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Sulphur 2020: Is this the regulation that launched a thousand ships?

Second article in series by FIS's Chris Hudson looks at the 2020 sulphur cap from the perspective of owners and operators.



Chris Hudson, Fuel Oil & Tanker FFA Broker at Freight Investor Services (FIS). Image credit: Freight Investor Services (FIS)


Updated on 02 Jul 2018 15:19 GMT

The second of our FIS article series on the 2020 sulphur cap changes will focus on the shipping sector, the problems that it faces, and look at the solutions which could help overcome the challenges of the new regulations.

Bringing about change in the shipping industry is about as hard as doing a Guardian cryptic cross word, upside down, after several pints of Scrumpy Jack. That said, there are significant financial challenges, as well as the potential of operational risk, which could make inaction a costly choice.

Like the world's worse buffet, there are several options on offer for ship owner/operators to deal with the incoming sulphur cap regulation: To wait and hope for a ubiquitous 0.5% fuel oil, to use marine gas oil (MGO) until a compliant fuel is more readily available, or to install scrubbers.

Granted, it is probably easier to play an extremely hard game of Where's Wally than be able to discover what grade of 0.5% fuel and where it is going to be available come 2020, but there have been some details on the various grades being developed.

Choosing this option would require the least effort on the part of the shipowner/operator, as well as the smallest financial outlay, but relies heavily on the refining industry to get things right. The flip side of this solution is that it opens up the possibility of operational risk. With the prospect of several different 0.5% grades, or not enough compliant fuel available, making managing refuelling challenging, but from conversations with refiners, these fears may have been overplayed.

Using MGO will be like buying an Apple laptop. Yes, you will have guaranteed quality and availability, but you will have to pay for the privilege. It is a fair assessment of the future to see MGO as a legitimate stop gap until the 0.5% conundrum is solved. There is a projected premium of around $350 over high-sulphur fuel oil, but one thing to remember on this is that would put bunker prices at around 2011-2014 period - when prices of IFO 380 were over the $600 mark. So if you survived that, then it's a pretty good chance you will survive. Then, once the refineries have had their meltdown, rushed to get fuel ready, distributed it, you can switch off your contingency MGO.

Scrubbers

Scrubbers have not proved hugely popular up to this point. It was reported in February that only 450 scrubbers had been fitted, and Mercuria - who have been offering financing help for scrubber installations - had received no orders.

There are several considerations to take into account when thinking about scrubbers: whether there will be the available high-sulphur fuel oil to make them a financially viable investment; will the outlay for retrofitting or premium in ordering pre-fitted newbuilds worth it; as well as how long before the technology becomes obsolete or illegal.

Scrubbers make a great choice for those who have predictable routes where they can contractually source regular supplies of lower cost high-sulphur fuel. For liners and ferries this is a no brainer, and it will come as no surprise that data suggests that these shipping areas have had the greatest uptake of scrubber orders so far.

If you have operations that are unpredictable, you have to ask yourself whether you want to risk the scenario where you cannot source cheaper high-sulphur fuel and end up burning 0.5% fuel - totally negating any advantage your scrubbers give you.

An interesting way to look at scrubbers, if you are still onboard with scrubbers after the above paragraph, is that there could be a significant financial advantage after a short payback period for the installation. If you look at the retrofit costs are currently in the region of $1.5 - 3 million, and for new builds in the region of $1 - 2 million.

Using the predicted spread between the high-sulphur and the low-sulphur fuel oils you could see a payback in as little as nine months for a non-eco VLCC and 15 months for a non-eco MR (basis $250 fuel spread). After this period your operations (fuel) will be cheaper, and your vessel more desirable to charterers - giving you an advantage over non-scrubber vessels.

The last thing to consider is how long it will be before scrubber technology becomes obsolete. There will be no let up in 'green' regulation, with increasing political and public pressure. If new regulation reduces the sulphur content further, or even pushes the shipping industry towards cleaner fuels, you may be forced into secondary financial outlay to deal with this change.

Also, the varying types of scrubber (open, closed, hybrid) may be discriminated against differently, as open-loop will surely come under fire from Greenpeace warriors over the increasing ocean acidification.

I'm trying to avoid sounding like a millennial snowflake, but each individual company will have their specific business situations, which will require their own solutions.

The questions that need to be asked are: Where will I be bunkering? Will it be predictable? Can I afford the financial outlay? Is the payback time realistic? Can we afford a short term higher cost fuel until the refineries sort their lives out? Do we think this will outweigh other solutions? How long will my solutions be viable for?

A lot of responsibility - and therefore trust - is being placed on refineries to sort this problem; however, with the regulation implementation so soon, we are already at our refinery capacity and operation for the beginning of 2020, so it is unfair to expect them to get everything right all on time.

Like anything in life, you have to pay to reduce risk - be that scrubbers, MGO, cleaning of tanks for different grades of fuel. The question is whether you pay that cost now or risk the potential costs later if all does not go to plan.

The next article in this series will look at the refining industry and its response in preparation for crunch time 2020.



Chris Hudson is a Fuel Oil & Tanker FFA Broker at Freight Investor Services (FIS).

Founded in 2002, Freight Investor Services is a specialist in dry bulk and commodity derivatives, including freight, iron ore, fertilizer and bunker fuel. The company has offices in London, Dubai, Singapore and Shanghai.

For further details about fuel oil swaps or to discuss trading opportunities, please contact the fuel oil desk on +44 207 090 1134.






Related Links:

Sulphur 2020: Regulation download
United Kingdom

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