IMO 2020 could create fierce competition for scarce water resources

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the amount of water removed from the source, and about 3% worldwide water consumption, defined as the volume of water withdrawn but not returned to the source.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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IMO issues more guidance on sulfur limit, uncertainty on scrubbers persists

 

The International Maritime Organization has issued additional guidance over the implementation of the lower 0.5% sulfur limit on bunker fuels that goes into effect from January 1, 2020, according to a statement Monday.

The guidance includes sections on the impact of fuel and machinery systems resulting from new fuel blends or fuel types, as well as clarifications on control mechanisms and a standard reporting format for non-availability of fuel oil.

Member states also approved the 2019 guidelines for on-board sampling for the verification of the sulphur content of the fuel oil used in ships.

The additional guidelines seek to lift some of the uncertainty surrounding the implementation of the lower sulfur caps in the year ahead.

However, on the topic of exhaust gas cleaning systems, also known as scrubbers, uncertainty remains.

The Marine Environment Protection Committee approved a new output on the “evaluation and harmonization of rules and guidance on the discharge of liquid effluents from exhaust gas cleaning systems into waters, including conditions and areas” in the 2020-21 biennial agenda of the Pollution Prevention and Response sub-committee.

There is significant variation on the guidelines surrounding the potential use of open-loop scrubbers among IMO member states, which the committee seeks to address, albeit in 2021 — one year after the lower sulfur cap goes into effect.

Open-loop scrubbers send water used to clean emissions back into the sea while closed-loop scrubbers retain the emissions for disposal at port.

However, countries remain divided over open-loop scrubbers due to environmental concerns over the discharge of polluted washwater into the sea.

As a result, some countries have started banning the use of open-loop scrubbers in their port waters, necessitating either the use of closed-loop scrubbers or lower sulfur marine fuels.

In January, the Port of Fujairah said it was banning the use of open-loop scrubbers in its port waterswhile Singapore is set to implement a ban from January 1, 2020 and China has already banned their use within its emission control areas covering inland waters and most of its coastline.

Other countries with bans or restrictions are India, Belgium, Germany, Lithuania, Latvia, Ireland, Norway and parts of the US.

According to the latest data from DNV GL, the Norwegian accredited registrar and classification society, the total number of ships in operation and on order with scrubbers fitted rose to 3,286 in May.

Of that total, 2,419 are retrofits and 867 newbuilds, according to DNV GL data.

Some 80% of scrubbers fitted or to be fitted to ships are open-loop scrubbers, while 16% are hybrid scrubbers enabling ships to operate in both open and closed loop.

Hence, the potential ban on the most widespread type of scrubber in some ports continues to cause significant uncertainty on the shipping markets.

The appeal of scrubbers is that they will allow shipowners to avoid paying higher prices for compliant fuel and continue to buy high sulfur fuel oil, which is expected to price considerably below very low sulfur fuel oil.

S&P Global Platts assessed FOB Rotterdam 0.5% marine fuel for Cal20 on the swaps forward curve at $528/mt Monday, compared with $329/mt for FOB Rotterdam for 3.5% fuel oil barges.

The MEPC also requested that an expert team be established to assess the available evidence relating to the environmental impact of discharges of exhaust gas cleaning system effluent, with a view to reporting its findings to the PPR.

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Sulphur 2020 implementation – IMO issues additional guidance

 

The International Maritime Organization (IMO) has approved and adopted a comprehensive set of guidance and guidelines to support the consistent implementation of the lower 0.50% limit on sulphur in ships’ fuel oil, which will enter into effect from 1 January 2020. Related draft MARPOL amendments were also approved

The 2020 rule will bring in considerable benefits for the environment and human health. The stricter limit will be applicable globally under IMO’s MARPOL treaty. (In designated emission control areas (ECAs), the sulphur limit will remain at 0.10%.)

The 1 January 2020 implementation date was adopted in 2008 and confirmed in 2016. IMO has been working with Member States and the industry to support implementation of the new limit, including the preparation of amendments to MARPOL Annex VI and development of guidance and guidelines.

Enforcement, compliance with and monitoring of the 2020 sulphur limit is the remit and responsibility of States Party to MARPOL Annex VI. Most ships are expected to utilize new blends of fuel oil which will be produced to meet the 0.50% limit on sulphur in fuel oil or compliant marine gas/diesel oil.

 

 

Guidance on 2020 sulphur limit

The IMO Marine Environment Protection Committee (MEPC), meeting for its 74th session (13-17 May):

  • Adopted 2019 Guidelines for consistent implementation of the 0.50% sulphur limit under MARPOL Annex VI – with sections on the impact on fuel and machinery systems resulting from new fuel blends or fuel types; verification issues and control mechanism and actions, including port State control and samples of fuel oil used on board; a standard reporting format for fuel oil non-availability (fuel oil non-availability report (FONAR); and possible safety implications relating to fuel oils meeting the 0.50% sulphur limit.
    The 2019 Guidelines on consistent implementation of 0.50% sulphur limit under MARPOL Annex VI adopted by resolution MEPC.320(74) are available here.
  • Adopted 2019 Guidelines for port State control under MARPOL Annex VI Chapter 3, providing updated enforcement guidance for provisions including regulation 13 “nitrogen oxides” and regulation 14 “sulphur oxides and particulate matter”.
  • Approved Guidance on indication of ongoing compliance in the case of the failure of a single monitoring instrument, and recommended actions to take if the exhaust gas cleaning system (EGCS) fails to meet the provision of the Guidelines.
  • Approved Guidance for port State control on contingency measures for addressing non-compliant fuel oil. The guidance covers possible actions to be taken, following discussions between ship, flag State and port State, when a ship is found to have on board non-compliant fuel oil either as a consequence of compliant fuel oil being not available when the ship bunkered fuel oil or the ship identifying through post bunkering testing that the fuel oil on board is non-compliant.
  • Approved the 2019 Guidelines for on board sampling for the verification of the sulphur content of the fuel oil used on board ships.
  • Approved an MSC-MEPC circular on Delivery of compliant fuel oil by suppliers, subject to approval by the Maritime Safety Committee (MSC 101) in June. The draft circular says that Members States should urge fuel oil suppliers to take into account, as relevant: MEPC.1/Circ.875 Guidance on best practice for fuel oil purchasers/users for assuring the quality of fuel oil used on board ships; and MEPC.1/Circ.875/Add.1 Guidance on best practice for fuel oil suppliers for assuring the quality of fuel oil delivered to ships.
  • Approved Guidance for best practice for Member State/coastal States. This includes best practices 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. The guidance says that Member States/coastal States should consider actions deemed appropriate, under domestic legal arrangements, with respect to promoting the availability of compliant fuel oils, consistent with regulation 18.1 of MARPOL Annex VI; and Member States or other relevant authorities desiring to do so may decide to establish or promote a licensing scheme for bunker suppliers.

The MEPC 73 in October 2018 had already approved Guidance on the development of a ship implementation plan for the consistent implementation of the 0.50% sulphur limit under MARPOL Annex VI (MEPC.1/Circ. 878).

The 2019 Guidelines on consistent implementation of 0.50% sulphur limit under MARPOL Annex VI adopted by resolution MEPC.320(74) are available here. These comprehensive guidelines include a template for a “Fuel Oil Non-Availability Report (FONAR)” set out in Appendix 1 and a “Technical review of identified possible potential safety implications associated with the use of 2020 compliant fuels” set out in appendix 2.

Carriage ban

A related MARPOL Annex VI amendment to prohibit the carriage of non-compliant fuel oil used by ships, which was adopted last year, is expected to enter into force on 1 March 2020.

Related MARPOL Annex VI amendments approved for future adoption

To support consistent implementation of regulation 14 of MARPOL Annex VI, MEPC approved draft amendments to MARPOL Annex VI to regulations 1, 2, 14 and 18, appendix I and appendix VI of MARPOL Annex VI, with a view to adoption at MEPC 75, with an expected entry force date of September 2021.

The MEPC also approved a circular to encourage early application of the approved amendments to the verification procedures for a MARPOL Annex VI fuel oil sample.

The draft amendments cover:

  • Draft amendments to Regulation 2 Definitions, to include new definitions for “Sulphur content of fuel oil” – meaning the concentration of sulphur in any fuel oil, measured in % m/m as tested in accordance with standard acceptable to the Organization; “Low-flashpoint fuel”, to mean gaseous or liquid fuel having a flashpoint lower than otherwise permitted under paragraph 2.1.1 of SOLAS regulation II-2/4; “MARPOL delivered sample”, to mean the sample of fuel oil delivered in accordance with regulation 18.8.1 of MARPOL Annex VI; “In-use sample”, to mean the sample of fuel oil in use on a ship; and “On board sample”, to mean the sample of fuel oil intended to be used or carried for use on board that ship.
  • Fuel oil sampling and testing – Draft amendments to Regulation 14 Sulphur oxides (SOX) and particulate matter, to add new paragraphs related to in-use and on board fuel oil sampling and testing, to add new paragraphs to require one or more sampling points to be fitted or designated for the purpose of taking representative samples of the fuel oil being used or carried for use on board the ship. The representative samples of the fuel oil being used on board are to be taken in order to verify the fuel oil complies with the regulation.
  • Appendix I amendments to the International Air Pollution Prevention (IAPP) certificate – Draft consequential amendments to update the IAPP certificate to add a reference to sampling points and also to note where there is an exemption to the provision for low-flashpoint fuel.
  • Appendix VI Fuel verification procedure for MARPOL Annex VI fuel oil sample Draft consequential amendments to verification procedures, to cover verification of the representative samples of in-use fuel oil and on board fuel oil.

Reporting on fuel oil quality and availability

The MEPC discussed how to enhance the reporting of data, as required by MARPOL Annex VI regulation 18 on fuel oil quality and availability.

The MEPC approved a draft MEPC circular on reporting of data related to fuel oil availability and safety in GISIS to promote greater understanding of the 0.50 % m/m sulphur limit under MARPOL Annex VI.

The MEPC instructed the IMO Secretariat to review the current MARPOL Annex VI module in IMO’s global shipping information system GISIS (including: Regulation 18.1: fuel oil availability; Regulation 18.2.5: evidence of non-availability of compliant fuel oil; Regulation 18.9.6: failure of fuel oil suppliers to meet the requirements specified in regulation 14 or 18 of Annex VI.

The MEPC instructed the Secretariat to update the existing tabs in GISIS for better functionality, including: updating the types of fuels and sulphur contents that are listed; allowing for multiple ports to be entered in a single entry; allowing searching by port or compliant fuel (adding a port list could assist with this); aligning with the Fuel Oil Non-availability Reports (FONAR); adding check-boxes on fuel oil quality; and improving the selection of regulations.

The MEPC established a Correspondence Group, to be coordinated by the Secretariat, to report back to MEPC 75, to investigate the reporting of additional items on GISIS; and further usability improvements, if feasible and as appropriate.

The Secretariat was also instructed to report to MEPC 75 a preliminary overview of data on fuel oil quality and availability currently available in GISIS as well as an overview of the current use of GISIS with reference to obligations under regulation 14 and 18.

The Committee invited the Secretariat to advise MSC 101 on the progress made on the new GISIS module for fuel oil safety matters.

Exhaust gas cleaning systems (EGCS)

Some ships use exhaust gas cleaning systems (EGCS) (“scrubbers”), accepted by their flag States as an alternative equivalent means to meet the sulphur limit requirement.

The Sub-Committee on Pollution Prevention and Response (PPR) is undertaking a review of the 2015 Guidelines on Exhaust Gas Cleaning Systems (EGCS). The guidelines include, among other things, washwater discharge standards.

The MEPC approved a new output on “Evaluation and harmonization of rules and guidance on the discharge of liquid effluents from EGCS into waters, including conditions and areas”, in the 2020-2021 biennial agenda of the PPR Sub-Committee and the provisional agenda for PPR 7 (meeting in February 2020), with a target completion year of 2021. PPR 7 is expected to further review the documents that were submitted to MEPC 74 in relation to the newly approved output, with a view to refining the title and scope of the output and will report the outcome of its consideration to MEPC.

The MEPC also instructed the Secretariat to liaise with the Joint Group of Experts on the Scientific Aspects of Marine Environmental Protection (GESAMP), an advisory body that advises the United Nations (UN) system on the scientific aspects of marine environmental protection.

The MEPC requested that, subject to sufficient external funding being provided by Member States and other stakeholders, a GESAMP task team be established to assess the available evidence relating to the environmental impact of discharges of exhaust gas cleaning system effluent, with a view to reporting its findings to PPR 7.

IMO sulphur monitoring programme

The MEPC note information provided by the Secretariat on the outcome of the monitoring of the worldwide average sulphur content of marine fuel oils supplied for use on board ships for 2018, based on three sampling and testing service providers. The worldwide average sulphur content (i.e. three-year rolling average) of residual fuel oil was 2.59% and for distillate fuel oil it was 0.08%.

The MEPC approved, in principle, draft amendments to the 2010 Guidelines, as amended for monitoring the worldwide average sulphur content of fuel oils supplied for use on board ships. The draft amendments update the IMO sulphur monitoring programme to take into account the entry into effect of the 0.50% sulphur limit from 1 January 2020 and the potential types of fuel oils which will be used to comply with this limit and will be required.

Roundtable meeting and 2020 seminar

The IMO Secretariat plans to hold a further roundtable meeting with representatives from across stakeholders in June 2019 to review progress and share information.

Additionally, to provide an opportunity for wider stakeholder engagement, IMO plans to hold an “IMO2020” seminar at IMO in autumn, as by then there should be a clearer understanding of the availability of compliant fuel oil and some experience of implementation that can be shared. Further details for this seminar will be issued in due course.
Source: IMO

http://www.imo.org/en/OurWork/Environment/PollutionPrevention/Documents/Resolution MEPC.320(74).pdf

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LPG carrier freight market braces for disruption as IMO 2020 nears

Owners and charterers of Very Large Gas Carriers are bracing for disruption to freight rates as vessels are increasingly fixed with scrubbers ahead of the International Maritime Organization’s move to cut bunker fuel sulfur limits to 0.5% from 3.5% from next year.

The transition is poised to split the LPG carrier sector into “flex” and “unflex” segments, between flexible vessels and ships without scrubbers, which will create uncertainty in the freight market if the price of low-sulfur fuel proves costly, shipping and trade sources said.

Opinions were mixed on the impact a two-tier market will have on the freight rate structure and the chartering strategies of shipowners.

Some market participants said VLGCs with scrubbers could command higher rates to those not fitted with gas emission cleaning devices.

Depending on tonnage, shipowners that fitted scrubbers and could sail at full speed may be inclined to keep their vessels in the spot market to take full advantage of the upside, one shipping source said.

Vessels that have missed the move towards scrubbers or chosen not to retrofit are looking to hedge the spreads between high sulfur and low sulfur fuel oil or marine gasoil in the swaps market, shipping sources said.

“One thought could be that there will be two sets of freight; one for scrubbers and one for the non-fitted older tonnage,” the source said. “In general, there is interest to [time] charter out non-scrubber fitted vessels with high consumption [of low-sulfur fuel] over the IMO January 2020 period,” the source added.

One shipowner said there were currently still more vessels without scrubbers than those fitted with the device and felt the freight structure was divided in two, but whether this remained the case would depend on whether scrubber-fitted ships could leverage the wide price difference between LSFO and HSFO.

The Singapore Marine Fuel 0.5% premium to the Mean of Platts Singapore 380 CST HSFO assessment hit a record high on May 14, backed by strong buying, as Singapore’s LSFO sales more than doubled year on year over January-April amid demand growth for cleaner fuels ahead of IMO 2020, S&P Global Platts data showed.

The Singapore Marine Fuel 0.5% premium hit $97.20/mt to the MOPS 380 CST HSFO assessment May 14, surging $25.89/mt day on day, Platts data showed. Marine Fuel 0.5% was assessed at $495.50/mt the same day.

Globally about 20 ships were currently being retrofitted with scrubbers at a cost of about $3.5 million each, shipping sources said.

Another shipping source said around 25 vessels have been fitted with scrubbers and around 40 more were due to be fitted, or will be fitted on newbuilds, likely resulting in some divergence in freight market structure.

Last December, Grieg Shipbrokers said 29 installed sulfur oxide, or SOx, scrubbers had been registered in the current gas carrier fleet and 17 had the option to install scrubbers, while among the 75 gas carriers under construction, 37 will have a scrubber installed and three had the option to install the equipment.

Major shipping firm BW LPG said there were currently 269 VLGCs on water and 38 on order that were slated for delivery over 2019-21.

SCRUBBER-FITTED SHIPS SET TO COMMAND PREMIUM

Despite widespread talk of a divide, some market participants said the spot freight structure would not change to reflect scrubber and non-scrubber-fitted ships.

“Freight rate itself will be the same between scrubber fitted versus non-scrubber vessels; the spot market rate will remain as ‘Baltic’ for now,” another shipowner said.

However, he said owners of scrubber-fitted vessels could potentially earn higher margins on a time charter basis as bunker costs were reduced by the improved efficiency to non-scrubber vessels, which will need to use costlier low sulfur fuel or marine gasoil.

Shipowners generally ask charterers to pay a premium for scrubber-fitted ships for time charters as charterers gain from low-cost bunkers, he added.

If the market rate is $800,000/month, owners will seek a premium for scrubber costs of $100,000-$200,000/month, bringing the actual time charter rate to $900,000-$1 million/month, he said.

“In the case of spot business, owners can cut bunker costs since they operate the vessel on their own. Therefore, it’s OK to get the freight rate as just Baltic, which equals the same freight as non-scrubber vessel,” he added

One regional trader also expected scrubber-fitted ships to command a premium. “It won’t be as easy to find bunker ports supplying gasoil, at least at the onset. Not all bunker ports will be ready for the change, so that would mean ships fitted with scrubbers should have more flexibility,” he said.

Spot VLGC rates on the Persian Gulf-Japan route surged to the highest in more than four years at $65/mt on April 26 before easing to around $53/mt last Friday. Houston-Japan rates hit $100/mt at the same time before dipping to $95/mt last Friday, Platts data showed.

The Baltic LPG rate has averaged $56.095/mt to date in May for the Persian Gulf-Japan route, a year-to-date high, while the Houston-Japan rate has averaged $95.14/mt.

BW LPG in its Q1 report said that in the short term, continued high US LPG exports were expected to support the improvements in rates that began in late March. While it revised down exports from the Middle East down due to US sanctions on Iran and OPEC crude output cuts, it said this would be partially offset by incremental exports from Australia, the US East Coast and Canada.

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The International Maritime Organization (“IMO”) Convention on Facilitation of International Maritime Traffic (the “FAL Convention”) was adopted in 1965 for the purpose of implementing a more streamlined logistics process for the transport of passengers, ships, and cargo in international trade. The FAL Convention has 121 Contracting Governments. The FAL Convention was adopted by maritime Contracting Governments, in part, as a response to increasing local requirements of maritime nations that created a burden on the shipping industry. The IMO’s stated objective underlying the FAL Convention’s was to avoid marine traffic delays, stimulate intergovernmental cooperation, and increase uniformity in the international maritime industry to the extent practicable. The convention contains standards and recommended practices to create efficiency in documentary requirements for ships.

The 2016 Amendments to revised Annex of the FAL Convention entered into force on January 1, 2019. The Amendments include new requirements for the digital exchange of shipping information. Effective April 8, 2019, the FAL Convention now requires Contracting Governments to establish a protocol for an electronic information exchange between ships and ports. The IMO Secretary-General Kitack Lim announced:

The new FAL Convention requirement for all Public Authorities to establishsystems for the electronic exchange of information related to maritime transport marks a significant move in the maritime industry and ports toward a digital maritime world, reducing the administrative burden and increasing the efficiency of the maritime trade and transport.

The grace period for governmental compliance with the digital exchange requirements is a minimum of 12 months. In addition, the Amendments introduce three additional documents that shore authorities may require of arriving vessels. These documents include (1) security-related information pursuant to SOLAS regulation XI-2/9.2.2; (2) advance cargo information for customs review; and (3) Advanced Notification Forms for Waste Delivery to Port Reception Facilities.

The IMO, through the FAL Committee, has developed standardized documents that are recommended for use by all Contracting Governments. The FAL Convention in Standard 2.1 contains a list of documents that public port authorities and governments of member states will demand from ships. To that end, the IMO has developed standardized forms for certain categories of documents including (1) IMO General Declaration; (2) Cargo Declaration; (3) Ship’s Stores Declaration; (4) Crew’s Effects Declaration; (5) Crew List — Passenger List; and (6) Dangerous Goods. All Contracting Governments are encouraged to adjust their local laws to comply with the FAL Convention requirements for sharing electronic information.

According to the IMO, the FAL Convention “encourages the use of a Single Window for data” to be provided by ships to local governments. Id. The primary purpose underlying the new protocol is to funnel all critical information that is required by public authorities relating to the arrival, berthing, and departures of ships, as well as all data required to carry cargo and allow the entry and departure of passengers through a single portal. The Single Window requirement is intended to house all necessary information for the international carriage of goods and passengers into one spot, thus avoiding duplication. The Single Window requirement to provide electronic information is an important international step toward simplifying international voyages for the maritime trade.

The FAL Committee of the IMO is continuing to study potential harmonization of electronic messages. Phase one of the IMO Compendium on Facilitation and Electronic business should be completed soon. Moreover, the revised Guidelines for setting up a single window system in maritime transport are expected to be approved soon. Ultimately, the new FAL Convention electronic requirements are expected to improve uniformity for marine transportation.
 

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Spain's Cepsa aims for premium position within 0.5% sulfur bunker market

 

Amsterdam — Spanish refiner Cepsa is aiming to position its 0.5% sulfur marine fuel blends as a premium product within the market for lower-sulfur fuels as it seeks to make all of them compatible with each other, the company said Thursday.

Fuel incompatibility is one of the larger logistical challenges facing the shipping industry ahead of the International Maritime Organization's lowering of the global bunker sulfur limit to 0.5% from 3.5% drives a shift to cleaner fuels. The lower limit will apply from January 1, 2020.

Most new 0.5% sulfur blends are likely to prove mutually incompatible, meaning that they are prone to separation when brought into contact with one another, risking engine failures.

Cepsa's customers asked it to produce 0.5% sulfur fuels that as far as possible meet the RMG 380 CST grade of high sulfur fuel oil, but with the lower sulfur content, according to Carlos Giner Monleon, the company's new head of marine fuels trading.

The company has been testing its new blends with a view to guaranteeing that the 0.5% sulfur fuel produced at its Huelva refinery will be compatible with the product from the San Roque plant, Monleon told the S&P Global Platts European bunker fuel conference in Amsterdam Thursday.

"We are working on that, for sure it is a target," he said.

Cepsa expected to sell more than 2 million mt/year of 0.5% sulfur fuels from 2020, and will make both them and marine gasoil (MGO) available at all of the ports across Spain and Gibraltar that it currently covers.

The company will determine where to make fuel oil available for vessels equipped with scrubbers according to customer demand, Monleon said.

Cepsa is hoping to position its new blends as a premium product within the 0.5% sulfur fuels space based on the refiner's technical work on making the products stable and compatible, Monleon said, but the company cannot yet put a dollar value on the premium it expects to attract to other 0.5% sulfur blends.

The company's use of mass flow meters for barge deliveries may help it. Cepsa plans to have a total of 14 barges fitted with the equipment by the end of this year, making its delivered volumes more reliable.

Cepsa, which has not yet signed any term contracts for 0.5% sulfur fuel sales for next year, is in discussions with customers.

The refiner produced a batch of 0.5% sulfur fuel in April which is being tested by key clients, Monleon said.

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BIMCO and INTERTANKO have jointly published Q&As addressing the contractual implications owners and charterers should keep in mind when chartering ships fitted with scrubbers. The Q&As highlight the key charter party clauses and concepts which should be reviewed for both time and voyage charter parties.

“We are pleased to have worked with BIMCO to provide advice and assistance for owners who have chosen this route to 2020 compliance. We will continue to develop the Q&As as experience of scrubber use develops,” said Michele White, General Counsel at INTERTANKO.

BIMCO’s Head of Contracts and Clauses, Grant Hunter, adds:

“We regularly receive questions about chartering issues relating to scrubber-fitted ships. These Q&As jointly produced with INTERTANKO will offer many useful answers as well as guidance.”

The Q&As consist of three parts. The first part deals with the implications of using scrubber-fitted ships under time charter parties, the second part deals with voyage charter parties and the third part addresses general considerations such as enforcement, fines and prohibition of open-loop scrubbers.

The main focus is on time charter parties as it is expected that this is where the use of a scrubber will have the greatest impact.

BIMCO and INTERTANKO have individually published clauses addressing the coming into force of MARPOL Annex VI Regulation 14 and 18 dealing with the reduction of sulphur oxide emissions from the current 3.50% m/m to 0.5% m/m. However, these clauses do not deal with the special operational, technical and commercial requirements of scrubbers installed on ships.

In early 2019, a BIMCO and INTERTANKO working group discussed whether there was a need for a dedicated “scrubber clause”. The working group concluded that, for the time being, no “scrubber clause” should be published. This is because the scrubber is, once installed, a “normal” piece of equipment and does not require any special status or special legal regime. The existing standard clauses (such as off-hire, drydocking and maintenance) will work in a time charter context in cases when the scrubber is not working.

The Q&A document is available to download from the BIMCO and INTERTANKO websites:

BIMCO: https://www.bimco.org/BIMCO-INTERTANKO-Scrubber-QA

INTERTANKO: https://www.intertanko.com/info-centre/intertanko-guidance

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Sushant Gupta, Research director, Asia Pacific refining and oils market, spoke about the changes expected for crude and product prices. These regulations are likely to be the biggest step change the shipping industry has ever seen, with massive sulfur reductions for the industry.

A number of uncertainties still remain, meaning it is hard to envisage full compliance by January 2020. Sushant talked through the likely rate of compliance and explains why, in our view, it will take the market a few years to reach full compliance. We currently expect full compliance by 2025.

From 2020 the marine fuels mix will significantly change. Switching to marine gas oil is easy but it’s also the most expensive option. Sushant went into detail on the expected demand for this and alternatives.

Impact of IMO on marine fuels demand

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Source: Wood Mackenzie Product Market Service – more detailed data is available through the subscription of this product

The shifts in marine fuel demand will lead to shifts in crude and product prices. We expect material impact on refining economics and existing refineries must focus on unit and stream level optimization.

Which upstream oil producing countries will be most impacted by IMO 2020?

Angus Rodger, Research Director Asia Pacific, then shared how the heavier sour crudes will fall in value relative to lighter sweeter grades. A combination of sanctions in some places and upgrading of facilities in other places are leading to strained supply. The shock will be short term, but over the next few years the impact will be lessened, so there will not be a long term impact on crude prices.

Showing charts of the top 10 global producers of sour crudes and sweet crudes, Angus explained that the NOCs, being the biggest producers, are most exposed to a fall in sour crude pricing. And why the Canadian oil sands region in particular will be one of the regions most impacted by these new regulations.

Implication for LNG and gas contract pricing and demand

Nicholas Browne, Director, Asian Gas and LNG Research, continued with his discussion on the two main impacts on the LNG sector. Firstly, the impact on shipping and secondly, the values of LNG within LNG contracts. He covered LNG bunker forecasts, with Shell and Total especially capitalizing on the opportunity. After an explanation of the expected acceleration in ship development, Nicholas shared information about the top JCC LNG buyers and sellers and therefore who is most likely to be impacted by the regulations.

Impact on bulk commodities, supply chain and dry bulk freight

Rohan Kendall, Principal Analyst, iron ore and steel costs, then explained why ocean freight will see the biggest impact from the new IMO regulations. He continued to cover the impact on delivered coal costs to China and compared charts showing cost increases for both an Indonesian thermal coal mine and an Australian thermal coal mine.

The panel wrapped up the webinar session by responding to various questions from participants.

Source: Wood Mackenzie

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Shipowners, who are facing one of the biggest changes in the oil industry in decades, are seeing more fuels that will be compliant with new rules on sulphur emissions from ships, but some say the way forward is far from clear.

The United Nations shipping agency the International Maritime Organization (IMO) will from January 2020 limit the sulphur content in fuel ships use to 0.5%.

With the exception of some zones around northwest Europe and North America known as Emission Control Areas where maximum sulphur content is restricted to 0.1% sulphur, the current global cap is 3.5%.

The sulphur switch will be a mammoth task as it requires adapting the 300 million tonne a year bunker fuel market, valued at over $200 billion at current prices.

Oil majors, including BP and Royal Dutch Shell , have announced they are producing very low sulphur fuels that meet the 0.5% requirements but the specifications of those products are not yet clear nor are the ports where they will be available.

A source at a major shipowner told Reuters his company has tested fuels from both Shell and BP and have not had any issues with quality.

“We do see a lot more refiners, a lot more smaller, second-tier refiners coming up with 0.5% fuel as well, so we don’t think there will be much of an issue with the supply side,” Rutstin Edwards, head of fuel oil procurement at Euronav, one of the world’s largest shipowners said.

He was speaking at the Platts European Bunker Fuel Conference in Amsterdam on Thursday.

Claus Kesting, general manager of bunker procurement at Danish shipowner J. Lauritzen, said that suppliers at smaller ports where his firm operates are yet to start complying.

TO SCRUB OR NOT TO SCRUB
“Going forward to 2020, fuel, at least to me personally, is a bit of a black box, it’s not quite clear what you get,” Sjaak Klap, vice president for business development at Dutch shipowner Spliethoff told the conference.

Spliethoff plans to take a more cautions approach to the transition to low-sulphur fuels, opting in the first three to six months to buy the more expensive marine gasoil before switching to the new fuels.

“We will start with marine gasoil (MGO) first, see where (the) market is going, hear about results and then act,” Klap said.

Under the IMO rules, only ships fitted with sulphur-cleaning devices known as scrubbers will be allowed to continue burning high-sulphur fuel.

Euronav has so far snubbed using them on its fleet, with Edwards saying “it’s a rather expensive installation cost for limited time frame”.

He added that the company had concerns about clarity surrounding the banning of certain types of scrubbers at some ports.

Spliethoff on the other hand, has invested in scrubbers but its aim to have its deep fleet ready with them by the end of the year could be scuppered by the company’s recent acquisition of 11 used tankers, Klap said.

Manisha Mathur, head of procurement at ferry-operator DFDS, said scrubbers made financial sense for the company, adding that going forward at least 66% of its fleet will have scrubbers.

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Total Marine Fuels Global Solutions readies for IMO 2020: MD

Global bunker supplier Total Marine Fuels Global Solutions has conducted several successful trials of its 0.5% sulfur fuel oil with shipowners at key ports globally and continues to do so as LSFO is set to be the main marine fuel choice come 2020, the company’s managing director Jerome Leprince-Ringuet said Tuesday.

“The International Maritime Organization’s global sulfur limit rule for marine fuels calls for a dramatic change and requires various stakeholders in the marine industry to work closely,” Leprince-Ringuet told S&P Global Platts in an interview.
“Total has stepped up its preparations very rapidly. We are ready to supply our customers in the main bunkering hubs with the products they require to ensure compliance to the IMO rule,” he added.

The IMO will cap global sulfur content in marine fuels at 0.5% from January 1, 2020, down from the current 3.5%. That will apply outside designated emission control areas where the limit is already 0.1%.

“Most of the shipowners have made a choice regarding which fuel they want to use. Indeed, no decision means you have to go for LSFO and making a decision could be an investment decision for scrubbers or LNG,” he said.

According to Leprince-Ringuet, HSFO will account for only about 10%-20% of the global bunker market in 2020.

There is an economic case for the use of scrubbers, but only a small proportion of the global shipping fleet will be fitted with the technology by 2020, he said.

“So that makes the base load for the future market,” he said.

While HSFO may be readily available in the major bunkering hubs globally as there will be enough liquidity in barging, storage, and refining production there, it may not be so readily obtainable at remote ports, he said.

So, at smaller ports, shipowners, particularly those in the tramping market, should contact their suppliers to ensure that the product is available, Leprince-Ringuet said.

TOTAL GETTING READY

In terms of Total’s marine fuel specifications, the company’s 0.50% sulfur compliant bunker fuels are going to be aligned to ISO 8217:2017 specs, Leprince-Ringuet said.

“In the old world (now and in the past), we were selling viscosity grades… now we will sell sulfur grades,” Leprince-Ringuet said at a company event separately organized on the same day.

“We will not guarantee both sulfur and viscosity. That’s just not what our customers want because if you guarantee both of these constraints, it comes with additional costs,” he said.

Meanwhile, Total’s technical team is working very closely with its customers to prepare for 2020, Leprince-Ringuet said.

It is imperative that shipowners seek a “partnership model” with their energy supplier, Leprince-Ringuet said.

“Not all shipowners can afford sending people for training courses. The best is to organize it onboard with the crew, their technical team and our technical team.”

Meanwhile, compatibility of fuels will continue to be a concern post-2020, he said.

“Nobody can guarantee their fuels will be compatible with another supplier’s fuels,” Leprince-Ringuet said.

As far as compliance with the IMO 2020 rule is concerned, the rule is very clear, Leprince-Ringuet said, adding that a high level of compliance is expected.

“When you are a major liner, when you are calling at a reputable port, I don’t think you can escape,” he said.

Moreover, most of the traffic goes through the main ports that are willing to enforce it in a very strict manner, he said, adding that Singapore is a good example of a port offering a very strict framework.

LNG BUNKERING

In 2020, the market for LNG globally as a marine fuel will remain quite limited, Leprince-Ringuet said.

However, it is expected to ramp up quickly after 2020 due to a number of developments such as the IMO 2020 rule, IMO’s greenhouse gas emissions target cuts, concerns over particulate matter, favorable pricing economics, and development of infrastructure, he said.

According to Leprince-Ringuet, LNG’s share as a marine fuel will reach around 5%, or about 10 million mt, by 2025.

Total, for its part, is “very active in the LNG market”, Leprince-Ringuet said, adding that the company has taken several initiatives to promote LNG and related infrastructure.

In 2018, Total and Singapore’s Pavilion Energy inked an agreement to jointly develop an LNG bunker supply chain in the Port of Singapore.

In 2017, Total and CMA CGM signed a deal covering the supply of LNG to fuel CMA CGM’s nine newbuild container ships, scheduled for delivery beginning 2020 onwards.

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Compliant Low-Sulphur Fuels The Dominant Choice Among Dry Bulk Owners Says Shipbroker

While scrubbers seemed to be a very popular choice among shipowners looking to comply with the IMO’s 2020 rule regarding the use of low sulphur fuels, starting next January, it seems that the financials of this investment proved to be too much for the vast majority of ship owners operating in the dry bulk market. In its latest weekly report, shipbroker Banchero Costa said that “2020 is fast approaching, and with it the implementation of new regulations regarding sulphur content in bunker fuel which is going to have significant technical and commercial repercussions also on the dry bulk shipping sector. Last month, the Baltic Exchange announced that the benchmark bulkcarrier used for the calculation of their widely used timecharter indices will remain described as a “non-scrubber fitted vessel”. This decision proved highly controversial, and the road to it attracted a lot of debate and intense lobbying from various parties. However, we believe that the decision to settle for a ‘no scrubber” clarification makes sense, and essentially was the “default” option all along, being just a reconfirmation of the current definition”.

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According to Banchero Costa, “whilst the adoption of scrubbers is a very controversial and polarising issue in itself, the reality on the ground is that in January 2020 no more than 10 percent of trading bulkcarriers will have exhaust scrubber equipment installed. Next year, the vast majority of vessels will simply take the route of using compliant low-sulphur fuels. It was not supposed to be like this. Last year, scrubber-enthusiasts were forecasting a much wider adoption of this technology, with supposedly quick financial returns based on expected wide price differentials between compliant and high-sulphur fuels. However, dry bulk shipowners are a pretty conservative bunch. Also, after a number of lean years, they are quite a cash-strapped bunch. The prospect of having to invest upfront millions of dollars in the hope of potential returns seems too much of a gamble”.

The shipbroker added that “the negative press regarding the open-loop version of the technology – the vast majority of those being installed – probably also helped to cool the enthusiasm. The technical problems experienced by many of the early adopters of water ballast treatments systems – another new anti-pollution technology – perhaps also made people stop and think. It is widely believed that the economics of a scrubber should work for larger bulkcarriers, such as Capesizes and VLOCs. For smaller vessels, in particular Supramaxes and Handies, the economics look far more shaky, and there is also often lack of physical space on board to install what is a rather bulky piece of equipment”.

According to Banchero Costa, “current adoption numbers suggest that by the end of 2020, up to 30 percent of Capesizes could be scrubber-fitted. For smaller vessels, the adoption rates will be much, much smaller. This in itself creates a perverse incentive. As most small vessels will rely entirely on compliant fuel, there will be little incentive for bunker suppliers to stock high sulphur fuel at more remote ports. Therefore, scrubber-fitted small vessels could have significant problems with fuel availability. There is no doubt that the timecharter rate for a scrubber fitted vessel should include a premium compared to a comparative non-scrubber fitted vessels. They will, after all, be able to use cheaper high-sulphur bunkers. This is no different from a modern “eco” vessel commanding a premium compared to older tonnage with higher fuel consumption rates”.

Will these premiums be sufficient to cover the installation cost of a scrubber? It will depend on what the actual bunker price spreads will be. It will also depend on the strength of the freight market, and therefore on the bargaining power of the shipowners versus the charterers. For the majority of bulkcarriers, the choice will be between 0.5% blends and marine gasoil. It’s by no means an obvious choice. Blends, using a mixture of high sulphur fuel oil and distillates such as vacuum gasoil, are expected to be the cheaper solution. However, these blends are not yet standardised and generally untested. There are serious concerns about their stability, especially when mixing blends from different suppliers. The risk is expensive damage to the engine. Therefore, at least in the initial stages in 2020, many shipowners will take the safe route and use tied-and-tested, but more expensive, MGO. There is no doubt that, in 2020, compliant fuels will be more expensive than what is burned today. IMO 2020 will push overall bunker costs upwards. And this will have plenty of implications”, Banchero Costa concluded.

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(edited)

On 5/21/2019 at 2:59 PM, ceo_energemsier said:

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.

Absolutely! That is of the most educated comments I've ever read on this forum.

I've read articles that suggest it really is a 3-way relationship (fresh water, energy, food).  If you have high amounts of any two, the third is easy to make.

Energy for fertilizer (plus of course sunlight) + fresh water = food

Food + fresh water = energy (bio-ethanol type stuff, or manual labor)

Energy + dirty water = fresh water

Hydro water = energy

Fresh water + petroleum = dirty water + energy

Edited by Enthalpic

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LNG for 2020: IMO Sulfur Limits and the LNG Alternative

 

This blog post compares the uses of liquefied natural gas (LNG) as a marine fuel with other options for complying with the more stringent sulfur emission requirements of the International Maritime Organization (IMO) beginning in 2020 and then discusses the development of LNG as a marine fuel.

The IMO 2020 sulfur limit

The IMO is the United Nations agency tasked with setting global standards for safety, security and environmental performance in global shipping. In 1973 the IMO signed the International Convention for the Prevention of Pollution from Ships (MARPOL), and on May 19, 2005 the provisions for preventing air pollution from ships (Annex VI of MARPOL) came into force. Over the past decade the IMO’s Marine Environment Protection Committee (MEPC) has been lowering the emission limits set forth in Annex VI for sulfur as well as other pollutants such as nitrogen oxide. Ships had originally been permitted sulfur emissions of 4.5 percent, but after several incremental reductions the MEPC confirmed in October 2016 that the new sulfur emissions limits effective January 1, 2020 are 0.5 percent globally and 0.1 percent in IMO-designated emission control areas (ECAs).

Sulfur reduction options

Low sulfur fuel oil
There are currently three options for meeting the IMO’s 2020 sulfur limits. The most straightforward option, and the one with the least capital investment required, is simply to switch from powering ships with high sulfur oil fuels to oil fuels that have low enough sulfur emissions to be deemed compliant by the IMO, such as gas oils and low, very-low or ultra-low sulfur fuel oils. Since the marine sector has been responsible for around half of the global fuel oil consumption in recent years, many analysts doubt that oil refineries have the capacity to produce the quantity of low sulfur oil fuels required for such a shift in fuel oil consumption patterns.

There is also a significant price differential between low and high sulfur fuel oils (HSFO). As of May 8, 2019, the current spread between IFO 380 (the HSFO most commonly used by ships) and marine gas oil (the low sulfur fuel most commonly used by ships) was $261.5 per metric ton. Energy and shipping consultancy Wood Mackenzie estimated that the spread would increase to closer to $350 per metric ton once demand for compliant fuels grows in 2020. For owners of large ships such as Newcastlemax bulkers or very large crude carriers (VLCC), which consume 60 to 70 metric tons of fuel per day, such a price jump could drastically increase operating costs. Most shipowners will pass these higher fuel costs onto charterers since fuel costs are usually for charterers’ account, but this will in turn will reduce such ships’ attractiveness to chartering clients.

Scrubbers
A second option is to use abatement technology known as “scrubbers” that capture sulfur and other pollutants as the ship burns fuel. This path toward compliance presents significant upfront capital investment of $2 million to $6 million (depending on the size, type and age of the ship) in material and installation costs per ship. Scrubbers allow the ship to continue to use HSFO, the lower cost of which offsets the hefty upfront investment. According to Gibson Shipbrokers, the installation costs on a retrofitted VLCC would be repaid in less than one year if the spread is $350 per metric ton (as predicted by Wood Mackenzie), less than 18 months if the spread is $200 per metric ton, and still a relatively short two and a half to three years should the spread fall to $87 per metric ton as shipping consultancy Drewry predicts will occur by 2023.

Hesitation about pursuing this approach to sulfur reduction compliance exists because (i) scrubber technology is new and unproven, (ii) further environmental regulations may render this approach unviable – for example, some countries have banned the use of open-loop scrubbers (e.g., China, Singapore and Fujairah), and (iii) the availability of HSFO in small or distant ports is uncertain as refineries reduce their production of such fuels and global supply shrinks.

LNG
Introduction

Liquefied natural gas (LNG) is created by cooling natural gas to minus 260 degrees Fahrenheit (minus 162 degrees Celsius). Liquefying the gas reduces its volume by a scale of about 600. The midstream energy industry has used LNG for decades because this denser form of gas can be carried on ships like oil rather than needing to be pumped through pipelines, as is required for the energy form in its natural, gaseous state. The first ship fueled by LNG, the Glutra, was a ferry built in 2000. By 2015 and 2017 there were 102 and 117 LNG-powered ships, respectively. Growth has occurred more rapidly since then due to the IMO 2020 sulfur cap. As of February 2019, there were 143 LNG-powered ships in operation and a further 135 on order.

Emissions

LNG is the cleanest burning fossil fuel form. It emits almost zero sulfur and particulate matter and achieves approximately 90 percent nitrogen oxide emission reductions. LNG-fueled ships could therefore operate in ECAs without switching fuel sources, while oil-fueled ships would need to switch to a fuel that emits even less sulfur than the standard low sulfur fuel oil when passing through ECAs. It also results in a 27 percent carbon emission reduction when compared to the fuels currently used, which is a 10 or 20 percent improvement on the low sulfur fuels that will be increasingly used beginning in 2020. Using LNG as fuel will increase the emission of methane, another greenhouse gas, but only by a small degree. Furthermore, the IMO may continue to impose new limitations. It has stated that it will attempt to reduce total annual greenhouse gas emissions by at least 50 percent by 2050 compared to annual greenhouse gas emissions in 2008. Given that ships have relatively long lifespans of 20 to 30 years, long-range planning is wise.

Installation and maintenance

Building an LNG-fueled, as opposed to oil-fueled, ship adds about $5 million to building costs. This cost is comparable to installing a scrubber. Analysts previously concluded that the economics of retrofitting a ship to run off LNG were prohibitive. Since engineers have been giving increasing attention to the LNG-fueling option in the shipping space, certain efficiencies have been achieved. Trial retrofitting projects are now being undertaken and further projects are being considered.

Many analysts also believe that LNG-fueled ship engines and associated equipment have greater longevity and require less maintenance than ships fueled by oil. This feature is especially notable given that there have been reports that the corrosive nature of the gases exhausted by the scrubbers means that these ships require more maintenance than ships without scrubbers.

Cost and efficiency of fuel

The cost of the fuel is almost certain to put LNG at an advantage to the low sulfur fuel option. There is currently not a standard global price for natural gas. Natural gas sold in the U.S. market is traded on its own exchange, called Henry Hub, while gas sold on most other markets is linked to the price of oil. In either case, a premium is added because a gas processing company must liquefy the gas. The price of LNG produced from Henry Hub gas, the world’s cheapest, is consistently less expensive on a million British thermal unit (mmBTU) basis than HSFO, let alone the more expensive low sulfur fuel oil. Henry Hub prices have also remained remarkably stable, another significant benefit to business operations. The price of Japan LNG, the world’s most expensive, has over the past five years been consistently more expensive than HSFO, and at almost all points in that period of time has been less expensive than low sulfur fuel oil on a mmBTU basis. That LNG is a more efficient form of energy, providing 50 GJ of energy per metric ton compared with HSFO providing 40.5 GJ of energy per metric ton, makes LNG the more economical fuel choice at this point in time.

Supply of fuel

A disruption in the supply of natural gas could alter the price dynamic between the fuels. The two oil-based paths to IMO 2020 compliance – burning low sulfur fuel oils and installing scrubbers – have supply shortage concerns because they depend on a certain type of oil refinery output in a market that is experiencing a profound change in demand. Most LNG industry observers predict that the supply of LNG will be abundant over the next few years, but some also predict that there could be a period of supply shortage beginning around 2022.

LNG is a form of energy that is much easier to consume than to produce. LNG production in the U.S., now strong, required years of investment both in infrastructure development and in political advocacy to convince regulators to greenlight the massive coastal projects. LNG export capacity in the U.S. may fall short of European and Asian demand for U.S. LNG though, in part because state governments on the west coast have prevented LNG export capacity there despite its valued geography for export to Asia. Australia, whose significance as a new (post-shale revolution) entrant to the LNG export space is rivaled only by the U.S., faces its own challenges. LNG export projects on the island continent have slowed or stalled due to technical difficulties and cost overruns, while domestic gas shortages led Canberra to institute LNG export controls.

One way for ship operators to mitigate their supply risk is to enter into long-term supply contracts with the major suppliers of LNG as a marine fuel. Linking the price of the LNG in the contract to benchmark oil would also mitigate price risk should a global shortage in LNG indeed occur.

Developing the LNG alternative

Current state of the industry
The use of LNG as a marine fuel is the 2020 compliance option least pursued at this point in time despite its environmental advantages and probable economic advantages. There are about 280 LNG-fueled ships in operation or on order, but there are over 600 scrubber-outfitted ships in operation and over 600 ships under construction that have plans to include scrubbers. Analysts predict 300 (lowered from 400 to 600) LNG-fueled ships, compared with 2,000 ships with scrubbers, by 2020. The slow start for building orders of LNG-fueled ships belies the positive long-term view for LNG held by much of the shipping industry. DNV GL, the maritime classification society most familiar with the LNG sector, estimates that the proportion of LNG in the global marine fuel mix will rise from the current less than 0.3 percent to over 10 percent by 2030 and 23 percent by 2050. Other consulting and non-governmental organizations have made similar estimates. The Oxford Institute for Energy Studies (OIES), one of the most respected think-tanks in its field, has fairly consistently assessed LNG to be a viable marine fuel despite uncertainty as to when implementation might occur.

The slower rate of adoption of LNG as a path to 2020 IMO compliance compared to scrubbers can be partially explained by the fact that scrubbers can be retrofitted on an existing ship, whereas engineering a ship from oil- to LNG-fueled is more complicated due to the larger size of the average LNG fuel tank. Therefore, unlike with scrubbers, there will be no sudden burst of LNG-fueled ship orders. Shipowners will instead decide their desired newbuild when they need to order new ships, resulting in LNG-fueled ships being phased into the world fleet at a steady pace rather than being converted en masse.

To the extent that shipowners are hesitant about ordering LNG-fueled ships, some observers believe it reflects a “wait-and-see” approach, whereby shipowners might be holding off on new orders until (i) more LNG bunkering infrastructure (the infrastructure used to load LNG on to the ships) is built, (ii) LNG fuel and bunkering technology develops further, (iii) more data points on the price of LNG fuel exist and (iv) more ships in the global fleet are scrapped given that the market is currently oversupplied. We are likely reaching the end of this waiting period, which has been commented on by industry insiders since at least early 2015, in part due to the approaching implementation of the IMO 2020 sulfur regulations and in part due to advances in LNG bunkering infrastructure.

LNG bunkering infrastructure
A couple of years ago LNG as a marine fuel was described by industry insiders as facing a “chicken and egg” problem: without sufficient development of LNG bunkering infrastructure, shipping companies faced serious risk and little incentive to order LNG-powered ships; but without sufficient growth of the LNG-powered fleet, LNG bunkering companies faced serious risks and little incentive to develop LNG bunkering infrastructure. Today, nine of the ten most frequented bunkering ports in the world offer, or have firm plans to offer by 2020, LNG fueling options.

There are three main types of LNG bunkering methods. LNG can be transferred from a truck to the ship (“truck-to-ship”) using a flexible hose, from a ship to another ship (“ship-to-ship”) and from a land-based tank or terminal to the ship (“shore-to-ship”).

The truck-to-ship method involves limited costs and is relatively flexible, as the trucks could also be used to supply LNG to vehicles other than ships. For this reason, and while LNG bunkering infrastructure is in its early stages of development, the truck-to-ship method is currently the most prominent. A truck holds enough LNG to fill the tanks of smaller LNG-fueled vessels such as tugboats or small passenger boats, but not for blue water cargo carriers or cruise ships.

The ship-to-ship method is the most flexible in terms of location and has a high “flow rate,” or rate at which the LNG can be transferred. However, it is expensive infrastructure to build (between €30 million and €60 million depending on size, compared with about €600,000 for the truck-to-ship method) and operate, and the ships would not have alternative uses when demand is low. This method might also lead to congestion at the ports.

The shore-to-ship infrastructure could be utilized by modifying existing LNG terminals or by installing tanks using fixed LNG pipelines. This method is best for ports with stable and substantial bunkering demand. This method is also best for inland ships since they more frequently pass by ports.

Financing LNG-fueled ships and infrastructure
Financing LNG-fueled ships and LNG bunkering infrastructure is similar to financing other shipping and infrastructure assets. Bank debt, private equity, and leasing structures such as sale-leaseback arrangements are the sources of financing most likely to be utilized. One aspect of financing LNG ship and bunkering assets different from financing other shipping assets (although similar to financing the installation of scrubbers) is that public and private sector programs exist to subsidize assets that contribute to lower emissions and other environmental objectives.

Private programs include “Green Bonds” and “Green Loans.” Both programs enable companies to raise capital for new and existing projects deemed compliant with “Green Bond Principles” and “Green Loan Principles” respectively, which principles are outlined by financial services trade groups such as the International Capital Market Association (in the case of Green Bonds) and the Loan Syndications and Trading Association and the Loan Market Association (in the case of Green Loans). If a project is deemed green, a financial institution will extend to the project company a Green Loan, often offered at a lower rate than standard loans. Financial institutions acting as bookrunners or structuring agents also make determinations as to whether a project is green, but companies issuing Green Bonds should, in addition, engage a third party to evaluate the project’s alignment with Green Bond Principles and issue a “second opinion.”

Japanese shipping and logistics company NYK issued the first Green Bonds in the shipping sector on May 24, 2018. The $92 million bonds have a maturity of five years, are unsecured, were managed and structured by Mitsubishi UFJ Morgan Stanley Securities Co. Ltd. and received a second opinion from Vigeo Eiris, an ESG (environmental, social and governance) evaluator based in France. The proceeds of the bonds will support several initiatives that will aid NYK’s efforts to comply with IMO 2020 and other environmental regulations: (i) LNG-fueled ships, (ii) LNG bunkering vessels, (iii) ballast water treatment equipment and (iv) scrubber systems. The author is unaware of any uses of Green Loans for LNG as of April 2019.

Public sector programs to finance LNG assets have come out of Europe and Asia. The European Investment Bank (EIB), a nonprofit lending institution of the European Union, launched the €750 million Green Shipping Financing Programme in the fall of 2017 to provide financing with favorable terms for projects advancing environmental objectives, including LNG-fueled ships. EIB signed framework agreements with Société Générale, ABN AMRO and ING, and plans to provide up to 50 percent financing for new ships and 100 percent financing for the green elements of retrofitting operations.

South Korea has launched a range of programs to make it competitive for LNG-fueled ships. In November 2018 the South Korean government announced it would order 140 LNG-fueled ships from domestic shipyards by 2025. In addition to placing this $886 million order, the government will also provide the shipyards with $886 million of guarantees and $620 million of financial aid. Further, the South Korean government announced in February 2019 plans to spend $2.48 billion on developing the country’s LNG bunkering industry. Singapore, focused on becoming an LNG bunkering hub rather than building an LNG fleet, has offered a more modest $2.25 million grant to each of FueLNG and Pavilion Gas in order to promote ship-to-ship refueling in Singapore in addition to these companies’ current truck-to-ship refueling businesses.

The northern European model
The most developed LNG bunkering infrastructure exists, and over half of the world’s LNG-fueled ships operate, in the North Sea and Baltic Sea. The successes of the northern European countries (particularly Norway) with LNG as an alternative marine fuel have been enabled by (i) government (and particularly supranational) support, (ii) abundant gas supplies, (iii) the prevalence of local shipping routes with predictable journey patterns and (iv) the fact that these countries have been using LNG as a marine fuel years for 20 years and thus have had time to incrementally develop supporting infrastructure.

The first sulfur ECAs were created by the European Union for the Baltic Sea and North Sea in 2005 and 2006, respectively, due to the susceptibility of the regions to acidification. In October 2014 the EU passed Directive 2014/94/EU requiring member states to take part in the construction of a core network (the “Trans-European Transport Network”) of both marine and inland ports with LNG bunkering. Individual states had some flexibility in their path to developing their allotted portions of the network, but national policy plans were required to be submitted to the European Commission for review in November 2016. LNG-fueled ships had been in use in the region long before then. The aforementioned Glutra, built in 2000, was Norwegian, as were the two dozen LNG-fueled ships built in the following decade. The European Union standards, however, were responsible for spurring the expansion of LNG bunkering infrastructure, which allowed the industry to overcome the “chicken and egg” problem.

As of January 2019 there were 22 ports with LNG bunkering capacity in the Baltic Sea ECA, 18 such ports in the North Sea ECA, and a further 49 such ports in the rest of the EU. 40 of these ports are coastal. Another 50 LNG bunkering ports are in development as of April 2019. To promote this network the EU spent over $250 million on LNG bunkering (as of June 2018) through mechanisms such as the Connecting Europe Facility, which provides equity, debt, guarantees and project bond credit enhancements, with funds usually at a level that matches the private sector contribution.

The Norwegian government has independently provided incentives to develop the industry for LNG as a marine fuel. In 2007 the government introduced a tax on nitrogen oxide emissions; in 2008 it launched the Business Sector NOx Fund, which diverted some of the NOx taxes toward subsidizing LNG-fueled ships. According to OIES, 39 of Norway’s 61 LNG-fueled ships listed by DNV GL have received financial support from this NOx fund. Other national governments have launched their own initiatives as well. In September 2017 Germany’s Federal Ministry for Transport and Digital Infrastructure announced that as part of its Mobility and Fuels Strategy it would grant a total of €278 million to German shipping companies willing to switch to LNG by 2020.

Norway’s energy abundance also contributed substantially to the development of LNG in northern Europe. Norway was the world’s fifth, sixth and seventh largest natural gas producer in 2006, 2011 and 2016, respectively. With a population of only five million, Norway is a leading exporter within Europe and globally, and thus had gas export infrastructure (including liquefaction facilities) already in place along its coasts as it began to develop LNG as a marine fuel. A portion of gas supplies already liquefied for export were thus able to be diverted toward separate facilities for the discharge of LNG into the fuel tanks of ships rather than on to LNG carriers used to transport the gas as a commodity.

Another key factor in the adoption of LNG as a marine fuel in the North Sea and the Baltic Sea was the fact that the ports in these regions feature a high degree of calls from roll-on/roll-off ships, cruise ships, ferries and similar ships making local, predictable journeys. A regular, short-distance route drastically reduces the chances of being stranded without an opportunity to refuel. By contrast, an oil tanker on a spot trade traveling great distances between Africa or the Middle East and northeast Asia or North America might face such a difficulty.

Conclusions

The use of LNG as a marine fuel represents a significant shift from the current operating environment due to the fact that an alternative bunkering infrastructure is required and over 99 percent of ships cannot burn LNG. Yet, LNG appears to be progressing toward becoming a viable alternative. The “chicken-and-egg” issue is no longer discussed in industry circles as being unresolved, although given the time needed to develop sufficient LNG bunkering infrastructure, shipping companies may continue to adopt a “wait-and-see” approach while the industry continues to develop, technology improves and costs are reduced.

Government financial support can facilitate a final investment decision by improving the cost of capital, such as in the Norwegian and South Korean cases, and government logistical support can help create an environment of enhanced cooperation between stakeholders, such as in the case of the European Union. However, LNG bunkering can be developed without government support, such as in the case of the states of Florida and Louisiana in the United States.

Regardless of private-public sector cooperation, developers of LNG bunkering infrastructure will have to consider as primary concerns (A) the gas source they plan to use to supply the LNG-fueled ships and (B) the trading and fueling patterns of the ships to which they plan to market. Many developers of LNG bunkering infrastructure will thus decide not only to locate their facilities near LNG suppliers, but also to negotiate long-term supply contracts with them prior to making significant investment in the facilities. Some developers might also seek joint venture or other contractual relationships with companies that use LNG-fueled ships and have regular trading routes that pass the LNG bunkering facilities.

The success of LNG as a marine fuel will depend on, in addition to the cooperation of stakeholders, levels of government support, global supply of natural gas and degree of technological innovation, the international community’s perception of global – and, as the ECAs have shown, particularly coastal – environmental needs, and the comparative environmental advantages provided by burning LNG as opposed to other fuel sources. While using LNG as a marine fuel may create certain economic and other tangible business advantages, the impetus for more widespread interest in LNG was environmental concerns, particularly the IMO 2020 sulfur regulations. Similarly, environmental concerns may substantially reduce the desire to develop LNG as a true global marine fuel alternative to oil. Should climate science and/or political sentiment evolve toward stances that are significantly less concerned about greenhouse gas emissions, LNG may be considered not worth the investment and market disruption. More likely, however, given the political and cultural context today and over the past 20 to 30 years, is that if deep concern about the climate persists, and technological breakthroughs for alternative marine fuels with even lesser environmental impacts (such as renewables) occur, LNG may be considered an insufficient improvement to the marine fuel mix. Close attention to international maritime regulations, industry sentiment and the technological outlook remains essential.

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Japan’s Cosmo Oil to halt supply of 1.0% sulfur A-fuel oil as early as September

Japan’s third largest refiner Cosmo Oil will halt the supply of 1.0% sulfur A-fuel oil in the domestic rack and waterborne markets from as early as September, when it starts to supply bunker fuels that comply with the International Maritime Organization’s sulfur limit rule, a company official told S&P Global Platts.

The company official with parent Cosmo Energy Holdings, however, declined to elaborate on the matter. Cosmo Oil holds about a 13% share of A-fuel oil supply in Japan.

However, market participants said that Cosmo Oil’s move is related to difficulties in keeping separate tank storage for a wide range of products due in part to the company’s response to the IMO mandate.

The company is facing a lack of storage facilities to keep its supply of A-fuel oils with different sulfur content — 0.1%, 1.0% and 0.5%, market sources added.

A-fuel oil — a blend of gasoil and fuel oil in a 90:10 ratio — is one of the key products supplied by Japanese refiners used by industrial power plants, coastal vessels as well as construction and agricultural machinery in the country.

Cosmo Oil’s latest move came to light after Platts first reported in February that the refiner planned to start supplying 0.5% sulfur bunker fuel from October in response to changes in IMO regulations, with the expansion of the coker at its 100,000 b/d Sakai refinery in western Japan.

Cosmo Oil has a combined 363,000 b/d capacity over three refineries in Japan, with oil terminals in Hakodate in the north and Sakaide in the west.

JXTG ALSO CONSIDERING SUPPLY SUSPENSION

Japan’s largest refiner JXTG Nippon Oil & Energy, which has a 48% share of A-fuel oil supply in the domestic market, also told Platts it is considering suspending a part of its supply of A-fuel oil, when it starts supplying IMO-compliant bunker fuel.

“We are considering it [to halt A-fuel oil supply],” a company official said, when asked whether the company was also suspending its supply of A-fuel oil.

According to market sources, JXTG was halting its supply of A-fuel oil, when it starts supplying IMO-compliant bunker fuels, with some customers already informed by the largest refiner.

JXTG, which accounts for 40%-50% of domestic bunker fuel supply, is ready to start supplying IMO-compliant bunker fuel by October, Tsutomu Sugimori, president of parent JXTG Holdings, said on May 13.

Meanwhile Idemitsu Kosan, which together with its wholly-owned subsidiary Showa Shell has a 34% share of domestic A-fuel oil supply, is the second largest refiner in Japan and it has decided to continue supplying 1.0% sulfur A-fuel oil even after January next year.

“We have estimated that a certain amount of demand for 1.0% sulfur A-fuel oil from shipowners would remain. Essentially, those who have installed scrubbers on their tankers,” a company official said.

Refiner Taiyo Oil does not supply any bunker fuel oil from its sole 138,000 b/d Kikuma refinery in western Japan — as it does not normally produce any residual fuels — with a 32,000 b/d residue fluid catalytic cracking unit, a company source with direct knowledge of the matter said.

In the fiscal year to March 31, 2019, Japan’s A-fuel oil demand stood at 11.07 million kiloliters or 190,762 b/d, accounting for about 7% of total oil products demand, according to the Ministry of Economy, Trade and Industry data.

The IMO will cap global sulfur content in marine fuels at 0.5% from January 1 next year, down from 3.5% currently. This applies outside the designated emission control areas where the limit is already 0.1%. Shipowners will have to either burn cleaner, more expensive fuels or install scrubber units for burning high sulfur fuel oil to comply with the rule.

Rack oil products are those that are transported by refiners and other independent suppliers over land by tank lorries — loaded from either refinery tanks or secondary tanks outside the refinery. Waterborne oil products are primarily supplied by local refiners and major trading houses in Japan.

On Wednesday, Platts assessed Japan’s rack 1.0% A-fuel oil, or HSAFO, in Kanagawa, Tokyo Bay, at Yen 64,700/kl, or $93.15/b, and waterborne HSAFO in Tokyo Bay at Yen 64,900/kl.

 

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2017-11-01

SK Innovation’s subsidiary, SK Energy, has decided to build a new VRDS (Vacuum Residue Desulfurization) facility (with a production capacity of 40,000 barrels per day) in the SK Ulsan Complex, with a KRW 100 billion investment by 2020.

This decision is interpreted as providing a preemptive response to the decision made by the IMO (International Maritime Organization) to strengthen the regulation of sulfur content in bunker fuel from 3.5% to 0.5%.

Generally speaking, the low sulfur content in fuel products is considered to be better when it comes to its ecological footprint. While diesel fuel, used for land transports, has very strict regulations of less than 0.001% in sulfur content, the bunker fuel used in maritime vessels has faced constant criticism with its comparatively lax regulation of 3.5% and the resulting contribution to air pollution.

SK Innovation’s new investment is expected to place them in a strong position to discuss the upcoming challenges posed by the new regulation, such as the lack of supply in the global market and the consequent rise in prices.

Low-cost vacuum residues (residue from vacuum distillation process), which are used to produce asphalt and high-sulfur content fuel, are expected to face significant declines in demand and prices because of the new regulations. SK Innovation’s new investment in desulfurization facilities will allow the company to process the residue into high-value products such as low-sulfur fuel, diesel, or naphtha, helping to a diversified profit structure. Furthermore, desulfurization facilities are also expected to stabilize the supply of lube oil production processes, further helping to improve the profit structure of the company.

Coupled with the new possibilities for sourcing low-cost crude oil, SK Innovation’s new competitiveness in the form of optimization is also expected to experience a surge.

CEO Jun Kim of SK Innovation commented: “This investment is intended to strengthen the fundamental competitiveness of our oil business” and “we will continue working to provide a preemptive response toward the changes in the global energy market.”

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European ports have been expanding their low sulfur fuel oil storage capacity ahead of IMO 2020 — a lower sulfur cap on marine fuels, mandated by the International Maritime Organization, from January 1, 2020.

The global cap on sulfur content in bunker fuel will be cut to 0.5% from 3.5%, and most bunker fuel demand was expected to shift from high sulfur fuel oil to very low sulfur fuels or marine gasoil.

The Scottish port of Aberdeen recently became the latest harbor in Northwest Europe to announce additional storage capacity to ensure supply of compliant 0.5% products. Peterson Energy Logistics invested GBP3 million ($4 million) into a new 4,000 cu m tank for storing marine gasoil.

That tank’s installation — operations are scheduled to begin this summer — and a 1,500 cu m tank that has also been recently installed, Peterson’s MGO capacity in Aberdeen will rise to 11,000 cu m.

Earlier this month, bunker supplier Stena Oil said it will lease and operate a planned new oil products terminal at Frederikshavn, Denmark, from the fourth quarter. The terminal is designed to meet demand for new, lower sulfur marine fuels that will be compulsory from next year.

“Its flexibility and multiple segregations will make it ready to…accommodate products complying with the new 2020 IMO sulfur regulations,” a company spokesman said.

The terminal will consist of 11 storage tanks and, with a total storage capacity of 74,400 cu m for maritime products and waste water, will be the largest in Scandinavia.

Meanwhile in Rotterdam, Vopak began maintenance at its storage facility at the start of the year as an initiative to invest in its oil hub terminals in preparation for the IMO 2020.

The transition to focus on offering greater capacity for 0.5% compliant fuel has limited available storage for HSFO, which the majority of the market is still using ahead of 2020.

TIGHTER STORAGE MARKET

In bunker hubs such as Rotterdam, the move to offer dirty tank space to allow tank leaseholders to begin blending 0.5% has contributed to the backwardated structure on the 3.5% FOB Rotterdam barge curve.

Additionally restricted HSFO storage in Rotterdam has created ongoing barge loading delays as barge owners have fewer options to load HSFO bunkers.

“We do not have any open fuel oil capacity, so we cannot accommodate new storage requirements,” a tank operator in the Amsterdam-Rotterdam-Antwerp trading hub said.

“For existing customers the systems have been or are being prepared for low sulfur (dedicated lines, separated systems etc.),” the operator said.

Many companies plan to be ready by October for IMO 2020 to ensure they are fully compliant by January, increasing the demand for ‘new fuels’.

However, others want to ensure they continue to maximize the hefty discount HSFO bunkers will carry as the cap approaches.

Further afield, Singapore has been drawing LSFO and components from Europe to the world’s largest bunker hub to prepare to blend down to the new 0.5% specification.

Stocks of low sulfur fuel oil with maximum 0.5% sulfur components have increased to 3 million mt or more around Singapore as traders prepare for IMO 2020, market sources said.

“Tankage is now tight in Singapore,” the tank operator said. “There was a lot of open capacity in the region only a few months ago, and almost all of it is now taken on a spot basis.”

Traders said stocks had been around 1 million mt in early March, while about 3-4 VLCCs had been taken for storing LSFO components. They estimated there were now 10 VLCCs storing product.

The increasing amount of LSFO storage in Singapore may also support the eastern HSFO market in coming months due to tighter conditions.

MOVE TOWARDS FLOATING STORAGE

LSFO components stored around Singapore include low sulfur crude oil, light cycle oil, vacuum gasoil and slurry oil, market sources said.

Most stocks are in VLCCs as the tankers have heating facilities, but some are also in landed terminals, market sources said.

Some of the floating storage vessels are cheap because they only store the products, while others are more sophisticated with blending and heating capabilities and these compete with land based tankage.

In Europe, a 441,561 dwt ULCC, the Oceania, has been anchored off the east coast of Malta since early January, according to Platts cFlow, trade flow software.

Sources said the vessel has been loading 0.5% fuel oil ahead of IMO 2020 to supply the Euronav fleet with compliant marine fuel in 2020. According to the website, Euronav has 72 vessels.

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MO meeting considers more control on bunker suppliers

Measures to improve control on fuel quality provided by bunker suppliers have once again been discussed at the IMO. This time, it resulted in some instructions for member states on what can be done as part of IMO guidelines to encourage consistent implementation of the 0.50% sulphur limit, as well as a draft joint MSC-MEPC circular expected to be approved by both committees at their next respective meetings.

The idea up for discussion at the 6th meeting of the IMO’s Sub-Committee on Pollution Prevention and Response (PPR 6) last month is not new at the IMO, but was this time put into the context of guidelines for 2020. The proposal was to carry out tests on an ad-hoc basis on fuel prior to delivery to ships to prevent delivery of fuels that do not comply with MARPOL regulations – both with regards to sulphur and Regulation 18.3 pertaining to fuel safety.

During discussions at PPR 6, there was support from various parties that a lot more should be done, but also warnings that a scheme calling for systematic pre-testing would create a significant administrative burden for the designated competent authorities. Many parties stressed that the frequency of such pre-delivery testing should be left up to each administration as they see fit.

IBIA pointed out to PPR 6 that fuels supplied to ships are already tested in the supply chain, which is why most fuels supplied are in fact compliant. Nevertheless, doing spot checks when there is a cause for concern could be way forward.

The question of how to address this was further discussed in the Working Group on Air Pollution during PPR 6, where text was developed for the guidelines on consistent implementation calling for designated authorities to take samples from bunker barges or shore bunker terminals as deemed necessary, but avoiding as far as possible causing operational delays for ships due to sample analysis. It also contains instructions to take corrective measures against non-compliant suppliers and share the information with the IMO.

These guidelines are expected to be approved at the Marine Environment Protection Committee in May (MEPC 74).

PPR 6 also developed a joint MSC-MEPC circular addressing the delivery of compliant fuel oil by suppliers, for approval at MEPC 74 in May and at the Maritime Safety Committee (MSC 101) in June. The draft circular is aimed at Members States to take appropriate action against suppliers under their jurisdiction to ensure they deliver compliant fuel oil. They are also told to urge fuel oil suppliers to take into account, as relevant Guidance developed by the IMO on best practice for fuel oil suppliers and fuel oil purchasers/users for assuring the quality of fuel oil delivered to and used ships.

Concrete proposals regarding a bunker supplier licencing scheme have also been invited to MEPC 74.

IBIA is in principle supportive of licensing schemes as it helps promote a level playing field for suppliers that adhere to best practices. However, if a supplier licencing scheme was to be made mandatory, it would need to be limited in scope to issues pertaining to IMO regulations in order not to go beyond the scope of member states’ obligations. This may include measures to ensure suppliers to adhere to MARPOL Annex VI requirements regarding fuel quality (Regulation 14 and 18.3) and SOLAS, and that they provide the correct associated documentation and representative samples as required by IMO regulations.

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Rivertrace publishes new white paper on scrubber technology and washwater monitoring

Ahead of the incoming Global Sulphur Cap restrictions that will impose a ban on all marine fuels with >0.50% sulphur content from January 1, 2020, market leading developers of smart water quality monitoring technology Rivertrace Limited, have published a technical white paper that focusses on scrubber technology options and washwater monitoring.

Entitled ‘To Scrub or not to scrub?’, the white paper provides the industry with a need-to-know guide to all options for compliance, with particular focus on scrubbers and IMO washwater monitoring guidelines. The paper also explores the impact of sulphur emissions from ships, the chemistry of scrubbing sulphur from exhaust gases and the benefits associated with scrubber use.

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Infographic showing the chemistry of washwater

As the global shipping industry prepares for the arrival of the global sulphur cap in January 2020, the choice between compliance options to meet fuel sulphur content restrictions imposed by the Global Sulphur Cap are fast becoming a reality for ship owners.

Rivertrace, as an advocate for environmental compliance, is working to ensure that ship owners are well-informed on current guidelines for scrubber washwater monitoring as the debate around the use of scrubbers by ships rages on. In publishing the new white paper, Rivertrace have issued an advisory to ship owners that during the selection of a scrubber technology, careful consideration of what washwater monitoring equipment is used by the scrubber manufacturer is a vital importance to ensure potential regulatory requirements are met in the future.

Mike Coomber, Managing Director of Rivertrace says: “We have seen recent bans on scrubber operation in some ports because of the washwater discharge issue. However, there is acceptance that the continued use of scrubbers by ships may depend on being able to prove that washwater quality is constantly monitored and shown to meet appropriate standards.

“The fact that scrubber washwater remains to be the only discharge of its type not subject to the same standards as discharges from other shipboard systems means that it will almost inevitably lead the requirement of mandatory monitoring Therefore, ship owners must be well-informed of washwater monitoring equipment options and those used by scrubber manufacturers in order to ensure compliance with future standards.”

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Rivertrace’s SMART ESM (Exhaust Scrubber Washwater Monitor) fully compliant with MEPC 259(68)

Rivertrace will showcase their product range including the new SMART ESM Exhaust Scrubber Washwater Monitor which measures and records PAH, Turbidity, Temperature and pH and is fully compliant with MEPC 259(68), at Nor-Shipping 2019 in Oslo between June 3-7. Visit the Rivertrace team at stand D06-04.

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Three Ps for IMO 2020

With less than a year left to get ready for the 0.50% sulphur limit, awareness is high but is that enough? Many have doubts, but don’t stop trying, says IBIA’s Unni Einemo.

To be where we need to be by the end of this year, many elements of the three Ps should already be in place. I am, of course, talking about what needs to happen for a successful transition to the 0.50% sulphur limit which takes effect on 1 January 2020.
The three Ps are: Plan, Prepare, Practise.

Exactly what that means varies between stakeholders; refineries have different timelines and concerns than ship operators. Various players in the bunker supply industry have others, depending on which links in the supply chain they take part in. The International Maritime Organization (IMO) is working hard to put comprehensive guidelines in place to ensure the regulation is effectively implemented.

The trickiest part of all this are the uncertainties created by the inter-dependency of all these stakeholders; they all rely on others to meet their needs and/or do the right thing. Will there be enough supply? Will scrubber uptake be high? Will ships comply?

Uncertainty about the answers to these questions puts stakeholders at risk of making the wrong investments or being put at a disadvantage if others aren’t being penalised for failing to play by the rules. Hence we see heavy emphasis on the need for effective enforcement of the regulation.

In November 2018, the technical manager of the chemical tanker company Ardmore Shipping, told the IBIA Annual Convention that for Ardmore, compliance with the 0.50% sulphur limit “is not a 2020 problem, it is a 2019 problem” because when we get to 2020 it is too late. Wise words! This company is already well down the line with the three Ps.

Three Ps for shipowners

Most owners should now have the first part of their plan ready, namely a decision regarding which route to compliance they intend to take. Owners also need to prepare the hardware, whether that is installations and/or retrofits of scrubbers, and considering potential changes to their tank and fuel system configurations to prepare their ships to be better equipped to deal with a variety of fuels, for example splitting larger fuel tanks into smaller ones to enable effective segregation of fuels, and ensuring tanks have flexibility to heat fuels when necessary.

Another element of their planning and preparation is to talk to bunker suppliers about their fuel requirements, whether that is high sulphur fuel oil (HSFO) to use with scrubbers or low sulphur fuels to comply in 2020.

Also, plan for the ‘switch’: what’s needed with regards to tank cleaning and fuel purchasing to achieve compliance by the start of 2020. Timing will be a critical and challenging factor to get right with impact on the overall cost weighed up against the risk of not being compliant in time.

Then there’s practice. Crew may have to deal with more varied fuels; awareness and training could help them manage better. They could get some practice ahead of time by trialling one or more of the ultra low sulphur fuel oils (max 0.10% ULSFO) on offer for operations in emission control areas, as these are probably quite close in nature to the very low sulphur fuel oils blends we can expect (max 0.50% VLSFOs) to come into the market for 2020. This would be good practice to get used to managing changeovers between potentially incompatible fuels. In fact, they can learn from changeovers between marine gas oil used for ECA compliance and HSFO as well, as these can also be incompatible. It is also possible to buy VLSFO on a trial basis now to get experience.

The supply equation

Do we have the same three Ps for the supply side? Certainly, and there’s at least one more: Prediction. The latter is causing a lot of bother due to the inherent unpredictability of all forecasting.

The shift from a 3.50% to a 0.50% sulphur limit for global shipping is a transport fuel specification change on an unprecedented scale for the refining industry to adjust to. Back in 2016, when the IMO decided to implement that change in 2020, it was on the basis of a study predicting that the global refining industry could cope. There have been other forecasts arriving at a different conclusion, and as we stare down the barrel of this massive challenge, opinions remain divided.

In January, IBIA took part in a forum called “IMO 2020 – Are you ready? Debate with the Specialists!” hosted by Euro Petroleum Consultants. It offered insights from a variety of refining experts and consultants. It demonstrated a few things very clearly: firstly, that the refining industry is paying attention because this will have a major impact on their product markets; secondly, even if there is a concerted effort within the refining industry to meet demand from shipping it will be a challenge; thirdly, there will be a global race for middle distillate molecules to bridge the gap when refinery bottoms will no longer be the major component of marine fuels.

Refiners will need a strong price incentive to divert sufficient molecules into the marine fuel supply pool and hence sufficient supply is not guaranteed. Also complicating the picture is that refinery models are typically not capturing certain marine fuel quality criteria such as the compatibility of blend components, lubricity, flash point, and cold flow properties. So concerns persist about sufficient supply from the refining industry, with the added concerns about fuel quality.

Predictions aside, the event in London also demonstrated that where some see problems, others see opportunities. There were several refinery consultants presenting solutions that can help refineries maximise production of low sulphur marine fuels. These included optimising blending with specialised equipment, maximising use of delayed coking to upgrade residues, and novel desulphurisation processes that essentially converts HSFO to VLSFO with, allegedly, lower capital investments required than refinery upgrades to increase cracking and coking capacity.

What about the other three Ps then? Some refiners have already planned ahead and made the upgrades needed to cut HSFO output and boost higher value products. These are generally not specifically aimed at meeting demand from shipping, but rather any market where they can get the best price for their various refinery streams. Some refiners and commodity traders are specifically preparing VLSFOs that meet ISO 8217 marine fuel specifications, in particular the oil majors and traders who are already active in marine fuel marketing.

Today, the majority of bunker fuels are not sold directly to ships from refiners. Traders play a key role in sourcing cargoes which may meet specifications at the refinery gate, but they may equally source a variety of cargoes that can be blended to meet marine fuel specifications. If the price is right, the balance might shift toward refiners in 2020, but traders will continue to play a major role in sourcing, blending and distributing compliant fuels to ports around the world.

Elsewhere in the supply chain, there’s planning and preparation to do with regards to the supply infrastructure, in particular reallocation of storage tanks and cargo tanks on bunker barges from HSFO to low sulphur products. The same principle applies here as to ship’s fuel systems: cleaning is required, getting the timing right is critical, and they need to consider the need for segregation of potentially incompatible fuels.

Practice is more difficult in the supply chain because until the demand is there, suppliers cannot produce, distribute, store, and supply large quantities of 2020 compliant fuels. But IBIA encourages those that will produce these fuel blends to develop trial products now, have them tested against ISO 8217 specifications, keep an eye on their shelf-life and preferably run trials and engine performance testing.

Compliance levels

One of the uncertainties and subject of much speculation is how good compliance will be. Alongside uncertainty about the extent of scrubber uptake, which has largely been expected to grow rapidly from a relatively low share of the global fleet in 2020, this has been cited as a reason for refiners to hold back on costly upgrades to convert more HSFO to high value products.

Is it possible to estimate what percentage of vessels will be compliant by January 2020? Maybe it is, but whether you put the estimate low or high it seems to cause controversy and how useful is it? From a preparation point of view, there seems little point in trying to put a number on this because from both the supply and shipping side, the focus needs to be on preparing to comply and speculating too much on compliance levels may be counterproductive.

Those that intend to comply are anxious that enforcement is effective so they are not put at a commercial disadvantage. IMO is providing a good framework for enforcement but it is difficult to predict how robustly it will be applied around the world and it will likely vary between countries. However, a large number of countries are well prepared to enforce effectively and most ships will, sooner or later, call at ports in these countries and hence be subjected to thorough inspections.

Ironically, the biggest cause of non-compliance in 2020 could prove to be a lack of availability rather than wilful cheating if refineries and the supply chain logistics struggle to cope to meet the increase in demand for low sulphur fuels.

That’s why it is important to have a well-developed mechanism to ensure ships are not unduly penalised if, despite their best efforts, they are unable to obtain compliant fuel. Work is underway at the IMO to develop a standard fuel oil non-availability report (FONAR), as provided for in Regulation 18.2 of MARPOL Annex VI. It’s important to note that FONARs are not exemptions, and it will be up to port state control officers at the ship’s next port of call whether they accept the FONAR as evidence the ship did all it could to obtain compliant fuel. PSC could then decide that the ship won’t be penalised but it will nevertheless be reported as a deficiency. They could even decide that the ship must debunker and take onboard compliant fuel, which is not a penalty but a pretty effective deterrent as this would be time-consuming and costly.

All in all then, the best course of action is for all parties to try their best to be ready for 2020, because doubts foster inaction. Society will judge the entire sector harshly if it fails.

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