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The challenges and the consequences of IMO’s new shipping’s 2020 low sulphur fuel rules

The 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 emissions.

According 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 analyst AlphaTanker.

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 own problems.

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 Technologies.

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.”

 


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