IBIA checks in at Chemical & Product Tanker Conference

The 9th Chemical & Product Tanker Conference took a long, hard look at upcoming emission regulations for shipping, and on other issues affecting this sector. IBIA addressed the conference about the challenges associated with the global sulphur cap in 2020, and reports here about the concerns raised in other papers and discussions at the conference organised by IPTA and Navigate

Hot topic: Greenhouse gas emissions

How should shipping contribute to keeping global warming in check? It is a tricky subject, often looking like a tug of war between the regulatory powers of the International Maritime Organization (IMO) versus the European Union (EU), UNFCCC principles regarding common but differentiated responsibilities (CBDR) for developed and developing nations, the goals of the Paris Agreement and various views among shipping organisations

According to the keynote speaker, Dr Tristan Smith, UCL Energy Institute, global shipping would need to reduce CO2 emissions by 60% by 2050 to contribute to the goal of holding the global temperature increase below 2°C, and by 90% from a 2010 baseline to reach the Paris Agreement’s aim to limit the increase to 1.5°C.

This rate of change is barely possible with all of today’s fuel-saving technology, even combined with a huge speed reduction, Smith said. Energy efficiency alone will not be sufficient.

Getting there will take the combined efforts of IMO, national governments and shipping companies, and a great deal of innovation. It will require technology pilots, environmentally effective regulation that also supports economic development in developing countries and addressing market failures such as the “split incentive” which sees owners hesitating to make investments in fuel efficiency that will only benefit the charterer.

Recognising that it will take time for policy levers to be implemented, Smith argued that shipping cannot wait for policy to start innovating to reduce the sector’s carbon footprint to remain relevant in the future.

A panel debate ensued on the subject with Tristan Smith; Sveinung Oftedal, Specialist Director, Norwegian Ministry of the Environment; Dr Edmund Hughes, Senior Technical Officer, IMO and Mark Cameron, COO, Ardmore Shipping, moderated by the conference chairman; Captain Ian Finley, Permanent Representative of the Cook Islands to the IMO.

The panel was broadly supportive of the IMO as the right place to develop regulations. The IMO’s GHG roadmap, agreed at the Marine Environment Protection Committee in October 2016, was highlighted as a way forward to help identify how the various policies will come together. An important element of the IMO’s GHG roadmap is its alignment with the framework of the Paris Agreement, where national CO2 reduction targets will be reviewed and likely tightened every five years. The IMO’s GHG roadmap envisages an initial GHG policy strategy in 2018, to be reviewed in 2023 based on analysis of mandatory fuel consumption data collection that will begin in 2019.      

Could LNG be part of the solution? Smith said that from a climate perspective. LNG is no better than petroleum-derived fuels due to the methane slip that occurs during the production, distribution and use of LNG. (Methane is a much more potent GHG than CO2.)

Hughes from the IMO pointed out that LNG addresses air pollution. It is seen as an important tool to address the air quality goals of MARPOL Annex VI which sets limits for emissions of sulphur oxides (SOx) and nitrogen oxides (NOx). It could be, however, that LNG is only a stop gap measure for maybe 30 years to clean up the air while we wait for genuine low-carbon alternatives, the conference heard.

The challenges of sulphur reduction

IBIA was invited to the conference to talk about the challenge facing the industry in meeting the 2020 global sulphur cap. The key points IBIA presented was that we can learn some lessons from the introduction of lower sulphur limits in emission control areas (ECAs), but the scale of this shift will make it a much greater challenge and we must be careful to conclude that the relatively smooth shift to the 0.10% ECA sulphur limit in 2015 means we have nothing to fear.

A key message from the presentation was the lack of incentive for the market to start using 0.50% sulphur fuels prior to 2020, which could make the transition quite abrupt and difficult to handle, with a period of local and regional shortages of compliant fuels looking quite likely due to the way some markets are structured.

We have also moved away from the assumption made in the past; that the global 0.50% sulphur limit will mainly be met by traditional marine distillates. The official availability study for the IMO, which concluded that there will be sufficient product available to meet the 0.50% sulphur limit in 2020, assumed that fuels in the 0.10% up to 0.50% sulphur band won’t be traditional distillates, but rather blends including distillates and a variety of other refinery streams. While it remains to be seen how that theory pans out, IBIA’s message was also that we are likely to see innovation to replace traditional distillates with lower cost products, and we have already seen with a variety of new low sulphur fuels designed to meet the 0.10% sulphur ECA limit.

The conference also heard from Pacific Green Technologies, which said it expects more than 1,000 ships will install its ENVI-Marine seawater scrubber over the next 5-7 years as the technology becomes financially attractive for global operators, not just in ECAs.

The final speaker on the subject of sulphur regulations was Gustav Kranz, Director, Trans Oleum, who presented his study arguing that the shift from heavy fuel oil (HFO) to marine gas oil (MGO) in the European ECAs in 2015 meant refineries in the region had processed and extra 2.6 million tonnes of crude in 2015 to produce more MGO, leading to 87 million tonnes extra CO2 being emitted annually. Translating this to the possible 2020 impact, assuming global shipping needs to replace 250 million tonnes of HFO with MGO, would equate to a stonking 1,6 billion tonnes extra CO2 being generated per year.

The subject of extra CO2 being generated as a result of reducing sulphur in marine fuel is not new, but Kranz had a new take on the indirect emission result. Most of those present were baffled and questioned the methodology and the figures, but it goes to show that the subject won’t go away as focus on CO2 grows.

EU MRV vs IMO’s fuel Data Collection System

Speaking of CO2, there is no getting away from it. From the start of 2018, ships above 5,000 GT sailing to and from EU ports will have to submit data to assess how much CO2 they produce, and a year later they will have to start doing it globally under the IMO’s regime to assess global shipping’s carbon footprint.

Unfortunately, the two systems are not aligned, as demonstrated in presentations by Torsten Mundt and Naufal Ashraf of DNV GL. The EU’s Monitoring Reporting and Verification (MRV) scheme is more detailed than the IMO data collection system (IMO DCS) and the reporting format appears to be different.

For the IMO SDC, three parameters need updating every year; fuel consumption by fuel type, distance travelled, and hours underway (but not cargo carried). The EU MRV reporting requirements additionally include cargo carried, and a cargo carried multiplied by distance travelled as a proxy for transport work. Crucially, while the IMO’s system will anonymise the data, the European Commission plans to make the EU MRV data public. Politically, it is difficult to imagine that the EU will relax its criteria to align it with the IMO so we may expect several years of overlapping systems, the conference heard.

A lot of detail remains to be clarified for both systems before they can become fully functional. The EU MRV regulation entered into force in July 2015, outlining the steps toward the actual reporting. Ships are obliged to submit monitoring plans to accredited verifiers by the end of August this year, but it is not clear what will happen if they fail to meet this deadline.

Market fundamentals and outlook

The conference also heard about other regulations that will impact the chemical and product tanker markets in the next few years. They are coming thick and fast, including ballast water treatment requirements and reviews of the IBC Code and MARPOL Annex II requirements for discharge of residues of high viscosity and persistent floating substances.

Against this backdrop, the chemical tanker market has had little reason to cheer after declining rates in the past three years and recovery looks set to be slow, based on Drewry research presented by Hugo Finlay, Master Mariner, LLM, Consultant. Earnings have been poor; however the drop in bunker prices since mid-2014 has helped.

The problem is fleet growth outpacing demand, not helped by “swing tonnage” that can switch between product and chemical trades, having a negative impact on rates for chemical tankers. The fleet is expected to grow further up to 2020 apart from the smaller stainless steel tank ships. The supply of ‘swing tonnage’ larger ships will grow and continue to be an irritant in the market, with overcapacity on the cards.

Luke Hartley, Braemar ACM Shipbroking, said 2016 was a disappointing year for product tankers after a good 2015, when the oil price collapse had stimulated refineries to run at full tilt, generating a lot of product trade. Activity has dropped off sharply since 2016 as many regions are now drawing down product stocks built up during 2015.

The outlook may be improving, however, especially for clean tankers, with and uptick expected every year from 2017 to 2021.

The fundamentals for ship finance, meanwhile, are not good due to significant oversupply of assets in several sectors, which is not encouraging for investors, Paal Hauge, Senior VP, DVB Bank told the conference.

The scene has changed dramatically. Prior to the 2008 financial crisis, close to 40 banks were actively involved in ship finance, today only a handful of banks are still interested in pursuing it. Other forms of finance are also more difficult today than a decade ago.

Tough times

Times are tough in shipping with most sectors struggling to bounce back from the current cyclical downturn. Combined with growing regulatory cost, this may contribute to more of the consolidation we have already seen. Eventually, maybe this will reduce the overcapacity that is at the root of shipping’s difficult times, and we will move toward a future of a leaner, cleaner fleet?

The 9th Chemical & Product Tanker Conference, jointly organised by the International Parcel Tankers Association (IPTA) and Navigate, took place in London on the 14-15 March, 2017.

Report by Unni Einemo: unni@ibia.net