Questions remain about the economic impact of lowering the cap on sulfur levels in marine fuels, as well as whether the refining industry can produce enough low-sulfur fuel to satisfy the increase in demand.
A decision that could boost the annual cost of moving ocean cargo to $60 billion could take place later this month when the Marine Environmental Protection Committee (MEPC) of the United Nations’ International Maritime Organization (IMO) discusses when to lower the global cap on sulfur levels in bunker fuel.
The 70th session of MEPC is expected to feature extensive talks on whether the refining industry can produce enough low-sulfur fuel to allow the limit to be lowered from 3.5 percent to 0.5 percent m/m (by mass) in 2020, or the rule should be deferred until 2025.
“This is an important issue with widespread global economic impacts,” says John Butler, the chief executive officer of the World Shipping Council, the primary trade organization for the liner industry.
The International Transport Forum (ITF) of the Organization for Economic Cooperation and Development in May said the cap planned for 2020 will have a “significant effect” on shipping costs. “Our calculations show that they could increase between 20 percent and 85 percent, depending on the assumptions regarding speed, fuel price and ship size,” it said. “The relatively large margin is due largely to the uncertainty surrounding the availability of low-sulfur ship fuel. The 2020 requirements could add annual total costs in the order of $5 billion to $30 billion for the container shipping industry.”
Postponement to 2025, however, would still result in costs going up in 2020 “in the order of 4 percent to 13 percent,” according to the ITF. “This is due to the fact that a 0.5 percent sulfur cap will come into effect in European Union waters from 2020, irrespective of the introduction of the global cap.”
While MEPC could delay its decision to as late as 2018, Butler believes “there’s a pretty good chance that they decide this time around.” The International Chamber of Shipping and tanker owner association INTERTANKO are among those that have called for an October decision.
“The more lead time there is, the better,” said Butler. “The industry would like to know where this is headed. There’s a lot of planning involved.” In other words, if 2020 is indeed the implementation date, the sooner refiners find out, the better.
MEPC in 2008 adopted revisions to Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL) aimed at progressively reducing pollutants such as sulfur oxides (SOx), nitrogen oxides (NOx), and particulate matter.
In 2012, the global cap on marine fuel sulfur content was cut to 3.5 percent from 4.5 percent.
The IMO also created “emission control areas” (ECAs), which extend 200 miles from most of the U.S. and Canada coast, as well as in the North Sea and Baltic Sea. The sulfur content of fuel for ships operating within ECAs was capped at 1 percent on July 1, 2010, then lowered to 0.1 percent on Jan. 1, 2015.
Alternatively, ships are permitted to use higher sulfur fuel along with special scrubbers to remove sulfur from exhaust.
The rule has driven up the cost of operating ships in ECAs substantially, especially for ships that spend a lot of time in the regulated waters. Butler notes China has also created some ECAs under national law.
The next big step in reducing ship pollution will come when the global cap on sulfur in marine fuel is slashed from 3.5 percent to 0.5 percent. But with questions about whether refiners can make enough of the fuel, MEPC ordered a study from Netherlands-based CE Delft.
According to the CE Delft study, “the refinery sector has the capability to supply sufficient quantities of marine fuels with a sulfur content of 0.5 percent…while also meeting demand for non-marine fuels.”
A study sponsored by several petroleum industry groups, as well as the Baltic and International Maritime Council (BIMCO), and conducted by Ensys Energy & Systems Inc. and Navigistics Consulting, however, drew a very different conclusion, saying “a full-on switch to the global sulfur standard in January 2020 does not look workable.”
“The uptake of scrubbers will be limited by end 2019 such that the required ‘switch volume’ from high sulfur to global fuel standard is estimated as 3.8 million barrels per day (195 million tons per annum) plus and minus a range of uncertainty.
“Based on this outlook, the global refining industry will lack sufficient capacity in one critical respect in 2020, namely sulfur plant and to a lesser degree hydrogen plant, (both vital to the ability to desulfurize refinery streams) to fully respond to the global sulfur cap,” the report said.
WSC, BIMCO, the International Chamber of Shipping and several countries – including those with important ship registries like Liberia, Marshall Islands and Panama – told MEPC “the 0.5 percent sulfur limit requires practical implementation measures, applied consistently to avoid commercial distortion associated with the higher daily operating costs for low-sulfur fuels” or scrubbers.
They noted the additional daily operating cost for a ship burning 100 tons of fuel a day to comply with the 0.5 percent sulfur limit could be $15,000 to $30,000 based on historical price differential ranging from $150 to $300 per ton of low-sulfur fuel. That differential varies as a result of crude oil price fluctuations.
But Butler said the difference could easily amount to hundreds of dollars per container, costs that shipping companies are likely to pass on to customers.
In addition to raising serious questions about adequate supply, a model used by EnSys and Navigistics projects an increase in open market prices of 11 percent to 23 percent “across all products, in all regions worldwide – not just across marine fuels. That would amount $350 billion to $700 billion per year.”
Will it be 2020 or 2025 for low-sulfur fuel?
