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Impact of 2015 ECAs on the 2020 global sulphur cap decision

Impact of 2015 ECAs on the 2020 global sulphur cap decision
We are now about 11 months into the implementation of the 0.1% maximum sulphur cap for fuels used on ships while operating in the North American, Baltic, and North Sea Emission Control Areas (ECAs). There were a lot of predictions being made in the years leading up to the 1 January 2015 implementation of the 0.1% sulphur cap in ECAs.

The pessimistic predictions included rapid fuel price increases that would threaten the financial feasibility of many ship operators; short sea shipping losing major market share to over the road transport; and radical changes in home ports for cruise ships. The optimistic predictions on the other hand, assumed that the global refinery industry would upgrade residual fuels to meet the new standards; and the accelerated development on LNG supply infrastructure.

It is clear that none of the worst case pessimistic scenarios materialised. However, there is no doubt that many of the shipping sectors are indeed experiencing serious financial pressures; they are being driven by significant drops in their revenue. In fact, lower fuel costs, as a result of the drop in global crude oil and liquid petroleum prices, are one of the few things helping to keep many operators in business.

Similarly, there has not been large-scale changes in cruise ship itineraries to move vessels out of the more heavily ECA impacted routes. Instead most major cruise ship operators have made large investments in exhaust gas cleaning systems or scrubbers so they can continue to use higher sulphur fuel oils. While the general experiences have been for these projects to be much more complicated and expensive than originally envisioned, most operators have been able to get temporary waivers from ECA limits, or other government support in exchange for the investment commitments. There is still not a lot of published information on the actual operational results but it is clear that the technology has not reached a point where it is “plug and play” for ships, or a point where economies of scale are bringing the investment cost down.

Not surprising to most in the industry, none of the best case optimistic scenarios have materialised either. There have been some announced investments by a few oil refiners to increase their distillate fuel production for other economic business reasons, but there has not been a rush of investments in fuel oil upgrading capabilities.

Another thing that has not happened is an accelerated development of LNG bunkering infrastructure. There have been a number of ship owners that have committed to taking delivery of LNG powered or LNG capable vessels. However, many of these owners have found securing the required LNG supply to be more complicated and expensive than the optimistic projections. There continues to be interest in some ports to pursue developing LNG infrastructure albeit without the same enthusiasm that initially accompanied the plans. It is reasonable to expect continued development for some of the short sea shipping traffic on dedicated routes. However, there has not been any indication that development will be at a pace to offer any real change to the impact of a global cap in 2020. It is always been a “chicken and egg” situation for LNG as a bunker fuel with a need for demand to increase so that there will be greater supply but LNG has always faced issues like the need for increased storage space; the lack of supply infrastructure; the requirement for expensive modifications. The unforeseen factor now weighing heavy on LNG development is the rapid drop in liquid petroleum prices, which has made the economic business case for LNG much less attractive.

So what has happened? Most ships have simply switched to using marine gasoil with a maximum 0.1% sulphur while in ECAs. They have either absorbed the cost or passed it on to their customers if possible. The absolute impact has been minimal as in today’s market marine gas oil cost roughly what they were paying for high sulphur fuel oil last year. Nonetheless, the incremental cost difference between marine gasoil and heavy fuel oil still provides an incentive for innovation.

There have also been a number of suppliers looking to make unique fuel blends from existing refinery streams that can be ECA compliant. We have seen more than 70 different suppliers offering various alternative ECA compliant fuels in over 90 ports. As each unique fuel blend is a different product, they have varying degrees of challenges for the operators. The common theme with most of these fuels is that they require dedicated storage and handling for each product. That is to say if you are using more than one alternative fuel, each one requires its own storage in addition to the storage for marine gasoil and heavy fuel oil. This has not been viewed as practical for most vessels, and the discounts being offered to marine gasoil have not provided much of an incentive to change this view. That said, Veritas Petroleum Services (VPS) has seen a growing acceptance of these fuels by some customers.

Taking all things known today into account, it is difficult to say that there has been any advancement in the supply of ultra-low sulphur fuel oils or alternative fuels like LNG that will lessen the impact of a 2020 global cap. The current pace and technological accomplishments in scrubbers have not really been a game changer yet either. However, there also has not been the devastating economic impacts that were projected either.

So how will all this be factored in to the study of fuel availability that will soon be conducted, and used to help make a determination for either a 2020 or a 2025 implementation date? In the end this is a decision that is going to be made by a political body, and it will very likely be impacted by the political pressures at the time. In today’s political arena, I assume that pressure to do something soon will prevail and we will have a global cap in 2020 with or without a definitive supply solution.

Contributed by Michael McNamara md, Americas at Veritas Petroleum Services. Email: [email protected]