A Comprehensive Review of Options in IMO Emissions Mandate




The decision to implement a global sulfur cap of 0.50% m/m (mass/mass) in 2020, revising the current 3.5% cap, was announced by the International Maritime Organization, IMO, and the United Nations regulatory authority for international shipping on October 27th.

IMO Secretary-General Kitack Lim said, “Reductions in sulphur oxide emissions resulting from the lower global sulphur cap are expected to have a significant beneficial impact on the environment and on human health, particularly that of people living in port cities and coastal communities, beyond the existing emission control areas”.

The IMO provided guidance on how the maritime industry might comply:

Ships can meet the requirement by using low-sulphur compliant fuel oil.  An increasing number of ships are also using gas as a fuel as when ignited it leads to negligible sulphur oxide emissions.  This has been recognised in the development by IMO of the International Code for Ships using Gases and other Low Flashpoint Fuels (the IGF Code), which was adopted in 2015.  Another alternative fuel is methanol which is being used on some short sea services.

Ships may also meet the SOx emission requirements by using approved equivalent methods, such as exhaust gas cleaning systems or “scrubbers”, which “clean” the emissions before they are released into the atmosphere.  In this case, the equivalent arrangement must be approved by the ship’s Administration (the flag State).

The industry now has just over three years to decide on how would be best to comply.

This mandate impacts all shipping companies including but not limited to Ardmore Shipping (NYSE:ASC), Costamare Inc. (NYSE:CMRE), Capital Product Partners L.P. (NASDAQ:CPLP), Danaos Corporation (NYSE:DAC), Diana Containerships (NASDAQ:DCIX), DHT Holdings (NYSE:DHT), Dynagas LNG (NYSE:DLNG), DryShips (NASDAQ:DRYS), Diana Shipping (NYSE:DSX), Euronav (NYSE:EURN), Frontline (NYSE:FRO), Golar LNG (NASDAQ:GLNG), GasLog (NYSE:GLOG), GasLog Partners (NYSE:GLOP), Golar LNG Partners (NASDAQ:GMLP), Genco Shipping (NYSE:GNK), Gener8 Maritime (NYSE:GNRT), Golden Ocean Group (NASDAQ:GOGL), Navios Maritime Midstream Partners (NYSE:NAP), Nordic American Tankers (NYSE:NAT), Navios Maritime Holdings (NYSE:NM), Navios Maritime Partners (NYSE:NMM), Navios Maritime Acquisition (NYSE:NNA), Pyxis Tankers (NASDAQ:PXS), Scorpio Bulkers (NYSE:SALT), Safe Bulkers (NYSE:SB), Star Bulk (NASDAQ:SBLK), Ship Finance International (NYSE:SFL), Seaspan Corporation (NYSE:SSW), Scorpio Tankers (NYSE:STNG), Teekay LNG Partners (NYSE:TGP), Teekay Corporation (NYSE:TK), Teekay Tankers (NYSE:TNK) and Tsakos Energy Navigation (NYSE:TNP).


The most basic way to comply with the new mandate is for shippers to switch over from Heavy Fuel Oil, HFO, to Marine Gas Oil, MGO.

Currently, marine fuel demand stands at 4 million b/d.  Over the last two years, MGO has been approximately $200 more per ton than HFO.


Source: Poten & Partners

Bunker prices account for anywhere between 40%-70% of a vessel’s total OPEX.

Some analysts like BIMCO have expressed concern regarding the ability of the refining industry to meet the upcoming MGO demand.

A shortage isn’t out of the question as the IMO has made some major assumptions regarding availability.  Among the most important would be that refiners would dedicate refinery capacity to produce these fuels and that all necessary supply would be available at the start of 2020.  However, refiners aren’t motivated by mandates, but rather by profit.  Therefore, they will produce what offers them the best return and can’t switch over from one fuel to another ‘overnight’.

Additionally, as we will discuss further, many of the vessels projected to use this fuel will be the older vessels.  Younger vessels could see long-term cost savings by implementing other strategies to meet the IMO mandates.  Meaning refiners might be hesitant to commit to a shift in production for what could turn out to be a temporary market which will lose customers as aging ships are sent to the scrap yard.

A shortage of the required fuel is therefore a very real possibility and should push costs even higher for compliant MGO.  If this happens, the economics of other technology to meet the IMO’s requirements could become even more attractive as the price spread increases.

This could lead to once profitable vessels becoming unprofitable.  In fact, MJLF reported that this is a very real possibility and the IMO mandate “will push distillate prices higher” and “we expect scrapping to start to vessels that will be going into their fourth special survey from 2018 onwards.”


Source: Euronav

As noted, that survey comes at just 17.5 years of age for tankers.  This comes as the other major IMO mandate, the Ballast Water Management Convention, is set to add another expense during the first survey following September of 2017.

Some bear markets for particular segments aren’t projected to clear up by 2018, meaning higher bunker costs, one-time BWMC retrofits, and low rates could take a significant toll on the existing fleet.

One such segment which will continue facing headwinds is the container shipping sector. 

This is not welcome news for a group that is still digesting the Hanjin shipping bankruptcy as survivors continue to consolidate and form alliances in an effort to increase operational efficiency to merely survive.

MSC, the world’s No.2 container line, estimated its own additional annual fuel costs at $2.02 billion.  In response, MSC has launched a $250 million retrofitting program to make its fleet cleaner.


A scrubber is a device installed in the exhaust system after the engine or boiler that treats the exhaust gas with a variety of substances.  For vessels, those substances are typically seawater, chemically treated fresh water, or both, otherwise known as open loop designs, closed loop designs, and hybrids, respectively.

An open loop system uses ambient seawater for exhaust gas scrubbing.  The seawater is filtered for heavy metals and particulate matter and then discharged into the sea containing all the sulfur cleaned from the exhaust.  These are simpler systems and do not require large amounts of waste storage and handling on board, but there are issues of water intake quality and more importantly some ports and areas may not permit the discharge of the waste water containing sulfur.

A closed loop system uses fresh water that is chemically treated usually by caustic soda injection to effect scrubbing.  Most of the scrubbing agent is re-circulated with only minimal water intake and effluent discharge.  These systems avoid the issues of waste water discharge, but are more complex, more costly to run, and create waste storage and handling issues on board.

A variation on the closed loop system is a hybrid system, which can operate as an open loop system while outside special areas.

Scrubbers remove most of the SOx from the exhaust and reduce particulate matter to some extent.  After scrubbing, the cleaned exhaust is emitted into the atmosphere.

There are numerous companies that offer a variety of designs.  Since the IMO has left it up to the “ship’s Administration (the flag State)” it will not be a one size fits all arrangement.

It is this variety and ambiguous wording that will probably lead to owners delaying implementation of this technology until approval is assured and costs perhaps come down due to greater adoption.

Scrubbers vs. Marine Gas Oil

Almost all analysts agree on two points:

First, the adoption of scrubber technology will be driven in part by the spread between HFO and MGO.  Second, older vessels will not have this technology installed due to the high initial costs and shortened recovery period due to expected vessel life.

Poten & Partners notes that the cost of running scrubber technology will add approximately “$20-$50 per ton of consumption.”  It estimates that installation costs will range between $3-$6 million, which means that a “VLCC burning 70 tons of fuel for 250 days per year would have a payback period of about 2 years.”

Gibson put forward a different set of numbers and included some issues that Poten & Partners failed to address:

Right now, scrubber technology remains in its infancy and the costs are high with some industry bodies suggesting the cost could range from $3-10 million depending the size and type of vessel, as well as the ease of installation.  However, retrofitting scrubbers may not be technically straightforward, given the requirements for additional space and waste collection tanks.

Even after taking these challenges into consideration, it is still likely that owners with that wish to keep their vessels on the water for at least a few years after the 2020 deadline will likely be considering scrubber technology as one alternative to MGO, if they have the capital to make this change.

LNG & Other Conversions

Another option can be converting a vessel to be powered by LNG.  The economics behind this move come down to conversion cost coupled with the spread between LNG vs. MGO.  Since that spread is dynamic, it can be hard to nail down an exact number.

Conversion costs can range anywhere from approximately $6 million to $22 million.  Clean Marine reported that the MGO vs. LNG spread favours LNG, even in today’s environment with projected recovery costs of about “2-5 years for many vessels.”

One recent example for a 1,400 TEU vessel on a loop that runs from the Baltic ports of St. Petersburg and Riga down to Rotterdam and up to the UK’s Teesport, a 12.5 day journey, illustrates the cost savings.  As noted, prices and therefore the spread are dynamic, so variations will occur, but Loadstar reported that with MGO at $440 per tonne and LNG at $250 per tonne, LNG-powered vessels would offer a cost savings of $55,000 per trip.  With a conservative 28 trips per year, this represents a $1.5 million savings.

However, currently, there are supply concerns which can be likened to the chicken/egg dilemma.  But those may be addressed in the near term as more regions are building LNG bunkering facilities.


Source: lngbunkering.org

Singapore is taking steps to position itself as an Asian LNG hub, which could be a big step toward solving that problem with the massive amount of traffic around that region.

Furthermore, the industry is expanding the use of LNG barges and pontoons which can reduce the costs of land based LNG bunkering facilities.  The cost of land based facilities is a major hurdle to overcome.  But as FSRU’s have reduced regasification costs and development time allowing greater imports of LNG for consumption, these barges or pontoons, specifically designed as LNG bunkering facilities, could do the same, leading to more widespread adoption for vessels.


But according the Maritime Executive running “a converted marine diesel engine on methanol could be among the cheapest ways to operate in an Emissions Controlled Area.”

The Greater Baton Rouge Business Report notes that “by converting to methanol, large ocean going vessels can reduce sulfur dioxide emissions by 99%, nitrogen oxide emission by 60% and particulate matter by 95%.”

Finally, methanol bunkering stations can be up to 95% less in terms of cost vs. that of LNG. That is largely because methanol is easier to handle than LNG, as methanol is a liquid and does not require to be held frozen nor be under a specific set of pressures.

Dual Fuel

But perhaps the best option for a vessel with a long life ahead could be a conversion to a dual fuel system, which in some cases should be called multi-fuel.

The latest systems have the ability to run on LNG, LPG, methanol, HFO, marine diesel, or MGO.  Though expensive, if installed on a younger vessel, cost recovery won’t be an issue. But this looks more like a forward-looking technology that will most likely be utilized for new builds.

Furthermore, the option of utilizing various types of fuels would allow it to capitalize on varying costs and have a wide selection of service routes.

Finally, it is projected that the systems should provide the greatest value in second-hand markets, should the vessel ever be sold.

Availability of MGO

One final issue that needs to be considered is that many HFO bunkering facilities might not be capable of producing MGO even if they wanted.  This is due to out-dated facilities and a limited availability of investment to upgrade these facilities.

Therefore, some major bunkering hubs which cannot meet these obligations to produce MGO may find themselves limited in supply or reliant of imports of MGO.  This creates either disruptions in the supply chain or another set of logistical challenges in managing proper imports to sufficiently supply vessels which use these terminals.  Meaning we could see a shift in trade flows or bunkering patterns.


Older vessels nearing the end of their service life will most likely pay for the higher priced MGO if they are to continue on the high seas.  This appears to be a main source of demand. Another source for MGO demand will be those owners which lack the funds to carry out conversions or install scrubbers which can be initially costly, but provide a more attractive return over time.  With credit and investment being tough to come by in the shipping segment due to historic turmoil in the dry bulk and container segments, this group of owners unable to carry out these improvements may be quite large.

It is also unclear to what degree refiners are willing or able to begin producing the required MGO.  This combination could create some very serious price distortions with regard to the HFO and MGO spreads.

While scrubbers appear to be the early favourite for vessels that will continue a service life long after the new IMO sulfur emission mandates take effect, other options exist to meet the requirements.

While the idea of LNG powered vessels has been gaining in popularity, methanol may be poised to take some market share as conversions are more cost efficient and bunkering facilities are much less expensive to establish.

Over the coming few years, it will be interesting to see if shippers go for the established solution (scrubbers) or will venture into uncharted waters and attempt to tackle issues that the IMO has on their agenda, such as CO2 emissions.  By taking up LNG or methanol propulsion, this could mean the industry can get ahead of a potential IMO mandate regarding CO2 in the future.


  • January 1st, 2020, has been set as the implementation date for a significant reduction in the sulfur content of the fuel oil used by ships.
  • The intention is to lower harmful sulfur emissions, of which 13% globally can be traced to maritime trade.
  • Aside from utilizing a cleaner type of distilled fuel oil, which is more expensive, other options exist which could make for some interesting decisions down the road.

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