Transition to the global 0.50% cap – should we act to avoid chaos?
The Marine Environment Protection Committee (MEPC) of the International Maritime Organization (IMO) is expected to decide on the timing of the global 0.50% sulphur cap for marine fuels in October this year, based on the result of a low sulphur fuel availability study required under MARPOL Annex VI.
Regardless of whether the global 0.50% sulphur limit takes effect in 2020 or 2025, the change from the current 3.50% to a 0.50% sulphur limit is a seismic shift on an unprecedented scale in the history of refining and shipping. It seems unrealistic to expect to successfully achieve this shift overnight.
Implementation of the global 0.50% sulphur limit in 2020 outside designated emission control areas (ECAs) where the fuel sulphur limit is 0.10% would likely be more challenging than 2025 from an overall supply/demand balance standpoint (see IBIA article dated June 20 ). A delay to 2025 would nevertheless bring a number of transitional challenges that cannot be ignored.
Below we highlight issues that may be expected, and outline a number of potential mitigation strategies as background, and ask our members to let us know whether they want IBIA to bring this to the attention of MEPC. There is a link to our survey at the bottom of this page.
ISSUES WITH AN ABRUPT GLOBAL SWITCH FROM 3.50% TO 0.50% SULPHUR BUNKERS
- Shifting global bunker supply from residual fuel to 0.50% sulphur fuels, which are expected to be principally distillates, cannot happen overnight
Shipping has undergone a fuel paradigm shift before, from coal to diesel in the 1920s and from diesel to heavy fuel oil (HFO) in the 1950s, but it happened gradually, not overnight. During the last 30 years we have also seen changes in the specifications and quality required for inland fuels, including sulphur limits. These were not always smooth transitions, with refineries and fuel distribution sometimes lagging behind demand resulting in cost going up for consumers. Such fuel specification changes have been applied in limited geographical locations (cities, regions and countries) and staggered over time, never across the globe from one day to the next. Yet this is what MARPOL Annex VI requires – a drastic change in marine fuel quality, or a radical change to alternative fuels like LNG and methanol or the installation of scrubbers.Refineries are already increasing output of distillates to address rising inland demand, resulting in a relative reduction of residual fuel oil, or (HFO) production, but this has been a linear, gradual process. Assuming that in 2020 or 2025, the capacity exists globally to produce sufficient marine fuels meeting a 0.50% sulphur limit, we would likely see regional and/or local disparities with some ports facing shortfalls. Furthermore the abrupt shift from mainly high sulphur HFO to low sulphur products will involve an enormous logistical undertaking that will require not only refiners, but other links in the supply chain to adapt in order to store and deliver distillates or other low sulphur fuels on a broader scale.
Some may argue that there is no issue as evidenced by how well the industry coped with the 2015 change from 1.00% to 0.10% sulphur fuel in ECAs, which was a shift from mainly HFO to mainly marine gas oil (MGO). However, the additional annual volumes involved were limited to no more than approximately 40 million mt of global distillate demand per annum and applied to limited geographical areas. The global cap would require an additional annual volume of around 210 million mt of maximum 0.50% sulphur product. According to the International Energy Agency, the difference between the ECA change in 2015 and the global 0.50% cap would be even more dramatic. It advises the 0.10% ECA sulphur limit caused 0.1 million b/d to shift from residual fuel oil to gasoil, while a global cap in 2020 would lead to a 2 million b/d shift from HFO to MGO.
- Market disruption likely to inflate distillate prices in marine fuels market and beyond
The refining industry, and the market, is able to absorb incremental annual demand growth for distillates, but an abrupt major increase like the one associated with a global shift to 0.50% sulphur fuels for shipping will very likely cause a period of supply shortages in some regions, which in turn would have an impact on distillate product prices globally. A distillate shortage and hence price inflation in one sector, like shipping, could impact inland markets such as road transport fuels and heating oil.Some may again argue that the anticipated price increase in MGO when the ECA sulphur limit dropped to 0.10% in 2015 did not materialise. This was only, however, a result of a sharp fall in global oil prices in the run-up to 2015. The price difference between MGO and HFO did, in fact, increase in relative terms from a typical 50-60% premium to 100% or more, and there is no guarantee that the introduction of the global cap will coincide with a similar period of low oil prices.
- Weak initial compliance may set unhealthy precedent and create uneven playing field
Distribution and availability of 0.50% sulphur fuels is likely to be uneven with frequent shortages of compliant fuels in some ports resulting in widespread instances of non-compliance. Moreover, a weak global cap enforcement regime combined with a significant premium for compliant versus non-compliant fuel could result in an imbalance in competitiveness between ship operators. This in turn could motivate further non-compliance and this downward spiral could undermine the use of compliant fuel outside of monitored waters, and set a precedent which could take some time to correct. - The shift is not a ‘flick of a switch’ process for ships
Fuel tanks on ships will have to be drained of high sulphur fuel and cleaned to avoid sulphur contamination that has the potential to make new product bunkered into the same tanks non-compliant. Some may also need to make adjustments to their fuel systems and tank configurations, which is not an instantaneous process. Furthermore, because of the higher cost of the new lower sulphur fuel, owners will want to hold off on making the shift for as long as possible, but this is not a ‘flick a switch’ process. - HFO supply infrastructure may disappear and undermine adoption of abatement technology
Uptake of abatement technology such as scrubbers is expected to allow a portion of the world fleet to continue to use HFO with a higher sulphur content both in ECAs and globally. Bunker suppliers have pointed out that if demand for HFO is limited to vessels equipped with scrubbers, demand would shrink dramatically with HFO becoming a niche market compared to the main market for 0.50% sulphur fuels. Suppliers would need to segregate high sulphur HFO from the lower sulphur fuels and many may stop offering it and potentially make HFO unavailable except for in selected ports where market conditions (i.e. regular calls from ships with scrubbers) make it viable. If fewer suppliers are willing to offer it, there is a risk that supply of HFO will begin to disappear just as more ships are installing scrubbers.
POTENTIAL STRATEGIES TO EASE TRANSITION TO THE GLOBAL 0.50% SULPHUR CAP
As outlined above, there are numerous challenges for global shipping associated with an overnight shift from fuels with up to 3.50% sulphur to maximum 0.50% sulphur that would likely lead to a period of significant disruption and market distortion. IBIA believes it would best serve global shipping if the IMO signatories to Annex VI were willing to consider strategies to mitigate these disruptions, while still achieving the desired environmental benefits in a realistic but nevertheless ambitious timeframe.
Options may include the following that may be considered on their own, or in combination:
- Introduce the 0.50% limit only in EEZs initially, possibly region by region
Rather than a global change, first introduce a 0.50% sulphur limit for ships when sailing in the Exclusive Economic Zone (EZZ) of Annex VI signatory countries. This would be similar to what the EU intends to do in 2020 and is similar to the US/Canada ECA zone, as well as designated maximum 0.50% sulphur zones being introduced in China. This approach would achieve the main health benefits intended by the regulation by reducing emissions of harmful air pollutants near populations. The initial increase in demand for 0.50% fuels would be significant, but much more manageable than a global requirement, especially if introduced region by region over an agreed timeframe. As a growing share of ships’ operations fall within low sulphur zones, it should incentivise additional uptake of abatement technology, thus achieving the IMO goal of both reduced SOx and NOx emissions whereas a global shift in fuel sulphur levels would only reduce SOx. The main issue with this approach would be to decide the timing for expanding the 0.50% cap from one region to the next, and then beyond the EEZs. It would also cause increased operational complexity for ships as they would face three different sulphur limits (0.10% in ECAs and in many ports, 0.50% in EEZs and 3.50% globally) for a limited period. - Gradual introduction of the cap by ship type
It may be possible to phase in the introduction of the 0.50% sulphur cap by ship type, such as cruise ship, container ships, crude tankers, bulk carriers etc. This approach would have the advantage of spreading out the demand growth but nevertheless give a clear framework for the timings and associated distillate demand growth. The main issue with this approach would be to decide ‘who goes first’. - Allow exemptions for ships committed to emission compliance retrofits
Annex VI already allows for exemptions for up to 5 years for ships to undertake ship trials of emission reduction technology. This has been taken a step further in the US, where authorities have given exemptions from meeting the ECA sulphur limit for ships operating in the US provided the owner has committed to retrofit solutions that will achieve an equivalent or better emissions profile within a given timeframe, like installing scrubbers or fuel systems geared toward alternative clean-burning fuels such as LNG or methanol. This could help ensure the appropriate level of HFO supply remains available in the marine fuels market as ships that will be able to use HFO after installing a scrubber, within a given timeframe, would be able to continue to use HFO in the interim. - Confirm the issuance and acceptance of fuel oil not availability notices (FONARs) permitted under Annex VI
Regulation 18 of MARPOL Annex VI say ships that were unable to source compliant fuel must provide evidence that it attempted to purchase compliant fuel in accordance with its voyage plan and, if it was not made available where planned, attempts were made to locate alternative sources and that despite best efforts to obtain compliant fuel oil, it was not made available for purchase. While the US has an established reporting system for ship operators, using fuel oil non-availability reports (FONARs), some countries do not. With a very real risk that compliant fuel is not always available, even in ports that have compliant fuel some of the time, ship owners need reassurance that they will be able to submit a non-availability report, and PSC officers need clear guidelines for assessing such reports. - Allow a period of adaption and monitoring before requiring and enforcing compliance
There is precedent for such an approach with regards to the initial enforcement of the ECA sulphur limits. The US recently implemented a voluntary fuel sulphur testing regime to allow authorities to assess compliance while ships were promised that they would face no penalties if the fuel tested as non-compliant. Some lenience has also been shown in the early stages of new ECA limits in European countries, before tightening controls. It would be paramount, however, that it was made clear that a period allowing for lenience and potentially low compliance would have a clear progress toward full and effective enforcement across all ships globally, irrespective of flag, to ensure both a level commercial playing field and achieving the environmental benefits of the regulation. - Gradual reduction in the sulphur limit
It may be possible to phase in the 0.50% sulphur limit with a gradual reduction from 3.50%, but given the fuel quality issues experienced with blending for the 1.50% and 1.00% ECA sulphur limits, and potential fuel compatibility challenges, IBIA would caution against such an approach. - Amend the regulation to allow effective global enforcement
Port state control can take action against ships for non-compliance occurring within their own coastal waters (EEZ) but once the global cap is in place, only flag state can take action against ships for non-compliance on the high seas, which may not be an effective way to ensure fair and equitable enforcement. Making it an offence to carry non-compliant fuel unless the vessel has approved abatement technology onboard (or is undergoing the abatement technology approval process) would give PSC the ability to take action against all ships.
IBIA would like to know if you think we should bring the issues associated with the transition to a global 0.50% sulphur limit to the attention of the IMO’s Marine Environment Protection Committee.
Please go to our online survey page to submit your response.