Countdown to 2020 – 800 Days
Distillates will be shipping’s primary choice in 2020
Today circa 80% of the fuel burned by the world’s shipping fleet is high sulphur (3.5%) heavy fuel oil (HFO). In 800 days it will be illegal to do so in the world’s oceans or seas without an emissions abatement system – or scrubber – installed on the vessel.
For individual owners and operators there are a wide variety of compliance options for the global sulphur cap when it arrives on 1 January 2020. However, at a macro level, the reality is that distillates, and distillate-based products will be the most widely used solution.
Despite concerns in the build up to the decision over when to implement the regulation in 2020, the reality is that the global diesel market is enormous. Since it would be relatively straightforward to bring it in from other sectors for transformation into fuel suitable for ships, it’s unlikely that there will be sustained availability issues in the major ports based upon the currently available information.
As Charlotte Røjgaard, Global Technical Manager for Marine Fuel Services at classification society Bureau Veritas, has been quoted as saying, "This is not the first time that sulphur limits have been imposed on marine emissions. Although refineries have prompted uncertainty about whether there is enough, there has always been a sufficient amount [in the end].”
This makes distillates and distillate blends the safest bet in terms of quickly complying with the sulphur cap. There is also no requirement for significant capital investment, and because – compared to LNG or scrubbers – there are relatively few transition costs; it’s the most straightforward option from the perspective of compliance. For shipping, the predictability of distillates and distillates-based products are the easiest way to continue with business as usual.
That’s not to say that there won’t be financial challenges. According to a Wood Mackenzie study that assumes full compliance, global bunker fuel costs could rise by USD $60 billion from 2020. Based on their analysis, they believe that a mixture of increased prices for crude and tighter availability of MGO could increase the price of MGO to four times the cost of HFO in 2016.
If you’re concerned about your company’s exposure to bunker price fluctuations, we can help eliminate the risk via a personalized hedging strategy to fix or cap a bunker price at a certain level and period of time – from research and risk assessment, through to strategy development and implementation.
What about scrubbers?
We can’t predict with certainty what the cost will be per ton for distillates in 2020. Proponents of scrubbers often reference this fact when they point to the approximately 200 million tons of excess HFO which will become available from the fourth quarter of 2019, and there is a very positive business case to be made around the economics of this surplus for shipowners.
Platts has estimated that the market for high sulphur bunker fuel is approximately 200 million mt/year. The current (25.10.17) spread between MGO and IFO380 according to Ship & Bunker is approximately USD 170 (Singapore), USD 173 (Rotterdam), USD 227 (Houston) and USD 244 (Fujairah). Those who have installed scrubbers could benefit from many years of extremely low prices for HFO.
One of the biggest supporters of scrubber economics is a major player in the cruise and ferry market, operating a large fleet of Ro-Ro, Ro-Pax and cruise ferries ranging from 11,000 to 40,000 GT. The company was among the first to install scrubbers on its vessels, and in an analysis from late 2015, Carnegie Consulting calculated the payback time on that company’s scrubbers to be three to four years, based on a fuel spread of USD 220 per ton. This conclusion is based predominantly on refinery economics, and at about USD 185 per ton, the payback time instead becomes four to five years.
Nonetheless, the spread is only one element of a complex equation.
Installing a scrubber costs USD 3-10 million, depending on the ship's size. Moreover, it's not a plug-and-play item. Each scrubber will need to be individually designed for every vessel, and each day spent in drydock will result in supplementary off hire costs.
For a vessel that’s likely to be scrapped within the next half decade, it becomes even more difficult to build a case for scrubber installation. Based upon current Bangladeshi prices of approximately USD 400 per light displacement tonne (LDT), a 20,000 LDT suezmax tanker would recoup USD 8 million. A sum that makes the economics much less viable for an older vessel, especially when one considers that scrap prices are currently at the highest they’ve been in some years, and there is an enduring global steel surplus.
One can put together a commercial case that shows that installing a scrubber is a good business move, but it comes with a lot of variables. Beyond the extra financial burden, additional complexity of operations, and concerns about the long-term viability of scrubbers to handle further emissions regulations, there’s also the fact that there’s limited yard space for installations. For a conservative industry that’s likely to prove a difficult sell.
Everyone in the industry will very soon need to take a stance on how they will transition. For now, many are taking a ‘wait and see’ approach.
At Bomin we’re fully prepared and ready to help guide you through the complexity of the challenge raised by the new IMO regulations, and can provide expert guidance and astute insight into a compliance solution that best suit your fleet’s operations.
As those who transitioned through the regional sulphur directive in 2015 will attest, planning for the changeover is imperative to avoid disruption. If you would like to learn more about how your fleet can successfully navigate this switch, please contact us here.