Tanker owners could see higher charter rates as vessels docked for scrubber work

Ships in dry dock. Credit: Igor Malushko
Ships in dry dock. Credit: Igor Malushko

Large tanker owners could see a ‘green bonus’ next year from higher charter rates as vessels are withdrawn from the market to have scrubbers fitted ahead of the International Maritime Organization’s 0.5% cap on sulphur emissions from January 2020.

While the cap will apply to all merchant vessels, the poor state of the tanker markets and the large number of tankers that could be affected relative to total fleet size meant the fitting of scrubbers could benefit tanker owners the most.

That comes as spot charter rates for very large crude carriers (VLCCs) and Suezmax tankers have largely failed to hit breakeven levels of around USD22,000/day for a VLCC since September 2017, according to figures from Frontline and Clarksons.

Overcapacity from newbuildings hitting the water and constraints on crude oil shipments because of production cutbacks by oil producers have depressed freight rates. Average VLCC rates fell to USD1,357/day on 11 May.

Lars Barstad, commercial director at Frontline Management, told IHS Markit “There are about 210 VLCCs and 129 Suezmax tankers in the age groups 2003–04, 2008–09, and 2013–14 that potentially need the extra work, assuming scrubbers are available,” he said.

These vessels account for 27% and 24% of the VLCC and Suezmax fleets, respectively.

“Adding 20–30% to their time ‘off-market’ over the next 12–24 months may prove quite significant,” Barstad added.

His views were echoed by Lars Spångberg, a senior tanker broker who left Ifchor Tankers in Switzerland at the end of August.

“Several owners have decided to go for scrubbers on existing tonnage. That will lead to a lot of vessels being out of action during the next 17 months and likely into a bit of 2020 as well, reducing some overcapacity. I can only guess that there will be more than one bottleneck adding to the time off-hire.

“How much capacity have the various scrubbers manufacturers got? What is the capacity of shipyards to fit the scrubbers – you’d want a fairly skilled yard to do this. Apart from tankers, there are dry cargo and containerships that are also going for scrubbers,” Spångberg told IHS Markit.

A raft of tanker owners have announced plans to fit scrubbers to their ships. DHT is planning to fit scrubbers to 12 VLCCs, with Frontline committed to fitting scrubbers to 14 vessels. Maran Tankers said equipment would be installed on nine VLCCs between May 2019 and February 2020.

“Typically, owners will fit scrubbers as vessels undergo planned maintenance and dry-docking; 10–15 days seems to be the norm, adding 20–30% to the normal time for 5-, 10-, and 15-year surveys,” Frontline’s Barstad said.

“However, due to logistical and timing issues, we understand owners could struggle to get their ‘ducks in a row’ in order to get all work done at one time, hence they will prepare the vessel during dry dock, but may have to return to the yard to get the scrubber fitted. In this case, they won’t need to dock the ship, but are still exposed to significant off-hire time,” Barstad added.

Ralph Leszczynski, head of research at ship broker Banchero Costa in Singapore, said, “I understand that given shortage of experienced technicians who can install scrubbers and the limited availability of the scrubbers themselves, it is difficult to synchronise the installation with a regular survey dry docking.”

This will increase the extra time lost for trading, he told IHS Markit.

Investment bank JP Morgan has estimated that 81 VLCCs would have scrubbers installed by 2021, compared with about 770 VLCCs under 20 years old in 2021.

However, James Leake, an analyst at London’s NS Lemos thought about half of the VLCCs would have scrubbers fitted given the payback between the equipment cost and the price differential between high and low sulphur fuel.

Broker E A Gibson estimated the cost of retrofitting scubbers on VLCCs would be recouped within 18 months if the fuel price differential was USD200/tonne. Singapore prices for high sulphur fuel were USD465/tonne at the end of August, while the price marine gas oil was around USD690/tonne.

Despite this, doubts remain over how many vessels will be fitted with scrubbers by the time the sulphur cap comes into force.

“There is simply so much uncertainty there. We do not know at what level bunker prices will be in 2020 and what will be the spread between high sulphur and low sulphur. We do not know what the availability of the two types of fuel will be like in 2020,” Leszczynski said.

“If you get a charterer to offer you a multi-year timecharter rate with a premium for having a scrubber, than it’s probably a no-brainer. But if your ship is trading spot, than it’s a gamble – an expense today for a potential benefit two years down the road. In the current low-rate environment, shipowners do not necessarily have all that appetite for additional gambling,” he added.

Leszczynski said that, while some estimates suggest no more than 2–3% of ships will have scrubbers installed, “even having 1% of the fleet out of trading would still have a positive effect on the spot market”.