April 3, 2018
The topic of the hour: Autonomous ships? Digital Disruption? No, it’s the 2020 sulfur cap. The date itself is more like the start of the conversation than its end, but we can be sure there are more unknowns than knowns around the topic at present.
The grey areas are numerous: technical, commercial, operational and regulatory. They wash up against each other and at times overlap but one thing is certain, when they come together on January 1, 2020 the industry will be changed forever.
There are many related issues too – the role of alternatives to conventional fuels, the need to comply with NOx emission standards in new emission control areas, the likelihood that some regions will move to ban ‘open loop’ scrubbers that discharge their wash water.
Among the alternatives to low sulfur marine fuel and gasoil are LNG and Methanol, the first of which has made strides in powering ships but not without issues of its own. Complex to store and handle, LNG also has the problem that as a fossil fuel it can only ever be a transition to a low carbon future, though it will enable owners to comply with 2020.
Methanol, in use on the ferry Stena Germanica and as fuel on some methanol tankers, is gaining ground, but whether the issue of its low energy content can be overcome remains a key question.
Where it scores is in being more straightforward to use – the Stena Germanica conversion cost around E13m and the company thinks a second could cost less. Because it doesn’t need cryogenic tanks, the cost for a methanol-powered newbuilding make it a viable contender.
Asked if there was a risk that owners investing in LNG-powered ships risk stranding their assets once future carbon regulations bite, Aziz Bamik of GTT told the recent CMA conference panel the best is yet to come. “I don’t have a crystal ball but the trend is to think that oil and gas companies will become gas and oil companies, it could provide more than 50% to the energy mix.”
Looking as far ahead as 2050 gas is the solution that checks all the boxes, he said, with lower particulates, SOx and NOx emissions. Given the uncertainty around the cost of low sulfur fuel come 2020, alternatives like gas could represent the better investment he said.
John Larese of ExxonMobil agreed, pointing out that for decades the industry had only burnt gasoil then residual fuel, the challenge was accepting a multi-fuel future. “It won’t be one solution, everyone will could do it differently. LNG will have a greater portion of that mix going down the line but there will be LPG, Methanol and better batteries, so it will be a mix.
Sufficient supplies of the high sulfur fuel oil needed to make the case for scrubbers could also be a problem come 2020 – though there is only a small percentage of ships fitted so far. Like LNG, HSFO could be hard to find and expensive unless owners take steps to lock in supplies and protect their investment.
For AMT’s Bob Kunkel, 2020 is more about technology than regulation because the former describes what the latter requires. His concern is the industry’s failure to grasp that while SOx reduction is fuel and scrubber-based, NOx reduction is combustion-based and therefore low sulfur marine fuels cannot be the answer. He quipped that any owners considering spending $8-12m on scrubbers should really be thinking about new construction to tackle the wider slate of emissions regulations.
Marsoft Analyst Arlie Sterling was honest enough to admit that he had no idea how much compliant fuel would be available in 2020 but said a better discussion would be how charterers could avoid huge cost increases and gain an advantage against those who failed to fit a scrubber in time and were forced to use expensive fuels.
“The path forward will involve LNG, high and low sulfur fuel. Don’t forget that owners have struggled to find the capital to put into scrubbers. If you estimate the affected fleet at 50-60,000 ships, 20,000 should be looking at a scrubber decision,” he said. “That’s roughly 250 owners and a lot of effort will be focussed on this decision over the next 15 months.”
A question not often asked is whether the IMO which set the 2020 deadline has done enough work yet towards ensuring the availability of compliant fuel. Head of the IMO Council Jeff Lantz said while the IMO could not generate the supply, it should define what happens when ships show up and find no availability as well as what guidance is given on the enforcement of penalties.
“The IMO wants good consistent enforcement worldwide and has urged all countries to make this happen. The issue is how you deal with it when there is not compliance,” he said.
The issues extend to the effect blended LSFO will have on engines designed to run on residual fuel. Most marine fuel is sold to the ISO 8217 specification but this does not include sulfur levels. Larese thinks future marine fuel specifications will increasingly include caveats that describe their risks as well as their properties.
The refiners are yet to release any specification for LSFO and like the Ballast Water Management regulations, the industry would benefit from an ‘experience-building’ phase so that shipowners could get some idea of what to expect, especially as more niche fuels are developed.
Whether scrubbers make sense economically is a question that Marsoft has considered and Sterling summed up the risks in terms of middle-aged vessels trading on timecharter. “The largest input is fuel and there is a minimal portion of these ships that will fit scrubbers. The least efficient vessel clears the market.”
But is the news all bad? Not necessarily, he added, though even the good news comes with some reservations. “When the shit hits the fan you get really expensive but probably sufficient LSFO. Our fall back analysis is that owners trade a lot more slowly and the resulting increase in charter rates might make some owners better off, because lack of efficient switch over means lower vessel utilisation. There’s an equilibrium that shifts as a result of changing the bunker market. Don’t underestimate the possibility of chaos in 2020.”