The International Maritime Organization’s (IMO) ruling to reduce the sulphur cap for bunker fuel from 3.5% to 0.5% by 2020, means an overhaul of the industry facilitating 90% of the world’s trade, including energy commodities.
2020 is a very short two years away for energy stakeholders to adapt to one of the biggest disruptions in the shipping industry in living memory. High sulphur fuel oil (HSFO) was used for approximately 70% of the world’s bunker fuel in 2016; volumes that will not be compliant post-2020.
The impact of the IMO ruling could result in a demand drop of as much as 2.1 million barrels per day in HSFO accounting for nearly 30% of global residual fuel oil demand. No entity along the value chain — from refineries, trading, logistics, ports to shipowners, will be untouched.
Feasible Options to Deal with the Regulation
A silver bullet to post-2020 bunkering remains elusive. But amongst the plethora of options, low sulphur fuel oil (LSFO) and liquified natural gas (LNG) bunkering are emerging as preferred options for energy stakeholders seeking an economic and environmentally sustainable route. Plans to increase the use of both bunkering options are under discussion in the Middle East; the UAE’s Port of Fujairah, the world’s second largest bunkering hub, is already developing LSFO bunkering solutions and in the GCC FSRU LNG import projects can be designed to facilitate LNG bunkering.
LSFO ticks the right environmental boxes and is arguably the Middle East’s easiest shortcut to meeting the IMO’s ruling, as the region’s portfolio of dedicated and sophisticated refineries can adjust their crude palettes to 0.1% (Ultra Low sulphur fuel oil, used in emission control areas (ECA) ) – 0.5% sulphur relatively easily. LNG bunkering also contains almost no sulphur, can be priced off oil markers, is a proven technology and has lower greenhouse gas (GHG) emissions.
Other bunkering options include using HSFO alongside scrubbers or exhaust gas cleaning systems, which are not considered an environmentally-friendly route long term. Additionally, the cost of investing in scrubbers can range between $1-9 million per ship depending on its size. Ship owners are currently reluctant to make these investments as the industry struggles out of a low margin environment.
Alternatively, ship operators can fail to act and pay the penalties. While there is no global game plan — solutions depend on individual needs — there is a consensus that conformity for post-2020 bunkering will help trim overall costs and improve energy supply and security.
Reforms Call for Improvisation
The lines of communication between refineries, ports and ship owners need to improve to accurately gauge the need and subsequent supply of LSFO supply from 2020. The same applies to minimizing the variability of the blend quality between suppliers all over the world. Meanwhile, LNG bunkering tends to suit fixed maritime routes that already have supporting infrastructure in place, both at ports and via floating storage regasification units (FSRUs).
The Cost Factor
Compliance to IMO 2020 carries a steep price tag in a cash-strapped energy industry. Consultants Wood Mackenzie estimated last year that a full compliance scenario would incur an increase of up to $60 billion per year in global bunker fuel costs from 2020, while S&P Global Platts said the impact of these changes will reach $1 trillion over five years. The line between winners and losers in the early 2020s could be well-defined between those who can afford to evolve — and those who cannot.
There are myriad implications for marine shippers, but let’s focus on the refining implications. There will be a huge shift in global refined product demand. This means price spikes for low-sulphur fuel oil (LSFO) and price craters for high sulphur fuel oil (HSFO). For refinery planners, this means a terrific opportunity to make money for the company.
Each point should serve as a reminder that the emphasis on making bunkering ‘greener’ will only intensify; therein lies the value of LSFO and LNG. Leveraging either or both will relieve these intensifying pressure points. They also serve as a good starting point for energy stakeholders to hedge against more shifting sands; more climate-related mitigations in the energy market are inevitably around the corner.
The Road to Compliance
The IMO 2020 regulations have, no doubt, created an atmosphere of chanciness within the shipping industry. Identifying problems and constraints would enable companies to put the necessary projects in place well before the 2020 implementation date.
The take-home message is the IMO 2020 regulation will be an opportunity for some shippers, but for others it will be a significant challenge. In either case, there are a number of approaches one should consider to improve position and ensure overall competitiveness in the period between 2020 and 2024 when a new equilibrium is found. The more effective approaches are technology-enabled, but all come back to a focus on enabling the workforce to adapt to new operational realities posed by IMO 2020.
(References: Saudi Gazette, Wall Street Journal, AspenTech, Platts)
Sea News Feature, September 11