All commercial cargo ships run on bunker fuel, which is either marine gas oil (MGO), marine diesel oil (MDO), intermediate fuel oil (IFO), marine fuel oil (MFO), or heavy fuel oil (HFO). These fuels have a high sulphur content which is detrimental to the environment. Since the 1960’s, the International Maritime Organization (IMO) has been trying to decrease the impact of transportation on the environment. The Prevention of Air Pollution from Ships (Annex VI) controls the emissions from ships to reduce air pollution.
The IMO has instated a new regulation that will go into effect on January 1, 2020. Dubbed IMO 2020, this regulation states that the sulphur content of fuel must not be higher than 0.5%. The marine shipping sector currently accounts for about half of the global fuel oil demand, with most of the fuel oil sulphur content between 1-3.5 wt%. It is expected that this new limit will reduce emissions by more than 75% worldwide. Ships that do not comply to IMO 2020 could potentially lose their international certification.
When the regulation goes into effect on January 1, 2020, an estimated 90% of the global vessel fleet will need to invest in alternative technologies. IMO has given several suggestions on how ships can meet the lower Sulphur emission standard.
Low Sulphur Fuel: Certain fuels such as marine gas oil or marine diesel are hybrid fuels that have a sulfur content below 0.5%. Ship engines can make the switch to this type of fuel with minimal operational impact.
Scrubbers: On-board exhaust scrubbers reduce the amount of emissions in exhaust gases, but have high installation costs, in the range of $2-$4 million per vessel. There is a secondary investment in scrubber technology to make it fit for purpose. However, the investment is high, and the operating and maintenance costs of the equipment are substantial. This solution also takes about 12 months from manufacture to installation.
Liquefied Natural Gas: LNG does not contain sulphur, however, it can only be used in newly built vessels. Plus, there are infrastructure investments since LNG is only viable on new build vessels, or in retrofit for a few existing “LNG Ready” vessels. While natural gas is a cheaper energy, its liquefaction and logistics are very expensive since this type of fuel is stored and transported at -160°C.
Ocean carriers are already preparing to be ready for the new regulation next year. The latest estimates as of May 2019 found that 83% of the total fleet by vessel and 62% by TEU capacity will have to switch to 0.5% LSFO. About 16% of the current fleet by vessel count and 36% in terms of TEU capacity are fitted or are to be fitted with scrubbers while only 1% of the total fleet by units and 2% in terms of TEU capacity will take up LNG as fuel.
In order to become compliant, it is expected that the shipping industry will spend up to $24 billion. These methods will cause uncertainty in fuel costs, and most likely result in higher prices for customers.
Implications of IMO 2020
To comply with the new regulation, shipowners will need to decide which route they are going to take and how they are going to pay for it. Shipowners also have to negotiate with bunker suppliers for the price of low Sulphur fuel. Shipping lines have indicated that additional surcharges will be necessary to cover the cost of cleaner fuel. These surcharges will now become a part of the price negotiations in a sales contract as they have not previously been a factor. There will be implications to the industry, too, such as higher refinery costs.
As a whole, shipping industry experts predict a sharp increase in fuel prices, with levels close to gasoil. After January 1, 2020, the market will need to re-balance as fuel costs will be much higher than today’s market level.
Shippers must weigh the options of compliance with IMO 2020. And, they will need to decide how to charge for this increase with either a higher all-in freight rate, with a surcharge, or with a revised Bunker Adjustment Factor (BAF). These decisions point to a volatile market for the start of 2020 as shipowners figure it out.