The International Maritime Organization’s 0.5 percent sulphur cap regulation, set to go into force in 2020, could cause shipping industry fuel costs to jump by as much as $60 billion annually, according to a recent report from Wood Mackenzie.
International Maritime Organization (IMO) regulations set to go into force in 2020 could cause shipping industry fuel costs to jump by as much as $60 billion annually, according to a recent report from research and consulting firm Wood Mackenzie.
The IMO’s proposed 0.5 percent sulphur cap for bunker fuel will require ocean carriers to switch from traditional fuel oil to alternatives like marine gas oil (MGO) or install “scrubbers” to remove sulphur from vessel exhaust gas.
According to the report, increased crude oil prices and a spike in demand for alternative fuels could cause MGO prices to rise to nearly four times the cost of fuel oil in 2016, “eventually costing the entire industry U.S. $60 billion annually.”
“Installing scrubbers may be an economically attractive option,” said Sushant Gupta, research director, refining at Wood Mackenzie. “Although there is an initial investment, shippers can expect a high rate of return of between 20 and 50 percent depending on investment cost, MGO-fuel oil spread and ships’ fuel consumption. The shipping industry is traditionally slow to move, but in this case, early adopters may hugely benefit.
“Switching to MGO is a more costly solution,” he added. “In a strict compliance scenario, we expect shippers to try and pass the cost to consumers, and freight rates from Middle East to Singapore could increase by up to U.S. $1.00/bbl.”
Refiners, on the other hand, could see higher profit margins if MGO prices increase relative to fuel oil, but the increase will vary widely depending upon their configuration, access to advantaged feedstock and type of products produced, according to the report. Deep conversion refiners with capability to increase MGO production like China’s Sinopec and Petrochina and India’s Reliance and Essar would see the greatest improvement in margins if MGO prices rise, but “simple” refiners could lose out if they are unable to increase MGO production, the report said.
“The options for refiners and shippers will depend on the course of action decided by each of them,” said Gupta. “At the end of the day, the shipping industry and refineries need to communicate and find middle ground, and time, unfortunately, is running out.”
Report: IMO sulphur cap could cost carriers billions
