A critical decision on fuel
IMO’s decision to reduce the global sulphur cap in 2020 is a welcome step towards greener shipping, but presents challenges for less efficient dry bulk carriers
In a landmark decision for both the environment and human health, January 1, 2020, has been set as the implementation date for a significant reduction in the sulphur content of the fuel oil used by ships.
The decision to implement a global sulphur cap of 0.5% mass/mass (m/m) in 2020 was made by the International Maritime Organization (IMO) during its Marine Environment Protection Committee (MEPC) meeting for its 70th session in London on the October 24-28.
It represents a significant reduction from the current 3.5% m/m global limit, which has been in effect since January 1, 2012, and demonstrates a commitment by IMO to ensure that shipping meets its environmental obligations.
Kitack Lim, IMO secretary-general, said: “The reductions in sulphur oxide resulting from the lower global sulphur cap are expected to have a significant beneficial impact on the environment and on human health, particularly that of people living in port cities and coastal communities beyond the existing emission control areas.”
“Particularly in the more commoditised areas like dry bulk, where the economics behind retrofitting with scrubbers is more challenging, we believe those owners with ships that consume less of the expensive fuel are likely to see stronger demand for their vessels.”
Further work to ensure effective implementation of the 2020 global sulphur cap will continue in the Sub-Committee on Pollution Prevention and Response (PPR).
The European Sea Ports Organisation (ESPO) was one of many to congratulate IMO on its decision, describing the decision as a “big step forward for the maritime and port industry and the people around ports”.
“Moreover, by maintaining 2020, IMO shows that an ambitious greening agenda is possible at a global level,” added ESPO.
The global sulphur cap applies to fuel oil used on board in main and auxiliary engines and boilers. Exemptions are provided for situations involving safety of the ship or saving life at sea, or if a ship or its equipment is damaged.
Ships can meet the requirements by using low sulphur compliant fuel oil. An increasing number of ships are also already using gas as a fuel as, when ignited, it leads to negligible sulphur oxide emissions. Another alternative fuel is methanol, which is being used on some short sea services.
Ships may also meet the SOx emission requirements by using approved equivalent methods, such as exhaust gas cleaning systems or ‘scrubbers’, which ‘clean’ the emissions before they are released into the atmosphere. In this case, the equivalent arrangement must be approved by the ship’s flag state Administration.
Sweeping consequences
This landmark decision promises sweeping consequences for shipping. In a client note, Ben Nolan, analyst at Stifel, said that the decision is likely to push fuel prices up materially, presenting a challenge for shipowners with less fuel efficient equipment, but an opportunity for modern, efficient shipowners.
Indeed, cargo shippers could potentially end up paying higher rates via fuel surcharges depending on how well the oil industry can meet demand for low sulphur fuel. The cost of low sulphur fuel can be around 50% more expensive than typical bunker fuel, even if there is an adequate supply.
Mr Nolan added that unless there is a major expansion of refinery capacity in the next few years, there will simply not be enough marine gas oil (MGO) and marine distillate oil to meet shipping demand when the sulphur cap comes into force.
Lars Robert Pedersen, deputy secretary general at BIMCO, shared a similar view: “We know that the shipping industry will buy the fuel they need,” he said. “But if it is in short supply, the cost will rise not just for shipping but for all users of the fuel. This will price those in poorer economies out of the market.”
Added to this, according to IHS Energy, neither the refining industry nor the shipping industry is likely to be prepared for the 2020 implementation date. The analyst said that the necessary shipping sector investments in scrubbers and LNG systems are “unlikely to be in place by 2025, let alone 2020”.
However, Sea\LNG, a consortium including shipping companies, class societies, ports, LNG suppliers, downstream companies, infrastructure providers and OEMs believes that the LNG sector is ready to meet shipping industry demand. The organisation’s chairman Peter Keller said: “We anticipate increased and significant investments across the shipping value chain as a result of this decision and the certainty it provides. LNG is an economic, clean and safe marine fuel with increasing global availability, offering ship owners a real opportunity to improve the environmental performance of the industry.”
Out with the old
Consequently, eco-ship designs could finally pay off on their original promise. Modern eco-ships can be up to 30% more fuel efficient than older vessels. In the dry bulk sector where the economics of retrofitting with scrubbers can be harder to justify, owners with ships that consume less of the expensive fuel could well benefit from stronger demand for their ships. This could lead to a flood of scrapping post-2020, when the increasing handicaps of less efficient ships will become more pronounced.
Therefore, what’s good for the environment may be equally as good for dry bulk ship earnings as the oversupply of tonnage is almost entirely to blame for the dire state of the freight markets. However, whether dry bulk ship owners can wait a further three years for the market to improve is a moot point.