Low-sulfur clock ticking for heavy-lift carriers

Low-sulfur clock ticking for heavy-lift carriers

A heavy lift cargo ship transports an oil rig.

If the costs of noncompliance are not onerous, or if the cost savings are material, some shipowners and operators will surely take that path. (Above: A heavy-lift cargo ship transports an oil rig.) Photo credit: Shutterstock.com.

Many, but not all, multipurpose and heavy-lift carriers (MPV/HL) have committed to International Maritime Organization (IMO) 2020 as matters of best business practice and of principal. But what happens when some owners and operators ignore or skirt the looming regulation, which should dramatically cut marine fuel pollution as of Jan. 1, 2020?

If the costs of noncompliance are not onerous, or if the cost savings are material, some shipowners and operators will surely take that path. Platts estimates that approximately 50 million metric tons (55 million tons) of noncompliant fuel demand could persist into 2020. Practically speaking, the costs of being noncompliant must be high enough to overtake the benefits.

Top-tier project and breakbulk beneficial cargo owners (BCOs) that JOC.com has spoken with take it for granted that their service providers will be in full compliance from day one. If not, one manufacturer remarked, “We will cease doing business with [that carrier].”

At the same time, a study from Wood Mackenzie estimated that annual bunker costs could jump by as much as $60 billion in 2020, and the “who pays and how is it figured” tug-of-war between clients and service providers is already under way. Some project owners are complaining they cannot get transparent fuel cost information when trying to plan time or voyage charters for long-lead projects. Carriers counter they can’t give information they don’t have.

No respite for the weary

“The first thing to be very clear about is: this is happening,” said Roger Strevens, founder and chairman of the Trident Alliance, speaking during a recent JOC.com webinar on the IMO’s 2020 sulfur cap regulations for marine fuel. The Trident Alliance is a group of shipping companies allied with the IMO and campaigning for “robust and effective” enforcement of maritime sulfur regulations.

"The global sulfur cap will reduce from 3.5 percent to 0.5 percent on the first of January 2020. There is no possibility of deferral" despite pushback from many organizations and members of the global fleet. Strevens, who is also global head of sustainability with roll-on, roll-off (ro-ro) carrier Wallenius Wilhelmsen, said there is no political will for a delay at the IMO, and implementing such a change would take more time than remains between now and the trigger date.

Many questions remain, however: how best to comply, how to manage fuel supply after IMO 2020, how to estimate changes in fuel costs, and how to plan for enforcement.

The three widely accepted compliance choices for the global fleet are burning low-sulfur fuel, installing scrubbers, or switching to liquefied natural gas (LNG). Strevens predicts that only a small percent of the global fleet will go for LNG, including essentially none of the MPV/HL sector.

LNG is expected to be cheaper than 0.5 percent bunkers, according to Platts, and would not create fuel compatibility issues. However, retrofitting for LNG is very expensive, so these vessels would be newbuildings. Additionally, LNG engines and fuel tanks take up more space than conventional ones, which would hit the MPV/HL sector with a costly loss of precious cargo space. Some larger container carriers and tankers are taking the LNG option, however.  

A growing subset of the global fleet is installing scrubbers, which will enable them to continue burning high-sulfur fuel oil, also called heavy-fuel oil (HFO), a low-cost residual product. HFO prices are expected to fall steeply after the 2020 deadline kicks in, offsetting scrubber costs. However, some then expect access and supply to shrink as demand for HFO disappears, with a concomitant price increase.

Scrubbers are not a good fit for all vessel types. Installation cost can range from $1.5 million to $8 million, depending on type and engine size, plus there's lost trading and dry dock time, which may come at a growing premium as 2020 approaches. Some create waste water that must be disposed of, and they do not last forever.

Scrubbers also have to make sense given the age of the vessel; if an MPV/HL vessel is already eight or nine years old, and project clients prefer to ship cargo on vessels that are 15 years old or less, does it make sense to install a scrubber? If the price differentiation between high-sulfur and low-sulfur fuel is wide enough, it could; but cost predictions are a tricky business.

IHS Markit, parent company of JOC.com, noted an acceleration in scrubber uptake as of June 2018, with 591 vessels with scrubbers fitted or on order, an increase of 171 ships compared with March 2018. Lloyd’s Register reported that order slots for scrubber installations to be done before Jan. 1, 2020, are almost full. The orderbook includes bulkers, tankers, vehicle carriers, and container vessels, and is split between retrofits and newbuildings.

A recent UBS survey revealed that about 19 percent of global shipowners were considering installing scrubbers. This still leaves 75 percent or so of the oceangoing global fleet dependent on 0.5 percent low-sulfur fuel. But will it be safe to use, will it be available, and how much will it cost?

The fuel quest

Fuel compatibility issues are not a new problem, and they will become more important after 2020. So far, there is no one defined recipe for distilling the 0.5 percent low-sulfur bunker fuel. The reality, Strevens said, "is that if you take two batches of 0.5 percent fuel, you may or may not be able to commingle them in the same tank ... if things go bad, the two batches will mix and form a solid, waxy kind of product, which you will have to literally dig out of your tanks."  

Low-sulfur fuels purchased at different sites may be incompatible. Bunkers can meet technical specifications but yet not be usable, Strevens said. In extreme cases, vessels could lose power and have to replace fuel pumps and other equipment, as demonstrated in several recent cases of ships damaged by bad bunker fuel. "That issue is unfortunately likely to become more frequent come 2020 ... [bad bunker] is difficult to detect as the fuel is being loaded, because a very sophisticated analysis is needed to find whether fuels contain these problem compounds."

The IMO is working on 2020 guidelines, including how fuel samples, fuel lines, and tanks should be checked and how tanks should be cleaned. Once tanks have been cleaned for low-sulfur fuel, if high-sulfur fuel is reintroduced they will have to be recleaned, a time-consuming chore. “It's very easy to overlook just how significant the human factor will actually be in maintaining compliance,” Strevens said. Adequate training will be key.

“It is almost ... certain that we were going to experience a period of disruption. However, the fleet operation model and size will affect the kind of impact that carriers will have. Those liner operators who follow a fixed schedule have at least got the advantage of being able to plan their bunker in advance,” Strevens said.   

“That means they can also consolidate their procurement and become a relatively larger buyer of fuel in that port, which then helps them become a bigger customer for the suppliers. [They will tend to be] first in line at the fuel pump. And that applies not just in terms of being able to get the quantities they need but also in terms of the quality of fuel that they can get.” Tramp and spot operators are more likely to be affected by scarce or questionable fuel supplies.

Enforcement authority

Authority for enforcement of IMO 2020 actually resides with flag states, but these lack resources and commitment, and fines are low, according to a report from Stillwater, a transportation fuels consulting house. To counter this reality, the IMO is debating providing enforcement authority to port states, many of which already enforce environmental regulations in their territorial waters.

Enforcement on the high seas is another matter. One approach could be deeming vessels that fail to comply “unseaworthy,” a proposal that Stillwater notes is “contentious.” If deemed unseaworthy, vessels could be denied insurance coverage.

Other enforcement methods put the onus on fuel suppliers, Strevens said. Bunker delivery notes, a receipt received when fuel is bought, would indicate that the supplier is satisfied that the fuel will be used compliantly. “In other words, if high-sulfur fuel is sold, there must be a scrubber on the vessel.”

Another compliance enforcement tool will be the “carriage ban,” not yet formally adopted, but which will make it an offense to carry fuel with sulfur content higher than 0.5 percent unless the vessel has a scrubber. This means enforcement agencies will not have to prove a given carrier has been using high-sulfur fuel. It would be sufficient simply to show that the carrier has high-sulfur fuel aboard, Strevens said.

Remote-sensing technologies such as drones or sniffer systems and satellite technologies could also be used to assess vessel compliance. "With the carriage ban, [these] form quite a powerful combination," Strevens said.

The IMO is also discussing the use of Fuel Oil Non-Availability Reports (FONARs), which recognize that there could be times when a vessel may not be able to access compliant fuel. "But to get one of these FONARs requires a high burden of proof. So, this is not going to be an easy 'get out of having to face the full cost of compliance' loophole," Strevens said. If 0.5 fuel isn't available, but 0.1 (used in emissions control areas) is, the vessel will be expected to use the 0.1 percent.   

Also, if excess high-sulfur fuel is purchased under a FONAR — more than required to get to the next port where compliant fuel is available — it may have to be offloaded, Strevens said. This contingency is under discussion at the IMO.

A pretty penny

The marine sector accounts for 50 percent of all high-sulfur fuel demand today. This percentage will shrivel come Jan. 1, 2020. According to Platts, a new annual demand for 223 million metric tons of 0.5 fuel will explode as of Jan. 1, 2020, while demand for high-sulfur fuel should drop to 36 million metric tons. Initially, price spreads between low- and high-sulfur fuel could jump by as much as a factor of four, according to some reports. In late September, the global average bunker price for IFO380 and IFO180, types of HFO, were $494 and $519.50 per metric ton, according to Ship & Bunker, while marine gasoil (MGO), a 1.5 percent sulfur fuel, was $769 per metric ton.

Today's conventional high-sulfur fuel could become something of a niche product if the majority of the world's fleet switches to low-sulfur fuel, eventually difficult to find at smaller ports, often called by tramp, spot, and regional/feeder vessels. That is less likely to happen if scrubber installations pick up, maintaining demand for HFO.

The middle distillates that will be used to distill 0.5 percent fuel (and are now used for 0.1 and 1.5) are also used for road diesel and heating oil, meaning there will be more competition against the marine sector for supply. Marine demand currently consumes only about 5 percent of the global demand for the middle distillate category that includes MGO. Some new middle distillate refining capacity is coming back online or being refurbished, according to IHS Markit, but finding adequate supplies in the near term may be a challenge.

Platts predicts that shipowners and operators shopping for the least expensive low-sulfur bunkers will rely on Suez or Singapore, as many refineries producing the appropriate distillates are in the Middle East and Asia Pacific.

Disruption ahead

“It’s a certainty that the regulation will come on the 1st of January 2020. Deferral is not an option. There are new enforcement tools which are being developed. The possibility of loopholes being exploited, ship-sized loopholes, is diminishing,” Strevens said. “2020 compliance for most vessels will be gained through a combination of 0.5 percent — or less — fuels. ... [including] these very-low-sulfur-fuel oils and MGOs for emission control areas.

“And then there will be vessels which will use scrubbers together with high-sulfur fuels. In total, there's expected to be about 2,000 vessels with scrubbers by 2020, out of the world's fleet of around 50,000 deepsea vessels. So, you can really see that the emphasis is on fuel solutions."

No matter what decision is taken, Strevens said, “Proactivity now is definitely preferential to panic later on.”  

Contact Janet Nodar at janet.nodar@ihsmarkit.com and follow her on Twitter at @janet_nodar.