IBIA commentary: Global cap in 2020: Now what?
Several unknowns remain about the global 0.50% marine fuel sulphur limit. Will assumed global capacity translate into actual marine market supply in 2020? Will refiners produce suitable fuels, and what will these fuels look like? Can the powers that be ensure compliance, and how will the IMO tackle transitional issues? We also don’t know to what extent the uptake of scrubbers and alternatives will impact overall demand.
IMO’s 2020 decision may be based on overly optimistic initial availability forecast
The official availability study undertaken for the International Maritime Organization by CE Delft concluded that there will be sufficient low sulphur fuel available to introduce the 0.50% global marine fuel sulphur limit on 1 January 2020. The 70th session of IMO’s Marine Environment Protection Committee also had before it a supplemental marine fuel availability study undertaken by EnSys/Navigistics, which concluded that implementing the 0.50% sulphur limit in 2020 looks unworkable.
The CE Delft study’s assertion that there will be enough 0.50% fuels to meet global demand in 2020 is based on the assumption that bunker fuels between 0.10% and 0.50% sulphur will consist of a wide range of blends, as opposed to traditional marine distillates. Its modelling suggests these blends will contain various residuals, treated light cycle oils, treated light distillates and kerosene, straight run atmospheric gasoil and un-specified cutter stocks. The alternative study from Ensys, meanwhile, used two scenarios assuming the 0.50% limit would be met – at least initially – by either 90% or 50% traditional marine diesel oil (MDO) as defined in ISO 8217.
How could MEPC 70 make a well informed decision on such opposing evidence? It would appear that the studies had limited impact on already cemented political positions. Signals in advance that the entire European Union bloc wanted 2020, combined with the release of a new study suggesting delaying the sulphur cap to 2025 would cause more than 570,000 additional premature deaths globally, made it politically very difficult to ask for a delay. Even so, several countries did say 2020 would be too soon and wanted a 2025 implementation date, while some supported a phased introduction as proposed by IBIA.
As MEPC 70 debated the implementation date, IBIA told the Committee that going from global consumption and supply of chiefly residual heavy fuel oil products meeting the current 3.50% global sulphur limit to a 0.50% limit is change on a completely unprecedented scale for the refinery industry, as well as a major logistical undertaking for all links in the supply chain. “Although the compliance date itself will be known well in advance, simple market economics leads us to believe that owners will not switch to far more expensive lower sulphur fuels before they have to, resulting in a virtual overnight shift,” IBIA’s IMO representative Unni Einemo told the Committee. IBIA had therefore suggested a phased approach, bringing in the global sulphur limit over a period rather than on a specific date.
Although, as we now know, MEPC 70 agreed on 2020, using the CE Delft study’s conclusion as the basis for implementing the global cap in 2020 makes several big assumptions that may be overly optimistic:
- It assumes refinery capacity to produce sufficient low sulphur fuels will translate into refineries actually producing fuels for the marine sector. We don’t know if that will be the reality because it will depend on refiners’ analysis of which markets offer them the best profit margins on their output.
- It assumes sufficient volume will be available from day one in 2020, not taking into account the issue of the massive ‘switch volume’ which means this transition cannot happen overnight.
- It assumes that all the theoretical 0.10% to 0.50% sulphur fuel blends will be suitable for marine engines. That has been questioned by International Organization for Standardization responsible for the ISO 8217 fuel quality standard, IBIA and others.
How will refiners and others respond to demand for 0.50% sulphur fuels?
When the emission control area (ECA) limit fell to 0.10% in 2015, we saw the introduction of a range of novel fuel formulations that cost less than marine gas oil (MGO), pointing to a future where the global 0.50% cap would not rely on a wholesale switch to distillates.
We are indeed likely to see many new types of fuel blends to meet the 0.50% limit from professional blenders and refineries. Based on what we have seen with the new ECA fuels (NEFs) so far, we can certainly expect more widespread use of vacuum gas oil, and use of very low sulphur HFO where available with a bit of low sulphur blend stock added. Some refineries are exploring opportunities to produce specific 0.50% marine fuels from existing product streams, some refineries may desulphurise HFO, and there are some independent innovators looking to get into the marine fuel market by stripping sulphur out of HFO.
One paper submitted to MEPC 70 by several European countries, 70/5/25, suggested the positive experience with the currently available NEFs should give confidence that marine fuel producers are capable of responding to new market requirements. Many other countries also pointed to the paper during the MEPC 70 discussion as evidence there was nothing to worry about.
IBIA reminded the Committee that while the experience with these fuels has largely been positive, it has not been entirely without problems, with incidents of problematic NEFs heard both during 2015 and very recently.
“We should also note that these novel fuels only make up a very small share of overall 0.10% fuels as the majority of vessels use traditional MGO which was already widely available to comply, and the introduction of these novel fuels has been gradual in geographically limited areas. Doing this on a global scale is a completely different ball-game and it will take time to ensure the blends perform well. Unfortunately, there is little incentive to burn 0.50% fuels until 2020, which gives little opportunity to gain experience with these fuels in a gradual way has been the case with the new ECA fuels in Europe,” Einemo told MEPC 70.
“The official availability study states that it is expected that refineries across the world will go through a product technology development process to ensure the low sulphur marine fuels perform appropriately. Indeed the market will try to produce appropriate and safe to use fuels, as we have seen with the new fuel formulations introduced for ECAs, but we should not stick our heads in the sand about the fact that refineries across the world may struggle to provide sufficient tried and tested blends that both perform appropriately and meet all safety requirements from day one.”
She added: “We think this further demonstrates the need for allowing a period of transition, during which these quality issues can be addressed. During this period, it must be recognised that compliant fuel will not be available at all times in all locations, but that it will gradually become more widely available.”
As reported by IBIA earlier, several member states did acknowledge that there will be transitional challenges, and the IMO will be looking at challenges surrounding the implementation phase. These are mainly focused on effective enforcement and how to respond to expected instances of non-availability.
How will the global cap be enforced?
One of the concerns raised by industry in the run-up to the global 0.50% sulphur cap is the question of how it will be enforced. Can it be effectively enforced on the high seas? Can the IMO do anything to make sure it is?
The current enforcement powers are not reassuring for those that fear weak policing will tempt operators to not comply because they can get away with it, creating competitive distortion and an uneven playing field between compliant operators and those saving vast sums of money by not complying.
Port state control (PSC) authorities can only enforce against foreign flag vessels for sulphur limit breaches occurring within their own waters. If they see evidence that a ship did not comply prior to entering the waters they have legal authority over, all PSC officers can do is to notify the ship’s flag State. The question then becomes what flag States will do about vessels not following the rules.
To address these issues, IBIA co-sponsored MEPC 70/5/2, which calls for the IMO to consider how PSC officers can detect and take action against ships using fuel oil that exceeds the 0.50% limit unless that ship is equipped and certified to operate an approved alternative compliance system, such as a scrubber.
There is no reason why ships without alternative compliance methods should have high sulphur fuel in their fuel tanks. If this became an offence, it would give PSC powers to take direct action such as detaining the vessel until it has debunkered non-compliant fuel and insist compliant fuel is bunkered. This would be a very powerful deterrent.
MEPC 70 agreed that the subject will be examined by the Sub-Committee on Pollution Prevention and Response (PPR) when it meets in January as part of a plan for effective implementation of the global cap.
Scrubbers and alternative fuels
The official IMO availability study from CE Delft predicts that, in 2020, ships equipped with scrubbers will consume 36 million metric tonnes of HFO, or about 11% of total global demand. It predicts LNG will make up about 4% of total global marine fuel consumption.
As with all predictions, these are subject to uncertainty, but several oil majors are now looking seriously at getting more involved in the supply of LNG for ships due to noticeable interest from shipping companies.
As for scrubber uptake, it is possible that the anticipated price difference between compliant fuel and HFO – demand for which drop dramatically in 2020 – will cause more ships to install scrubbers ahead of the implementation date.
The uncertainty around the ‘scrubbed’ volume creates another question, however, which is to what extent physical bunker suppliers will continue to offer HFO after 2020, when it looks set to become a relatively niche product. This may cause some of the HFO supply infrastructure to disappear in 2020, and could create a HFO supply/demand mismatch if there is a sharp increase in scrubber uptake from 2020 onwards.
IBIA has suggested that the IMO may look at allowing ships that have confirmed contracts to install a scrubber before 2020, but were unable to install them in time due to installation bottlenecks, may be allowed to continue to use HFO until the scrubber is in place, providing this period is strictly specified and limited. This could serve to reduce the initial sharp drop-off in HFO demand and help ease a subsequent supply/demand mismatch. It remains to be seen if this proposal will be heeded as part of the effort to make the transition to the new global low sulphur regime a bit smoother.
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