shipping industry is preoccupied with the new emissions regulations coming into
force from 2020 and with finding cost effective ways of achieving compliance
with the IMO regulations. The analysts, however, say that the shipping
industries are not yet ready for the regulations and they are ill-prepared for
it. They have to make a decision whether they have to go in for cleaner fuel or
fit the vessels with proper equipment to achieve reduction in sulphur
to the new rules, the IMO will ban ships using fuel with a sulphur content higher than 0.5 percent, compared to 3.5 percent now, unless a vessel has equipment to clean up
its sulphur emissions.
Failure to comply with
the new rules will make the vessel ‘unseaworthy’ which means it cannot sail
anymore. And what is a ship worth for if it cannot sail?
It is expected that the
demand for low sulphur distillate fuel will soar manifold.
Morgan Stanley predicts
this will generate at least 1.5 million bpd in extra demand for distillate in
the next three years, pushing up total distillate demand growth for the period
to 3.2 million bpd. The market dynamics will see to it that the cost of fuel
oil will hike to $ 380 per tonne by early 2020 from about $ 250 a tonne. It
means that the ship using cleaner fuel will have to shell out extra daily
expenses to the tune of about $ 6,000 to $ 20,000. It is said on an average a
ship consumes about 20 to 80 tonnes a day; in fact, the operating expenses for
fuel account for about half of the ship’s total operating cost, according to
Thomson Reuters Research.
For example, a VLCC, one
of the biggest oil tankers at sea, will pay 25 percent more for its fuel, or an
extra $500,000 on top of normal bill of $2 million, for a typical 25-day voyage
from the Middle East to Japan.
Scrubber is indeed the
next option. It is said that some ships already have the scrubbers. A scrubber
will cost an arm and leg of the shipowner; the equipment costs about $ 1
million to $ 6 million which, according to manufacturer Wartsila, will be out
of reach of many operators.
By 2020, about 2,000
ships could have scrubbers, according to Wartsila, SEB Bank and industry
But AlphaTankers’ Andrew
Wilson called this a “drop in the ocean”, given there are about 90,000 vessels
in the global fleet, of which about 60,000 ply international routes.
Based on the limited
number of manufacturers and time constraints on facilities to install scrubbers,
AlphaTanker estimates no more than 500 ships could be fitted each year.
Wartsila puts the figure closer to 300.
So it would take more
than 100 years to fit the global fleet.
Apart from all such
considerations, the most critical aspect in the scenario is the strong feeling
that not all will follow the rules and different consultants point to different
numbers of ‘cheaters’ in the sense that they do not comply with the regulations
but they manage to sail. Consultant Citac says industry polls indicate cheating
could be in a range of 25 to 40 percent.
When the question of the refiners meeting the
demand pops up fast, the answer seems to be largely in the negative. Either the
refiners in different regions are not prepared or they cannot afford,excepting
a few, a hydrocracker or coker unit to update the refinery since they cost
about whopping $ 1 billion.
Morgan Stanley says
refineries of Spain’s Repsol, Turkey’s Tupras, India’s Reliance and U.S.
independent Valero are among the best prepared because they already produce
high middle distillate and low high-sulphur fuel oil.
Crude market also has its
The simplest way for
refineries to produce fuel with less sulphur is to buy and process crude that
contains less sulphur, a shift that could change demand for different oil
grades and lead to greater oil market volatility.
For example, processing
Iraq’s Basra Heavy grade with high sulphur content produces as much as 50
percent fuel oil, while using light, sweet North Sea crude with less sulphur
produces about 12 percent fuel oil.
“There will be a bidding
war for sweet crude,” said Stephen George, chief economist with KBC Advanced
This could hike the price
of sweeter crudes, including several grades used to make dated Brent, the
benchmark for three quarters of the world’s oil. Meanwhile, the cost of
refining “sour” crudes with more sulphur, such as those from Venezuela, Mexico
and Ecuador, “could be more than its value,” he said.
At the end, the million
dollar question stares at the industry as a whole: who will bear the additional
expenses to be incurred for achieving compliance with the new emission rules?
The obvious answer is the
consumer; this is the established business norms down the ages; the end-user is
forced inevitably to bear the brunt of the additional though necessary
expenditure. All kinds of consumers will have to face the cost-hike almost in
every conceivable product beginning from household appliances to gasoline that
are shipped around the world. If ships do not sail, the major bulk of the trade
stops; the routine ordinary life is disturbed.
Alpha Tanker’s Wilson put
it effectively: “It is going to make moving anything more expensive.”