To scrub or not to scrub

One way or another, ship owners are soon going to have to make big, and in some cases expensive, changes to meet compliance. New International Maritime Organization (IMO) regulations coming into force at the start of 2020 will slash the allowed concentration of sulphur oxides in fuel from the current 3.5% to just 0.5%. While strict sulphur limits had already been a fact of life for operators sailing in Emission Control Areas in Europe and North America, these new caps will now apply everywhere around the globe.

The options available to ship owners include switching from heavy fuel oil (HFO) to a compliant (and costlier) marine gas oil, converting to LNG, or using an exhaust gas cleaning system (EGCS) better known as a scrubber. Since LNG is currently available only in certain ports and reasonable only for certain ships, the vast majority of owners are left pondering the question: to scrub or not to scrub.

Heidi MJ Paulsrud, Director of Sales & Marketing at Wärtsilä’s Exhaust Gas Cleaning division, points out that the answer mainly comes down to this. Weighing the cost of the scrubber and its installation against potential savings that come from using a cheaper fuel. The more fuel you typically burn, the bigger that savings will be.

“If you look at the price differential between gas oil and HFO, even today when the differential isn’t that big, the payback time for scrubbers is fairly short, especially if you install a simpler type of scrubber system,” Paulsrud explains.

The simplest type of scrubbing is done through the open-loop system, which works by spraying seawater on the exhaust to convert the sulphur oxide to sulphuric acid, then releasing the wash water back into the ocean where the acid is neutralised by the seawater’s natural alkalinity. The more complex closed-loop scrubbing system is used in areas where the water’s alkalinity is too low to be effective. This system then relies on caustic soda to get the job done and a system of tanks to clean and hold the wash water until it can be safely discharged. A hybrid scrubber system allows switching from open-loop to closed-loop as needed to meet compliance.

“The benefit of the open-loop system is that it’s simpler. And you don’t need chemicals – you basically just use seawater to scrub the exhaust. The operation and maintenance of the system are much cheaper,” Paulsrud explains.

And, fortunately, the open-loop option fits with most operating profiles. Closed-loop scrubbers, on the other hand, are intended for ships that spend much of their time on fresh water or in specific zones where discharge is prohibited. Ships that spend most of their time at sea can always opt for open-loop scrubbers and then switch to a compliant fuel when entering a problematic area.

fuel-price-difference-payback-time-open-

Fuel price difference – Payback time (open-loop system)

Critical reactions

When delving into recent discussions surrounding open-loop scrubbing and its environmental impact, Paulsrud notes that there are many misconceptions surrounding the issue.

“People say you’re just taking something out of the air and putting it into the sea, but actually that’s not the case, at all,” she says. The difference, she explains, is that the seawater is a medium where chemical reactions are taking place. The alkaline seawater quickly converts the sulphur in the wash water into sulphates, which are a natural part of the ocean chemistry.

Recent bans on open-loop scrubbing in Singapore and China, which are based on fears that too much wash water released in high traffic areas will cause a build-up of acidity, have also cast the technology in a negative light.

28 of the 174 European Union countries have recently submitted a paper to the IMO saying the use of open loop scrubbers was “expected to lead to a degradation of the marine environment due to the toxicity of water discharges.” The paper also mentioned that it wanted to see “harmonization of rules and guidance.”

Paulsrud and other insiders, the IMO included, point out that IMO regulations for scrubber design already take these concerns into account. In other words, any MARPOL-certified scrubber on the market is efficient enough to make the concern a non-issue. Additional studies conducted in Denmark and Japan have both backed up the assertion.

In any case, such bans haven’t been a big worry for scrubber owners and operators, Paulsrud says. They can always turn off the scrubber and switch fuels when needed.

Particulates matter

An added benefit in scrubbing with Wärtsilä’s open-loop system is its ability to cleanse the exhaust of particulate matter (PM) – which is both a pollutant and an eyesore. Per today’s date PM capture is not addressed and/or controlled in regulations.

“One thing people using open-loop scrubbers worry about is the particulate matter you capture in the seawater, which makes the discharged water look dirty. Of course, if you’re running a vessel without a scrubber, you’re still discharging it into sea, since the particulate matter from the exhaust will fall into the sea. But in the scrubber wash water you can see it more clearly,” Paulsrud explains.

To mitigate the dirt and bad optics, Wärtsilä offers a water treatment unit for its open-loop systems. “Our scrubber is designed so we can change the inlet to capture more particulates from the exhaust if we want to, and we can capture it in the water treatment later on. So we can actually adapt our scrubber to focus on more than just sulphur,” she says.

Any way to reduce stress on the environment is, of course, a step worth taking – even more so when it provides a money-saving path to regulatory compliance. In the grand matchup between Exhaust Gas Cleaning and sticking with distillates, the combined benefits of scrubbing make it the clear winner.
Source: Wärtsilä

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Bbuut ocean acidification! 

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UAE due IMO 2020-compliant refinery

  Brooge Petroleum & gas Investment Co. FZC(BPGIC) is building a 250,000-b/d refinery designed to produce bunker fuel in Fujairah, UAE.

The refinery will be the first of its kind in the Middle East and North Africa to comply with new regulations of the International Maritime Organization (IMO) 2020 by capping sulfur content in shipping fuels, BPGIC said in a statement published by UAE’s state-owned Emirates News Agency on May 13.

The first phase of the planned refinery will be completed by first-quarter 2020, according to Nicolaas Paardenkooper, BPGIC’s chief executive officer.

Further details regarding the refinery or future phases of the proposed project were not disclosed.

IMO’s new regulations, set to take effect in 2020, will require ships to use marine fuels with a sulfur content below 0.5%, down from the current 3.5%.

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Readers may keep in mind that Wartsila, the source of the above article, has a large vested interest in selling more hardware.  Those on-board systems are not as sanguine as they are made out to be.  The disadvantages are that they take up valuable (and very scarce) real estate on that boat, which was not designed for that addition, and then the system competes for real estate with the ballast water holding and treatment systems, which are mandatory.  You can operate without a scrubber, but you cannot operate without a ballast water treatment system. 

For you fans of LNG, this is even more difficult: for safety reasons, the tanks holding the fuel have to be positioned on the rear weather deck, open to the sea air as ventilation.  Many, if not most, boats no longer have open rear weather decks.  Those that do, have their tonnage hatch back there, and you would have to take over that rear hatch from cargo and divert that volume, which is otherwise income-producing, into fuel storage and handling.  Ouch. 

As far as oil goes, yes the marine gasoil  [MGO] (basically #2 diesel, but without the additives) is going to run the operator as much as twice HFO and still at least 50% more than IFO. But if the entire fleet, or most of it, and you are looking at some 10,000 freighters, is running on MGO then the competitors are all on the same level (except for those that spent the coin to have an on-board scrubber system), so the additional fuel costs really don't come into the picture.  Meanwhile, even for those few ships that install scrubbers, if every single one were totally booked up with freight, so what?  They do not consume enough tonnage to really impact freight rates, not enough will have been switched over. 

Installing a scrubber is not cheap.  Figure some $2 million.  Ships do not last very long; there are ships being scrapped that are not 20 years old yet.  Who is going to put an expensive system in an older ship, to have it headed for the scrappers in two or three years?  Nobody. 

The other problem that the scrubber installers will face is that cheap bunker fuel may becomes scarce or non-existent in some ports.  If the fleet goes to gasoil, who is going to reserve tanks of HFO just for you, the solitary ship that might show up?  HFO may well go the way of the dodo at ports, and be found instead at tank farms inland, supporting large marine diesels used as either prime power or standby power in lieu of deactivated nuclear plants.  

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12 minutes ago, Jan van Eck said:

Readers may keep in mind that Wartsila, the source of the above article, has a large vested interest in selling more hardware.  Those on-board systems are not as sanguine as they are made out to be.  The disadvantages are that they take up valuable (and very scarce) real estate on that boat, which was not designed for that addition, and then the system competes for real estate with the ballast water holding and treatment systems, which are mandatory.  You can operate without a scrubber, but you cannot operate without a ballast water treatment system. 

For you fans of LNG, this is even more difficult: for safety reasons, the tanks holding the fuel have to be positioned on the rear weather deck, open to the sea air as ventilation.  Many, if not most, boats no longer have open rear weather decks.  Those that do, have their tonnage hatch back there, and you would have to take over that rear hatch from cargo and divert that volume, which is otherwise income-producing, into fuel storage and handling.  Ouch. 

As far as oil goes, yes the marine gasoil  [MGO] (basically #2 diesel, but without the additives) is going to run the operator as much as twice HFO and still at least 50% more than IFO. But if the entire fleet, or most of it, and you are looking at some 10,000 freighters, is running on MGO then the competitors are all on the same level (except for those that spent the coin to have an on-board scrubber system), so the additional fuel costs really don't come into the picture.  Meanwhile, even for those few ships that install scrubbers, if every single one were totally booked up with freight, so what?  They do not consume enough tonnage to really impact freight rates, not enough will have been switched over. 

Installing a scrubber is not cheap.  Figure some $2 million.  Ships do not last very long; there are ships being scrapped that are not 20 years old yet.  Who is going to put an expensive system in an older ship, to have it headed for the scrappers in two or three years?  Nobody. 

The other problem that the scrubber installers will face is that cheap bunker fuel may becomes scarce or non-existent in some ports.  If the fleet goes to gasoil, who is going to reserve tanks of HFO just for you, the solitary ship that might show up?  HFO may well go the way of the dodo at ports, and be found instead at tank farms inland, supporting large marine diesels used as either prime power or standby power in lieu of deactivated nuclear plants.  

Very true Jan, it is also upto individual ship companies how and what they want to do to manage the costs and the compliance with the IMO requirement.

Some shipping companies have already opted to use scrubbers, for some it may be feasible for others it may not.

For my own self interests, no scrubbers LOL.

 But what is going on in the industry ...

 

Scrubber uptake grows six-fold in 2018

Thu 21 Feb 2019 by Gavin Lipsith

 

https://www.mpropulsion.com/news/view,scrubber-uptake-grows-sixfold-in-2018_56921.htm

 

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https://shippingwatch.com/secure/carriers/Tanker/article11047966.ece

 

Germany’s industrial services provider Bilfinger has secured contracts worth more than EUR 100 million (USD 113.5 million) for its scrubber technology, following additional orders in recent months. 

This brings a total of 70 ocean-going vessels belonging to national and international shipping companies in line with stricter future environmental requirements imposed by the International Maritime Organization (IMO) and the European Union.

https://worldmaritimenews.com/archives/271904/bilfinger-to-install-scrubbers-on-seventy-ocean-going-ships/

 

https://www.reuters.com/article/us-shipping-bunker-fueloil/more-ships-adding-scrubbers-to-their-smokestacks-to-support-fuel-oil-usage-in-2020-jbc-idUSKBN1KZ151

More ships adding scrubbers to their smokestacks to support fuel oil usage in 2020: JBC

An increase in the number of ships adding cleaning systems to their smokestacks will mean vessels will continue to burn a sizable amount of fuel oil once new sulfur regulations for the fuel go into effect, Vienna-based consultancy JBC Energy said on Tuesday.

Ships installed with exhaust gas cleaning systems, known as scrubbers, are expected to burn 600,000 barrels per day (bpd) of high-sulfur fuel oil (HSFO) in 2020 when the new rules from the International Maritime Organization (IMO) start, JBC said.

____________________________________________

 

Scrubber uptake quadrupled in 2018

Derek Novak, Senior Vice President of Engineering and Technology and the American Bureau of Shipping, explained at the forum that the total adoption of scrubbers as of October 2018 amounted to 1,509 units, with 665 to be installed on newbuild vessels and 844 to be retrofitted.

He expects that a total of 2,000 to 3,000 vessels will be outfitted with scrubbers to comply with the new regulations. Assuming the total merchant marine fleet amounts to close to 60,000 vessels, those 2,000-3,000 scrubbers make up only 3%-5% of the entire fleet.

 

Looming 2020 regulations capping marine fuel sulfur at 0.5% have so far benefited manufacturers marketing scrubbers – or exhaust gas cleaning systems, as they are more formally known – but this solution is now being viewed with a more critical eye.

https://blogs.platts.com/2018/12/12/scrubbers-scrutiny-maritime-industry-imo-2020/

 

image.png.a4d4789539696ef54c4ff32038ebba21.png

image.png.a2804def8656e1a964fde7bdf790af3f.png

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Pollution-Busting Scrubbers Spark Uproar in Global Shipping

They’re large, they’re expensive and they’re increasingly controversial.

 
 

Scrubbers, a type of exhaust filter installed in ships, have been hailed by some as the key to efforts by the industry to comply with new pollution regulations due in 2020. Yet ports and shipping companies are starting to question their credentials when compared with cleaner fuel, and environmental organizations have warned they may enable shippers to dodge obligations to move on from dirty fuel.

 
 

Those concerns came to the fore late last month, when the world’s second-largest port of Singapore said it won’t allow the use of so-called open-loop scrubbers, which after filtering fuel release a sludge that contains sulfates and particles into the ocean. That type has also been restricted by ports in Germany and Belgium, and others may follow suit.

https://www.bloomberg.com/news/articles/2018-12-21/pollution-busting-scrubbers-spark-uproar-in-global-shipping

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Meeting the 2020 sulphur cap - Star Bulk fitting scrubbers to 24 vessels

Scrubbers are seeing a sudden upturn in interest and the largest US-listed dry bulk shipowner Star Bulk Carriers is installing 24 exhaust gas cleaning units on some of its larger vessels.

With the global 0.5% low sulphur cap deadline less than 19 months away the case for scrubbers, especially on larger vessels, has gathered rapid momemtum. Greek-run, US-listed Star Bulk is taking the plunge with scrubbers on 24 vessels, with one already fitted.

http://www.seatrade-maritime.com/news/europe/meeting-the-2020-sulphur-cap-star-bulk-fitting-scrubbers-to-24-vessels.html

 

________________________________________________________________

 

Scrubbers are the best investment for ships right now

Nicholas Confuorto, President & CEO, CR Ocean Engineering, argues why scrubbers are the best option for compliance with 2020 regulations and provides an overview of the market as well as his forecast for 2025, 5 years after the initial deadline. Considering all options, he concludes that only those who choose scrubbers can benefit from this technology, which is already available and proven.

https://safety4sea.com/cm-scrubbers-are-the-best-investment-for-ships-right-now/

 

 

 

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Clean Shipping Alliance Concerned About E.U. Scrubber Proposal

 

https://www.maritime-executive.com/article/clean-shipping-alliance-concerned-about-e-u-scrubber-proposal

 

 

 

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Japan’s third largest shipping company looks at all methods for compliance; MSC adds scrubbers on about one-tenth of fleet.

Two major shipping companies are laying out their plans for how they will comply with the pending global mandate to reduce sulfur emissions from ships.

The International Maritime Organization, the United Nations agency that regulates global shipping, will require that ships in international waters emit no more than 0.5% sulfur by 2020.

The mandate is poised to disrupt the maritime industry, which has long relied on cheap high-sulfur bunker fuel with sulfur content around 3.5%.

The major lines are now facing hard decisions on how to meet the mandate.

Low-sulfur marine fuel is one route. But it’s expected to cost nearly double the price of high-sulfur fuel by 2020.

Japan’s K Line (Tokyo: 9107), the ninth largest global shipowner by total fleet size, plans to take all three approaches with its fleet of 324 vessels.

In its annual report, the company said it plans to low-sulfur fuel, sulfur removal equipment and convert ships to run LNG. “We will proceed on a ship-by-ship basis, aware that we cannot limit ourselves to one particular measure,” the company said.

In addition to owning 37 container ships and being part of the Ocean Network Express alliance with Japanese peers Mitsui O.S.K. Lines (Tokyo: 9104) and Nippon Yusen K.K (Tokyo: 9101), K Line is a substantial owner of dry bulk vessels for carrying ore, coal and grains. The company has 101 dry bulk vessels.

Separately, Italy’s Mediterranean Shipping Company, which is part of the 2M Alliance with Maersk, is planning on fitting 29 of its 220 of its container ships with scrubbers at a Chinese shipyard. In July, the company signed a $198 million deal with Finland’s Wartsila for their scrubbers.

https://www.freightwaves.com/news/k-line-msc-2020

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Financing scrubbers – potential solutions

https://www.nortonrosefulbright.com/en/knowledge/publications/aeb93994/financing-scrubbers---potential-solutions

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1 hour ago, Jan van Eck said:

Readers may keep in mind that Wartsila, the source of the above article, has a large vested interest in selling more hardware.  Those on-board systems are not as sanguine as they are made out to be.  The disadvantages are that they take up valuable (and very scarce) real estate on that boat, which was not designed for that addition, and then the system competes for real estate with the ballast water holding and treatment systems, which are mandatory.  You can operate without a scrubber, but you cannot operate without a ballast water treatment system. 

For you fans of LNG, this is even more difficult: for safety reasons, the tanks holding the fuel have to be positioned on the rear weather deck, open to the sea air as ventilation.  Many, if not most, boats no longer have open rear weather decks.  Those that do, have their tonnage hatch back there, and you would have to take over that rear hatch from cargo and divert that volume, which is otherwise income-producing, into fuel storage and handling.  Ouch. 

As far as oil goes, yes the marine gasoil  [MGO] (basically #2 diesel, but without the additives) is going to run the operator as much as twice HFO and still at least 50% more than IFO. But if the entire fleet, or most of it, and you are looking at some 10,000 freighters, is running on MGO then the competitors are all on the same level (except for those that spent the coin to have an on-board scrubber system), so the additional fuel costs really don't come into the picture.  Meanwhile, even for those few ships that install scrubbers, if every single one were totally booked up with freight, so what?  They do not consume enough tonnage to really impact freight rates, not enough will have been switched over. 

Installing a scrubber is not cheap.  Figure some $2 million.  Ships do not last very long; there are ships being scrapped that are not 20 years old yet.  Who is going to put an expensive system in an older ship, to have it headed for the scrappers in two or three years?  Nobody. 

The other problem that the scrubber installers will face is that cheap bunker fuel may becomes scarce or non-existent in some ports.  If the fleet goes to gasoil, who is going to reserve tanks of HFO just for you, the solitary ship that might show up?  HFO may well go the way of the dodo at ports, and be found instead at tank farms inland, supporting large marine diesels used as either prime power or standby power in lieu of deactivated nuclear plants.  

I personally strongly believe that the best approaches to this are at two fronts and levels

1) At the refining stage (refineries produce the cleaner fuels) by using techs to reduce sulfur

2) Oil producers , upgrade and remove the sulphur and other contaminants from their crude streams by using upgrading techs

I think the scrubbers maybe useful in limited scope and scenarios.

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13 minutes ago, ceo_energemsier said:

I personally strongly believe that the best approaches to this are at two fronts and levels

1) At the refining stage (refineries produce the cleaner fuels) by using techs to reduce sulfur

2) Oil producers , upgrade and remove the sulphur and other contaminants from their crude streams by using upgrading techs

I think the scrubbers maybe useful in limited scope and scenarios.

Your thinking mirrors that of most of the shipping community.  They expect the fuel to be delivered alongside ship to be of a type and grade able to be used as-is, on board.  Looks like that is the way the industry will end up going. 

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17 hours ago, Jan van Eck said:

Your thinking mirrors that of most of the shipping community.  They expect the fuel to be delivered alongside ship to be of a type and grade able to be used as-is, on board.  Looks like that is the way the industry will end up going. 

Hi Jan,

That is coming from the perspective of E&P and Upstream side. I dont mind if ship owners and operators want to go full throttle to load up on scrubbers, there is no law against it and there is nothing holding them back except for capital investment and time and logistics.

My side of the equation is

1) We upgrade a producers crude oil for a fee and royalty to reduce sulphur, heavy metals and other contaminants

2) We do the same process with refineries who want to feed cleaner crude through their refineries

3) Work with major products traders to set up the same process at their facilities or at a logistically central and feasible location to upgrade their high sulfur products on a regional basis

Catering door to door to vessels is not in our business structure nor are we capable of doing that.

The IMO 2020 has opened up a lot of new business possibilities for many who are willing and ready to take the risk and are capable of it , just as it has created challenges.

I am seeing that some pure shipping companies are now getting into physical trading of LNG and bunker fuels too, to try to reduce their exposure and costs and add a new revenue stream.

"

South Korea’s Sinokor Merchant Marine, a shipping company, has hired a trader to open a desk trading physical liquefied natural gas (LNG), two industry sources said.

The trading desk, which is still being formed, will be located either in South Korea or Singapore, they said."

 

 

 

Innovation and tech keep the barrels flowing.

 

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Ship owners Caught “Between a Rock and a Hard Place” When it Comes to Bunker Prices and IMO 2020 Rules

With just a few short months until the implementation of the IMO 2020 rule, ship owners around the world are becoming increasingly aware of the significant rise of their operational expenses, especially when it comes to bunker costs. In its latest weekly report, shipbroker Banchero Costa said that “for the majority of vessels, especially the small and medium sized ones, the choice of fuel from 2020 will be between low-sulphur 0.5% blends and marine gasoil (MGO). There is no doubt that, in 2020, compliant fuels will be more expensive than what is commonly burned today. IMO 2020 will push overall bunker costs upwards”, the shipbroker said.

However, is this really such a game changer for the industry? According to Banchero Costa, “one could easily argue that it is not, and that it’s just part and parcel of your normal shipping volatility. After all, bunker prices change on a daily basis, as they are directly correlated with crude oil prices, and we have seen some pretty wild swings in the past. Back in 2012, we saw Brent crude prices reach 125 USD per barrel. That resulted in IFO380 prices as high as 740 USD per tonne in Singapore. In fact, IFO380 prices stayed above 600 USD per tonne for three and a half years, from Feb 2011 till Sep 2014. Shipping didn’t stop in 2012, and timecharter rates were actually higher back then than they are now”.

poiuytrewsdfghjklkjhgfds1.jpg

“Shipping will not stop next year either, even if charterers are forced to cough up 800 dollars for each tonne of compliant MGO. Since then, IFO380 dropped to as little as 150 USD in Jan 2016, and then climbed back to the 440 USD that it is now. Ironically, MGO today, at 600 USD per tonne, costs less then IFO380 did six years ago. The IMO 2020 rules pushing for the use of more expensive fuels is an exogenous factor in many ways not different from, say, an OPEC oil production cut or US sanctions on Iran. Such events result in higher oil prices, and therefore in higher bunker costs. It just happens that this time we have an IMO regulation providing the shock, rather than our usual geopolitical event (as if we didn’t already had enough of those…)”, said Banchero Costa.

Nevertheless, according to the shipbroker, “a return to an expensive bunker environment will have commercial implications. We are likely to see further reductions to sailing speeds, down to 11 knots or even below for bulkcarriers. This will restrict available tonnage, and will actually have a positive effect on helping to support charter rates. It will also reinforce a two-tier market between modern eco tonnage and less fuel efficient vessels, helping boost demolition activity. This will be balanced, however, by a potentially negative impact on sailing distances. Higher bunker costs, and therefore increased freight per tonne, could make long haul shipments less competitive. This could impact the relative advantage of, say, Brazilian iron ore when compared to Australian exports, or the attractiveness of Australian coal exports to China versus China’s domestic coal production. The net effect is difficult to quantify, as no one knows yet what bunker prices will really be like when 2020 comes”, Banchero Costa concluded.

oiuytrewqASDFGHJKMNBVCSDFGHJ2.jpg

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Shipping industry executives are calling for speed limits on commercial vessels, to cut emissions and protect the environment.

More than a hundred industry figures are asking the International Maritime Organisation (IMO) to help arrest — and even reduce — global temperature rises.

The predicted level of metric tonnes of Co2 created by shipping fuel annually by 2030 is more than 600,000,000.

But a 10% reduction in vessels’ speeds could bring it below that figure, while 20% and 30% reductions would push C02 emissions below 500,000,000 metric tonnes.

Ship speeds are actually not covered by the 2015 Paris climate accord. Emissions from international shipping and aviation do not come under a particular country’s jurisdiction. This means that the respective industries need to be involved to drive change.

The IMO, the industry’s regulatory body, formulated plans last year to half emission levels by 2050 compared to 2008 levels.

The IMO’s intention is to also explore low-carbon fuels including hydrogen and natural gas to meet the 2050 climate target.

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“The idea that open loop scrubbers will be banned in ports is a fake issue,” claims COO of CR Ocean Engineering.

The issue of banning open loop scrubbers is being propagated to scare people away from scrubbers, according to Nick Confuorto, president and chief operations officer for CR Ocean Engineering, and a keynote speaker at Maritime Week Americas.

“The number of ports likely to forbid open loop scrubbers is just a drop in the ocean but is being overplayed as if it were the majority of ports,” he said as the industry prepares to gather at Maritime Week Americas where Confuorto will be delivering a conference speech.

Maritime Week Americas, at Fort Lauderdale from 20 – 24 May, brings together leading industry figures from the maritime sector across North and South America and includes a three-day conference. This year’s event is likely to be especially lively as the issue of fuel prices and environmental intervention is so pressing for the shipping industry, as Nick explains:

“There are two key issues right now: the price of fuel, and whether or not open loop scrubbers are acceptable.

“The new 2020 regulation to reduce sulphur emissions from shipping represents a very positive environmental improvement for the maritime industry, however using lower sulphur fuels, or heavy fuels but with a scrubber in place, both represent a dramatic step change, and the question of what price ship owners will pay for this improvement if they chose not to deploy a scrubber solution won’t be known until January 2020.”

Nick, who is also chairman of the Exhaust Gas Cleaning Systems Association (EGSA), explains that is already too late for ship owners to fit scrubbers in time for the January deadline:

“Large corporations have been putting scrubbers in place to be ahead of the legislation. All industrial sectors operate in a competitive environment so, like businesses the world over, many shipping companies are delaying making a decision for as long as possible, however the reality is that the decision has already been made for them.

“There isn’t now time to fit a scrubber for January, so about ninety per cent of all marine vessels, all those without a scrubber, will have to buy the new lower sulphur fuels at whatever price it is come January”.

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Coming marine fuel standard will disrupt markets for 1-5 years: BCG study

HOUSTON (Reuters) - The marine industry’s January 2020 shift to using very low sulfur fuel oil (VLSFO) to power ships worldwide will launch a one- to five-year disruption in oil and refined products markets, according to a study released Thursday by Boston Consulting Group.

The International Maritime Organization (IMO)’s mandated switch will require fuels to have a sulfur content below 0.5%, compared with 3.5% now. It aims to improve human health by reducing air pollution from sea-going vessels.

The changeover may increase profits for refiners, especially on the U.S. Gulf Coast, where plants are designed to process high-sulfur crudes. It could also benefit producers of shale oil, which has a lower sulfur content than other varieties, the study found.

 

Conversely, prices for high-sulfur fuel oil (HSFO) or bunker fuel, with a maximum sulfur content of 3.5%, will fall as demand erodes, according to the study.

“The effects will be more than made up for by higher market prices for VLSFO and middle distillates, leaving most refiners, particularly complex refiners on the U.S. Gulf Coast, with substantially higher margins than they had before the disruption,” it said.

Prices for crude oil from shale fields will benefit from the transition, the study said, and “command a rising price premium, due to a sulfur concentration that is lower than that of oil from other sources.”

 

The shortest period for the transition would be one year if the IMO, a United Nations body regulating the shipping industry, were to postpone the start to 2022, allowing refiners and shippers more time to prepare for the change, which was first announced in 2016.

The longest period – five years – would be expected if the world economy falls into recession and shippers widely do not comply with the regulation, narrowing the expected price spread between HSFO and VLSFO.

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Dislocations in oil markets are dampening the outlook for light-heavy crude spreads and value US refiners expected from International Maritime Organization (IMO) 2020 emission standards but Canadian exploration and production (E&P) companies are benefiting, says Fitch Ratings. US sanctions on Iran and Venezuela and inadequate Canadian pipeline infrastructure resulting in Alberta’s oil curtailment have been disruptive.

Credit implications of revised IMO 2020 expectations should be limited. For refiners, we anticipate surplus FCF associated with the IMO 2020 tailwind is earmarked for share buybacks which can be quickly dialed back if needed.

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At least one US refiner curtailed a project related to IMO 2020 implementation due to the prospect of longer-term tightness in light-heavy spreads. Marathon Petroleum Corporation (BBB/Stable) announced last week it would shelve the Garyville 3 coker expansion project in light of changing economics produced by light-heavy crude spreads. This project would have gone online at YE 2021.

IMO 2020, which lowers the cap on sulphur content in bunker fuel used by ships to 0.5% from 3.2% due to environmental concerns, should benefit US refiners in two ways. Demand for low-sulfur distillate by shipping companies would increase as it allows shippers to comply with tighter fuel specifications without installing scrubbers or alternative fuel systems. Additionally, discounting of heavy crude oil should result in wider light-heavy spreads, benefiting refiners with deep conversion (coking) capacity. However, geopolitical events including sanctions and Alberta’s oil curtailment to the US have unexpectedly tightened the heavy-sour crude supply, diluting the second benefit.

There are still questions about timing and full implementation of IMO 2020. Recent proposals by some ship owners include complying with IMO 2020 based emissions targets through slow steaming which lowers emissions by burning less fuel rather than using low-sulfur fuel and could further reduce IMO 2020’s expected benefits for US refiners.

Conversely, tighter light-heavy spreads stemming from the Alberta curtailment have largely benefited Canadian E&P companies. However, the effects on individual companies are case by case and depend on the level of spot exposure to Western Canadian Select (WCS) versus integration with downstream. Lack of egress for Canadian crude oil is resulting in project deferrals and lower capex among Canadian E&P companies. While this enhances near term FCF, lack of growth may continue to have some negative secondary effects.

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Secondary effects include slower asset sales and, to the degree companies with delayed projects decide to greenlight them at the same time new capacity comes online, future project cost inflation. The lack of long-term takeaway capacity is linked to delayed in service dates for the region’s main pipeline expansions including Enbridge’s Line 3 replacement, a +370,000 bpd expansion; TransCanada’s Keystone XL pipeline at +830,000 bpd; and the Trans Mountain Expansion Project at +590,000 bpd.

WCS to West Texas Intermediate (WTI) price differentials tightened since the beginning of 2019 to the $12 per barrel (bbl) to $14/bbl level, versus blow out levels of $40/bbl-$50/bbl in the fall of last year. Similarly, Mexican Maya grade crude, which historically traded at a discount to WTI, is trading at a premium to WTI this year.
Source: Fitch Ratings

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Just How Disruptive Will IMO 2020 Be?

Effective January 1, 2020, in accordance with a mandate from the International Maritime Organization (IMO), the allowable percentage of sulfur in marine fuel will fall substantially, from 3.5% to 0.5%. This looming change, known informally as IMO 2020, could pose a major disruption to the markets and business practices of oil refiners, shipping companies, and other stakeholders.

Precisely how great the disruption proves to be—and, critically, how long it lasts— will be influenced by several factors, including the speed at which refiners can produce compliant fuel and the specific strategies that shippers employ to meet the challenge. We have modeled a wide variety of scenarios and can imagine a disruption lasting anywhere from one year to more than five years, generating significant costs for many businesses. (Our analysis is underpinned by the BCG IMO 2020 Model, a tool that enables us to project how the disruption will impact markets and that will allow us to analyze markets in real time as 2020 unfolds.)

Risks notwithstanding, most stakeholders, including oil refiners and shipping companies, have opportunities to make smart moves and improve how they fare individually. Understanding the nature of the disruption, and what signposts to look for to gauge its potential length and progression, can help. (See the sidebar “Defining Disruption.”)

The IMO and the Mandate

The IMO is the United Nations body responsible for regulating the shipping industry. As part of its charter, it is tasked with curbing pollution from ships—and sulfur emissions are particularly polluting. Hence, the IMO made the decision in 2016 to impose a markedly lower global standard for the permissible proportion of sulfur (by weight) in marine fuel, with the ruling to become effective in 2020. The IMO had embarked on a series of regional sulfur reduction efforts starting at the turn of the century by instituting so-called emission control areas, in which the allowable level of sulfur would be much lower than else where in the world. IMO 2020 transforms that aggressive sulfur reduction effort, which had been regional, into a global campaign.

Initially, compliance with IMO 2020 among shippers was forecast to be low: some shipping companies delayed taking the necessary actions because of doubts about the actual launch date and whether, or how aggressively, regulations would be enforced. (Note that the IMO itself do es not have an enforcement mechanism. Responsibility for compliance instead rests with the individual governments of the IMO’s member states, which guarantee compliance by shipping companies domiciled in their countries and establish penalties for noncompliance in their waters.)

Now, however, the degree of compliance among shippers seems likely to be high. Shippers will certainly have incentive to comply. Major ports, as well as insurers, will demand that ships use compliant fuel. The shipping industry is also relatively consolidated, which limits the number and percentage of ships in the global fleet owned by rogue operators that might be inclined to ignore the mandate. Finally, in late 2018, the IMO approved a so-called carriage ban that prohibits the transportation of noncompliant fuel by ships that lack scrubbers (technology that removes polluting sulfur emissions from ship exhaust). This regulation, which is scheduled to take effect in March 2020, reduces the likelihood of ships switching fuels at sea.

Disruption and Its Effects

IMO 2020 stands to sharply decrease demand for high-sulfur fuel oil (HSFO), which has 3.5% sulfur content and represents the vast majority of marine fuel currently sold, at a rate of nearly 4 million barrels per day. Simultaneously, IMO 2020 will raise demand for very-low-sulfur fuel oil (VLSFO), which has 0.5% sulfur content. (See Exhibit 1.) This dynamic will result in a substantial widening of the price spreads between HSFO and VLSFO, which will have major implications for stakeholders.

exhibit1.jpg

Shippers. Choosing to fuel vessels with increasingly expensive VLSFO would cost the shipping industry dearly—an additional $60 billion in 2020 over current fuel costs, according to one estimate. There might also be logistical hurdles associated with this strategy. The availability of VLSFO will be limited relative to expected demand, at least initially, as refiners work to boost supply by increasing yields and initiating new projects. (See Exhibit 2.) Fuel compatibility issues may arise as well, with potentially critical inconsistencies emerging among fuels produced by different suppliers.

Some shipping companies might turn to marine diesel, an established fuel that poses no compatibility risk, for their fuel needs. But marine diesel will b e the most expensive option among the oil-derived products. Liquefied natural gas (LNG) is yet another alternative for shippers. But the high cost of engine and infrastructure conversion and the logistics of onb oard storage (LNG tanks take up considerable space) will likely dissuade a critical mass of shipping companies from pursuing it, at least in the near term. (Over the longer term, as the global fleet of vessels turns over, LNG could become increasingly popular as a fuel, especially if pressure to reduce emissions intensifies.)

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Scrubbers could be yet another viable choice for some shippers. But scrubbers are expensive—retrofitting a vessel requires an investment of $2 million to $3 million— and installation can take up to six months. Scrubber installation is also hindered by shortages of skilled craftsmen and necessary raw materials, such as high-quality steel and chrome alloys. In addition, the open-loop scrubbers now being installed could prove to be a short-lived option, given environmental concerns about putting sulfur directly into the water.

Regardless of what path shippers ultimately choose, they will try to pass along their costs to customers. How successfully they will be able to do so remains to be seen.

Refiners. Meanwhile, refiners will strive to keep up with soaring demand for VLSFO. Complex refineries that can convert high sulfur (or sour) crudes to low sulfur (or sweet) products, including VLSFO, and maximize their production of distillates— which can be used to make compliant fuel, such as marine gasoil (MGO), a fuel that could rise sharply in demand—could see their margins surge. Simple refineries that mostly produce HSFO and have relatively low distillate yields will have greater difficulty maintaining their margins.

Simultaneously, refiners will struggle to work through falling demand for, and a resulting oversupply of, HSFO. Ultimately, they will have to lower prices on HSFO until it reaches the point where it can compete on price with natural gas as a fuel for power generation. These price reductions will diminish refining margins. But the effects will be more than made up for by higher market prices for VLSFO and middle distillates, leaving most refiners, particularly complex refiners on the US Gulf Coast, with substantially higher margins than they had before the disruption.

Suppliers of crude oil. A further widening of price spreads between sweet and sour crudes is likely to occur. Oil derived from US shale fields will be regarded as increasingly attractive, and thus command a rising price premium, due to a sulfur concentration that is lower than that of oil from other sources. Logistics bottlenecks that may emerge as markets adjust to the changing demand picture, however, could reduce this premium.

Variables That Could Influence Disruption

The extent and duration of the disruption will hinge on the following factors.

The Degree and Speed of Scrubber Adoption. This factor will be the most influential of all. Widespread adoption of scrubbers would allow shippers to continue to burn HSFO, thereby curbing the price spreads with VLSFO. But few ships are currently equipped with scrubbers and, as discussed, there are limits to how quickly the industry could install them: BCG projects that fewer than roughly 2,000 ships (about 3% of the global fleet of 60,000 ships) are likely to have scrubbers by 2020. And that number will climb only gradually, rising to about 11,000 at most by 2025.

The Rollout of the Mandate. As of this writing, IMO 2020 is scheduled to become operant on January 1, 2020, and the IMO has not indicated that there might be a delay. The organization undoubtedly recognizes that a delay would raise the potential for disruption in the short term, affect the scale and duration of such a disruption, and undermine the organization’s credibility regarding the launch of future regulation. But several governments of IMO member states, including the US, have indicated that they might be in favor of a delayed launch if shipping prices were to spike, harming consumers, as the launch approaches. Shipping companies have also lobbied for a delayed launch as they seek to secure approval for their plan to pass along costs to consumers. And the World Bank has announced that global economic growth is losing momentum, increasing the odds of an outcry against any new measure that seems likely to accentuate the trend. Taken together, these facts raise the specter of a delayed launch. The chances of a delay are dwindling quickly as 2020 approaches, however. Acknowledging this, some shipping companies have indicated that they plan to comply with the mandate as early as the beginning of the fourth quarter in 2019.

Additional Investment from Refiners. If refiners were to bring enough suitable capacity online before 2020, bottlenecks would be eliminated or reduced, and fuel pricing would be unlikely to change much. The needed investment would emphasize desulfurization of high-sulfur crude, production of middle distillates, and the destruction or disposal of HSFO. This would entail bringing new hydrotreaters, hydrocrackers, and cokers online, as well as small projects aimed at improving molecule management to better segregate VLSFO. The question remains, however, whether refiners, which have already invested substantially in recent years—adding 1.7 million barrels per day of conversion capacity since 2017—are likely to make additional investments of major scale in the near term and, if so, how quickly they would be able to bring those investments online.

Fuel Compatibility Issues. Optimal marine engine operation hinges not just on sulfur content but on secondary fuel characteristics (such as viscosity and stability), and the comingling of fuels from different providers on vessels is inevitable. If sufficient consistency of these characteristics cannot be ensured across refiners, and shippers have associated engine problems, the length of the period of disruption will grow. There are positive developments on this front, although not all questions have been resolved. Refiners and regional marketers have begun to offer new blends that meet the IMO’s requirements—but there is no explicit coordination among these efforts. Oil majors have declared their intention of making compliant fuels available by 2020—but the ultimate degree of compatibility across the companies’ offerings is still unknown. (Indeed, several blend types have already been patented, which limits choices and raises costs.) The International Standards Organization is preparing a specific standard for IMO 2020 fuels—but until that standard materializes, the potential for compatibility-related problems remains.

Lighter, Less Sulfurous Crude. This trend in the world’s crude supply, driven in large part by the growing production and representation of US shale oil, could also influence the disruption, though to a lesser degree than those discussed above. API gravity (a measure of crude weight) is expected to rise 0.1 degree, while sulfur content is expected to fall 0.1%, from 2020 to 2025. A rising percentage of lighter, sweeter crude in the global crude pool over the next few years means that, all else being equal, the complexity of producing IMO 2020–compliant fuel, along with its associated costs, should fall.

Scenarios for Length of the Disruption
How might these factors play out in combination and influence the length of the disruption period? Leveraging BCG’s proprietary IMO 2020 Model and focusing on such critical variables as scrubber-adoption rates, fuel compatibility, refinery projects and optimization efforts, and production rates of sweet crude, we have defined four scenarios. Note that, in the descriptions, “very high” spreads are differences in the prices of HSFO and MGO wide enough to result in surplus HSFO being sold into the power generation market; “high” price spreads are wide enough to incentivize refiners to maximize coking capacity and, in some cases, bypass some fluid catalytic cracker capacity. (See Exhibit 3.)

exhibit3.jpg

• Base Case. This scenario assumes that the mandate goes into effect on January 1, 2020, as scheduled; 2,000 ships have installed scrubbers by 2020 and 8,000 have done so by 2025; refiners make step changes to their capabilities (including major upgrades in residue desulfurization, fuel segregation, and throughput volume) over time; and high price spreads between HSFO and MGO occur for approximately 18 months. In this scenario, we would expect the disruption to last about three years.

• Delay. Here we assume that political and economic concerns about price increases for shippers and, ultimately, consumers delay the mandate’s launch by two years (although we can imagine materially longer or shorter delays), and that uncertainty about policy implementation increases the price volatility of relevant fuels, such as marine diesel. In this scenario, the two-year delay is followed by lingering uncertainty among stakeholders and wide spreads between MGO and VLSFO; this lasts about a year, giving the IMO and stakeholders additional time to prepare for the mandate’s eventual launch. (Additional refinery projects will be brought online; the rate of scrubber adoption will increase as well.)

• Quick Shift. This scenario assumes that IMO 2020 goes into effect as currently scheduled, and that extremely high and sustained (that is, for approximately 18 months) price spreads between HFSO and MGO, underpinned by strong economic growth, prompt rapid action by both shippers (through aggressive adoption of scrubbers) and refiners (through an increased rate of investment in conversion capacity). In this scenario, the total disruption would likely last about 18 months.

• Slow Burn. In this scenario, we assume that the mandate becomes operant as currently scheduled; the global economy goes into recession, blunting the mandate’s economic and environmental impact; price spreads between HSFO and MGO remain relatively small (that is, the price of HSFO does not fall to the point at which it is at parity with the price of natural gas when used as fuel for power generation) due to unexpectedly high levels of noncompliance among shippers; and the narrow price spreads reduce the perceived urgency for remedial measures and slow the rate of investment among shippers and refiners. Under these circumstances, disruption would likely last about five years.

What Companies Can Do

Disruption will significantly affect specific energy companies, particularly simple refiners and producers of sour crude, which will have limited options for creating higher-value fuels. Companies that could suffer substantially from higher fuel prices include heavy users of transportation fuel, such as shipping companies, airlines, railway companies that use diesel-powered trains, and freight-transportation businesses.

But disruption will also create winners, depending on which of the four scenarios we describe comes to pass. The list of potential winners includes complex refiners, ships with scrubbers (especially ships that installed scrubbers early on), sweet-crude producers that have strong ties to demand centers, companies that store oil and petroleum products, traders, and power producers able to burn fuel oil.

Key stakeholders can take a number of steps to mitigate the potential negative effects of disruption on their businesses. For shipping companies, the most important steps include determining a plan for fuel use during the disruption and putting contingency plans in place. Another critical action is to identify and test different ways of passing on higher fuel costs to customers to ensure that revenues are not negatively impacted by higher fuel costs or customer migration.

Refiners can—and should—take a host of steps, all of which may positively impact revenues in all cases except for our delay scenario. They should do what is necessary to ensure that they can operate efficiently and without interruption through 2021. Appropriate measures include inspecting equipment and making sure that spare parts for critical equipment are secured or readily available. Refiners should also take steps to prepare for the oversupply of HSFO—such as developing a plan to blend, store, and trade products to exploit arbitrage opportunities; identifying powergeneration facilities that represent HSFO demand; and, in the case of simple refiners, identifying complex refiners that are potential HSFO buyers. To facilitate production of marine diesel fuel and distillates, refiners should identify and work to remove bottlenecks and capacity constraints. To lock in sources of demand, they should partner with ship owners.

Crude producers should take steps to facilitate maximum production of sweet crude—including, for instance, performing maintenance and conducting equipment inspections before the disruption hits. Crude producers should also take steps to secure takeaway capacity and facilitate takeaway—by, for example, examining and working to address import and export bottlenecks. And they should work to secure takeaway of heavy and sour crudes specifically through advance planning and by conducting scenario analyses.

Traders, particularly those with physical assets across the value chain, are in an excellent position to translate the changes in the market surrounding IMO 2020 into additional physical assets and potentially lucrative financial positions. Some traders have already installed scrubbers on their fuel ships; traders should also consider engaging in swaps and in offsetting positions on the forward curve. Traders that combine such moves with the ability to store crude could find that IMO 2020 and the asso ciated disruption could more than offset any lost or reduced revenue caused by lower volatility and prices in the market in recent years.

IMO 2020 will affect multiple stakeholders, but it could weigh particularly heavily on refiners and shipping companies. Most refiners and shipping companies can take steps to increase their chances of emerging in relatively good shape. Though the time for taking many of these actions is limited because the disruption is nearly at hand, many investments, even if made late, will still likely prove profitable, given the disruption’s potential length.
Source: BCG

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Study concludes IMO 2020 promotes U.S. energy security, trade, and the environment

Yesterday Energy and Environmental Research Associates released a white paper co-authored by Drs. James J. Corbett and Edward W. Carr of the University of Delaware on the economic effects of the International Maritime Organization’s (IMO) 2020 standards to cap sulfur emissions from shipping fuels. According to the paper, IMO 2020 “is good policy for the United States, for energy security, the economy, and the environment.”

“The global shift to cleaner fuels serves U.S. interests, both economic and environmental,” the paper notes. “Advance regulatory notice, planning and investment, and technology and operational adjustment will help achieve IMO 2020 goals with minimal and temporary economic impact.”

IMO 2020 will reduce the maximum sulfur content in marine fuels from 3.5 percent to 0.5 percent. With the United States already producing and using fuel that is five times more stringent, IMO 2020 will bring the rest of the world more in line with American standards. To achieve compliance, shippers can either install emissions-control devices known as “scrubbers” or exchange their high-sulfur fuel for a low-sulfur alternative such as liquefied natural gas or light, sweet crude—both of which are widely produced in the United States.

“U.S. industry is prepared to provide advanced fuels and technologies to achieve IMO 2020 standards, at a competitive advantage,” the paper states. “The U.S. refining industry invested more than $100 billion over the past decade to meet growing demand for middle distillates used by freight transportation and to provide cleaner fuels, including ultra-low sulfur diesel and IMO 2020 compliant marine fuels.”

The IMO’s Marine Environment Protection Committee 74th annual meeting is currently taking place in London. Thus far during the meeting, IMO officials, echoing earlier comments from the U.S. Coast Guard, have stated that IMO 2020 standards will be enforced as planned.

The Coalition for American Energy Security launched earlier this year to educate policymakers on the benefits IMO 2020 offers to American energy security and competitiveness. “The U.S. operates some of the most technologically advanced refineries in the world and is well prepared to comply with the new standards,” said Ken Spain, spokesperson for the coalition. “Dr. Corbett’s conclusions add to a growing body of research pointing to industry’s readiness to meet the IMO 2020 standards and how the U.S. stands to gain.”

Members of the coalition include, among others, the American Fuel & Petrochemical Manufacturers, the World Shipping Council, the United Steel Workers, the American Petroleum Institute, the Center for Liquefied Natural Gas, the Domestic Energy Producers Alliance, the Independent Petroleum Association of America, American Exploration and Production Council, and several state oil and gas associations.

https://americanenergysecurity.com/wp-content/uploads/2019/05/EERA-IMO2020-White-Paper.pdf

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IMO 2020 – a major shake-up for oil and shipping

Tougher rules on sulfur emissions from ships will come into effect next year in the biggest shake-up for the oil and shipping industries for decades.

United Nations shipping agency the International Maritime Organization (IMO) met in London this week for the only Marine Environment Protection Committee (MEPC) session this year and will fine tune guidance.

What will the regulations mean for users and makers of marine fuel?

IMO 2020
From January 2020, the IMO will ban ships from using fuels with a sulfur content above 0.5%, compared with 3.5% now.

Only ships fitted with sulfur-cleaning devices known as scrubbers will be allowed to continue burning high-sulfur fuel. Ship owners can also opt for other sources of cleaner fuel such as liquefied natural gas (LNG).

Failure to comply with the global regulations will result in fines or vessels being detained, which could affect vital requirements such as insurance cover. The actual enforcement will be policed by flag and port states rather than the IMO.

The regulations are aimed at improving human health by reducing air pollution.

A study cited by the IMO says over 570,000 premature deaths will be prevented between 2020 and 2025 by the introduction of the tighter guidelines.

Refineries separately face significant costs to adapt to the new fuel specifications.

CAN THE RULES BE STOPPED?
Toward the end of last year there had been some industry concerns over whether there would be enough time to prepare for the start of the regulations, even though the measures were fully adopted in 2016.

Given the complex IMO process involved in changing regulations, which would require an estimated 22 months for any amendments to take effect, there will not be enough time to delay the date and the changes will go ahead.

Analysts still question whether there will be full enforcement by flag and port states.

WILL THERE BE ENOUGH LOW SULFUR FUEL?
Oil majors including BP and Royal Dutch Shell have announced they are producing very low sulfur fuels that meet the 0.5% requirements.

One of the major issues is whether there will be enough quantities of compliant fuel around ports across the world, which is vital for ships planning sailings.

While major fuel bunkering ports such as Singapore, Fujairah in the United Arab Emirates and Rotterdam in the Netherlands are expected to have compliant-fuel supplies, analysts and shipping firms point to concerns over what happens at smaller ports.

The IMO approved at the MPEC session a standard format for what it called a “fuel oil non-availability report”, which can be presented to a port state in the event that only non-compliant fuel was available for a vessel to use.

The International Chamber of Shipping association has warned ship owners that such mechanisms were a “tool of last resort” and should not be seen as a “free pass” either to use or carry non-complaint fuel.

ARE THERE ANY SAFETY ISSUES WITH THE NEW FUEL?
It remains unclear what impact there will be over mixing very low sulfur fuels of 0.5% together, which at this stage have not been fully tested on ship engines. One of the risks is that the level of sediment created could damage engines at sea.

The IMO is working on guidance to avoid mixing different fuel batches.

However, with potential for bunker fuel contamination after major problems in 2018, this issue continues to raise worries.

WHAT ABOUT SCRUBBERS?
Apart from the use of low sulfur fuel of 0.5%, there is still an issue over whether jurisdictions and ports could restrict the use of certain types of scrubbers due to uncertainty over the effects of the waste water that gets pumped into the sea.

Ten environmental groups have called on the IMO to impose an immediate ban on the use of scrubbers.

Users of the devices argue that there is no conclusive scientific research showing that discharges from open loop scrubbers – which wash out the sulfur – cause environmental harm and their use was safe. Analysts say there is still the possibility of tighter restrictions, which would add to the costs of those investing in them.

The IMO has encouraged further study into the impact of scrubbers on the environment.

WHAT ABOUT FUTURE REGULATIONS?
The IMO is also pressing ahead with imposing tougher targets for cutting CO2 emissions from ships compared with 2008 levels in a phased process up to 2050.

Many companies remain concerned about making investment decisions given expectations of more regulation.

“These future regulations may result in shippers switching to alternative non-petroleum fuels such as LNG,” the U.S. Energy Information Administration said in March.

“Because of this uncertainty, refiners and shippers may be hesitant to invest in complying with IMO 2020 if additional IMO regulations in the future could cause those investments to lose value or no longer be needed.”
Source: Reuters (Editing by Veronica Brown and Emelia Sithole-Matarise)

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The IMO tightened energy efficiency targets for new vessels across seven ship types in total, as a long-term climate measure (as new ships replace old ones, the CO2-saving effect increases each year).

The accelerated targets for containers, general cargo ships, hybrid diesel-electric cruise ships, and LPG and LNG carriers cover about 30% of ships and about 40% of CO2 emitted from ships subject to energy efficiency regulations

This measure could reduce CO2 emissions by about 750 million tonnes of CO2 cumulatively from 2022 to 2050 according to an analysis by the International Council on Clean Transportation (ICCT). That’s about 2% of all emissions from international shipping over that time period and about one year’s worth of emissions in 2015.

IMO will consider additional requirements for new ships after 2025 plus efficiency requirements for in-use vessels at its next meeting. The improved standards were made within the framework of Energy Efficiency Design Index (EEDI) (see separate explainer document for details).

However, the governments present did not do enough to take concrete actions to cut emissions from the industry – meaning we still don’t know how shipping will reach its targets laid out in its plan. This is despite concrete proposals from a range of countries and vocal pressure from the community for the industry to step up (including from Extinction Rebellion and school children from across the UK.)

HURDLES TO ACTION

Countries who blocked further action in general include Saudi Arabia, US, Brazil, and Cook Islands. On speed reduction in particular, opposition came from Chile and Peru.

“IMO’s decision to move up and tighten energy efficiency targets for some new ships is a modest but necessary step to combat climate change. Next, IMO will consider energy efficiency measures for existing ships to reduce emissions in the near-term.” Dan Rutherford, ICCT’s marine program director.

“IMO’s move shows that further efficiency improvements are still possible for fossil fueled ships. Future standards should promote new technologies like wind assist and eventually zero emission fuels like hydrogen and electricity.” Bryan Comer, senior researcher in ICCT’s marine program

However other NGOs argue that the agreed reduction rate from 2022, while bringing an end to the least efficient ships being built, is already being beaten by the most efficient ships built currently, and that much deeper reduction targets could have been set.

“Following four years of negotiations and countless meetings, IMO eventually admitted what was already evident for the scientific and environmental community: that it is not prepared to adopt rules that encourage technological innovation with EEDI regulation. IMO’s comfort zone is rather to timidly follow what the market has already delivered without regulation, and then take credit for it”. Faig Abbasov, Shipping Policy Manager at Transport & Environment

“What a shame that IMO continues to treat the EEDI as a way of describing what is already happening rather than mapping out a future pathway to decarbonisation.” John Maggs, Seas at Risk.

“The IMO this week recognized the need to address the climate impacts of shipping fuels — but it missed an opportunity by not focusing on policies that will drive zero-emissions fuels and vessels. At the next set of talks in November, countries in the IMO need to prioritize policies that drive investment in future-proof sustainable fuel supply chains.”

-Aoife O’Leary, Senior Legal Manager, Environmental Defense Fund

2) Speed reduction taken up for further development as short-term CO2 cutting measure

The context is the landmark Initial Strategy on Greenhouse Gases was agreed by countries at IMO last April, setting goals to peak emissions as soon as possible, reduce shipping’s carbon intensity by at least 40% by 2030, and to cut absolute GHG emissions by at least 50% by 2050 compared to 2008 levels.

This week at MEPC, countries were due to discuss Short-Term measures to start achieving these goals.

However no agreement could even be found on which of the 15 candidate measures to discuss first, with Saudi Arabia, Brazil, and the US objecting even to the word “prioritization”.

“Instead of discussing substance, countries discussed process.” said Faig Abassov at Transport and Environment.

Despite very slow progress, speed reduction remains on the table, despite fears by its proponents that it could be removed from the agenda at an early stage. The working group has inserted speed reduction and speed optimisation into one of three key packages to be worked on further at the next GHG working group in November.

“All the short term measures have been forwarded into a work stream,” said Abbasov. “Nothing has been taken off the table. It will be the task of the next session to prioritize the measures that will have the highest impact on shipping emissions.”

The GHG working group published a timetable showing that short-term CO2 cuts could still be achieved before 2023, as required in the Initial Strategy. However delaying actions from the above countries this week have put this deadline at risk.

Although no short-term measures were adopted at this MEPC, significant political shifts are happening around the need for short-term climate action from the sector.

One year ago, only the NGOs in Clean Shipping Coalition supported speed reduction of shipping to cut CO2.

Now the governments of France and Greece submitted official speed reduction proposals, and Malta has supported the idea from the floor.

Greece, the biggest shipowning nation, coming out in support of speed gave a new dimension to talks.

(Just like cars, giant container ships and tankers burn less fuel at slower speeds. Speed limits for ships could cut the sector’s giant emissions by a third. Shipping emits more GHG than all but the top 5 country emitters, almost a gigatonne a year, so getting this peaked and down in the short term would be a big win for the climate.)

Speed reduction of the global shipping industry to cut CO2 would have co-benefits for whales and dolphins of reduced underwater noise, and fewer collisions with ships causing injury and death to whales, helping endangered whale populations recover.

Japan and Denmark have also submitted decent proposals for tougher operational efficiency standards, which would indirectly result in lots of ships slowing down to meet them.

INDUSTRY SHIFTING
Over 100 shipping CEOs signed a joint letter to governments at IMO calling for global speed limits at sea, ahead of the latest round of talks.

Signatories include:

– the world’s largest listed crude oil tanker company, Euronav

–top 10 Dry Bulk shipping firms: Diana Shipping, Navios Maritime Holdings, Safe Bulkers, Star Bulk

–top 10 LNG shipping firm DYNAGAS

–French industrial giant Louis Dreyfus

–Greek shipping legends like Tsakos Shipping and Trading S.A.

The political context is that the industry is realizing its a fork in the road at IMO, and that either speed limits, or operational efficiency standards will be adopted to achieve the IMO’s short term GHG reduction goals.

“We’ve seen over 100 individual shipping companies united with NGOs in calling for speed reduction, overruling the policy stance of the industry associations,” said Faig Abbasov.

”The shipping industry associations no longer represent the best interests of shipping companies.”

SPOKESPEOPLE
Solomon Islands Permanent Secretary for the Ministry of Infrastructure and Development, Jimmy Nuake: JNuake@mid.gov.sb (one of the most active in fighting for 1.5 degree carbon budget for shipping as survival of his country at stake)

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Global demand upturn, IMO rule could boost Brent oil to $90 a barrel – BofA

De-escalation of a trade war could result in a weaker dollar and stronger global growth, which along with International Maritime Organization (IMO) changes to shipping fuel rules could raise Brent oil to $90 a barrel, Bank of America Merrill Lynch said.

“The new shipping fuel rules by IMO could result in the largest ever surge in middle distillate demand … The net result will likely be a large bump up in oil demand from the global power generation sector.”

The IMO’s mandated switch, due to take effect next year, will require fuels to have a sulphur content below 0.5%, compared with 3.5% now.

However, prices could dip to $50 per barrel if the U.S.-China trade war hurts consumer sentiment, which could eventually lead to an economic downturn, the bank said in a note dated May 16.

Oil rose to $73 a barrel on Friday, supported by a host of supply cuts and concern about further disruptions to Middle East shipments as tensions rise, and was heading for a weekly gain.

But oil inventories appear balanced, with supply (less Iranian/Venezuelan supply) and demand (less business cyclical demand) factors partly offsetting each other, it added.

“With military tensions rising in the Middle East and trade tensions rising between the U.S. and China, we believe that chances of a tail event driving Brent crude to these price extremes (are) higher than what option markets are currently pricing.”

December 2019 Brent options imply only a 10% chance of a jump above $90 per barrel and a 6% chance of prices falling below $50 per barrel, the bank said.
Source: Reuters

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Air Pollution and Energy Efficiency

 

Draft amendments to MARPOL Annex VI.

The Committee approved amendments to regulations 1, 2, 14, 18, 20 21 and appendices I and VI of MARPOL Annex VI, with a view to adoption at MEPC 75, which:

a. Provide definitions of sulphur content, low flashpoint fuel, MARPOL delivered sample, in-use sample and on board sample.
b. Require mandatory reporting of required and attained EEDI and other relevant information for ships subject to Regulation 21 (required EEDI).
c. Accelerate EEDI Phase 3 in 2022 (from 2025) and increase the reduction factors for specific ship types/sizes as follows (bold text indicates amendment to table 1 or table 2 of Regulation 21):

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d. Amend the EEDI reference line parameters for bulk carriers. (Increase the required EEDI for large bulkers above 279,000dwt). In table 2 of Regulation 21 (Parameters for determination of reference values for the different ship types), row 2.25 for bulk carriers is replaced by the following:

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e. Amend the Supplement of the IAPP Certificate for confirmation of the designated sampling point.
f. Simplify the verification procedure in appendix VI of MARPOL annex VI for the “MARPOL delivered fuel oil sample” and to add verification procedure for the “in-use sample” and the “on board sample”. To ensure a consistent approach to verifying the sulphur limit of the fuel oil delivered to, in-use or carried for use on board a ship until the entry into force of the approved amendments, the Committee approved MEPC.1/Circ.881 inviting Member Governments to apply the approved amendments related to the verification procedure, in advance of their entry into force.

Draft 2019 guidelines for consistent implementation of the 0.50% sulphur limit under MARPOL Annex VI.

Taking into account the 1 January 2020 global implementation of 0.50% sulphur limit for the fuel oil used on board and the 1 March 2020 carriage ban of non-compliant fuel, the Committee adopted the subject Guidelines which will be published as a Resolution shortly. The draft final fuel oil non-availability report (FONAR) is included in the Guideline. The FONAR is to include a description of the voyage plan, evidence of past attempts, and future plans, to obtain compliant fuel, operational constraints that prevented the use of compliant fuel and records of previously filed FONARs.

Draft 2019 guidelines for port State control under MARPOL Annex VI.

The Committee adopted amendments to the 2009 PSC Guidelines intended to provide basic guidance on the conduct of port State control inspections for compliance with MARPOL Annex VI and afford consistency in the conduct of these inspections, the recognition of deficiencies and the application of control procedures. The 2019 PSC Guidelines would be issued as an MEPC resolution to support the consistent and effective implementation of the global 0.50% sulphur limit. A new appendix included in the revised Guidelines, providing guidance to port State control officers in the case that non-availability of compliant fuel is claimed by a ship used the Fuel Oil Non-Availability Report (FONAR).

Draft Guidance for port State control on contingency measures for addressing non-compliant fuel oil.

The Committee approved the subject Guidance which will be published as MEPC.1/Circ.882. This new Circular provides guidance to the port State, flag State, ship-operators and other stakeholders concerned on how the ship should handle the remaining non-complaint fuel on board after a FONAR. In the case of non-compliant fuel oil, communication between the ship and the port State should occur. The ship and the port State should consider possible contingency measures like actions predetermined in the Ship implementation plan, discharging non-compliant fuel oil to another ship to be carried as cargo or to an appropriate shipboard or land-based facility, managing the non-compliant fuel oil, modifying sailing or bunkering schedules and/or retention of non-compliant fuel oil on board the ship. After the non- compliant fuel oil is completely used or discharged, further actions should include the possibility of cleaning and/or flushing through or dilution of remaining residues by using compliant fuel oil with the lowest sulphur content available

Draft MEPC circular on Guidance on temporary indication of ongoing compliance in the case of the failure of a single monitoring instrument, and recommended actions to take if the EGCS fails to meet the provisions of the guidelines

The Committee approved the subject Guidance as MEPC.1/Circ.884, applicable for those ships that will operate an exhaust gas cleaning system (EGCS) which will provide guidance to the attention of Administrations, port State control authorities, industry, relevant shipping organizations, shipping companies and other stakeholders concerned on how they should handle unexpected issues during the operation of an EGCS such as:

• System malfunction that leads to emission exceedance
• Short-terms exceedances of the applicable Emissions Ratio
• Interim indication of on-going compliance in the case of sensor failure,

Any EGCS malfunction that lasts more than one hour or repetitive malfunctions should be reported to the flag and port Stateʹs Administration along with an explanation of the steps the ship operator is taking to address the failure. At their discretion, the flag and port State’s Administration could take such information and other relevant circumstances into account to determine the appropriate action to take in the case of an EGCS malfunction, including not taking action.

Draft amendments to the 2018 Guidelines on the method of calculation of the attained Energy Efficiency Design Index (EEDI) for new ships (resolution MEPC.308(73)

The Committee adopted amendments to the current 2018 EEDI Calculation Guidelines introducing a new factor (fm) for ice-classed ships having IA Super and IA. The committee also noted and a new section 3 describing the information to be reported to the EEDI database for every ship subject to Regulation 21 (Required EEDI) for adoption at the next session.). Information to be reported are as follows:

1. applicable EEDI phase (e.g. phase 1, phase 2, etc.);
2. identification number (IMO Secretariat use only);
3. ship type;
4. common commercial size reference2 (see Note (3) in appendix 5 of these Guidelines), if available;
5. DWT or GT (as appropriate);
6. year of delivery;
7. required EEDI value;
8. attained EEDI value;
9. dimensional parameters (length Lpp (m), breadth Bs (m), and draught (m));
10. Vref (knots) and PME (kW);
11. use of innovative technologies (4th and 5th terms in the EEDI equation, if applicable);
12. short statement2 describing the principal design elements or changes employed to achieve the attained EEDI (as appropriate), if available;
13. type of fuel used in the calculation of the attained EEDI, and for dual fuel engines, the fDF gas ratio; and
14. ice class designation (if applicable)

The above information is not required to be reported for ships for which the required and attained EEDI values had been already reported to IMO.

2019 Guidelines for on board sampling for the verification of the sulphur content of the fuel oil used on board ships

PPR 6 had agreed to a draft MEPC circular on 2019 guidelines for on board sampling for the verification of the sulphur content of the fuel oil used on board ships which establish an agreed method for sampling to enable effective control and enforcement of liquid fuel oil being used on board ships under the provisions of MARPOL Annex VI. Following consideration, the Committee approved MEPC.1/Circ.864/Rev.1 (which supersedes the current MEPC.1/Circ.864) on the 2019 guidelines for on board sampling for the verification of the sulphur content of the fuel oil used on board ships

Draft MSC-MEPC circular on delivery of compliant fuel oil by suppliers

As instructed by MSC 100, PPR 6 had developed a joint MSC-MEPC circular addressing the delivery of compliant fuels by suppliers, with a view to approval by MEPC 74 and MSC 101.

According to the draft MSC-MEPC circular it is recommended that Member States should take appropriate action to ensure that fuel oil suppliers under their jurisdiction deliver compliant fuel oil. Parties undertake to ensure that appropriate authorities designated by them take action as appropriate against fuel oil suppliers that have been found to deliver fuel oil that does not comply with that stated on the bunker delivery note.

Following consideration, the Committee approved, subject to concurrent approval by MSC 101, the draft MSC-MEPC circular on delivery of compliant fuel oil by suppliers.

Guidance for best practice for Member States/coastal States.

The Committee approved the subject Guidance as MEPC.1/Circ.883, intended to assist Member States in carrying out their responsibilities under MARPOL Annex VI, to ensure effective implementation and enforcement of statutory requirements of that Annex mainly related with:

• on how to promote availability of compliant fuel oil:
• handling of notifications of the non-availability of compliant fuel oil
• fuel oil quality
• inspection of bunker delivery notes by competent authorities
• the maintaining of a register of local suppliers of fuel oil:

Recognizing the usefulness of a voluntary licensing scheme for bunker suppliers to help ensure the quality and compliance of fuel oil a new paragraph included at the end of the Guidance recommending Member States, or other relevant authorities, desiring to do so may decide to establish or promote a licensing scheme for bunker suppliers.

Miscellaneous

MARPOL Amendments for Electronic Record Books

The Committee adopted Resolutions MEPC 312(74) and 314(74) containing amendments concerning the acceptability of using electronic record books in lieu of paper record books which are scheduled to enter into force on 1 October 2020 for:

• MARPOL Annex I, Regs 1 and 17: Oil Record Book Part I (Machinery space operations) and Part II, Reg 36: (Cargo/ballast operations)
• MARPOL Annex II, Regs 1 and15: NLS Cargo Record Book
• MARPOL Annex V, Reg 1 and 10: Garbage Record Book
• MARPOL Annex VI, Reg 2, 12, 13 and 14: Ozone-depleting substances record book, the logbook on the on/off status of marine diesel engines for NOx Code Tier Standards and the logbook for fuel-oil-change-over operation when entering an ECA, and SOx log book.
• NOX Technical Code, Ch 1 1.3.20, Ch 6 6.2.2: Record Book of Engine Parameters

Supporting these amendments, the Committee adopted a MEPC resolution 318(74) on Guidelines for the use of electronic record books under MARPOL.

MARPOL Annex II Amendments – Cargo Residues/Tank Washings of Persistent Floating Products

The Committee approved resolution MEPC.313(74) containing amendments to MARPOL Annex II which regulate cargo residues and tank washings of persistent floating products with a high viscosity and/or a high melting point – persistent floaters. An approved MEPC.2/Circular contains a list of specific vegoils and waxes which are controlled by these amendments. When operating in the areas defined as North West European waters, Baltic Sea area, Western European waters and the Norwegian Sea the revised prewash procedure for persistent floaters shall be applied. This procedure is to be included in a revised and approved Procedures and Arrangements Manual. Appendix IV of MARPOL Annex II provides a format for this manual, and guidance on the subject of persistent floaters has been added.
Residue/water mixture generated during the prewash is be discharged to a reception facility at the port of unloading. Any water subsequently introduced into the tank may be discharged in accordance with the current discharge standards in MARPOL II, regulation 13.2:

• the ship is proceeding en route at a speed of at least 7 knots
• the discharge is made below the waterline through, and in accordance with the design of, the underwater discharge outlet
• the discharge is made at a distance of not less than 12 nautical miles from the nearest land in a depth of water of not less than 25 m.

The entry-into-force date of these amendments was adjusted to take place on 1 January 2021, to align with the entry into force of the related IBC Code Amendments.

NOx Technical Code Amendment – SCR Systems

The Committee adopted resolution MEPC.315(74) containing amendments to sub-paragraph 2.2.5.1 of the NOx Technical Code 2008 concerning certification requirements for Selective Catalytic Reduction (SCR) systems. The amendments continue to specify the established principles that:

• a NOx-reducing device is to be included within the engine’s certification;
• the device must be recognized as a component of the engine;
• the device must be recorded in the engine’s Technical File.

However, the amendments clarify the equivalency and application of Scheme B of the 2017 SCR Guidelines. In all cases, the applicable test procedure is to be performed and the combined engine/NOx- reducing device shall be approved and pre-certified by the Administration taking into account the amended 2017 SCR Guidelines noted below.

For engines not pre-certified on a test-bed in combination with the SCR, pre-certification in accordance with Scheme B of these Guidelines (which allows for analytic modeling to estimate the effect that the proposed SCR design and arrangement will have on the NOx emissions from the engine) may be applied. Under Scheme B, the pre-certification survey procedure may be accepted for an Individual Engine or for an Engine Group represented by the Parent Engine only, but it is not to be accepted for an Engine Family certification. The single applicant principle, that the applicant for certification should be the entity responsible for the complete engine system fitted with SCR, remains applicable.

Associated amendments to the 2017 Guidelines addressing additional aspects to the NOx Technical Code 2008 related to marine diesel engines fitted with Selective Catalytic Reduction (SCR) Systems (resolution MEPC.291(71)) were also subject to adoption in resolution MEPC.319(74).

IBC Code Amendment – Prewash Procedures and H2S Detection Equipment

The Committee adopted resolution MEPC.316(74) containing amendments to several chapters of the IBC Code. Amendments to chapter 15 will require that vessels carrying bulk liquids prone to H2S formation must be provided with H2S detection equipment. Toxic vapour detection instruments complying with
13.2.1 of the Code for testing for H2S may be used to satisfy this requirement.

The amendment made to chapter 16 introduces prewash requirements which are referenced from new paragraph 13.7.1.4 of MARPOL Annex II, for substances which are designated as persistent floaters.

Additionally, a complete replacement of chapters 17, 18, 19 and 21 has been issued to incorporate references to the above amendments. Carriage requirements for chemicals have also been reviewed, and toxicity categorization of products has been revised.

These amendments enter into force on 1 January 2021, for new and existing ships to which the IBC Code applies.

BCH Code Amendment – Prewash Procedures and H2S Detection Equipment

The Committee adopted resolution MEPC.317(74) containing amendments to chapters IV and V of the BCH Code which correlate to the amendments made to the IBC Code at this session. The amendment to chapter IV requires that vessels carrying bulk liquids prone to hydrogen sulphide formation under this Code must also be provided with H2S detection equipment. Toxic vapour detection instruments complying with 3.11.1 of the Code for testing for H2S may be used to satisfy this requirement.

Additionally, the amendment made to chapter V introduces prewash requirements which are referenced from new paragraph 13.7.1.4 of MARPOL Annex II, for substances which are designated as persistent floaters.

Marine plastic litter from ships

Following up on the work of the Correspondence Group on Marine Plastic Litter from Ships, the Committee approved the Terms of Reference for the IMO Study on Marine Plastic Litter from Ships. The terms of this study call for assessment of the availability of port reception facilities and recycling technologies available to ships, as well as assessment of the volume and types of plastic litter being collected during fishing operations. It was also recognized that other United Nations groups, such as GESAMP and FAO, are also conducting studies related to plastic litter in the ocean environment, and their findings should be considered. It is anticipated that the IMO Study on Marine Plastic Litter will be established in late 2020, after being informed by ongoing work in other United Nations group also researching this issue.

Furthermore, in support of the Action Plan to Address Marine Plastic Litter from Ships (Resolution MEPC.310(73)), the Committee developed a grouping of short-, mid- , long-term and continuous actions to address marine plastic litter from ships. Progress of mid- and long-term actions may be delayed pending outcomes of the above noted studies. However, short-term actions will be referred to relevant sub-committees to begin work. These include:

• Guidance to Member States on their responsibilities in enforcement of MARPOL Annex V on fishing vessels, and collection of information on accidental loss of fishing gear;
• Consideration of making the Garbage Record Book mandatory for ships of 100G GT and above;
• Improvement of seafarer training, through STCW Code, to increate marine environmental awareness for personnel on fishing vessels.
• Consider ways to communicate the location of lost shipping containers, and establish a compulsory system for declaration of lost containers.

This work to be undertaken on short-term measures is anticipated to begin in 2020, with the goal remaining to complete and implement actions by 2025.

Ballast Water Management

Appendix I of the BWM Convention (Form of the International Ballast Water Management Certificate)

The Committee agreed to an updated unified interpretation (UI) of appendix I (Form of the International Ballast Water Management Certificate) of the BWM Convention. Since MEPC 74 is the last session of the Committee before the BWMS Code’s effective date is 13 October the 2019the UIwill also become applicable on 13 October 2019. Considering that the 2016 Guidelines for approval of ballast water management systems (G8), adopted by resolution MEPC.279(70), will be revoked when the BWMS Code takes effect, the references to the Guidelines (G8) in the original UI have been replaced with references to the BWMS Code in the updated UI.

The Committee approved amendments to the form of the International Ballast Water Management Certificate. The amendments add a selection of “other approach in accordance with regulation” in addition to the current selections (in accordance with regulation D-1, or D-2, or D-4) under “The principal Ballast Water Management method(s) employed on this ship is/are” with a view to adoption by MEPC 75.

Revised Data Gathering Analysis Plan for the experience-building phase

The Committee approved a revision of the circular for data gathering and analysis plan for the experience- building phase associated with the BWM Convention (BWM.2/Circ.67/Rev.1).

Amendments to Regulation E-1 of the BWM Convention (including BWM System Commissioning Test)

The Committee approved amendments to regulations E-1.1 and E-1.5 of the BWM Convention – survey and certification requirements for ballast water management adding confirmation that a commissioning test has been conducted to validate the installation of any BWMS to demonstrate that its mechanical, physical, chemical and biological processes are working properly, taking into account guidelines developed by the Organization.

BWMS Commissioning Testing

The Committee endorsed the view that commissioning testing should begin as soon as possible in accordance with BWM.2/Circ.70. As an interim measure, the Committee urges Administrations to provide the Recognized Organizations, which act on their behalf, with written and clear instructions in relation to the conduct of indicative analysis testing at the time of their commissioning on ships that fly their flag; including what actions are to be taken in the event of testing demonstrating non-compliance.

BW Management System Approvals

Basic Approval was granted by the Committee for CleanBallast® – Ocean Barrier System submitted by Norway. CleanBallast – Ocean Barrier System treats ballast water by filtration and in-line electrochlorination during uptake and neutralization with sodium thiosulfate at discharge.

Basic Approval was granted by the Committee for the FlowSafe Ballast Water Management System submitted by Cyprus. FlowSafe uses a SeaWater Conditioning Unit (SWCU or Trident Unit) and a side- stream electrochlorination unit during uptake and, as needed, sodium thiosulfate for neutralization during discharge.

Final Approval was granted by the Committee for the Envirocleanse inTank™ (Bulk Chemical Variation) submitted by Norway. The Envirocleanse inTank™ Bulk Chemical Variation injects sodium hypochlorite as the Active Substance after uptake based on concentration-time (CT) treatment approach. During the voyage, in-tank recirculation is used to monitor residual oxidant levels and redoes as needed to achieve the minimum target CT and, prior to discharge, in-tank recirculation to check for residual oxidant levels and apply sodium thiosulfate to neutralize any remaining oxidant.

Final Approval was granted by the Committee for the MICROFADE II submitted by the Netherlands. MICROFADE II uses a filter and injection of sodium dichloroisocyanurate dihydrate (SDCC) as an Active Substance during uptake and sodium sulfite for neutralization during discharge.

Final Approval was extended by the Committee for the Purimar™ Ballast Water Management System submitted by the Republic of Korea on freshwater. The Purimar BWMS uses a filter and side-stream electrochlorination during uptake and sodium thiosulfate for neutralization during discharge.

Final Approval was not granted for JFE BallastAce® that makes use of NEO-CHLOR MARINE® submitted by Japan.

IMO Strategy on GHG Emissions

The Committee continued to develop their method of work to implement the Initial IMO Strategy on reduction of GHG emissions from ships (resolution MEPC.304(72)) and considered how to formally progress on the development of candidate measures into actionable steps in the reduction of GHG emissions from ships.

Procedure for Assessing Impacts on States of Candidate Measures

The Committee approved the Procedure for Assessing Impacts on States of Candidate Measures, which will be released as a MEPC Circular. For States and organizations who are proponents of a given candidate measure to reduce GHG emissions, this procedure requires the proponent to submit an initial impact assessment as part of their proposal to the Committee. Documents commenting on this proposal may be submitted up until the next meeting of the Committee. If any clarifications are requested, the proponent will have until the following meeting of the Committee to provide a comprehensive response.

At that stage, if the Committee so decides, a comprehensive impact assessment would be initiated, taking into account the comments raised and a detailed qualitative and/or quantitative assessment of specific negative impacts on States.

If no commenting documents are submitted during designated period for comments, then the Committee may consider whether a comprehensive impact assessment is required, or if sufficient detail has already been submitted in the initial impact assessment for development of new regulation to proceed.

Commencement of the Fourth IMO GHG Study

Continuing the progress made at the Intersessional Working Group on GHG Reduction, the Committee approved the Terms of Reference which will govern the 4th IMO GHG Study. The terms of the study will require collection of data on global emissions of GHGs emitted from ships of 100 GT and above engaged in international voyages. This inventory of emissions will focus on the period from 2012 to 2018, as far as statistical data are available, and will seek to differentiate emissions from domestic voyages as compared to international voyages. The study will also provide a projection of transport demand and shipping emissions out to 2050.

The Terms of Reference for the study also provide the criteria by which potential tenderers of the study will be evaluated. The Committee has requested the IMO Secretariat to issue the Invitation to Tender, and organizations applying to assist the IMO in conducting this study will have until the end of June 2019 to submit their bids. A steering committee of Member States will also be established to participate in the evaluation of applicants. The IMO will consider their recommendation and will award the contract for this study in October 2019.
With these guiding principles in place, the Committee agreed to initiate this process, and anticipates receiving the final report of the 4th IMO GHG Study at MEPC 76 in Autumn 2020.

Streamlining of Proposals on Candidate Short-term Measures

In support of progressing the ambitious goals of the IMO Initial Strategy on GHG Reduction, numerous proposals of candidate measures to reduce GHG emissions in shipping have already been submitted by Member States for consideration. A total of 37 proposals have been noted so far, which were initially categorized into 14 different approaches to address these emissions. The Committee noted that there were multiple interlinkages between these different approaches, and have streamlined them into 3 approaches for further development:

a. Consideration of proposals to improve the operational efficiency of existing ships, with a view to developing amendments to Chapter 4 of MARPOL Annex VI (and associated guidelines, as appropriate);
b. Consideration of proposals to reduce methane slip and emissions of Volatile Organic Compounds (VOCs); and
c. Consideration of proposals to encourage uptake of alternative low-carbon and zero-carbon fuels, including the development of lifecycle GHG/carbon intensity guidelines for all relevant fuel types (and associated incentive schemes, as appropriate).

Proposals for candidate measures to reduce GHG emissions will be considered under one of these three approaches, which will also help facilitate the comparison of impact assessments for each proposal.

Cooperation between Port and Shipping Sectors on GHG Emissions

The Committee adopted Resolution MEPC.323(74), calling for voluntary cooperation between the port and shipping sectors to facilitate the reduction of GHG emissions from ships. As discussed in the IMO Initial Strategy on GHG Reduction, it was acknowledged that cooperation between ports and the maritime industry would be needed to aid in the reduction of GHG emissions of the maritime transport system. This resolution calls for Member States to address this at ports within their jurisdiction through initiatives such as improving onshore power supply to ships at dock (and providing that power from renewable energy sources), increasing access to bunkering of alternative low-carbon fuels, and supporting the optimization of port calls.
Source: ABS

 

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Violations of IMO 2020 Emissions Rules for Shipping Could Hit Insurance Cover

 

Tougher rules on sulfur emissions from ships will come into effect next year in the biggest shake-up for the oil and shipping industries for decades.

United Nations shipping agency the International Maritime Organization (IMO) met in London this week for the only Marine Environment Protection Committee (MEPC) session this year and will fine tune guidance.

What will the regulations mean for users and makers of marine fuel?

IMO 2020
From January 2020, the IMO will ban ships from using fuels with a sulfur content above 0.5%, compared with 3.5% now.

Only ships fitted with sulfur-cleaning devices known as scrubbers will be allowed to continue burning high-sulfur fuel. Ship owners can also opt for other sources of cleaner fuel such as liquefied natural gas (LNG).

Failure to comply with the global regulations will result in fines or vessels being detained, which could affect vital requirements such as insurance cover. The actual enforcement will be policed by flag and port states rather than the IMO.

The regulations are aimed at improving human health by reducing air pollution.

A study cited by the IMO says over 570,000 premature deaths will be prevented between 2020 and 2025 by the introduction of the tighter guidelines.

Refineries separately face significant costs to adapt to the new fuel specifications.

Can the Rules Be Stopped?
Towards the end of last year there had been some industry concerns over whether there would be enough time to prepare for the start of the regulations, even though the measures were fully adopted in 2016.

Given the complex IMO process involved in changing regulations, which would require an estimated 22 months for any amendments to take effect, there will not be enough time to delay the date and the changes will go ahead.

Analysts still question whether there will be full enforcement by flag and port states.

Will There Be Enough Low Sulphur Fuel?
Oil majors including BP and Royal Dutch Shell have announced they are producing very low sulfur fuels that meet the 0.5% requirements.

One of the major issues is whether there will be enough quantities of compliant fuel around ports across the world, which is vital for ships planning sailings.

While major fuel bunkering ports such as Singapore, Fujairah in the United Arab Emirates and Rotterdam in the Netherlands are expected to have compliant-fuel supplies, analysts and shipping firms point to concerns over what happens at smaller ports.

The IMO approved at the MPEC session a standard format for what it called a “fuel oil non-availability report,” which can be presented to a port state in the event that only non-compliant fuel was available for a vessel to use.

The International Chamber of Shipping association has warned ship owners that such mechanisms were a “tool of last resort” and should not be seen as a “free pass” either to use or carry non-complaint fuel.

Are There Any Safety Issues with the New Fuel?
It remains unclear what impact there will be over mixing very low sulfur fuels of 0.5% together, which at this stage have not been fully tested on ship engines. One of the risks is that the level of sediment created could damage engines at sea.

A test video by BP showed the effect of mixing two compliant and stable but incompatible marine fuels with 0.5% sulfur content: https://www.bp.com/en/global/trading/crude-oil-and-refined-products/marine/marpol/marpol-video-library.html

The IMO is working on guidance to avoid mixing different fuel batches.

However, with potential for bunker fuel contamination after major problems in 2018, this issue continues to raise worries.

What About Scrubbers?
Apart from the use of low sulfur fuel of 0.5%, there is still an issue over whether jurisdictions and ports could restrict the use of certain types of scrubbers due to uncertainty over the effects of the waste water that gets pumped into the sea.

Ten environmental groups have called on the IMO to impose an immediate ban on the use of scrubbers.

Users of the devices argue that there is no conclusive scientific research showing that discharges from open loop scrubbers – which wash out the sulfur – cause environmental harm and their use was safe. Analysts say there is still the possibility of tighter restrictions, which would add to the costs of those investing in them.

The IMO has encouraged further study into the impact of scrubbers on the environment.

What About Future Regulations?
The IMO is also pressing ahead with imposing tougher targets for cutting CO2 emissions from ships compared with 2008 levels in a phased process up to 2050.

Many companies remain concerned about making investment decisions given expectations of more regulation.

“These future regulations may result in shippers switching to alternative non-petroleum fuels such as LNG,” the U.S. Energy Information Administration said in March.

“Because of this uncertainty, refiners and shippers may be hesitant to invest in complying with IMO 2020 if additional IMO regulations in the future could cause those investments to lose value or no longer be needed.”

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Chevron Marine Lubricants to put Global Sulphur Cap and cylinder oil lubrication in the spotlight

Chevron Marine Lubricants will use this edition of the Nor-Shipping international maritime trade show held in Oslo, Norway between June 3-7, to explore IMO 2020 solutions including the new Taro® Ultra range of Global Sulphur Cap-ready cylinder oil lubricants, drip oil analysis DOT.FAST® testing program and FAST™ equipment condition monitoring service.

As the global shipping industry prepares for the arrival of the Global Sulphur Cap in January 2020, the operation of ships in a multi-fuel future is a fast approaching reality. Lubricants are essential to the smooth operation and service life of propulsion machinery, but their optimal use is highly dependent on fuel sulphur content.

Regardless of the compliance route chosen, bunkering low sulphur fuel alternatives—versus installation of scrubbers on board- cylinder oil lubricant use will be impacted. The use of one type of fuel oil by the majority of the global fleet accompanied by one type of lubricant will soon become a thing of the past. In the post-2020 industry, the role of the cylinder oil lubricant will become ever more crucial in protecting the engine.

Choosing the right cylinder oil with the correct BN and feed rate can be particularly challenging for ship owners navigating the shift to meeting compliance requirements and bunkering different types of fuel. Having launched the new Taro Ultra range of cylinder oil lubricants in in September 2018, Chevron will use Nor-Shipping to advise and educate the ship owning community on transitioning their cylinder oil lubricant use in preparation for fuel sulphur-constricted operations in 2020.

Chevron will also host a seminar to explore key trends impacting shipping in the run up to the implementation of IMO 2020 emissions legislation on June 4 at 13.00.

During the seminar, Chevron experts and invited speakers will deliver the latest update regarding the IMO 2020 regulation will be discussed, 2020 fuel oil quality aspects as well as guidance on potential operational aspects related to supply and use of 0.50% S fuel oils. The seminar will also provide attendees with the opportunity to explore both lubricant and fuel issues that affect the industry globally and Chevron will provide an update on developments regarding Chevron Marine Lubricants products and services in preparation for 2020. There will be an opportunity for networking and to meet some of Chevron Marine Lubricants team.

Monique Vermeire, Chevron Fuels Technologist, will be speaking at this event. Monique is a member of the CIMAC Fuel Oil WG7, convener of the ISO Classification and Specification of Marine Fuels Working Group and represents Chevron in other industry organizations such as IPIECA and EI.

Additionally, Ian Thurloway our Brand and Marketing Manager will be speaking. Ian has over a decade worth of experience and knowledge within the Marine industry and has been a key member involved in the roll out of Chevron’s new cylinder oil range. Ian has vast experience across the Chevron businesses having had roles in trading, aviation and business development before returning to marine lubricants in 2016 and has a degree in mechanical engineering and diesel technology.

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Oil firms struggle to meet IMO 2020 clean fuel for ships

 

Barely eight months to the take-off of the new shipping fuel regulations by the International Maritime Organisation (IMO), oil firms and refiners have begun jostling for significant share of the new fuel market created by the shipping sector.To this end, some of the leading oil companies have introduced new sulphur-content-compliant oil, while others are wooing shipping firms to Liquefied Natural Gas (LNG) for vessels under the new regime.

By The Guardian’s evaluation, the shipping firms appear on top of the game, as they continue to weigh the options; the costs and market implications. The shippers are worried about the cost of shipping. Maritime nations are shaping strategies for smooth compliance. But the oil firms are smiling and working hard to break new grounds.The first in the race is Petrobras (the Brazilian oil giant), which has just produced and supplied its first batch of IMO 2020-compliant marine fuel.

The fuel oil was produced in the 45,000-barrel per day (bpd) Isaac Sabba Refinery in Manaus, Brazil. According to Petrobras, it has 0.34pc sulphur content, viscosity of 323cst at 50°C, and density of 932.7 kg/m3 at 15°C. A batch of 618t was supplied on April 21st to a vessel it chartered.

However, Petrobras is yet to determine how it will price its IMO 2020-compliant fuel, while awaiting more clarity in the market.
Also, other Petrobras’ Brazilian refineries are testing production of IMO 2020-compliant fuel oil, even as the company does not plan to market high-sulphur fuel oil to vessels with scrubbers after the marine fuel regulation begins next year Industry sources said refiners are now testing a series of blends of low sulphur fuels, and trial results are expected to be available over the next several weeks.

Barring any unforeseen circumstances, the IMO’s bunker fuel regulations come into effect on January 1, 2020. The sulfur content limits in bunker fuels used outside the designated Emission Control Areas (ECAs) will be reduced to 0.5% (from 3.5%) to reduce air emissions from shipping.

High sulphur fuel oil (HSFO) currently represents nearly 80% (approx. 3.84 million bpd) of the 5.0 million bpd global bunker demand, which will become non-compliant. Essentially, ship owners have three options: 1) Switch to compliant fuels, such as oil products with low sulphur content or alternative fuels such as LNG; 2) Install SOx scrubbers (exhaust gas cleaning systems); or 3) Fail to comply with regulations (non-compliance).

In preparation for IMO 2020, Shell Marine has also introduced Shell Alexia 4, a new two-stroke engine cylinder oil specifically for use with engines running on 0.5% sulphur content or very low sulphur fuel oil (VLSFO). With a base number of 40, Shell’s Alexia 40 has been developed to optimise equipment performance and condition as ship owners and charterers prepare for the IMO’s 0.50% global sulphur limit for marine fuels in 2020.Shell Marine expects most of the world’s shipping fleet will aim to comply with IMO 2020, by switching to fuels with a sulphur content of 0.5% and below.

Shell Marine Global General Manager, Joris van Brussel, said: “Shell Marine can help ship owners and charterers be prepared, as the world moves to a low emissions future. As a trusted partner, we will help our customers to have the right lubricants in the right place at the right time to take the uncertainty out of fuel selection.”

After extensive testing at Shell’s Marine & Power Innovation Centre in Hamburg, and working closely with original equipment manufacturers, Shell Alexia 40 has undergone thousands of hours of trials on board four ships with the latest engine types, using representative IMO 2020-compliant fuels, to verify performance at sea.

The new product will be available for use in Singapore from June 1, 2019, and will be gradually introduced to other main supply ports within the Shell Marine global network such as the U.S., China, United Arab Emirates, and the Netherlands before January 1, 2020.
Meanwhile, the DNV GL and Keppel Marine and Deepwater Technology (KMDTech), a subsidiary of Keppel Offshore & Marine (Keppel O&M), have signed a framework agreement to boost the uptake of liquefied natural gas (LNG) as ship fuel.The agreement, according to the partners, covers potential new building projects including LNG bunker vessels, small-scale LNG carriers and floating storage regasification units (FSRUs), as well as LNG related assets employing battery and hybrid technologies. Raystad Energy Research and Analysis estimated that around 700,000 bpd of VLSFO will be available in 2020, rising sharply to 1.3 million bpd in 2025.“In 2020, we estimate that another 600,000 bpd of marine fuel demand will be satisfied by blends manufactured from existing low-sulphur fuels, middle distillates and high sulphur fuel oil.

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Chevron Marine Lubricants Publishes New 2020 Global Sulphur Cap White Paper

Chevron Marine Lubricants has released the second in a series of new white papers focusing on innovations and developments impacting the fast-changing shipping industry.

This latest white paper, entitled ‘The 2020 Global Sulphur Cap and the role of cylinder oil lubricants’ explores the impact of ships burning fuels with differing sulphur contents to heavy sulphur fuel oil cylinder oil use. The paper also offers advice form Chevron Marine Lubricant experts on how to manage the transition between cylinder oils pre-and post-2020.

As the global shipping industry prepares for the arrival of the global sulphur cap in January 2020, the operation of ships in a multi-fuel future is a fast approaching reality. Lubricants are essential to the smooth operation and service life of propulsion machinery, but their optimal use is highly dependent on fuel sulphur content. A diversified marine fuel mix demands tailoring lubricant selection to fuel sulphur content to ensure compatibility with fuels bunkered across a fleet.

With an entry into force date of January 1, 2020, stricter fuel sulphur content restrictions imposed on the global fleet has put the industry on the verge of what will be the most significant period of change in the past decades. Under the new rules, ships must burn fuels with a sulphur content of no more than 0.50% m/m or a maximum equivalent emission output. This is a significant drop from the current limit of 3.50% which has been in effect since 1 January 2012.

Lubrication is the lifeblood of an engine, the dominant function of cylinder oil being to protect the engine from acidic corrosion. Regardless of the compliance route chosen, bunkering low sulphur fuel alternatives versus installation of scrubbers on board, cylinder oil lubricant use will be impacted due to its synergetic relationship with the sulphur content in fuel.

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The new range of Taro® Ultra lubricants will be phased in throughout 2019

Chevron is a leader in providing complete and reliable lubrication solutions for ships using virtually any fuel type. Its new full range of Taro® Ultra cylinder lubricants, from the low 25 BN Taro® Ultra 25 to the new 140 BN Taro® Ultra 140, provide solutions for the complex operating requirements of today, and tomorrow.

Alongside the use of Chevron’s Taro® Ultra cylinder lubricants, Chevron’s DOT.FAST® service is used to optimise engine lubrication and manage feedrates. DOT.FAST® provides both on-board and onshore analysis of drip oil giving an accurate measurement of total iron wear, including corrosive wear. Combining both a drip oil analyser for iron wear and a BN tester, it is the best such service in the market today.

Ian Thurloway, Brand and Marketing Manager for Chevron Marine Lubricants says: “As an industry leader with one of the best supply networks in the world and a full range of products to meet the diverse range of needs of both today and tomorrow, Chevron remains committed to providing reliable solutions for the marine fuels of the future. To meet the uncertain demands of 2020, Chevron’s global supply network has been further strengthened to provide a robust, flexible and agile model to ensure supply in a changing landscape. From ship visits to FAST and DOT.FAST fluid analysis, Chevron’s world-class technical support team hold the expertise to help you transition to 2020.”

https://www.chevronmarineproducts.com/content/dam/chevron-marine/white-papers/Chevron_Global Sulphur Cap White Paper_1_DESKTOP.pdf

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IMO 2020 could create fierce competition for scarce water resources

The International Maritime Organization (IMO) regulations set to take effect in 2020 have sparked mountains of research on the expected costs for the energy and maritime sectors. Less thought has been given to IMO 2020’s environmental consequences, especially on water demand.

The US refining complex will need more water than ever before after IMO 2020 comes into effect. This conclusion is based primarily on forecasting from S&P Global Platts Analytics and the US Energy Information Administration along with the findings of recent academic research.

 

The sheer scale of this issue is difficult to appreciate, but simply considering the US refining complex processed some 17.2 million b/d in 2018, using approximately 1.5 barrels of water for each barrel of oil, any marginal increase in the sector’s water usage demand is worth discussing.

Energy and water are connected

Without a doubt, modern societies could not exist without sufficient energy or water and, vexingly, their production is highly interdependent. In other words, producing one tends to require a vast amount of the other. Scholars have named this problem the “energy-water nexus” and solving it will be one of the greatest challenges of the 21st century, given this interdependency should become more dramatic over time.

The International Energy Agency (IEA) says the global energy complex accounts for about 10% of global water withdrawals, or the amount of water removed from the source, and about 3% worldwide water consumption, defined as the volume of water withdrawn but not returned to the source. By 2040, water consumption by the energy sector is expected to rise by almost 60% to over 75bcm, compared with 2014 levels.

Most of the energy sector’s water demand comes from electricity, but creating liquid transport fuels is another thirsty business, because each refinery processing units needs ample water for cooling. Diving a bit deeper, Estimation of US refinery water consumption and allocation to refinery products, a paper authored by a group of scholars with the Argonne National Laboratory and Jacobs Consultancy last year, offers a look not only at the amount of water needed to make various refined products, but also at how those figures are sensitive to refinery complexity.

The authors modelled three different refinery configurations: cracking, light coking, and heavy coking. They assumed the simplest configuration uses light, sweet crude while the most complex refinery uses heavier, sour barrels. The research is nuanced, but it broadly shows a refinery’s water needs will rise higher if the crude processing rate increases; if the facility becomes more complex, adding more processing units; and if the crude slate becomes sourer and/or heavier.

Most crucially for IMO 2020, the research shows that destroying high sulfur fuel oil through a heavy coking system to make more diesel is highly water intensive. Diesel at a simple cracking refinery uses about 0.2 gallons of water per gallons of water, while a heavy coking refinery uses double that. These findings have critical implications for water demand, given expectations for the post-IMO 2020 oil sector.

Refining shifts towards cleaner fuels

The regulations coming into force next January will move the maximum sulfur cap for marine fuels on the high seas down to 0.5% from the current 3.5%. Platts Analytics predicts this adjustment will cause more than $1 trillion to change hands from 2020 to 2025 as refiners and oil producers cash in on the production of cleaner, more expensive marine fuels.

Almost overnight, makers of bunker fuel will have to find a way to replace 3 million b/d of high sulfur fuel oil, which will no longer be compliant with marine fuel regulations. Platts believes the missing fuel oil in the global bunker pool will be supplanted by 1.3 million b/d of new low sulfur fuel oil paired with as much as 2 million b/d of increased distillates for bunkering.

graph showing forecast demand for different bunker fuels, to 2030

Refiners will achieve this by adding new, more complex refinery units, combined with stronger refinery runs. Platts Analytics expects the global refining complex’s conversion capacity will grow by 1.7 million b/d from 2017 to 2020, which should help destroy as much 1.6 million b/d of high sulfur fuel oil. According to IMO data, global coking capacity and hydrocracking capacity will grow by 35% and 37% respectively between 2012 and 2020.

Go deeper: S&P Global Platts special report on the future of fuel oil after IMO 2020

In the US, the EIA forecasts the refining complex will process 17.9 million b/d in 2020, an all-time high. Margins on diesel production could double after the sulfur cap goes into effect, and the EIA predicts US distillate refinery yields will increase from 29.5% of US production in 2018 up to 31.5% of US production in 2020. Residual fuel yields should meanwhile decrease from an average of 2.4% in 2018 to an average of 2.2% in 2020.

Speaking on the Platts Capitol Crude podcast series in February, Susan Grissom, chief industry analyst for the trade association, American Fuel & Petrochemical Manufacturers, said US refineries with sufficient complexity to run heavier, more sour crude slates will be best positioned to reap the gains of IMO 2020.

This will be because simpler refineries, especially outside the US, will need to pay steeper premiums for lighter, sweeter barrels if they wish to increase middle distillate creation.

This view seems to gel with Platts Analytics’ forecasting, which foresees low sulfur versus high sulfur crude oil spreads widening “sharply” with the 30 API Mars crude discount to Light Louisiana Sweet Crude at 38 API in 2020 nearly doubling from 2018. With sweet-sour spreads widening, “deep conversion refineries will see much stronger margins as they produce essentially all light products and no fuel oil, and they can do that using ‘cheap’ heavy high sulfur feeds,” Platts Analytics said in an April 2018 report, Making Waves. Despite higher prices for light, sweet crudes, simpler US refineries will also run at higher rates: “even cracking refineries should see healthy margins.”

Refineries and rivers

Higher refinery runs, heavier crude slates, the addition of new conversion units, and increased high sulfur fuel oil destruction to boost distillate output all point to the same inescapable conclusion: more water than ever before will be needed to run the US refining complex in 2020. What’s more, the global refining complex will continue to grow more sophisticated after 2020. To get a sense of what this could mean for individuals and businesses, just look to Galveston County, Texas. That is where the Marathon Petroleum Galveston Bay Refinery and Valero Texas City Refinery are located, with a combined capacity of nearly 800,000 b/d.

By virtue of its location, this mini-refining hub gets 100% of its water from the Brazos River under the auspices of the Gulf Coast Water Authority, an independent government agency. These refineries compete with over 18,000 acres of irrigated rice crops in the region, the 50 million gal/d Thomas S. Mackey Water Treatment Plant, and other industrial users such as a Dow Chemical Plant, for allocations of river water.

In this microcosm transport fuels, consumer goods, food, and drinking water are all in competition for the same increasingly scarce river water. If these refineries increase their utilization rates without decreasing their water footprint after IMO 2020, it will heighten competition for water in an area that has already dealt with shortages.

According to environmental consultancy SWCA, “the Brazos’ 2011–2015 drought period was the worst in recorded history” for certain parts of the river, and the risk of drought can only worsen, given the Brazos River Basin population could swell to 5.4 million people by 2060. On the bright side, because refining companies know water is a critical input for their business models, they have a constructive role play in its conservation.

In a report for investors last year, Marathon Petroleum said: “Since taking ownership of our Galveston Bay refinery in 2013, we have been implementing a water optimization program that has already reduced water consumption by over 750 gallons per minute.” “We are currently studying a reverse osmosis process that would enable the reuse of treated wastewater effluent in the refining process,” the report continued.

“This effluent reuse could potentially reduce water usage by another 4,000 gallons per minute and make operations more sustainable in the event of drought.” Marathon Galveston Bay claims to be the second largest refinery in the US with a Nelson Complexity index ranking above 15: it is precisely the kind of facility Platts expects will ramp up distillate output after IMO 2020, using more water than ever before.

Drought risk and policy

But as the Gulf Coast Water Authority warns, “even senior water rights will not meet customer demands in low river flows.” In other words, a prioritized legal right to use water from the Brazos will not do these refineries much good during a severe drought. This will only get worse after IMO 2020 comes into effect but it is by no means unique to Galveston County: the US Department of Energy estimates refineries across the country will have to spend more than $10 billion over the next 50 years to ensure they have access to adequate water supplies.

The situation along the US West Coast may be especially challenging as refineries there get about half of their water from municipal or city water sources and the region is especially vulnerable to drought. California – home to 16 different refineries – recently signed new legislation to permanently place restrictions on urban and agricultural water usage to help cope with future droughts. While those restrictions may affect each refinery differently, they raise an obvious question: to what extent will California facilities be able to increase refinery runs after IMO 2020 if they have less water at their disposal?

It is almost certain the US refining complex will consume more water after IMO 2020. While Trucost, part of S&P Global, says that the switch to cleaner marine fuels should save billions in healthcare costs, there may be unintended and unforeseen costs in the amount of water – and money – it will cost to produce them. The lesson is that solutions to problems at a global scale will always require difficult choices and tradeoffs – in the case of IMO 2020 the exchange of potentially vast amounts of water for cleaner air. Only time will tell if this price was right.

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