Sea change for shipping sector
New rules are imminent and will have a big impact on the global fuel oil sector
Only two years remain before world shipping must conform to the International Maritime Organization's (IMO) Marpol "Annex VI" regulation to reduce sulphur content in marine fuels. Market participants agree that this is a major and potentially disruptive change, but say fuel suppliers and shippers seem to be approaching the deadline with equanimity.
"Fundamentally, people are not prepared, in the sense that they're not doing anything differently" ahead of the deadline, says Andrew Laven, regional manager for Middle East and Africa at the Bomin Group, a bunkering company with operations worldwide. He points out that many in the industry believe evaluations that there will be enough 0.5% sulphur-compliant fuel available to minimise disruption and costs.
Nonetheless, Laven says the changes are significant. The IMO, the UN agency whose membership covers over 96% of the world's shipping, has agreed that from 1 January 2020, the permitted mass-on-mass sulphur content in marine fuels will fall to 0.5% sulphur from its current 3.5%. The last similar reduction took place in 2012, when the IMO reduced permitted sulphur content from 4.5%. Within existing Emission Control Areas (ECAs) covering the Baltic, some Chinese ports, the North Sea, and parts of the US coasts and Caribbean, permitted sulphur content is already even lower, at 0.1%. The IMO says average fuel oil sulphur content in fuel tested during 2015 was 2.45%.
The sulphur content limit is effectively an emission, rather than a fuel standard. Ships may use alternative fuels, such as liquefied natural gas, or alternative technologies, such as "scrubbers" to limit sulphur oxide (SOx) emissions. Under the IMO guidelines, vessels' consumption of fuel and use of alternative technologies should be monitored by flag states, port states, and suppliers, but the industry is still awaiting detailed regulations.
The oil and shipping industries are considering how the Annex VI limits will affect the oil market and shipping economics. Marine fuel oil consumption statistics are unreliable, but estimates range up to 5m barrels a day, which would account for nearly 63% of world fuel oil consumption, according to BP's Statistical Review of World Energy 2017. Onshore fuel use, particularly for power generation, is increasingly restricted by ageing generation plant and emissions regulation, so the marine sector is the principal outlet for a low-margin product with few alternative uses. Also, the prevalence of high-sulphur sour crudes over low-sulphur sweet crudes means large volumes of fuel oil will need to be blended with other products to meet the new sulphur restrictions.
Bomin's Laven points out that the regional mismatches between bunker demands, product availabilities, and crude oil qualities probably means that while post-2020 demand for 0.5% sulphur fuel oil can probably be met, doing so may create significant market volatility and trading opportunity. Oil-product forward curves are already showing a widening of the Gasoil/High Sulphur Fuel Oil spread, as the market perceives that HSFO will lose value through and after 2020, a trend that's expected to continue until the spread covers the cost of blending HSFO with other products to meet post-2020 sulphur limits.
Part of the market's overall apparent equanimity in the face of the 2020 sulphur deadline may be the result of the concentration of bunkering volumes. Industry officials estimate that six countries—China, the Netherlands, Singapore, the UAE, the US, and South Korea—account for nearly 60% of world bunkering demand; and that the 10 largest bunkering companies account for around 50% of supply. The key bunkering countries and companies all have fairly robust and flexible regulatory and internal controls in place, which will likely speed the adoption of any new procedures necessary to meet the Annex VI sulphur regulations. The result could lead to effective compliance of over 80% within a year of the effective date of the regulations, which would be "a pretty good outturn", according to Laven.
On the consumption side, industry officials point out that while shipping companies may face economic and technical challenges to meet the Annex VI regulations, three key themes are emerging. First, that large listed shipping companies such as AP Moeller Maersk and cruise ship operators such as Carnival, with high public profiles to maintain and shareholders to keep content, are nearly certain to fully comply with all regulations. Similarly, leading listed, high-profile product suppliers such as France's Total will ensure product availability and alternative fuels. Finally, vessels plying point-to-point routes, from ferries to large commercial vessels, may well take to alternative fuels, in particular LNG.
Despite these optimistic possibilities, industry participants see some likely hiccups in implementation of the Annex VI regulations. They point out that in certain jurisdictions, including Latin America and most of Africa, sulphur-compliant fuels may be hard to come by and certify given local refinery configurations. They also note that several significant flag states are small and may not be able to recruit and develop the requisite personnel and information technology to maintain effective databases. Finally, industry participants say it's not yet clear how fines for non-compliance may be invoked under the regulations. In other industries, similar emissions limitations have been met by firms simply paying fines when these were set at less than the profitability of the polluting units.
Suppliers and consumers agree, however, that the Annex VI regulations are just the first step towards more comprehensive control of marine atmospheric emissions. The Annex VI regulations already include three levels of nitrogen oxide (NOx) limitations to be met. Industry participants say that they expect vessels will be required to meet CO2 emissions limitations in the not-too-distant future. Bomin's Laven points out the perception of pollution is a major driver in encouraging emissions restrictions, and suggests that the marine-fuels sector should be closely studying the progress of emissions restrictions in onshore transport for lessons in how to handle the issue.
The only reason shipping emissions haven't previously been preaddressed strongly "is because they're in the middle of the ocean and no one sees them", he says.