Scrapping of older tonnage or retrofitting will be one the main talking points in the shipping industry as we edge closer to the realization of major regulatory changes. According to shipbroker Charles R. Weber, “While ship owners who are unable to decouple their IOPP survey from their dry dock schedule should buy more time, others may simply decide to scrap rather than spend more money on aging vessels.
There is a much broader regulation, facing a far greater section of the maritime industry that we feel needs discussions. IMO has decided to enforce a 0.5% sulfur cap on all marine bunkers on January 1, 2020. While there are NOx regulations and CO2 regulations coming as well – the SOx regulations would seem to us to have, in the short term certainly (The IMO CO2 strategy will not be finalized until 2023, after a study and reporting commencing in 2019) the most revolutionary effect on not only international shipping, but the refining business, bunker business, vessel design, specification and operation, national enforcement, chartering and consumers”.
Caps on sulphur used in fuel:
According to Mr. John M. Kulukundis, “based on the fixed date of 2020, the IMO states that ships will have to use fuel oil with a sulfur content of no more than 0.50% m/m (mass/mass) and the IMO interpretation of “fuel oil used on board” includes use in main and auxiliary engines and boilers”. One of the ship owners’ options for achieving compliance is to burn marine distillates whose sulphur content is 0.5% or less. “Globally, the shipping industry burns about 636,000 metric tons of heavy fuel oil a day to keep the world’s cargo moving. If it suddenly switched to more expensive LSMGO – the surge in demand would swamp refining capacity and represent an amount equivalent to 4 years of global demand growth – overnight! Not to mention what it would do to the price of LSMGO. Bunker suppliers would need to clean out their storage tanks and delivery tankers of the higher sulfur product prior to selling and delivering 0.5% sulfur. Also, owners permanently switching their ships to ambient LSMGO would negate the need for bunker settling tanks, purifiers and all the other equipment associated with HFO. Also, bunkers tanks will have to be reassigned and capacity possibly revised”.
Alternate option to burn residual fuel:
Another option is to burn residual based marine fuel with sulfur content less than 0.5%. According to CR Weber’s analyst, “this lower sulfur residual based fuel could be provided either through further refining (desulfurizing) of higher‐sulfur HFO, through blending of HFO and lower sulfur streams, or a combination of the two. Which refiners will produce this and how widely it will be available is an unknown. It would have to be made in more complex refineries or simpler ones would need to fit new coking towers (cost around USD 1 billion + is there enough time to plan and build) to get the sulfur down to acceptable levels. Price wise, were it to be available we would expect it to sell at a discount to the new high price for LSMGO rather than the same as the new low price for 3.5% HFO. Again, bunker companies will need to clean and strip and secure supply”.
In order to comply with the new rules, owners can also burn an alternative fuel (e.g., LNG or methanol) whose sulfur content is 0.5% or less.
Kulukundis notes that “this has the added advantage of reducing a vessel’s emissions of NOx, CO2, and PM. But retrofitting is very expensive, new buildings are not cheap and global supply right now, despite a big push, is sparse, to say the least. It is ideal for cross Baltic ferries and fixed route container vessels, but troublesome for global tramping tankers and bulkers. Also, bunker sellers will need to get onboard globally, with the additional cost of cryogenic storage and complex delivery tankers. Once cost saving is that certain EU and Scandinavian ports offer LNG vessels discounts on some port costs”.
Installation of Scrubbers:
Also, they can install an exhaust gas cleaning system (scrubber) and continue burning up to 3.5% sulfur HFO. CR Weber’s report says that “we expect the price of 3.5% HFO to drop precipitously as we approach January 1, 2020. We also do not believe that there is enough time or manufacturing to fit as many scrubbers as may be wanted as people move towards the deadline. Scrubbers do require additional energy (fine as you’re paying less for your fuel, but it may have cost you more than USD 6 m to install it) and sludge disposal costs.
Also, a scrubber only removes SOx, so NOx and CO2 issues will have to be dealt with separately. Some industry experts have put the cost of installing exhaust scrubbers at between $3m and $6m depending on vessel size, it is believed that this number does not include ballast to dry dock and loss of earnings while installing. Also, weight and stability and maintenance need to be taken into account. This solution would be very good for bunker sellers as nothing changes, except massively falling sales volumes of traditional HFO”.
Other more controversial and definitely temporary options include the obtaining of a waiver for “non‐availability of compliant fuel” —in other words, an exception from the cap‐enforcing country (that is, the Flag State or the Port State) that would temporarily free a ship from compliance with the 0.5% sulfur requirement. This is only a temporary solution so not one to base a business model on.
More scrutiny on the cards:
Finally, ship owners can elect to ignore the requirement and hope not to get caught. Kulukundis note that “while the already established (S) ECA nations are pretty good at enforcing the 0.1% sulfur regulations and so will be good at a global 0.5% reg. Other nations will have had no experience in enforcing emissions, may not have the Coast Guard or environmental teams to inspect every vessel calling their country or simply may not have the budget to do so.
This will inevitably open the new global sulfur cap up to abuse by those willing to burn 3.5% sulfur with no scrubber and operate their vessels at a considerably lower cost than those obeying the regulations. We conclude that charterers will face more scrutiny in the near future to release their GHG emissions figures by a more demanding and environmentally aware consumer. The introduction of these regulations will enable this to be achieved much more simply for the shipping portion. But of course it seems very clear that all of the options above come with an extra cost, and whether the consumer is willing to pay for cleaner, greener shipping is another thing entirely”, he concluded.
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Source: Weber Weekly
