May 2019 is almost behind us. Soon we will have only seven months remaining before the International Maritime Organisation's (IMO's) new 0.5% sulphur (sulfur) cap takes effect.
To understand the maritime industry's readiness for this radical change, it is useful to imagine a cycling race.
In Olympic cycling, professional match sprint races start with competitors cycling as slowly as possible. Slower than slowly. Those who manage to stop their bike entirely and keep it stationary for the longest time are usually rewarded with victory. In the fastest cycling event in the world, crowds cheer for riders who can hold their bikes motionless.
It’s a paradox. But it’s also highly strategic. Whoever is behind in the last lap of the race has the advantage of surprise. The rider who hangs back is able to see more of the race. He has no blind spots. He can respond better to changing circumstances and launch an attack when the time is right.
The IMO Marpol Annex VI, 'Prevention of Air Pollution from Ships', was first adopted in 1997 and came into force in 2005. Part of its purpose was to reduce the sulphur emissions resulting from the use of heavy bunker fuel.
Many vessel operators expected to call the IMO's bluff
Initially, the regulations set a global sulphur cap of 4.5%. This was lowered to 3.5% in 2012.
Then, in October 2016, the IMO Marine Environment Protection Committee (MEPC) decided to drop the permissible sulphur content of marine fuel to 0.5%. Implementation of that rule is set for 1 January 2020.
For some time after the IMO's October 2016 announcement, nothing happened. Shipowners became Olympic cyclists. So, it seems, did refinery owners.
Many vessel operators expected to call the IMO's bluff. They anticipated a postponement, perhaps even a cancellation, of the new regulations.
Maritime industry players were also delaying their decision as late as possible to get the most accurate view of future fuel prices.
These prices, specifically the price differential between high sulphur fuel oil (HSFO) and low sulphur fuel oil (LSFO), would be the most influential factor in which IMO 2020 compliance strategy shipowners chose to adopt. They would also affect how refineries prioritised their processing activities.
Suddenly, in 2018, the race started in earnest. Once it became clear the IMO had no intention of pushing back the implementation of IMO 2020, shipowners began to make arrangements.
They had, and continue to have four primary options available to them.
Now, within sight of the finish line, what has been the interest in these different solutions?
Solution 1: Fit a marine scrubber
Exhaust gas cleaning systems, or gas scrubbers, are fitted to the outlets of ships’ engines to clean the exhaust gases before they are discharged into the atmosphere. By doing so, they permit vessel operators to continue burning low-price high sulphur bunker fuel.
In preparation for IMO 2020, scrubber uptake was initially slow. Scrubbing systems can be costly to install, require expenditure on maintenance, and increase vessel fuel consumption.
However, with sufficient HSFO/LSFO price differentials, the cost benefits of burning cheaper fuel are great. Payback times on capital investment are reduced to months, not years.
The closer we get to the launch of the new sulphur cap, the higher those price differentials looks set to be. Major LSFO supply concerns and geopolitical factors have driven – and are likely to continue driving – LSFO prices up. Such hikes have made exhaust scrubbers an increasingly appealing compliance solution.
Almost 2,000 vessels are currently fitted with scrubbers. Though that number is expected to grow to 5,200 in 2024, by 2020, it looks set to be 3,500. That would only account for around 4% of the world fleet.
Solution 2: Switch to compliant fuel
Emerging supply-side pressures over the last few months suggest that come next year, stock of compliant fuel may be hard to come by. Moreover, the price is set to rise. Trading companies are already stockpiling LSFO at sea. Though refineries are expected to do what is necessary to produce compliant fuel, an adequate response is far from certain.
With LNG-powered and scrubber-fitted ships accounting for less than 10% of the world’s 94 000 vessel fleet, switching to LSFO or ultra-low sulphur marine gas oil (MGO) is assumed to be the compliance solution favoured by 90% of shipowners. However, these numbers may be deceiving.
The Oil and Gas Journal predicts that a higher diesel price will have two primary effects. First, it will encourage the fitment of scrubbers, which will now have even shorter payback periods.
Second, it will incentivise owners to cheat.
The IMO has tried to pre-empt this by instituting a ban, effective March 2020, on any ship not fitted with a scrubber from holding HSFO onboard. However, this ban and the primary regulation it supports will rely on enforcement.
Solution 3: Switch to non-petroleum-based fuels like Liquified Natural Gas (LNG)
Limited by undeveloped global bunkering infrastructure, LNG has been the least appealing compliance solution for shipowners. This is despite LNG’s low, relatively stable price and more reliable supply.
The growth in the number of LNG-powered vessels has, however, been notable. The size of the LNG-fuelled fleet grew from 118 in 2017 to 143 in February 2019, with a further 135 on order. Also, 135 LNG-ready ships are already in operation or on request.
In response, the LNG bunkering infrastructure has expanded to 24 of the world’s top 25 bunkering ports.
If this trend continues, we are likely to see some growth in LNG-powered vessels – Wood Mackenzie expects to see a 70% rise between 2019 and 2020 - however numbers will remain small, only a tiny fraction of the world fleet.
As a result, LNG is very much an outside bet.
Solution 4: Non-compliance
With just months to go before IMO 2020 becomes a reality, shipowners who have not yet committed to alternative solutions like scrubbers or LNG have left themselves with only one option: running their vessels on compliant fuel.
As this accounts for the vast majority of ships at sea, there are well-founded concerns about whether there will be enough fuel for all these vessels. Even if there is, the price of what is available will drive more shipowners than expected to run the gauntlet and risk penalties for non-compliance.
With global enforcement untested and so many factors still to be clarified, it looks increasingly unlikely that we will see a fully compliant fleet when 2019 draws to a close.