Top takeaways from Fairplay’s latest sulphur cap webinar (Part 2)

2002-built tanker Nave Electron. Credit: Dietmar Hasenpusch
2002-built tanker Nave Electron. Credit: Dietmar Hasenpusch

In the second of its three-part series of webinars on the global sulphur cap on bunker fuel, IHS Markit drilled deeper into shipowners’ options and related costs of complying with the regulation, which goes into effect on 1 January 2020. The expert panel considered the latest trends and cost analysis on those options, providing a valuable compliance update to IHS Markit’s 16 November 2017 webinar.

The following slides feature five key takeaways from the 22 March webinar, “Meeting the global sulphur cap: a closer look at compliance options”.

Bunker fuel price swing

The International Maritime Organization’s requirement to reduce the cap on the amount of sulphur in fuel oil from 3.5% to 0.5% – except inside emission control areas (ECAs), which caps the limit at an even lower 0.1% – will likely cause a significant price spike for low-sulphur fuel as the 1 January 2020 compliance date approaches, according to John Leavens, director for Oil Markets Midstream and Downstream at IHS Markit Energy, a subsidiary of IHS Markit parent IHS Markit.

At the same time, lower demand for high-sulphur fuel will mean a corresponding drop in price for bunker fuels with sulphur content of 0.5% and above, Leavens’ analysis shows.

His analysis also reveals that the price swing between the two fuels could be dramatic: a USD140/tonne price difference between high- and low-sulphur fuel in 2019 will expand to close to USD370/tonne in 2020.

“A significant amount of high-sulphur residual fuel will likely be displaced away from the marine sector and into the [land-based] power markets, which will have to be cheaper initially so that it can compete with coal,” Leavens said. “That will mean a very low price for high-sulphur fuel oil.”

Slow uptake for LNG

With fewer than 300 vessels using liquefied natural gas (LNG) as a compliance fuel (including current fleet and confirmed orderbook), the use of this alternative to meeting the impending sulphur cap has not proven to be a popular compliance option so far.

Retrofitting old vessels or building new LNG ships is expensive, and most that are LNG-capable currently are operating in ECA zones. Many of those are in the offshore sector that “don’t have to move very far very often”, Leavens pointed out.

With some continued growth in new LNG-capable vessels, the estimated demand in 2020 is approximately 2 million tonnes annually of high-sulphur fuel equivalent demand. So while LNG is a solution to meeting the regulations in terms of its impact on the balance of high-sulphur fuel oil, “it’s very much limited”, Leavens said. “This is something for the more distant future, rather than for the short term.”

Scrubbers: the inevitable choice?

Despite only 419 vessels identified by Leavens’ research as having a scrubber installed or on order out of an estimated 52,000 vessels that will be subject to the sulphur cap, Ram Vis contends scrubbers will be the clear choice for compliance – not surprising, given that the company he founded, Viswa Group, sells the equipment.

To support his claim, Vis pointed out that the price to purchase and install a scrubber has declined over the past several years, even though market analysis continues to use old pricing data. “I’m seeing prices from two or three years ago,” Vis said during the webinar, noting that a 10 MW scrubber can be manufactured and installed for about USD2 million, compared with “old research” citing USD5 million or more.

In addition, he said, even at current price difference between high- and low-sulphur fuels, the return on investment on a scrubber is about 12–14 months. “If that price differential almost doubles after 2020, then it pays for itself in a matter of months,” he said. “So because of the viability, and the fast return on investment, the scrubber numbers are going to increase, I project, exponentially.”

Big Oil power

But the argument for scrubbers is not as certain when oil refinery market power is considered, argues Arlie Sterling, president of maritime advisory group Marsoft.

Based on discussions with clients, there is the potential for high-sulphur fuel oil to become a niche product given the potential drop in demand for it, Sterling said, and would therefore command a premium price versus a discount. “In fact, you can imagine the bunker world of the future being an array of many different kinds of fuels, many compatible with certain vessels but some not,” according to Sterling. Traditional high-sulphur bunker fuel could therefore occupy a relatively small niche relative to its current position.

“And that would provide oil companies with pricing power in the market, with the potential to use that power to increase the price of high-sulphur bunkers. This is going to be an oil company play, and owners have to be on their guard about how oil companies are going to price bunkers going forward.”

Compliance not a given

Even banning the carriage of high-sulphur fuel to make it easier for port state control to enforce the global sulphur cap – a proposal that has wide industry support at the IMO – full compliance will still be difficult to achieve.

Leavens’ fuel demand analysis assumes 15% non-compliance – but there’s likely to be substantial regional differences, he said. “Even in Europe, where a lot of the water is under an ECA zone, some of the penalties are very low for violating the rules, compared with the economic incentive,” Leavens said. The current rate of non-compliance in the North Sea region is at 8%.

While there are large bunkering hubs around the world such as Singapore and Malta, “there are many other ports across the world, some in remote locations, that supply bunker fuel in smaller quantities”, Leavens said. “In some parts of the world, supply of adequate quantities of compliant bunker fuel could be a challenge, while in some others, the port states might not have the means, or the willingness, to enforce compliance.”

To listen to the IHS Markit webinar, “Meeting the global sulphur cap: A closer look at compliance options,” follow this link: https://event.on24.com/wcc/r/1604448/76104E36D15FEF35DDB9BC70E58267D8