The global sulfur cap 2020 - is the industry prepared?
On 1 January 2020, the maximum allowable sulfur content of marine fuels will be drastically reduced from the current 3.50% to 0.5% m/m. A sense of anxiety is gripping the shipping industry as 2020 is rapidly approaching. It is expected that the global sulfur cap 2020 will have great impact not only on the shipping industry but also on the refining sector triggered by the increasing demand for compliant fuel. Analysts estimate that less than 1% of the worldwide shipping fleet is currently operating within the sulfur cap 2020. As there is a range of options for compliance, shipowners and operators must urgently weigh their options and reach a conclusion on how to ensure compliance in the most cost-efficient way. This article aims to provide a brief overview of the regulations and the main alternatives for compliance with focus on the scrubber systems.
The reduction of sulfur emissions of ships is regulated by the sixth annex of the MARPOL Convention of the International Maritime Organisation (IMO). As of January 2018, 156 states are parties to the MARPOL convention, being flag states of 99.42% of the world’s shipping tonnage, which entered into force on 19 May 2005.
Shortly after, a revised Annex VI with significantly strengthened limits on sulfur emissions was further introduced. These constraints were to be implemented gradually starting from 2010, with reduction of the global sulfur cap from 4.5% to 3.5%, effective from 2012, and further reduction to 0.5% by 2020. This is the so-called «global sulfur cap 2020».
On the EU level, the Sulfur Directive was adopted on 1 January 2012 to implement the requirements of IMO Marpol Annex VI introduced in 2010. The Sulfur Directive and the MARPOL convention are both transposed into domestic law in Norway and hence have direct legal force.
According to MARPOL Annex VI, the 2020 date was originally made «subject to a review, to be completed by 2018, as to the availability of the required fuel oil. Depending on the outcome of the review, this date could be deferred to 1 January 2025.» However, on 27 October 2016 IMO announced that they will stick to the 2020 date as scheduled and this was further re-confirmed in April this year on the 72th session of the IMO Marine Environment Protection Committee.
It is should be noted that the global sulfur cap has already been implemented in some designated areas in China as of 1 October 2018. These areas include, among others, the Pearl River and Yangtze River Deltas, as well as Bohai-rim Waters. It follows from the above that ships operating in these areas are prohibited from using fuel with a sulfur content exceeding 0.5% unless an exhaust gas cleaning system has been installed.
Moreover, a ban on the carriage of noncompliant fuels, i.e. HFO, unless an approved compliance method such as scrubbers is used is currently under review by IMO and will likely be adopted for entry into force by March 2020. The intention is to help ensure that the global sulfur cap will indeed be successfully implemented worldwide as the measure will provide governments with an additional tool to monitor full compliance of the sulfur cap.
In addition to the global cap on sulfur emissions from ships, the MARPOL regulations further provide for the creation of certain emission control areas (ECAs) – designated zones in which stricter limitations are applied due to high concentration of shipping activity and coastal populations. The ECAs currently include the Baltic Sea area, the North Sea area, the English Channel, most of the US and Canadian coastal areas, as well as the US Caribbean Sea area (around Puerto and the US Virgin Islands). As opposed to the global cap, a 0.1% limit on sulfur content applies in the ECAs and has existed since 1 January 2015.
Compliance options and their challenges
There are mainly four options for shipowners to ensure compliance with the sulfur emission regulations. They may either choose to (1) switch from heavy fuel oil (HFO) to marine distillates such as marine diesel oil (MDO) or marine gas oil (MGO), (2) use ultra-low sulfur HFO/hybrid fuel (LSFO), (3) retrofit vessels to use alternative fuels such as LNG or (4) install scrubber systems which will allow them to continue burning regular HFO.
Although there are several approaches, most shipowners and operators are likely to choose MDO/MGO as this seems to be the easiest option in the short run since it requires no modifications to the vessel. One interesting point, though, is that many analysts foresee a spike in the marine distillates price as 2020 deadline nears because refineries are not likely to be able to produce enough to satisfy demand. Whether this is the ultimate outcome, remains to be seen.
One thing is certain, this change will have an impact on the global refinery industry which has to undergo a massive change in order to meet demand. Clearly, the refineries must shift their output from high sulfur fuel to low sulfur fuel. To a great extent, how this transition will look like will be in the hands of the refineries and it is crucial to consider how they manage their production, how much it costs them, and how they work with the bunkering industry.
The cost of low sulfur fuels and other compliant fuels is typically 50% more than the cost of heavy oil in the current bunker market. Given the increased demand for low sulfur fuels due to the mandatory switch in 2020, the cost of bunkers is likely to increase considerably – some expect as much as US $400 a ton, which is equivalent to the spread between LSFO and current cost of HFO.
An alternative for owners who are concerned about the price increase and availability of compliant fuels may therefore be to install a scrubber.
Simply described, a scrubber is an exhaust gas cleaning system which removes sulfur oxides in a ship’s exhaust gases. There are mainly three types of scrubbers available today: open loop, closed loop and a hybrid system that switch between the closed- and open-loop system depending on the area in which the vessel operates.
While the open-loop scrubbers rely on the natural alkalinityof the seawater, the closed-loop systems use water mixed with chemicals to wash out the sulfur oxides in the exhaust. As opposed to the closed-loop systems, the waste water resulting from using open-loop systems must be discharged back to the sea. This may cause some complications as the resulting waste water must meet certain MARPOL requirements before being released. Moreover, some ports even restrict the discharge of waste water, leaving the closed-loop and hybrid systems as the only options.
The price tag for a scrubber is somewhere between US $3-5 million depending on the size and type. As scrubbers come in all sizes and types, there is simply no one-size-fits-all solution. The installation of scrubber must be decided on a case by case basis whereby the following factors should be taken into account: type and size of vessel, the machinery configuration, operational patterns and the routes of the vessel as some areas and harbours may operate with constraints on the discharge of scrubber water. It is also necessary to consider the weight and space, especially when scrubbers are retrofitted on existing vessels, as well as potential off-hire due to retrofitting and the remaining lifetime of the ship. It seems that the most attractive business case for scrubbers are large vessels such as VLCCs and VLOCs trading between continents with a limited number of port calls.
With the global sulfur cap coming into force in 2020, we expect an increasing demand for scrubbers, especially if the spread between high and low sulfur fuels increases. Based on the current figures, return of investment for the installation of a scrubber may be achieved within two to three years, all depending on the circumstances.
Although the installation of scrubber system seems to be the most cost-effective option given the short payback time, one should also bear in mind the potential difficulties for ships that continue to burn HFO after 2020.The main concern seems to be the risk that, having invested in a scrubber system, the availability of HFO might decrease significantly from January 2020 as it becomes uneconomic for refiners to produce. It is, however, likely that HFO will continue to be available in major ports with higher demand so again the trading pattern of the vessel may be vital.
The 2020 deadline is really no surprise as it has been on the agenda for many years. Experiences with the restrictions applied in the ECAs indicate that the market is more prepared than many realize.
Analysts predict that the refiners will soon be able to offer a blend of LSFO at a low-cost price as opposed to the MGO alternative to HFO. It follows that, if HFO becomes more expensive as its refining costs increase and a LSFO discounted option is made available, the scrubber option may well not be a good option in the long term.
Implementation of the global cap may prove far more complicated, especially if the refineries do not manage to provide sufficient quantities of compliant fuels and there is a significant price spike in 2020. With that being said, it is impossible to predict with certainty what will happen in two years.
As shipowners are faced with several options for compliance, there is just no simple answer as to what option they should choose. It is in owners’ best interest to investigate all compliance options and choose the one option they consider the most cost effective, suitable for their operations and sustainable in the long term while taking into account the situational factors.
Although it is predicted that the use of LNG and scrubbers is likely to increase, especially after 2020, this will certainly only involve a small percentage of the world’s fleet. Consequently, the vast majority of ships are likely to comply by using fuel oil with a sulfur content of 0.5% or less.