There have been a number of estimates of the magnitude of the cost to the shipping community of implementing the global 0.50% sulphur cap in 2020. IBIA does not make such specific forecasts, but we observe them with interest and we have members who do provide such analysis.
Recently, Wood Mackenzie grabbed the headlines by saying global bunker fuel costs could rise by up $60 billion annually from 2020, in a full compliance scenario, when the International Maritime Organization (IMO) regulation kicks in. The underlying assumption for this headline figure was based on the majority of the world fleet switching from high sulphur fuel oil (HSFO) to marine gas oil (MGO). “A combination of higher crude prices and tight availability of MGO could take the price of MGO up to almost four times that of fuel oil in 2016, and eventually cost the entire industry additional US$60 billion annually,” Wood Mackenzie said in a press release about the findings of a study undertaken by the research and consultancy firm.
IBIA has been provided with details from a separate analysis of the potential cost of the IMO’s 2020 sulphur regulation based on modelling undertaken by Marine and Energy Consulting Limited (MECL), which follows here.
It is accepted that lower sulphur fuels will be, and have been, more costly than higher sulphur, predominantly, residual bunkers. There is a growing uptake of abatement systems with the accompanying investment and operating costs, which will continue after 2020.
There are additional costs resulting from the accelerated investment in LNG bunkers in terms of more costly vessels, complex infrastructure but possibly lower bunker costs. However, the use of LNG as bunkers is not expected to become significant, maybe no more than 25 million tons (8%) of demand until 2030 and not all of these costs can be attributed to the introduction of the global cap. There will also be considerable increased costs in the supply chain from more segregation and higher value stocks. Refiners have and will invest in expanding their distillate yields. These costs are assumed, over the longer term, to be recovered from higher refinery gate prices leading to increased bunker prices. Suppliers’ costs of doing business will also rise. Added to this are the not inconsiderable expenses of drafting regulations, administration and enforcement of them as well as any penalties and fines.
The bunker costs will be initially met by ship operators whose operational costs will go up. It is uncertain if or when they will be able to pass this onto shippers of cargo through higher freight rates. The cost has been estimated by MECL from the following assumptions on future prices and bunker demand.
In this analysis scenario the larger distillate/residual price differential is assumed immediately after 2020.
The take up of scrubbing is critical and obviously impacts both the demand for higher priced, lower sulphur fuels and the investment and operating costs of scrubbers.
The following forecast assumes that some 100 million tons of high sulphur residual bunkers will be scrubbed by 2025, which requires scrubbers to be installed on 14,000 ships by then. This forecast, shown below, sees a lower uptake in 2020 than the predictions made in the CE Delft study undertaken for the IMO and the supplemental study provided by Ensys/Navigistics. The CE Delft study does not have a prediction for the scrubbed volume in 2025, but the Ensys/Navigistics study projects a sharp increase from 2020 to 2025. If the take up is slower, the demand pressure and hence the costs of the additional lower sulphur bunkers will be higher, giving a stronger case for the viability of scrubbing which could accelerate uptake.
The costs of operating scrubbers, including additional bunkers, sludge disposal, chemicals used in closed loop mode as well added repair and maintenance and insurance is of the order of $45/ton of bunker scrubbed. This is in addition to the capital costs and any finance or leasing costs. There are considerable economies of scale in the viability of scrubbers, making it most attractive to owners of larger vessels, and these types of vessel consume some 80% of bunkers globally.
Combining the bunker cost differentials with the prices and uptake in scrubbing results in average annual costs to the shipping community of $24 billion over the decade starting in 2020. As can be seen in the figure below, these costs would subsequently decrease.
If the assumed take up of scrubbing is slowed by 25% to 75 million tons in 2025 the costs to the shipping community would increase to an average of $26 billion per annum over the same period.
By 2035 it is estimated that LNG and other alternative fuels will account for nearly 20% of the energy consumed by ships and a different range of costs will develop, no doubt not only as a result of sulphur legislation but also as the maritime sector eventually comes to terms with reducing its carbon emissions.
The above reflects some of a number of scenarios developed in a comprehensive analysis of the impact of 2020 prepared as a multi-client study by Marine and Energy Consulting Limited.