Enough low-sulfur fuel at US ports come 2020?

Enough low-sulfur fuel at US ports come 2020?

The International Maritime Organization has mandated that all ocean carriers must switch to burning fuel with a sulfur content of less than 0.5 percent on Jan. 1, 2020. Photo credit: Shutterstock.com.

With implementation of the International Maritime Organization’s (IMO’s) low-sulfur fuel requirement for vessel operators just 10 and one-half months away, the level of confidence that fueling infrastructure and adequate fuel supplies will be in place ranges from moderate to doubtful.

While US port and industry sources say they are somewhat confident that the industry will have the new fuel type, energy analysts aren’t so sanguine. IHS Markit energy analysts warn that the refining and shipping industries aren’t ready for the mandate that will require container ships to reduce the sulfur content of vessel fuel from 3.5 percent to 0.5 percent, starting Jan. 1. This will result in a “scramble period” of up to a few years when a new equilibrium of supply and demand will be determined by refiners and shipowners, analysts predict.

“Refiners — and fuel buyers — will experience significant price impacts as they shift production to deliver greater volumes of very low-sulfur fuel oil [VLSFO] and find a market for their less valuable fuels,” said Spencer Welch executive director, oil, midstream, and downstream for Europe, the Commonwealth of Independent States (CIS), and Africa at IHS Markit. Refiners will produce greater volumes of the higher-value, low-sulfur fuel as demand increases, Welch said. However, since most refineries process a variety of fuels for both vessel and overland users, each refinery will make its decision on apportioning production according to its customers’ needs, he indicated.

Compatibility concerns

Furthermore, compatibility of fuels must be taken into consideration. Josh Lowell, an energy analyst, warned in a blog post that because there isn’t one single recipe for low-sulfur fuel oil (LSFO), mixing of various LFSO blends will be a necessity. But combining incompatible fuels can cause damage to a vessel’s engine, taking valuable carrier assets out of operation and stranding any cargo on board in the process.

“Compatibility with different bunkers currently affects less than half of 1 percent of fuel oil deliveries, but issues will increase considerably with new LSFO fuel blends,” Lowell wrote.

Refiners say the fueling infrastructure and adequate fuel supplies should be in place, but refiners and suppliers are being far less forthright about exactly how they aim to ensure readiness at the major gateways in North America. When approached with the question of low-sulfur availability and fueling infrastructure, refiners generally respond, “We should have it, but we’re not ready to talk about it,” Peter Lindsey, regional manager in Seattle at KPI Bridge Oil, told the Propeller Club of Los Angeles-Long Beach last week.

At least one carrier is leaving nothing to chance as far as supply is concerned. Maersk Line has formed a partnership with a bunker fuel supplier to ensure its vessels calling at East Coast ports will have access to sufficient low-sulfur fuel.

Having adequate supplies of bunker fuel with 0.5 percent sulfur content, and the necessary fueling infrastructure in place, even before the Jan. 1, 2020, deadline, will be critical to smooth implementation of the rule subscribed to by most maritime nations. That’s because it is expected to take two months or longer for shipping lines to secure contracts with suppliers, clean the remaining heavy 3.5 percent sulfur fuel out of their tanks, and make the transition to low-sulfur fuel while avoiding the engine damage that could occur from mixing incompatible fuels.  

Container lines calling in California ports learned that lesson in 2012 when the state Air Resources Board mandated that an even lower sulfur content of 0.1 percent be used within 40 miles of the coast. It took Maersk about four months to make the transition, according to Lee Kindberg, the carrier’s environmental director. Since the IMO directive has a global impact, however, the switch over at US ports shouldn’t take quite that long, she said.

Maersk and PBF Logistics on Thursday announced an agreement to source and process crude oil at CPI Operations, a PBF Logistics terminal facility in New Jersey. “The agreement enables Maersk Oil Trading to supply IMO 2020-compliant 0.5 percent marine fuel to its customers on the East Coast,” Maersk stated. “We will continue our drive to ensure compliance in all geographies come 2020.”

Since most carriers do not have such agreements with suppliers, ports are working with local refiners and suppliers to ensure readiness. The shipping industry, which has been dealing with Emission Control Area (ECA) requirements for the past five years in North America and Europe, should be prepared for further possible environmental requirements as nations across the globe seek to reduce harmful emissions, Lindsey said. “It’s not the beginning; it may not be the end,” he said, citing the possibility of future restrictions on greenhouse gas emissions.

The most efficient way for a refiner to produce low-sulfur fuel is to begin with light, sweet crude that has a lower sulfur content and is not as heavy as crude oil that is found in some countries such as Mexico and Venezuela, Lindsey said. Grades of crude oil also vary by region. Generally, the three US coasts either have nearby access to light, sweet crude oil, or refiners in those regions have the processing capability to reduce the sulfur content from heavier crude, he said.

Some vessel operators may choose to blend various grades of fuel, but Lindsey said that approach can have dire consequences if the blending is not handled professionally. “It could cause a ship to stop en route,” he said.

Pass-through pricing

Lindsey said the shipping industry’s increased demand for low-sulfur fuel will force up the price, not only for ocean carriers but also for truckers and intermodal railroads because LSFO, unlike its high-sulfur counterpart, competes in the same distillate market for supply as the diesel burned in overland transportation. On the other hand, the price of today’s high-sulfur bunker is likely to drop sharply along with demand, he said.

As a result, the low-sulfur mandate will impact the entire transportation supply chain one way or another, Lindsey said. BCOs will face cost increases as shipping lines attempt to pass on the higher fuel costs to them, ports and terminal operators must ensure there will be sufficient infrastructure readiness, carriers will incur increased fuel costs of about 50 percent, truckers and railroads will experience a collateral impact from the increased demand in the distillate market, and refiners will be stuck with excess supplies of residual fuel as demand drops. On the scale of thick, high-sulfur oil to sweet and light crude, the only crude oil product lower than bunker fuel is asphalt.

Carriers have several options for meeting the IMO requirements. In addition to the low-sulfur fuel option, some carriers are ordering onboard scrubbers that reduce the sulfur content to 0.5 percent. Liquefied natural gas (LNG), which is used now in some of the coastal trades, is even more environmentally benign, although fueling infrastructure and LNG availability limit this option. Therefore, the vast majority, possibly as much as 95 percent of the global liner fleet, will be switched to 0.5 percent fuel, according to a study by the Coalition for Responsible Transportation.

Lindsey said each option has advantages and disadvantages based on cost and availability of fuel and infrastructure. With regard to the scrubbers, some countries and states, such as California, ban the use of open-loop scrubbers because they dump the resulting waste contaminants into the ocean. According to IHS Markit Research, approximately 2,000 vessels have been retrofitted with scrubbers, and that number could increase to between 5,000 and 10,000. The retrofitted vessels will be allowed to continue to burn today’s high-sulfur fuel. However, shipyards are dealing with so many orders for scrubbers right now that it’s probably too late for a carrier to decide to place an order today and expect to meet the Jan. 1 deadline, Lindsey said.

Carriers and beneficial cargo owners are preparing for bunker fuel costs to increase later this year and into next year due to the higher production costs of low-sulfur fuel. According to Argus Marine Fuels, the price of high-sulfur bunker fuel last week was $410.70 per metric ton, compared with $545.40 per metric ton for the low-sulfur fuel, a difference of $134.60 per metric ton (33 percent). That could increase the cost of carrying each container by about $150-200 per TEU, according to the Coalition for Responsible Transportation, although costs will vary by the length of the voyage to the West Coast or East Coast, and carriers’ ability to pass on all or most of the cost will be affected by overall market conditions in the trans-Pacific. When capacity exceeds demand, carriers have difficulty implementing accessorials such as fuel surcharges, but when demand exceeds supply, such as during the peak season last autumn, carriers are generally able to pass those costs on to the customers.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.