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Shipping sector braces for emissions storm

Is the fuel oil market ready for tighter carbon and sulphur emissions rules on shipping?

Tighter emissions regulations are set to cause a revolution in the shipping fuel market over the next few years, with plans now in place for carbon emissions cuts and tougher regulations on sulphur emissions increasingly likely to come into force in 2020.

A compromise agreement reached by member states of the International Maritime Organisation (IMO) in London on 13 April has paved the way for carbon emissions cuts of at least 50% by 2050, compared with 2008 levels. A more stringent target had been sought by the UN shipping agency but this was scaled back due to concerns among countries including India, Brazil and the US over the impact of higher costs on trade.

Nevertheless, the deal is significant, not least because carbon emissions from shipping fall outside the terms of the Paris climate agreement of 2015 and were unregulated until now. While carbon emissions from the marine sector account for only 2.2% of total global emissions at present, that share looked certain to soar - perhaps to 20% or more - as the sector expanded and emissions from other sectors decreased over coming decades.

Environmental groups, the European Union and some leading players in the industry, such as Maersk, wanted the target to be an emissions cut of at least 70% by 2050 . But the compromise agreement still recognises that the end objective is to decarbonise the sector completely.

A final plan is not expected to be in place until 2023, though the IMO has already cited areas where changes need to be made. Rules for raising fuel efficiency in new ships to cut carbon emissionshave been adopted. The sector is also looking at ways to improve energy efficiency in existing vessels, the introduction of low-carbon and zero-carbon fuels, and other measures to speed up the transition to lower-carbon fuels.

There are different low and zero-carbon technologies competing to become the replacement. Possibilities include, among others, synthetic fuels, biofuels, batteries and hydrogen fuel cell storage, helped by the likelihood of falling costs over the next 10-20 years.

Coming, ready or not

Whatever the solution, demand for bunker fuel looks to be in jeopardy, and not just due to the high carbon emissions of fuel oil. The market also faces the more immediate impact of tougher regulations on sulphur emissions in the maritime sector, which will come into effect in just two years.

In 2016, the IMO set 2020 as the implementation date for a reduction in the sulphur content of fuel oil used by ships to 0.5% from the current 3.5% limit. Following the April 2018 meeting in London, the organisation said it had approved measures to ban ships carrying high-sulphur fuel from 2020, if they don't have sulphur-stripping equipment on board. 

Global bunker fuel costs could rise by up to $60bn a year from 2020

"It's only around the corner, but people have put their blinkers on and ignored the new regulation, believing it will be delayed or changed. It looks like it is coming, and I don't think the markets are really ready for it yet," Mohamed Bassatne, chief executive of energy trader BB Energy told Petroleum Economist.

Wood Mackenzie has estimated that global bunker fuel costs could rise by up to $60bn a year from 2020 if the industry complies fully with the 0.5% cap. Switching to alternative fuels, such as Ultra Low Sulphur Fuel Oil or Marine Gas Oil (MGO), or the installation of scrubbers to remove sulphur from exhaust gas, will all add to the expense.

The consultancy said that while installing scrubbers could be one of the more economically attractive options, their use could be limited by factors such as access to finance, scrubber manufacturing capacity and dry-dock space.

"Switching to MGO is a more costly solution, and in full compliance, would probably see freight rates increase, perhaps by around $1 a barrel," Iain Mowat, a refining and oil products analyst at Wood Mackenzie said. The consultancy estimates that demand from the bunker fuels market will total some 5.3 million barrels a day in 2020. 

Projected SO2 emissions from maritime transport compared to all land-based sources in EU27 Source: IIASA GAINS model,


LNG fuel questions

Increased use of LNG as a shipping fuel has been touted as another possible solution, though uptake remains very limited. DNV-GL said in November that there were just

117 vessels burning LNG, of which over two-thirds were operating in Europe, including 60 in Norway. However, there are confirmed orders for another 111 vessels.

The rapid expansion of the global LNG sector is likely to increase the potential of LNG bunkering around the word and thus the viability of LNG as a marine fuel. That would certainly help in 2020, as LNG contains no sulphur oxides, virtually no particulate matter and emits up to 90% less nitrogen oxides than heavy fuel oil, according to DNV-GL.

But, with carbon emissions now also moving to centre stage, proponents of LNG as a shipping fuel have more work to do. Using established best practices and technologies to minimize methane leakage, using LNG as a fuel would reduce carbon emissions by 25% compared to current fuels, according to data cited by DNV-GL. While that is a step in the right direction, it is a long way from the industry's avowed objectives.

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