New Rules on Ship Emissions
New rules coming into force from 2020 to curb pollution produced by the world’s ships are worrying everyone from OPEC oil producers to bunker fuel sellers and shipping companies.
The regulations will slash emissions of sulfur, which is blamed for causing respiratory diseases and is a component of acid rain that damages vegetation and wildlife.
But the energy and shipping industries are ill-prepared, say analysts, with refiners likely to struggle to meet higher demand for cleaner fuel and few ships fitted with equipment to reduce sulfur emissions.
This raises the risk of a chaotic shift when the new rules are implemented, alongside more volatility in the oil market.
“The reality is that the industry has already passed the date beyond the smooth transition,” Neil Atkinson, head of the oil industry and market division at the International Energy Agency (IEA), said in April.
WHAT ARE THE NEW RULES?
The rules, drawn up by the U.N. International Maritime Organization (IMO), will ban ships using fuel with a sulfur content higher than 0.5 percent, compared to 3.5 percent now, unless a vessel has equipment to clean up its sulfur emissions.
Any vessels failing to comply will face fines, could find their insurance stops being valid and might be declared “unseaworthy” which would bar them from sailing.
HOW WILL IT AFFECT THE FUEL OIL MARKET?
The global shipping fleet now consumes about 4 million barrels per day (bpd) of high sulfur fuel oil, but about 3 million bpd of that demand will “disappear overnight”, according to the average market forecast calculated by Norway’s SEB Bank.
Most demand is expected to shift to marine gasoil, a lower sulfur distillate fuel.
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.
That, in turn, will drive up prices. Gasoil now trades at a premium of about $250 a ton to fuel oil, but the forward curve forecasts this will balloon to $380 per ton by early 2020.
Thomson Reuters Research estimates fuel accounts for about half a ship’s daily operating cost. Based on average fuel consumption of 20 to 80 tonnes a day (MT/day), a ship using cleaner fuel faces extra daily expenses of about $6,000 to $20,000.
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.
WILL “SCRUBBERS” HELP THE SHIPPING INDUSTRY?
Shipowners can install kit called a “scrubber” that strips out sulfur emissions and allowing them to use the dirtier fuel oil. Some ships already have them. Global trading firm Trafigura has ordered scrubbers for its fleet of 32 ships.
But the equipment alone can cost $1 million to $6 million, according to manufacturer Wartsila, putting it 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.