‘phase-in’ of the regulations and are seeking an ‘experience building phase’. A phase-in would mean that the rule would not have to be fully complied with until a later unspecified date.

However, the IMO has maintained that the implementation date of January 1, 2020, is non-negotiable.

Options available to comply

The new rules will have a direct bearing on the ship-owners and refiners. One option with ship-owners is to install scrubbers in existing ships—retrofitting.

Retrofitting of a scrubber costs anywhere between $2-5 million depending on the ship size. On some older vessels, fitting a scrubber might not even be possible or might not make economic sense. Dock availability for the global fleet of around 92,000 ships is also a constraint.

From the supply side, there are only a handful of suppliers of scrubbers. Given the constraints on the production capacity, a scrubber ordered today will only be delivered over the next 8-10 months. This lag time further restricts the ability of the ships to be ready before January 2020.

The other option ships will likely go in is for use of marine gas oil (similar to diesel), low sulphur bunker fuel or blending of fuels to meet the emission norms. Currently, the low sulphur fuel is at a premium of $150-200 per ton.

This premium can even go up as and when the demand for low sulphur bunker fuel rises. Operational issues with regards to using blended oils with the existing engines will also pose a challenge.

Experts view

Experts point to the fact that merely 1,500-2,000 ships can be retrofitted with scrubbers by the time the new rules come into play. Lack of a globally accepted standard for scrubbers further puts the ship-owners in uncertain waters.

As the new rules come into force, major bunkering posts across the globe are likely to stock and provide the low sulphur compliant fuel. In such a scenario, there might be decreased availability of high sulphur fuel oil.

Some of the new vessels are being built with scrubbers already pre-fitted. Dual-fuel ships are also a possibility, but are costly to build and operate. Use of LNG as a fuel to power ships is some time away.

Refiners options

Refiners will have the option to produce low sulphur fuel oil by changing their crude feeds or de-sulphurising the existing high sulphur fuel oil.

Alternatively, refiners can also further process the residual high sulphur fuel oil in their refineries to make other products like petcoke.

Availability of LSFO

There are fears in the market that adequate amount of low sulphur fuel might not be available. However, the IMO commissioned study is optimistic and states that compliant fuel availability will not be a problem.

Adequate availability of low sulphur fuel will depend on the refinery economics—some stand to gain while others will lose. Removing sulphur is capital intensive.

Complex refineries might still find it easy to change their inputs and outputs in line with the market dynamics. While the US shale oil is low in sulphur, experts have pointed out to the challenges at refiner’s end to make low sulphur bunker fuel using the same. Moreover, US shale’s access to global markets remains restricted by pipeline infrastructure for now. Refiners will make a gradual move to low sulphur bunker fuel, with demand for high sulphur fuel oil still coming in from scrubber fitted ships and blending for a few years.

Who is responsible?

Many in the industry still doubt the implementation of the new regulations. Once the new regulations come into effect, individual countries are responsible for making it a part of their law and ensuring its enforcement.

The penalties for non-compliance are to be set individually by the member countries. Low penalties might incentivise breach of the regulations. Fuel Oil Non-Availability Reports (FONARs) too can be used by ships to attract no or minimal penalties.

Implications to world economy

There are also hopes that the implementation of new rules might be delayed. Along with ambiguity for refiners and ship owners, the new rules also come with broader implications for the world economy.

Be it installation of scrubber or use of a compliant fuel, the new rules will increase freight costs. Anything that gets seaborne will get costly.

Increased cost of shipping will push up global inflation and might eventually hurt growth. This could mean slower growth for 2020 and may be even some following years. Many in the market foresee the new rules as a big event for the oil markets pushing up prices of crude oil as well as refined products.

This can impact prices of a wide variety of goods along with prices of petro-fuels. This can further impact growth. Other sectors and commodities like petcoke, coal and sulphur too will feel a rub-off of the new regulations.

Along with a cleaner future (low sulphur, not low carbon) in 2020, the IMO brings along more headwinds to sail through.

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Source: FinancialExpress

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