Euronav CEO brands sulphur cap the ‘worst’ legislation

Euronav CEO Paddy Rodgers. Credit: Chris Preovolos/Marine Money
Euronav CEO Paddy Rodgers. Credit: Chris Preovolos/Marine Money

Euronav chief executive officer (CEO) Paddy Rodgers has branded the International Maritime Organization’s sulphur cap, due to be introduced in January 2020, the “worst” regulation conceived. He added that regulators started from the wrong premise when formulating it.

Speaking at classification society ABS’s pre-SMM event in Hamburg, Germany, Rodgers told the audience that regulators should have started formulating the sulphur regulation by asking “Who pays?”

“I haven’t seen a worse piece of legislation. It means owners will need to make an investment of about 8–9% of the vessel’s initial capital costs, but the economics of the freight market will not change.

“Scrubbers are a one-time premium [that an owner could pay] that allows you to gain a cost advantage,” said Rodgers, adding that it is unclear how long it will be cheaper for. A few years ago, it was said that the spread between low-sulphur fuel oil (LSFO) and heavy fuel oil (HFO) was USD400/tonne. “Already, that has come in by USD90/tonne and we’re still 18 months ahead of the introduction of the cap.”

Earlier in the event, Rodgers had heard Goldman Sachs’ senior commodities analyst, Christian Lelong, explain why there is unlikely to be a major shortfall in the supply of LSFO, which could add another level of uncertainty to the scrubber-versus-compliant-fuel debate.

According to Lelong, the refiners were already building extra refining capacity before 2016, and this was based on the premise that the demand for crude would grow. Since those investment decisions were taken, demand for crude has dropped as the use of fuel oil is now in decline, and that is a source of LSFO that will need no extra investment as the investment decisions were already made.

Lelong also pointed to the probability that the “flows of fuel oil will be rearranged with the LSFO that is currently utilised by onshore power plants going to shipping, while the HFO will be diverted to the power plants.” The logic is that the power plants already have scrubbers fitted and can use the technology to operate on HFO.

In addition, Lelong said he believes that the scrubber technology for vessels will have a short shelf life because of the conversion in the cost of LSFO with the cost of HFO. According to Goldman Sachs, some 50% of fuel is currently consumed by 10–15% of the global fleet, and these ships are the larger vessels with bigger engines that spend much of their time operating at sea.

These larger vessels could fit scrubbers and recoup the cost relatively quickly. However, when the smaller vessel sizes are brought into the equation, the economics change and there is greater uncertainty as to whether fitting scrubbers will be cost-effective for these next-level ships.

“The prices of compliant fuel and HFO will converge, and in about two to three years’ time, the market for scrubbers will decrease,” Lelong said.

Rodgers was unequivocal. “Fuel oil will become more expensive for shipowners full stop, and that cost must be passed on to the freighting costs because shipping companies will not be able to absorb them,” he said.

“By going to scrubbers, you are signalling to customers that the HFO price is the correct price, not the compliant-fuel price” that Rodgers believes will make life significantly tougher for shipowners as a result.