Lessons for the road ahead
During 2021, I spoke to IBIA members and others about the road to ‘net zero’ shipping. In doing so, I think we have plenty to learn from IMO 2020
As we approached the end of another strange year, with Covid continuing to disrupt our pre-pandemic normality, I was invited by S&P Global Platts to speak at their 10th Annual Mediterranean Bunker Fuel Conference. Originally intended to be a hybrid event, mixing in-person and remote participation, they decided to stay fully virtual. That’s been the norm this year, although a few in-person and hybrid events have taken place too.
The subject they asked me to deliver a presentation on was a review of how, nearly two years after the transition to the 0.50% sulphur limit, the bunker market responded to ‘IMO 2020’ and what effect Covid-19 had in the process. Is it job done, or are there still challenges?
Looking back at market reactions in 2016, when the IMO decided to introduce the 0.50% sulphur limit in 2020, and not wait another five years, we could be forgiven for thinking that this was going to be ‘mission impossible’. Sound familiar? What can we learn from this significant energy transition as we grapple with the much, much bigger energy transition ahead of us? Quite a few things, I think. Three stand out: we needed that clear deadline, things don’t always work out as expected, and we underestimated the industry’s ability to adapt.
The 2020 decision was taken on the basis of an availability study commissioned by the IMO, which concluded that there would be sufficient availability of low sulphur fuels in 2020 to meet demand both from shipping and other sectors. There were many misgivings about the study, in particular the assertion that the majority of fuels required in 2020 – almost 74% – would be blends of various refinery streams, including residual fuel oil. With uptake of scrubbers still very low, a predicted 11% of demand being met by ships with scrubbers also looked uncertain. Many thought the 12% expected to be met by distillates with no more than 0.10% sulphur was too low.
Before the availability study, most market observers had been sure that the 0.50% sulphur limit would have to be met chiefly by distillate fuels. Indeed, the share of residual fuels, or heavy fuel oil (HFO) volumes meeting a 0.50% limit in 2018 was less than 2%, according to data from the IMO’s sulphur monitoring programme. Another 3% of tested HFO volumes ranged from 0.51% to 1% sulphur, so could relatively easily be blended to compliance, with another 4.5% or so ranging from 1-1.50% sulphur. But the vast majority of HFOs tested in 2018, around 90%, had sulphur content above 1.50%, with the overall HFO average at 2.60% sulphur. Clearly, a big challenge lay ahead, one that refiners in particular would struggle to meet as major upgrades to convert more residual high sulphur fuel oil (HSFO) to higher-value, low sulphur products take time.
Even after the IMO availability study introduced the idea of fuels between 0.10% and 0.50% being very low sulphur fuel oil (VLSFO) blends, many continued to think that most shipowners and operators would initially prefer using MGO. There were widespread concerns about the quality of VLSFO blends, with persistent suspicions that they would not be safe to use due to instability, incompatibility, non-compliance with the SOLAS flashpoint limit and other quality issues. The fact is that fuels are still blended and sold in accordance with ISO 8217 to be commercially viable, addressing all of these issues apart from compatibility, which was and still is a fuel management issue.
In hindsight, we have seen that VLSFO fuel quality has been better than expected. Test data indicate that VLSFOs are mostly cleaner fuels with better ignition and combustion properties than HSFO. The only expectation that has come true is that VLSFOs have much more variable characteristics, in particular density and viscosity. They also appear to present more challenges with compatibility, and with cold flow properties due to being more paraffinic than aromatic. All these are issues operators need to be aware when handling these fuels. Unfortunately, there has been an increase in fuels testing off-spec for sediment, as well as fuels showing more rapid deterioration in terms of long-term stability. A comparative study undertaken by the technical committee in charge of revision the ISO 8217 standard found that fuels testing above the 0.10% limit for TSA to indicate propensity to form sediments rose from 0.23% of HSFO samples tested in H1 2018 to 1.50% of VLSFO samples tested during H1, 2020. It is a significant increase, and concerning as stability is a critical quality parameter, but thankfully still a small percentage overall. The dreaded increase in fuels testing below the SOLAS flashpoint limit did not materialise in H1, 2020.
Apart from the variability of VLSFO compared to HSFO, hardly any of the other predictions about IMO 2020 came true, which on the whole has been good news!
VLSFO became the fuel of choice, with only a small share of operators choosing to comply by shifting to distillates. Scrubber uptake, after a slow start, picked up more rapidly than predicted. Sales data from the world’s leading bunkering port Singapore, and test data from the IMO’s sulphur monitoring programme show this very clearly. The latter show that 20% of residual fuels tested in 2020 were above 0.50% sulphur, which correlates fairly well to data on scrubber uptake.
Other surprises were that the supply of compliant fuel was generally good, though there were some market imbalances during the transition period, which was remarkably swift. Fears that the higher cost of compliant fuels would lead to a credit crunch and incentivise widespread cheating were appeased, in large part because the onset of the Covid-19 pandemic accelerated a collapse in crude oil prices amid a dramatic fall in demand for oil products, in particular for road and aviation fuels. An expected oversupply of HSFO and associated price drop compared to compliant fuels did not materialise. This has made the so-called Hi5 spread much lower than expected, making the business case for scrubber installations much less compelling.
The lessons from IMO 2020 that we can take with us for the road to ‘net zero’, in my view, are largely positive. The supply challenge, which looked insurmountable to many, was overcome. The market responded to IMO 2020 with innovation in fuel blending, refiners found ways to produce more compliant fuels, uptake of abatement technology and alternative fuels like LNG increased. Supply and technical challenges were identified and, with the help of communication and cooperation among industry stakeholders, they were largely overcome.
What is also clear, however, is that none of this would have come to pass without a clear deadline. Hardly any owners began using compliant fuels until very late in 2019 due to the higher cost, making the challenge for the supply side very hard. This is why, in the message I delivered to IMO at MEPC 77 in November, I stressed that we will need the right regulatory signals to help drive the market toward low and zero carbon fuels and technologies. Price signals are clearly important. Phasing in a low GHG fuel standard also holds promise as we have, with IMO 2020, demonstrated that the market is adept at responding to demand. Change happened when needed. Let’s hope that, in the not-too-distant future, we can look back on the marine fuels and shipping sector and conclude that we have met the ambitions of the IMO’s initial GHG strategy, and are making good progress toward net zero.