How Trafigura’s Carbon Levy Proposal Affects Shipping

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A proposed carbon levy is the latest in a wave of change potentially facing the global shipping industry, reports Opportune.

IMO2020 regulations

The year 2020 has been one of unexpected change and it has been no different for the maritime space. On January 1, the International Maritime Organization (IMO) started enforcing a new regulation (IMO 2020) that caps the allowable sulfur content in all global fuel oil used in ships from its former level of 3.5% m/m (mass/mass) to 0.5% m/m.

The demand destruction in the oil markets led to a flood of traders chartering vessels for floating storage and high volatility in charter prices.

Between March 2020 and May 2020, one-year very large crude carrier (VLCC) rates increased by 100%. The spot rate was even more volatile, with the TD1 route (Arabian Gulf to U.S. Gulf Coast) seeing over a 500% increase.

The most recent wave of change came in the form of a proposal to the IMO from Trafigura introducing a carbon levy of between $250 per metric ton (/mt) and $300/mt of CO2 equivalent on shipping fuels.

Impact of this proposal on the oil industry

According to Reuters, in 2018, the shipping industry was responsible for over 1 billion tons of CO2 emissions. Based on the United Nations Conference on Trade and Development, crude oil accounts for 17% of maritime cargo. This would imply that crude oil shipping is responsible for roughly 179,520,000 tons of CO2 emissions.

  • In 2018, 1.886 billion tons, or 13,824 million barrels (bbls) of crude oil, were transported via ship. Considering the proposal has an undefined benchmark at which the levy would be applied, it’s not exact math, but even if only 20% were applied, a VLCC voyage would have cost up to $1.5 million more. Given today’s VLCC rates, a 30-day voyage only costs about $900,000 for freight.
  • In 2019, there were about 7,400 crude oil tankers in use globally, of which only about 175 of them are LNG-fueled vessels (just under 2.5%). The Trafigura proposal would impact 97% of the oil tanker fleet and give any owners or charters of LNG-fueled vessels a significant competitive advantage in the market.

While these levies will be assessed to the shipowner, it’s all but certain that they will be passed along to any charterers. Ultimately, freight rates will be market-driven, so this levy would be an additional hurdle for those owners using fuel with greater emissions. All of this results in increased cost to the end consumer.

A renewable future

More energy companies are turning their focus to clean and renewable energy options. Companies like BP, Shell, and Total have invested close to $10 billion in renewable energy projects.

While these investments have low initial returns, a proposal of a levy on high-carbon fuels, while providing subsidies for low-carbon fuels, maybe a bit like Robin Hood—robbing from the traditional fuel oils to pay for their replacements and ultimate demise.

It’s also interesting to note that the company proposing the high-carbon fuel levy recently announced plans to invest $2 billion into renewable energy projects.

Available options for low carbon fuels

  • LNG — Liquified natural gas (LNG) is a proven and available commercial solution. In recent years, both Shell and ExxonMobil have invested in projects to provide LNG bunker fuels. There are currently more LNG-fueled ships under construction than there are in production, but it’s still a small percentage of the total shipping capacity. While LNG has been hailed as the best fuel to meet the IMO 2020 regulations, there are concerns about how “green” LNG really is.
  • Hydrogen — Shell recently published a report suggesting that liquid hydrogen was advantageous over other potential zero-emission fuels.
  • Bio Fuel Oil — In September 2020, ExxonMobil completed a successful sea trial using marine bio fuel oil. Both hydrogen and bio fuel oil offer promise, but it hasn’t been as fully developed as LNG, so there’s still research to be done.

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Source: Opportune

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