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Estimates differ for cost of 2020 sulphur cap

Fri 07 Apr 2017 by Paul Fanning

Estimates differ for cost of 2020 sulphur cap
Sushant Gupta, research director for Asia refining at Wood Mackenzie

Global bunker fuel costs could rise by up to US$60 billion annually from 2020, when IMO’s 0.5 per cent sulphur cap regulation for bunker fuels comes into force, according to a recent report.

A report from analyst Wood Mackenzie shows that a combination of higher crude prices and tight availability of marine gas oil (MGO) could take the price of the product up to almost four times that of current fuel and eventually cost the entire industry the additional US$60 billion.

Traditionally, heavy fuel oil is used by the shipping industry as bunker fuel. In 2016, global demand for this high sulphur fuel oil stood at almost 70 per cent of demand for bunker fuels overall.

With the implementation of the IMO regulation in 2020, shipowners will have to decide whether to switch to alternative fuels such as MGO, which will enable the sector to meet the regulation’s sulphur specifications. Alternatively, they could install a scrubber – a system that removes sulphur from the exhaust gas emitted by bunker fuel.

Research director for Asia refining at Wood Mackenzie Sushant Gupta said: “Installing scrubbers may be an economically attractive option. Although there is an initial investment, shippers can expect a high rate of return of between 20 per cent and 50 per cent depending on the investment cost, the MGO-fuel oil spread and the ship’s fuel consumption.

“Despite attractive returns, the penetration rate for scrubbers could be limited by access to finance, scrubber manufacturing capacity, drydock space and technological uncertainties. The shipping industry is traditionally slow to move, but in this case early adopters may benefit hugely,” he added.

Mr Gupta made the point that switching to MGO is a more costly solution. When the IMO regulation is in force and vessels are in full compliance, shippers are expected to try to pass the cost on to consumers and freight rates, which could increase by up to US$1 a barrel.

Wood Mackenzie said that it also expects a shift in bunkering locations based on the availability of compliant fuels. Singapore could potentially lose some of its market share for bunker fuels to China as shippers look for alternative locations with a surplus of compliant fuels.

Mr Gupta added: “The options for refiners and shippers will depend on the course of action decided by each of them. At the end of the day, the shipping industry and refineries need to communicate and find middle ground. And, unfortunately, time is running out.”

In response, the International Bunker Industry Association (IBIA) has pointed out that the headline figure in the report was based on the majority of the world fleet switching from high sulphur fuel oil to MGO. It has been provided with details from another analysis of the potential cost of the 2020 sulphur regulation based on modelling undertaken by UK analyst Marine and Energy Consulting.

This modelling assumes a higher uptake of scrubbers and its findings reflect this. IBIA said: “Combining the bunker cost differentials with the prices and the uptake in scrubbing results in an average annual cost to the shipping community of US$24 billion over the decade starting in 2020. These costs would subsequently decrease.”

 

SEA\LNG signs deal with SGMF

SEA\LNG, the group set up in mid 2016 to promote the use of gas as marine fuel, has signed a memorandum of understanding with the Society for Gas as a Marine Fuel (SGMF), creating a framework for working together to persuade global shipping to adopt liquefied natural gas (LNG) as its fuel of choice.

The two organisations will retain their individual objectives. SEA\LNG will continue to focus on tackling the commercial barriers and SGMF will focus on safety, operations and the technical challenges to the take-up of LNG as a marine fuel. They plan to share knowledge, data and information to benefit their combined membership.

SGMF general manager Mark Bell said: “Through our work on the safety and technical aspects of LNG, SGMF remains wholly focused on promoting safe, responsible operations for gas-fuelled ships.

“The 100-plus members of SGMF represent the whole value chain, from supply to end use, and our focus remains on safety, technical, contractual, training and competence, environment and gas-as-fuel industry information. SGMF does not cover the commercial aspect and so it will be beneficial to leverage the work of SEA\LNG on this issue.”

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