Fuels at sea
Ships must pollute less. Their owners can't ignore the impending regulatory changes
The International Maritime Organisation (IMO) deadline for emission control in world shipping is fast approaching. Beginning in 2020, vessels worldwide must limit their emissions to the equivalent of burning 0.5% sulphur-content fuels, whether by burning low-sulphur fuels themselves or by installing "scrubbers" to treat exhaust emissions. The change is likely to affect around 4m barrels a day of oil demand. Competition between new blends of oil fuels (very-low-sulphur fuel oil or marine diesels), scrubbers, or liquefied natural gas is likely to be fierce but evolutionary. Each competitor presents different challenges: scrubbers affect fuel efficiency and may be difficult to finance when so many vessels are run by special purpose vehicles (SPV); low-sulphur oil fuels may have knock-on costs in engine efficiency and operating costs; and LNG requires bunkering logistics that aren't yet widely available and may need major capital expenditure. Despite available engine and scrubber technology, many in the shipping industry doubt it's ready for the obligation, outside regular point-to-point shipping in Emission Control Areas (ECAs) and environmentally sensitive cruise lines. They also doubt the ability of many Flag States to effectively monitor the ships flying their flags, and question the lack of detailed regulation from the IMO governing the new emissions limits and how monitoring will be implemented. A recent survey by ExxonMobil suggests up to 70% of the maritime industry doesn't believe the deadline will be met. If fully implemented, though, the shift could represent the first major case of oil demand destruction in transport as LNG progressively grabs market share from other fuels. Even a progressive shift to marine diesel implies significant refinery upgrading investment.
Intra-US and Canadian shipping is already covered by the North American ECA, and the area's refining capacity appears flexible enough to produce marine fuels with the required sulphur content. But progress towards the use of LNG as a marine fuel appears slow, with only a single operating facility, in Louisiana, built specifically for LNG bunkering. It seems the US shipping and bunkering industry is adopting a wait-and-see evolutionary attitude towards LNG as a fuel, given the required capital costs. Such reluctance may evaporate as additional American LNG-export terminals come on stream and the market warms to the demand potential of maritime LNG.
South America and Caribbean
Oil-industry restructuring in sour-crude producers Mexico and crisis-hit Venezuela gives little near-term hope for the availability of IMO-compliant fuels in time to meet the 2020 deadline, and industry officials suggest that Brazil's progress towards the IMO goals seems insufficient to meet the deadline. But LNG bunkering appears to be growing in the Caribbean, where AES Dominicana has been actively developing the business since 2015. Small-scale short-haul exports of LNG from the US may further boost supply. Below the equator, Peru LNG, South American's first LNG exporter, is developing bunkering facilities in addition to its conventional export capacity.
In the EU, progress towards IMO goals is proceeding apace, helped along by the Baltic and North Sea ECA, and EU initiatives to require greenhouse gas reporting and monitoring for shipping. LNG bunkering is growing. This year alone, utility Engie and oil major Shell took delivery of purpose-built LNG bunkering vessels, while Finland's new Tornio LNG-import terminal is designed to provide bunkering services. In southern Europe, Spanish regasification terminals are diversifying into the bunkering sector. Among European refiners, Exxon and Total are completing upgrading projects designed in part to provide additional supplies of low-sulphur marine fuels. A new Russian class of Aframax tankers is expected to be fuelled by LNG. Environmental groups are lobbying to have the Mediterranean declared an ECA.
Regional hub Fujairah is the world's second-largest bunkering port after Singapore, and is developing procedures for ship-to-ship LNG bunkering. Shell and Qatar Petroleum have formed a joint venture to explore opportunities for LNG bunkering in the Mideast, Europe and East Asia.
The continent's key sweet crude suppliers Angola, Algeria, and Nigeria shouldn't encounter major difficulties in meeting IMO marine fuel sulphur-content limits, but bunker-sector executives see Africa as a question mark on the compliance map, principally because of a lack of infrastructure. While long-time gas supplier Algeria has announced plans to enter the LNG-bunkering sector it seems to have made little material progress. The main initiative in the sector is in Spain's Canary Islands, where plans are underway to adapt an LNG-import terminal to undertake LNG-bunkering operations. Key South African refineries are expected to require significant upgrades to produce IMO-compliant bunker fuels.
The world's largest bunkering port doesn't intend to be left behind in the race to prepare for the supply of low-sulphur bunker fuels. Singapore this spring issued its first Technical Reference Standard for LNG bunkering, allowing, among other, Pavilion Gas, in partnership with Total, and FueLNG, a Shell partnership, to be active in LNG bunkering. Among other oil companies, historically leading bunker supplier BP has said that it's prepared to meet the new IMO sulphur-content regulation for fuel oil and marine diesel.
China, Japan and South Korea
In keeping with its generally tightening emissions policies, China early this year raised the number of its port ECAs to 11, although there's not currently an ECA covering all its territorial waters. The port ECAs require the use of 0.5% sulphur fuel oil, or equivalent emissions, when berthing, and the policy is expected to be progressively extended. Japan has announced a $10bn public-private initiative to promote the growth of LNG as a fuel in Asia, including support for LNG-bunkering expansion. This is partly to help promote demand for LNG in light of the current surplus in world markets and Japan's aim to inject additional flexibility into LNG marketing. In South Korea, Kogas is developing an LNG-bunkering protocol, and has partnered with steelmaker Posco and the Ministry of Ocean and Fisheries to develop a class of 180,000-tonne LNG-fuelled vessels.
This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here