The bunker industry is undergoing the most extensive change since the conversion from coal to liquid fuels as a result of the reduction in harmful emissions. This is being driven by the growing awareness of the damage to the environment being caused by pollutants from shipping. As practically all other sectors and particularly land transportation have drastically reduced emissions, the spotlight has shifted to the marine sector and procedures have now been established to reduce emissions at sea.

The clean-up process mandated by a series of national and international regulations commenced in 2006 and will continue for another decade and beyond. There are unknowns in these regulations that make it more difficult for both the supply and consuming sides to plan and, as a result, there is a reluctance to commit to either ship-borne solutions or investments in refinery capability to convert higher sulphur residual to lower sulphur fuels, predominately distillates.

These regulatory changes and proposed technical solutions are adding to the level of uncertainty and change in the industry. While we do see demand growth of 1%pa from 2015 it is being slowed by:

Changing trade patterns particularly East of Suez with increasing intra-Asia trade;

Continuation of slow steaming;

The introduction of larger vessels;

Widening of the locks in the Panama Canal;

Eventual increase in usage of Arctic routes;

Effective implementation of both the EEDI and the SEEMP.

The next key change is the use of fuel with a sulphur content of less than 0.10% from the beginning of 2015 in the Emission Control Areas (ECA) that encompass the Baltic and North Seas, and areas 200 nautical miles off the shores of North America and off Puerto Rico in the Caribbean.

The analysis from FGE, together with Marine & Energy Consulting Ltd, run by Robin Meech, demonstrates that there will be sufficient product available but that distillate prices will increase and fuel oil prices decrease. The widening distillate/fuel oil differential will further incentivise the introduction of abatement technology.

The unknown is the level of compliance, particularly in the European ECA where penalties and enforcement levels have tended to be relatively low. Professional operators are demanding greater controls so that they can operate on a level playing field with less scrupulous ship owners. This task falls to the port state control authorities who have, in most cases, not responded to this essential increase in their responsibilities. This is particularly true in Europe whereas the Coast Guard in the US is seen as competent and determined to ensure compliance. This uncertainty has not encouraged ship owners to invest in scrubbing, the most economic means of complying for vessel trading predominately in an ECA. The possibility of increased use of LNG as bunkers has further clouded the decision-making process.

The key uncertainty in the future regulations is when the 0.50%S global cap will be introduced. The current position dictated by Annex VI of MARPOL is that it will be introduced at the beginning of 2020. The Annex also allows for a review of the availability of suitable fuels to be undertaken before 2018. Should this conclude there is not sufficient fuel the introduction will be delayed until 2025. Currently there is no provision for the introduction in an interim year. In the recent IMO debate on this issue, it was agreed to start the review as soon as possible and the results should be available in late 2016 or early 2017.

FGE and Marine & Energy Consulting Ltd. have combined their expertise over nearly a decade to examine the complex issues surrounding the bunker industry and markets. Our latest analysis has been published in a new study, presenting our assessment of the challenges which lie ahead.

The Outlook for Marine Bunkers and Fuel Oil to 2035 study has adopted the introduction of the global cap in 2025 as the Base Case, as this appears the most likely and the study concludes that there will be sufficient compliant fuels available. In the study, we suggest this will require low sulphur feed stocks currently being processed through FCCs and hydrocrackers to be rerouted to the marine fuel oil pool. All sectors of the supply side including refiners, terminal operators, blenders and suppliers will need to make investments in order to ensure sufficient lower sulphur fuels are available.

Key investors, such as ship owners and refiners, would prefer the delay in the introduction of the global cap. Neither group is currently financially strong and has suffered a number of years of poor returns. The shipping community is investing its limited resources in energy efficiency, while refiners are investing to meet the more attractive gasoline and distillate market demand and addressing the evermore stringent product qualities being mandated there.

FGE and Marine & Energy Consulting Ltd.’s detailed analysis also concludes that from a technical standpoint, sufficient 0.50%S bunkers could be made available to introduce the global cap in 2020, under the conditions that refiners meet their current investment deadlines in secondary process units and support infrastructure. This is by no means certain as projects are liable to delay, especially if crude oil prices drop in the near term (which is their expectation) due to short term oversupply. Also, ship-owners will have to accelerate their investment in retrofitted scrubbers, which again may not happen due to the continual inertia in the shipping industry especially at a time of low freight rates, which is expected to prevail for at least a further two or three years. Furthermore, if the Regulators don’t give a firm timetable until 2017, it leaves very little time for the ship owner, refiner or anyone else to make the necessary investment in order to meet a 2020 deadline.

The change from 1.00% fuels to 0.10% sulphur will enhance quality. LSFO has tended to be less stable than HSFO and contain greater amounts of cat fines. The 0.10%S fuel does present risks including the potential inclusion of biofuels and reduced lubricity but will contain less corrosive contaminates. 0.50%S bunkers will be manufactured through a range of processes and blends and presents a greater uncertainty. The bunker testing companies may well have to adopt their practices to be able to properly advise their clients on how best to use the range of fuels expected in the market.

LNG as a fuel for non-LNG tankers has generated widespread interest and will play an increasing role. It creates far less toxic emissions and may be less costly in the future when the economies of scale have been achieved for the delivery infrastructure. However, retrofitting existing vessels is generally uneconomic and as new build costs are over 20% higher, this option is not universally attractive to the ship owner. LNG also brings inherent operational and financial risks and may not be adopted as rapidly as some proponents of the fuel may have us believe. FGE and Marine & Energy Consulting Ltd.’s analysis sees a real growth in the take-up, though this will be relatively slow and will only account for 5% of marine energy consumption in the late 2020s, but could subsequently grow to 15% by 2035.

FGE and Marine & Energy Consulting Ltd.’s study, Outlook for Marine Bunkers and Fuel Oil to 2035, has investigated the salient issues based on their continual monitoring and analysis of the marine and refining industries, capturing both quantified and qualitative information on an unbiased and independent perspective. The unknowns associated with the regulations, refiners and ship owners’ propensity to invest and comply and the future of LNG bunkering have been assessed, with quantified forecasts presented to assist in understanding the issues and to provide input to both short and long term planning.