With tighter ship sulfur emission caps, scrubbers and heavier fuel may become attractive.
Since the beginning of this year, ships operating in so-called Emission Control Areas—which include areas within 200 miles of the coast of the United States and Canada, Great Lakes, as well as the North Sea, Baltic and English Channel—have had to comply with the International Maritime Organization’s requirements to use fuel with a sulfur content not exceeding 0.1 percent or use other technology to reduce emissions to a similar level.
The International Chamber of Shipping (ICS) said earlier this year “at some point in the future, it is possible that China may eventually decide to establish ECAs, perhaps in the Pearl River Delta and around Shanghai. Japan may also eventually follow.”
Globally, fuel with a sulfur content of 3.5 percent may be used (it was lowered from 4.5 percent at the start of 2012) so the ECAs have driven up fuel costs for ships if they operate in waters around North America and Northwest Europe because of the higher cost of low-sulfur fuel.
The website “Ship and Bunker” said marine gas oil, used as a low-sulfur fuel by most ships operating in ECAs, was selling for $551.50 a metric ton on July 3, a premium of $221 per metric ton over the common bunker fuel IFO 380, which was priced at $330.50 on the same day.
Today, many container carriers charge a low-sulfur premium for containers moving in and out of ports adjacent to ECAs. For example, the Transpacific Stabilization Agreement of 15 transpacific liner carriers recommends its members impose a $324 bunker surcharge on 40-foot containers and a $41 low-sulfur component for cargo moving through West Coast ports; the comparable numbers for cargo moving through East and Gulf coast ports are $645 and $39 per 40-foot container.
Carriers that spend all their time in the ECA areas have gotten creative in their effort to control costs. TOTE, for example, is converting its ships in the Puerto Rico and Alaska services to use liquefied natural gas (LNG) as fuel. Algoma Central Corp., the largest Canadian shipowner, is installing exhaust gas scrubbers on six new ships that will remove 97 percent of sulfur from the emissions they generate.
But ICS noted globally “relatively few ships are currently making use of options for alternative compliance (such as scrubbers and LNG) instead of burning low-sulfur fuel, a provision which ICS fought hard for during the negotiations at IMO, when the MARPOL amendments were adopted in 2008.”
ICS said “the take up of alternative compliance options” is expected to increase in 2020.
That’s when the global cap on the maximum sulfur content in bunker fuel will drop from 3.5 percent to 0.5 percent. (The term “bunker” for ship fuel dates back to the days when ships were powered with coal and the coal was stored in bunkers near their boilers.)
The classification society DNV GL predicted a 2012 study that there would be up to 1,000 LNG-fueled ships by 2020, but added this year the number “will most likely not be met. However, as more bunkering options come in place, growth could accelerate.
“Scrubbers, on the other hand, were seen as a regulatory compliance option that would not be a significant option until after 2020 and the introduction of tighter global restrictions on sulfur,” DNV GL said. “Today, the scrubber market is developing faster than expected, with more than 200 confirmed projects.”
In addition, DNV GL said “the substantial drop in battery prices and improved energy storage capacity means that hybrid systems are now becoming a real option for the shipping industry. They are best suited for vessels with large variations in power demand, coastal trades and operations within emission control areas.”
Currently, there are 33 hybrid vessels either in operation or on order, and it is possible that number will top 100 by 2020, Tor E. Svensen, DNV GL’s chief executive officer, said in a speech at the Nor-Shipping conference in Oslo this spring.
Costly Mandate. There is concern about whether that requirement for ships to use fuel with a maximum sulfur content of 0.5 percent could strain refining capacity, and the IMO has scheduled a review of the situation in 2018, which could conceivably push off the date for implementing the 0.5 percent cap to 2025.
In November 2013, World Shipping Council head Christopher Koch said the 0.5 percent sulfur mandate would be “the single most expensive environmental regulation the shipping industry has ever faced.”
If the difference in price between heavy fuel oil and distillate fuel is $300 per ton, the difference would be $75 billion per year; if the differential is $400 per ton, it could climb to $400 billion.
Rudy Kassinger, a New Jersey-based consultant with more than 50 years of experience at Exxon and DNV Petroleum Services, said “there is no simple answer and all solutions will be expensive. There is no silver bullet out there.”
He believes carriers may increasingly embrace scrubbers and seek to reduce fuel prices by using ever higher viscosity fuel.
Most large ships burn fuel with a viscosity of 380 centistokes (CST) in areas outside the ECAs, but he said in Singapore, the largest bunker market in the world, about a fifth of bunker sold is higher viscosity fuel of 500 CST.
Statistics from the Maritime and Port Authority of Singapore bear out the move toward more viscous (higher CST numbers) fuels: In 2014, 19.1 percent of the marine fuel oil (MFO) sold was MFO 500 CST, 75 percent was MFO 380 CST, and 1.8 percent MFO 180 CST. In 2007, 12.6 percent was MFO 500 CST, 72 percent MFO 380 CST, and 9.4 percent MFO 180 CST.
Kassinger forsees shipping companies using more of this viscous fuel in the future, perhaps even with a 700 CST specification.
“The reason it’s very attractive, particularly to the big containerships, is that it’s the lowest priced of the fuels available,” he said.
Five hundred CST bunker fuel sells at discounts that this year have ranged from $2 to $12 in Singapore when compared to 380 CST fuel.
Heavy fuel must be heated to about 140-150 degrees Celsius before it enters the big slow-speed diesel engines on most ships so the viscosity goes down to about 15 centistokes, the viscosity that most engine builders recommend for proper atomization of the fuel into the diesel cylinder, Kassinger said. But he said this is not a major challenge when moving from 380 CST to 500 CST fuel—the heaters on fuel lines can just be adjusted to a higher temperature.
Kassinger explained bunker fuel is made with residue from atmospheric or vacuum distillation of crude oil, and is blended with distillate product that is always more expensive than the residue itself.
The refiner seeks to make as little bunker fuel as possible, because it is a byproduct, the cheapest product sold by the refinery. Indeed, Kassinger said bunker fuel prices are about 70 percent of the crude price, cheaper than the oil from which they are made.
“One of the reasons it sells cheaply is there’s not a lot of alternatives for it. Sure, some utilities that scrub can use it and, while it’s not a good quality fuel, everything is relative—compared to coal, it’s pretty good,” he said.
He added there are limited outlets for residual fuel, or “black oil” as it is also known, ad that 60 to 65 percent of all the black oil made in the world is used for bunkers.
“My argument is that when you do the arithmetic, cheap black oil and scrubbing, I think, will be very competitive,” Kassinger said.
“If you look at crude oil for example, 85 to 90 percent of the sulfur is in the residue,” he explained. “So that even if you had low-sulfur crude, the residue from [it] would not meet the 0.5 percent sulfur requirement.”
He noted the vacuum residue from even “sweet crude oil” with low-sulfur content, such as West Texas Intermediate or Brent oil from the North Sea, has a sulfur content of about 1 percent. Making a fuel that would meet the IMO’s requirements in 2020 would require using an equal amount of zero-sulfur distillate as a blend stock, not only driving up the price, but creating a fuel that Kassinger said would probably end up having a fuel of less than 100 centistokes.
“You’d have a lot of potential problems of compatibility, stability and plus the fact the refiner doesn’t like doing that. I mean he’s downgrading—now the price obviously has to come to reflect the value of the distillate that he’s putting in but the world is currently short of distillate fuel as it is,” he said.
Fuel suppliers have reacted to the need for low-sulfur fuels in the ECAs by blending bunker fuel with lighter distillates to meet the current sulfur standard, said Raymond Brigley, president of Oiltest Marine Services, but added “we’ve also seen some engine operational issues when they’re trying to burn the distillate without fully vetting everything associated with it.”
When ships first switch over to operating with distillate, the distillate acts as a solvent, and “sort of cleans out the entire fuel system,” Brigley said, and can lead to “engine stoppage, filter plugging, and overloading purifiers.”
But he noted the problem generally rectifies itself after the ship has run distillate for some time.
Brigley said fuel suppliers have come up with blends that are not as expensive as distillates and just a little more expensive than the heavy fuel, but still meet the sulfur requirements. “I think they will continue to do that going forward,” he added.
LNG Attraction. Looking to 2020, Kassinger said LNG is an attractive option, because it has no sulfur and has a high hydrogen content (you get more energy breaking a carbon-hydrogen bond than a carbon-carbon bond). On the other hand, LNG requires energy to be spent to cryogenically liquefy it, and there are few ports with LNG storage infrastructure, let alone the ability to fuel ships.
He also noted ships fueled with LNG require three- to four-times more onboard space to store their fuel than those using bunker fuel because of its lower energy density.
Bunkering a ship with LNG is a much more complex process than loading a ship with liquid fuel.
Even if the IMO decides to postpone the requirement to cap the sulfur content of marine fuel at 0.5 percent to 2025, Kassinger believes Europe will move forward with the requirement.
In the future, he predicted refineries are going to be “desperate to get rid of black oil” because of the growing demand for distillate products and to avoid what’s called “refinery block,” where a refinery may be forced to shut down when it has too much black oil on its hands.
If a refiner does not have a “high conversion” refinery, 20 percent of its output may be black oil, Kassinger said, though he added in the United States the ratio is very low, perhaps 2 or 3 percent.
Refiners are able to squeeze more distillate product out of each barrel of crude oil by using either carbon rejection or “coking” or hydrocracking, both of which are expensive processes.
He pointed to Exxon Mobil’s announcement in July 2014 that it would spend more than $1 billion for a coker unit that will convert heavy, higher sulfur residual oil into products such as diesel.
With demand for about 5 million barrels per day of bunker fuel, “you’d need 100 cokers. That’s $100 billion,” Kassinger said.
“What’s going to happen, I think, is that there’s going to be a lot of demand for distillate, which means that the supply is going to be short, the price will go up and by the same token, in my view, the price for black oil will come down,” because refiners will be desperate to sell it,” he explained.
As the price of distillate goes up, it will become increasingly attractive to burn black oil and desulfurize it by using scrubbers, he said.
Kassinger cautioned that scrubbers are not worry-free—it’s an extra piece of equipment that has to be installed on a ship, and if it does not work properly, it’s the ship, not the manufacturer that will suffer the consequences.
This article was published in the August 2015 issue of American Shipper.