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Abu Dhabi, UAEWednesday 19 September 2018

Shipping industry is gearing to adopt cleaner fuels by 2020

Low-sulphur marine fuel is set to transform the energy sector

LNG importers around the world including India's GAIL are looking to negotiate shorter, more flexible contracts. AFP/ LEX VAN LIESHOUT
LNG importers around the world including India's GAIL are looking to negotiate shorter, more flexible contracts. AFP/ LEX VAN LIESHOUT

Great changes in energy markets do not always have to flow from great causes. In the case of marine fuel, what seems to outsiders like an apparently modest change to an arcane regulation is going to make waves not just for shipping, but the wider oil business. Other consumers and industries are set for a big New Year’s surprise on 1st January 2020.

This is the date when the International Maritime Organisation’s new ruling, advanced in October 2016, on the sulphur content of marine fuel comes into force, limiting it to no more than 0.5 percent – today the maximum is 3.5 percent. Large vessels burn 5 million barrels per day of the 8 million barrels of fuel oil that refineries churn out, the heavy, dirty, low-value residue. Now they will have to look elsewhere.

This move is intended to protect the environment in shipping lanes, since burning this fuel creates sulphur oxides, responsible for acid rain. Pollution from ships has been estimated to cause 130,000 premature deaths from respiratory illnesses worldwide each year, and is particularly bad along the Arabian Gulf, Red Sea, India, Java and East Asia. By contrast, the North Sea and the coasts of North America already apply stricter rules.

Cowboy shippers may not follow the regulations immediately – enforcement and penalties are unclear. But leading shipping and cruise lines and major ports will comply. They have four choices. They can use fuel oil processed to reduce its sulphur content, but this will be expensive and in scarce supply. They can burn marine diesel, which also has lower sulphur but is costly.

They can fit scrubbers, essentially devices which wash the exhaust with seawater to turn the sulphur oxides into harmless calcium sulphate. But scrubbers are expensive, some $3-$5 million each, and shipyards cannot fit enough of them for the 2020 deadline.

Or they can convert ships to burn liquefied natural gas, a clean fuel. But converting an existing ship to use LNG is expensive, and the required tanks reduce the vessel’s cargo capacity. LNG is not available at all ports, though the major ones such as Rotterdam, Singapore and Shanghai are installing LNG bunkering facilities. Fujairah, the world’s second-largest bunkering port, is still without LNG however.

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The shipping industry has struggled with years of low charter rates, and no shipowner wants to spend money unnecessarily. Refineries have also been slow to add additional capacity for de-sulphurising fuel oil or producing marine diesel.

Shipowners and oil storage operators will start changing over to the new fuels a few months before the start of 2020, to avoid being left with non-compliant stocks. Marine fuel suppliers are already testing the new low-sulphur grades to ensure they are compatible and usable in engines. The few far-sighted shipowners who have scrubbers or LNG engines will do very well. The new Middle East refineries, particularly in Saudi Arabia, built to maximise diesel output, will also enjoy strong profitability.

Other shippers will face much higher fuel bills, which will drive up the cost of sea transport. The competition for diesel will also hit truckers, operators of farm and construction machinery, and drivers of diesel cars. Even airlines will suffer as refineries aim to produce more diesel instead of the similar jet kerosene. Crude oil prices will rise as refiners have to run more to meet demand for all fuels. These industries may not have been closely reading the IMO rules so far, but they need to be prepared for price spikes and possible disruption in supply chains.

Assuming the IMO sticks to its guns, there is very little any of the participants can do now – there is no more time or capacity to change vessels or refinery units before the deadline. But the industry will adjust, and probably prove itself more flexible and creative than some observers believe. A wide price differential between high- and low-sulphur fuel oils and diesel will encourage new investments in scrubbers and complex refineries.

Producers and suppliers of LNG, such as Shell, have for a few years been trying to encourage the use of their fuel for ships, but with only limited take-up – about 200 vessels in service or on order, out of a global merchant fleet of 52,000.

Now LNG will get a big boost both from the 2020 rules and from the next IMO move, expected in 2023, to reduce carbon dioxide. Ships produce 3 percent of the world emissions of this greenhouse gas. Scrubbers and low-sulphur oils are no help here, but LNG cuts carbon dioxide by about 28 per cent. The 0.5 per cent sulphur standard will also be tightened in future, probably to 0.1 per cent. In the longer term, ships will move to even cleaner modes, which could include batteries for short journeys (such as ferries and supply boats) and hydrogen for longer ones.

Eventually this regulation will drive the biggest change in marine propulsion since the changeover from coal to oil started in the 1910s. It will make the shipping business cleaner and more sustainable, and after a temporary but perhaps painful spike, the extra costs will be absorbed. But for a year or two, shippers, passengers, cargo and customers alike have to be prepared for some choppy waters.

Robin M Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

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