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IMO 2020:


JUST A RIPPLE OR A STORM FOR SHIPPING AND OIL?


There is no debate that since Donald Trump took over the presidency of the USA, he has ploughed a deep and disruptive furrow in respect of US trade relationships with the rest of the world, above all that with China.


However one might evaluate his negotiating tactics, there will be consequences for the outlook for global growth, the demand for raw materials (above all oil) and indeed for the world’s shipping industry, which facilitates some 90% of physical goods trade, including energy products.


It can certainly be argued that the ultimate outcome of the various trade tensions and associated negotiations relegates other considerations to subordinate roles. However there is rarely anything that pertains to global trade that is one dimensional, and as a rule the bigger picture is an array of complex inter-dependencies, where a single factor can have an inordinate influence, even that proves to very transitory with the benefit of hindsight. The International Maritime Organization’s (IMO) ruling to reduce the sulphur content cap for bunker fuel from 3.5% to 0.5% from 1 January 1, 2020 will entail a major overhaul for the shipping industry, with major implications for all those in the sector’s value chain, including refiners, as well as trading, logistics and ports operators.


Via way of an overview of key aspects, it is worth noting the following. High sulphur fuel oil (HSFO) accounted for ca. 70% of the world’s bunker fuel us in 2016, and these will be non-compliant as of 2020. The marine sector consumed 3.8 million bpd (barrels per day) of fuel oil in 2017, and thus was responsible for roughly of all global fuel oil demand.


By way of a contrast the marine sector also used ca. 1.0 mln bpd of marine gas oil, which a lower sulphur content distillate, but this amounts to just 5% of global gas oil and diesel demand (the bulk of which is consumer by the heavy duty trucking sector). While vessels which install ‘scrubbers’ (allowing vessels to continue to burn cheaper HSFO by washing the exhaust gases to reduce the SOx emissions) can continue to HSFO post 2020, the cost of investing in these scrubbers is estimated at $1.0-10.0 mln per ship (depending on size). It is hardly surprising that the marine industry, which is struggling to claw its way out of a low margin environment, is very reticent to make such investments, particularly as it is hardly environmentally friendly. That said, there are some short-term attractions, in so far as the upfront investment on ‘scrubbers’ can be recouped much more quickly, than for example replacing them with compliant vessels, and on current price differentials, once the investment has been recouped, there would also be a unit cost advantage.


So what are the options to comply with IMO 2020 that are viable both in business and environmental terms? There are a plethora of options, but the industry preferences appear to be crystallizing around two: low sulphur fuel oil (LSFO) and liquefied natural gas (LNG) bunkering. However the challenge for vessel and port operators along with refiners is to try and gauge prospective demand for LSFO and LNG, particularly as it will also require investment in supporting infrastructure (port & floating) above all for LNG (which is better suited to fixed maritime routes), and indeed a need to address the issue of minimizing LSFO differences in so-called ‘blend quality’ between suppliers around the world. The latter is to a certain extent subordinate to the broader topic of compliance with IMO 2020, and establishing a regulatory framework that work towards full compliance, and has to recognize that full compliance will certainly not be immediate, even with the prospective introduction of a so-called ‘carriage ban’, which expressly forbids ships from carry non-compliant fuels in their bunker tanks, with port authorities tasked with enforcing regulation.


12 | ADMISI - The Ghost In The Machine | September/October 2018


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