There’s a looming mandate for container lines to run on ultra-low sulfur fuel. Is the industry ready for the implications?
Hapag-Lloyd is one a dozen major global ocean carriers. But if the German steamship line’s concerns are any indication over the availability and price of low-sulfur fuel when a new regulation goes into effect in three years, the shipping industry could be headed for some troubling times.
In an interview with the Adam Smith Project, Hapag-Lloyd says its containership fleet will be fully compliant with the International Maritime Organization’s 2020 mandate for the world’s ocean carriers to burn fuel with a maximum of 0.5 percent sulfur content.
But the German carrier is concerned about those aspects of the IMO mandate that still remain outside its control.
“What is important for us, and the entire industry, to know: Is the 0.5 percent low-sulfur fuel available everywhere? Is the quality of the low-sulfur fuel on a high level everywhere—and how is the quality check going to be performed? How will worldwide authorities safeguard and check compliance of shipping lines? Is a level playing field for all shipping lines guaranteed?” asked Nils Haupt, a senior spokesman for Hapag-Lloyd.
The answers to these questions will depend on the refineries and bunker suppliers to deliver this level of low-sulfur fuel globally to the carriers and the IMO member states’ ability to even-handedly enforce the regulations.
The increased costs could have implications up and down global supply chains.
Curtailing harmful emissions from ships’ exhaust has been underway at the IMO for more than 20 years and was set in motion when the IMO’s Annex VI to the International Convention for the Prevention of Pollution from Ships (MARPOL Convention) was adopted in 1997.
Vessel emissions from burning heavy bunker fuels include a mixture of gases and substances, such as sulfur dioxide, carbon dioxide, black carbon, carbon monoxide, nitrogen oxide and other particulate matter. These emissions not only foul the air in ports but threaten the health of people living and working in these areas.
Burning bunker fuel with less sulfur has accelerated within the IMO during the past eight years. In early 2008, the IMO’s Marine Environmental Protection Committee (MEPC) developed and approved a plan that would set in motion a cascading of sulfur content in ship’s bunker from an average of 4.5 percent to 3.5 percent by 2012, and then to 0.5 percent by 2020.
In addition, an IMO requirement for ship operators to use fuel with a sulfur content not exceeding 0.1 percent, or enlist other technologies to reduce emissions to a similar level, took effect for so-called Emission Control Areas (ECAs) at the start of 2015. ECAs include areas within 200 miles of the coast of the United States and Canada, Great Lakes, Caribbean, as well as the North Sea, Baltic and English Channel.
China has established under domestic law a similar marine fuel sulfur limit of 0.5 percent for fuel used while vessels are berthed in specific Pearl River Delta, Yangtze River Delta, and Bohai Sea ports. It’s anticipated that in 2018 China will apply this 0.5 percent sulfur cap to all ports within those areas. There’s also been considerable discussion for creating an ECA along Japan’s coasts.
Large ocean carriers have become adept in recent years at switching fuels in transit—from burning bunker with sulfur-content levels of 3.5 percent in open seas to 0.1 percent in the ECAs. The 2020 mandate recalibrates that in-transit switch to for burning fuel with 0.5 percent sulfur in open seas while the ECAs will maintain their 0.1 percent levels.
We are effectively looking at a virtual overnight shift at the start of 2020. That’s very problematic, because the transition from 3.5 percent to 0.5 percent is not as easy as flicking a switch.
Supply questions. Major refiners of ship fuel are already working toward the IMO’s January 2020 goal of 0.5 percent sulfur content.
Earlier this year, French container carrier CMA CGM, for example, entered a three-year memorandum of understanding with Total, the fourth largest international oil and gas company, to supply a range of ship fuels through its Total Marine Fuels Global Solutions.
“The new regulations require both marine fuel suppliers and shipping industry stakeholders to adapt quickly,” said Patrick Pouyanné, Total’s chairman and chief executive officer, in a statement. “That is why we are working hand in hand with CMA CGM, a long-standing partner.”
Bunkering companies, however, remain concerned that the refineries and shipping industry will have a difficult time meeting the 0.5 percent sulfur content requirement by January 1, 2020.
“Simple market forces leads us to think that [ship]owners are likely to hold off making the change until the last minute due to the higher cost of low-sulfur fuel compared to higher sulfur fuel oil (HSFO),” said Justin Murphy, chief executive of the London-based International Bunker Industry Association. “Because of this, production and supply of higher sulfur marine fuels would need to continue until just before the 0.5 percent requirement takes effect, meaning we are effectively looking at a virtual overnight shift at the start of 2020. That’s very problematic, because the transition from 3.5 percent to 0.5 percent is not as easy as flicking a switch.
“Even if, theoretically, there may be sufficient global refinery capacity to meet demand for low-sulfur fuels in 2020, it is impossible for global refining to switch production away from HSFO to a 0.5 percent compliant product virtually overnight,” he added. “Changing refinery configurations takes time and investment.”
Murphy also pointed to the enormous logistics undertaking involving transport between refineries, bunker fuel storage facilities and on the bunker industry delivery vessels, as tanks that previously held high sulfur fuel oil will need to be cleaned before stocking up on low-sulfur fuels.
“We think the availability of compliant fuels will vary from port to port,” he said. “The bigger ports with access to multiple storage tanks can prepare in advance, while some ports/suppliers may be able to adapt in time.
“Some locations may not be able to replace traditional volumes of HSFO sold to ships with low-sulfur fuels even during 2020, because the refineries that supply specific local markets won’t be able to provide the same volumes of fuels that comply with the 0.5 percent sulfur limit,” Murphy explained. “So unless they start importing it, these locations would not have sufficient availability.”
Container carriers, which have struggled in recent years to operate profitably, will not be able to absorb the drastic rise in fuel costs ramping up to the 2020 mandate and will have to pass those increases onto the shippers in the form of heftier surcharges.
Cost questions. The shift to using fuel with less than 0.5 percent sulfur content will be costly nonetheless. The Organization for Economic Cooperation and Development’s (OECD) International Transport Forum estimated that the 2020 mandate will cost the container shipping industry an additional $5 billion to $30 billion. Another estimate by research and consulting firm Wood Mackenzie put that cost closer to $60 billion annually for the maritime industry at large.
“No one knows for sure where that cost range will fall by 2020,” John Butler, president and chief executive officer of the World Shipping Council, said in an interview. “The reality is that any way you cut it this will be the most expensive environmental regulation ever placed on the industry.”
There’s also no doubt that the container carriers, which have struggled in recent years to operate profitably, will not be able to absorb the drastic rise in fuel costs ramping up to the 2020 mandate and will have to pass those increases onto the shippers in the form of heftier surcharges.
“The industry is not able to manage the additional cost,” Hapag-Lloyd’s Haupt said. “Hence container transportation will get more expensive, effective January 2020, and shippers and consumers will have to bear the additional cost.”
However, the carrier industry has other technological options for meeting the 0.5 percent sulfur emission cap via scrubbers and liquefied natural gas (LNG).
Scrubbers clean exhaust gas of harmful emissions and particulate matter before it’s released into the atmosphere. There are a number of providers of this technology to the marine industry.
CR Ocean Engineering (CROE), based in Parsippany, N.J., for example, has watched its orders for scrubbers increase since the 0.1 sulfur emission caps took effect in the ECAs at the start of 2015. The company has been designing and supplying scrubbers since the 1950s to industrial companies to treat a wide variety of pollutants, and moved into the marine market three years ago.
CROE makes both open loop systems, which use seawater to reduce sulfur dioxide, and closed loop systems, which use a recirculating scrubber design that uses an aqueous solution to reduce sulfur dioxide so it can be used in fresh water.
“If, as expected there is a huge surplus of HFSO in 2020, the price differential to low-sulfur fuels will support the business case for scrubbers,” Murphy said. “How this plays out remains to be seen, and shipping companies may delay investment in scrubbers because money is tight right now.”
According to the OECD, the cost to install scrubbers ranges from $2 million to $8.5 million per ship, depending on the vessel’s purpose, scrubber type, and if it’s a newbuild or retrofit. Scrubbers also cause additional fuel consumption of 1-3 percent.
“Moreover, scrubbers need space on a ship, which is often scarce,” the OECD said. “Along with scrubbers, peripheral equipment, such as equipment for wash-water, pumps, pipe systems and monitoring systems need space. This makes it easier to install scrubbers on large vessels.”
LNG an option? In July 2016, a group of maritime and petroleum companies formed a coalition to promote the environmental advantages of LNG and expand its use in the ocean shipping industry. The SEA/LNG coalition comprises ABS, Bureau Veritas, Carnival Corp., Clean Marine Energy, DNV GL, Eagle LNG Partners, ENGIE, ENN Group, Gas Natura; Fenosa, GE, GTT, JAX LNG, Keppel Gas Technology, Lloyd’s Register, Mitsubishi Corp., NYK Line, Port of Rotterdam, Qatargas, Shell, Total, TOTE Inc., Toyota Tsusho Corp., and Wärtsilä.
Ineffective implementation is likely to lead to more ships using non-compliant fuel oil so having a significant commercial advantage over ships complying, leading to a distortion in the market.
Compared to HFSO, LNG cuts nitrous oxide emissions by 85 percent and eliminates sulfur oxide emissions almost entirely. Natural gas itself does not contain sulfur and particle production is near zero due to its efficient combustion.
According to SEA/LNG, by late last year there were more than 85 ships operating globally with LNG, with another 95 on order by carriers.
In late September 2016, United European Car Carriers (UECC) took delivery of the world’s first LNG-fueled pure car and truck carrier (PCTC). The ship, Auto Eco, is the first of two sister vessels equipped with dual-fuel engines that allow it to switch between LNG and heavy fuel oil or marine gas oil. The Auto Eco will operate in the Europe ECA.
Pasha Hawaii announced last year plans to build two 3,400-TEU ships for delivery in mid-2019, which will operate solely on LNG.
Peter Keller, chairman of SEA/LNG and executive vice president of TOTE, noted engine manufacturers are also developing LNG conversion kits for marine engines, and many ships have been built to be “conversion-ready.”
Yet LNG is still limited as to its availability, leaving many large ocean carriers unconvinced that it’s the right option for them to meet the 0.5 percent sulfur cap by 2020.
“We are following the developments of this technology with lots of interest,” Haupt said. “But currently we are skeptical, as there is no global coverage of LNG supply which is important for globally operating container shipping lines.”
“We all need to do more to help break down the commercial barriers to LNG, particularly in the deep-sea shipping segment,” Keller said in a statement earlier this year. “A collaborative approach is the only way to overcome current challenges. Creating the infrastructure to enable quick, safe and cost-effective LNG bunkering in key global ports; making LNG-fueled vessels cost efficient; and, establishing consistency of international and national regulations are all essential if LNG is going to fulfill its potential as a solution for the shipping industry.”
On March 8, SEA/LNG signed a memorandum of understanding with the Society for Gas as a Marine Fuel (SGMF). The MOU creates a framework for how the two organizations will work together to promote LNG as a primary fuel for the shipping industry.
Enforcement. However, a far larger concern for many ocean carriers and bunker suppliers at the moment is how the 0.5 sulfur cap for fuel will be implemented and enforced by the IMO member states.
The IMO does not set fine or sanctions for non-compliance. That’s left up to individual members. However, the organization is aware of the need for consistent implementation of the mandate worldwide.
“Inconsistent and ineffective implementation would increase the uncertainty concerning actual market demand for 0.5 percent sulphur marine fuel oil, which in turn would increase the difficulty for the marine fuel oil supply chain to plan effectively to meet global demand and for ship operators to assess the viability of investing in exhaust gas cleaning systems,” the IMO’s Subcommittee on Pollution Prevention and Response said in a Jan. 20 statement. “Importantly, ineffective implementation is likely to lead to more ships using non-compliant fuel oil so having a significant commercial advantage over ships complying, leading to a distortion in the market.”
The subcommittee plans to address these issues in detail during its sessions in 2018 and 2019.
What is clear is that the IMO will not push back the Jan. 1, 2020 implementation for the 0.5 sulfur content cap mandate.
The World Shipping Council praised the IMO for remaining attuned to the ocean carrier industry’s ongoing concerns related to upcoming implementation.
“There’s a real recognition in the IMO that that it is important to get this right,” Butler said. “It’s real. It’s coming. It’s not going away.”