As ship-owners gear up to embrace new sulfur emission norms that will come into effect from 2020 onwards, challenges related to upgrade of vessels, availability of cleaner fuels, and ordering new ships remain vexing issues.

The International Maritime Organization, or IMO, has stipulated a reduction in the maximum sulfur limit in marine fuels from 3.5% to 0.5% from January 2020 onwards.

In less than three years, all ships across the globe will mandatorily have to use low-sulfur fuels or gas instead of the high-sulfur fuel oil, or HSFO, that currently dominates the market.

A common refrain among ship-owners is that while the date of implementation of the new sulfur cap is finalized, the “fine print of how to enforce and implement” needs to be worked upon. This is significant because the new norms will entail additional costs that can cause serious commercial distortion if the implementation does not happen uniformly across the world.

Since this involves a global equivalent to millions of tons of fuels used in thousands of ships, several stakeholders in the shipping industry are now suggesting additional measures to ensure that the transition is smooth and hassle free.

According to shipping industry estimates, based on current demand, close to 2.5 million b/d, or over 75% of the current bunker fuel market, will be displaced when the lower sulfur content norms are implemented.

“There are a number of practical consequences — it is of course hard to believe that in one minute on the new year eve of 2020, all ships around the world will suddenly become 100% compliant, particularly if in the middle of a voyage,” Dragos Rauta, technical director at the International Association of Independent Tanker Owners, or Intertanko, told S&P Global Platts.

Intertanko has around 210 members, whose combined fleet comprises some 3,654 tankers, totaling over 312.7 million dwt.

Ship-owners will have to choose whether they want to use 0.5% sulfur fuel or invest in scrubbers, an assessment they will make based on ship’s age, price of scrubbers, operational costs of scrubbers, and price differential between HSFO and ultra-low sulfur fuels, or ULSFs, Rauta said.

NEW PROPOSALS

“A great deal more needs to be done at IMO ahead of the 2020 deadline,” the secretary general of Asian Shipowners’ Association, Harry Shin, told Platts.

Intertanko, Baltic and International Maritime Council, or BIMCO, and a host of other industry bodies have now jointly submitted a proposal document to an IMO sub-committee over the issues of concern for effectively implementing the cap on sulfur emissions.

Among others, the document mentions of the impact on machinery systems, particularly the safety concerns that may arise from the use of new sources of fuels and blends, and a verification mechanism “to ensure a level commercial landscape,” and delivery of compliant fuels on ships.

“Ships cannot ascertain the sulfur level of fuels being delivered to [them] prior to or during bunkering operations; non-conformity is discovered only days after bunkering,” the document said.

Not all ports will be ready to supply 0.5% sulfur fuels by 2020 and there is already a provision to allow ships which could not obtain compliant fuels, but parameters for such instances need to be formally recognized by IMO, it said.

However, ship-owners say that this can put them at a disadvantage, especially those who are scrupulously following the rule book, because ULSFs command a premium over HSFOs. The price differential between HSFO and 0.10% sulfur-content marine gas oil has typically been in the $250-$350/mt range, according to the shipping industry estimates.

ENFORCEMENT AND QUALITY

“Enforcement is [critical] to make sure that owners following the new laws are not at a competitive disadvantage to ships not using the required fuels,” managing director of the Hong Kong Shipowners Association, Arthur Bowring, told Platts. The association is one of the world’s largest, with its members owning and operating a fleet with a combined carrying capacity of more than 162.5 million dwt.

Questions remain as to whether the sulfur cap will be enforced effectively, as legal frameworks and detection methods remain inadequate, and fines and sanctions are currently upto the individual member countries to enforce, Banchero Costa, a Genoa-based shipping consultancy and brokerage said in a recent report.

There is also a concern that the new blends that are described in the IMO’s assessment report, might not be compatible with the existing engines and fuel systems, Bowring said.

Many of the new fuels with 0.10% sulfur content that showed up in the market over the last two years are not included under the ISO standard for marine fuels, called ISO 8217, said Rauta. Since safety requires full transparency, the criteria defining any such new fuels should be fully provided and they should be inserted in the ISO 8217 series, he added.

“In 2020, the entire world will be an Emission Control Area, so there are no cheap options left,” the chief shipping analyst at BIMCO, Peter Sand, told Platts. BIMCO is the world’s largest international shipping association, with more than 2,200 members globally.

SCRUBBERS VS FUELS

“If the operator also owns the ship and pays for bunker fuel, investing in a scrubber is the most economical option,” Sand said. Scrubbers are exhaust gas cleaning systems that remove sulfur from fuel, thus enabling continuous use of HSFO, and are permitted under the IMO rules but have related technical and environmental challenges.

Ship-owners can recover investment costs sooner or later, Sand said, adding that “if the prices of IMO-compliant fuels go through the roof in early-2020 and the world is awash with HSFO, it will be a matter of months before a scrubber investment is recouped.”

Ship-owners’ concern will be the upfront cost of around $3 million-$4 million with no guarantee that it will be needed in case the spread between marine gasoil and HSFO stays very narrow.

“Keep in mind that if today a five-year old Supramax is worth some $14 million, to spend at least $3 million-$5 million on a scrubber is quite a big investment,” said Ralph Leszczynski, research director at Banchero Costa.

“I [think] we will get into a bit of a rush to install scrubbers towards 2019, when it sinks in that the rules are indeed going to be implemented and distilled fuels really do cost a lot more than HSFO. I think, for the moment, 95% of people will go for either distilled fuels or scrubbers,” he said.

Intertanko’s Rauta points out that if a ship is running on 50 mt fuel/day and is on sea for 200 days/year, while the ULSFs’ premium to HSFO is $200/mt, the extra cost of fuel for the ship-owner will be $2 million/year. Depending on the price one pays to retrofit a scrubber, but assuming it to be $2 million-$4 million, the owner can recover it within one or two years of operations, he said.

In 2012, Intertanko developed a calculator to assist ship-owners in doing a cost-benefit analysis of installing a scrubber versus using ULSFs in the Emission Control Areas.

“LNG as fuel is also an option, but not a cheap one; retrofitting a ship to use LNG [may not be] economically viable today,” said Rauta.

Currently, only a miniscule number of ships, around 100 out of the global merchant fleet population of more than 85,000, are running on LNG, though newbuilding orders are on the rise and may rise exponentially over the next decade.

“The supporting infrastructure for LNG bunkering currently remains limited globally. LNG requires cryogenics for bunker storage tanks, which would reduce available onboard cargo space,” the Banchero Costa report said.

“LNG has the main problem of limited availability at ports. So if you trade a Supramax bulk carrier or an Aframax tanker, you are not going to cut yourself off from the possibility of bunkering at most ports in the world,” added Leszczynski.

However, things are not hunky dory for scrubbers either. The wash-water of a scrubber is an acid which is very corrosive. Ship-owners have options to invest in hybrid scrubbers that have closed loop for operations in ports that do not allow direct discharge of wash-waste.

“There are also challenges in disposing solid waste ashore if closed-loop scrubbers are used, and they may be a preferred option only for a small, and perhaps specialized, portion of the fleet, unless the ULSFs are in shortage and very costly,” said HKSOA’s Bowring.

Rauta suggests a blend option. It would be cheaper to operate the open-loop scrubber on high seas and switch to ULSFs in specific waters where their use is restricted, he said.

Ship-owners can reconfigure the fuel system of ships so that the operations of ULSFs and HSFOs are segregated and the fuel switch is managed to maximize the use of scrubbers and minimize that of expensive IMO-compliant fuels, he added.

Another interesting dimension of the entire initiative is that now new ships will be ordered which must be able to run on different type of fuels though the shipyards are not regulated by IMO.

Source: Platts