With Maersk having announced last week that it would be installing scrubbers on its ships to comply with the IMO2020 rules on cleaning up the marine fuels pool, a report by a Norwegian bank can be viewed as another sign that just using lower-sulfur products may not be the only solution.
The shift is a significant one as markets try to estimate the impact of IMO2020, a rule that will require all marine fuels to contain no more than 0.5% sulfur. While some regional areas are under that requirement now, sulfur content around the world can be as high as 3% or more. A move down to 0.5% and new demand on the distillate part of the barrel, as opposed to the cheaper "bottom of the barrel" that is the source for the high sulfur fuel oil now used, is projected by some of the most extreme forecasts to have the capability of pushing crude oil prices toward $200/b.
Conventional wisdom has been that scrubbers, which remove sulfur from emissions, were uneconomic, required significant retrofitting of ships and would take only a small share of the market. Instead, according to the widely-held view, the marine industry would turn to low-sulfur marine diesel or marine gasoil. But for other parts of the transport industry, that shift would create new demand for supply out of the market's distillate pool, which includes diesel, gasoil, jet fuel and kerosene. The switch would boost the price for those fuels and for oil in general.
But in a recent report, Norwegian bank DNB sees a shift. "We forecast scrubber uptake to reach 2,300 by early-2020, a sharp increase from the latest data indicating 1,316," DNB wrote in the report. The bank says the reason for its shift includes that "the current figures do not reveal the full picture"; paybacks from installation that have improved; and the existence of capacity to build and install the scrubbers. Its predictions on the amount of scrubber installation out to 2020 are almost excessively precise for what it calls "major shipping segments": 973 for dry bulk, 530 for tankers and 383 for containers.
The installation of scrubbers would not be balanced across the board, DNB said. There is a big imbalance in the fuel efficiency of the fleet, the bank said, with the "most fuel-hungry" vessels--about 5% of the fleet--consuming 38% of all marine fuels. The top 2.5% of that accounts for 24% of the consumption. "The larger and more fuel-hungry vessels are likely to be overrepresented at the scrubber shop," the report said.
A move to scrubbers, besides reducing the demand surge on the distillate pool, would have another impact: speeding up ships from a projected slowdown. The forecast is that with ships facing higher fuel costs as they run more-expensive marine diesel or marine gasoil, they'd slow to conserve fuel. But DNB said its revised calculations for a market that would have more scrubbers show a "slowsteaming impact" on speed of just 0.5%. The DNB forecast is that without the scrubber impact, the price of compliant fuels in 2020 would have been $550/tonne. But if the market would be pushed down to $350 because of changes, the slowsteaming impact would be down to its 0.5% level from an earlier projection of 4%.
By comparison, current Platts data in Houston lists IFO 380 CST--the key grade of bunker fuel another term for the barrel bottom product used to propel ships--at $420/mt, and marine gasoil--which is a diesel-like product--at $695. The spread between the two is tighter in Rotterdam, with IFO 380 CST bunker fuel at $429/t and MGO at $645. The MGO would be considered the "compliant fuel."
"Put simply, scrubbers look like a good investment," the DNB report said. "Assuming a $250/tonne fuel price spread between (high sulfur fuel oil) and a compliant alternative, we estimate a scrubber investment payback period of nine months for a VLCC, 12 months for a VLGC, 14 months for a Capesize, 17 months for an MR and 18 months for a Supramax."
Estimates on the prices this far out are subject to an enormous amount of variables. What's the overall oil market? What adjustments do refiners make in their slates as a result of IMO2020? The amount of scrubbers being used is a key variable, and according to DNB, it is going to change in an unexpected way, easing a scenario that many have seen as a brewing crisis.