(Bloomberg) — Even as the owners of ships carrying everything from bananas to oil spend billions of dollars to meet tighter clean-air rules, demand to buy the dirtiest fuel will still hold out in some parts of the world.
In two and a half years, the International Maritime Organization will slash by 86% the amount of sulfur allowed in the fuel burned by the world’s cargo ships and oil tankers as they sail around the globe. Meeting the new standards will cost the world shipping industry $60 billion a year, according to consultant Wood Mackenzie Ltd.
The IMO’s new standards that require ships to use fuel with 0.5% sulfur or less — versus the current 3.5% — as of Jan. 1, 2020 should reduce heavy fuel demand by 2.3 million barrels a day, according to industry consultant FGE. Changing fuels completely across the world will be difficult, as refiners will need to build units such as cokers. More than two-thirds of residual fuel use is in developing countries, according to International Energy Agency data.
"This assumption of residual fuel all of a sudden disappearing is highly unlikely," said Mikhail Shapiro, a marine fuels marketing manager for Glencore Plc. "The majority of the residual fuel, and where the cokers need to go, is held in places and in countries that simply don’t have the financial investment to do this."
Today, ships burn bottom-of-the-barrel bunker fuel — what remains after every bit of more valuable gasoline, diesel and jet fuel has been squeezed out of crude. The upcoming regulations leave shipowners with two main options: switch to more-expensive diesel fuel or install a scrubber on the ship to clean up emissions.
The price difference between diesel and bunker fuel will probably increase, Shapiro said at a conference in Stamford, Connecticut. "Take a look at scrubbers, because the gasoil/fuel oil spread will increase by default and you will have a lot of fuel oil displaced."
Scrubbers cost about $10 million for large container ships and $5 million for medium ships, according to Adrian Tolson, a consultant at 20/20 Marine Energy. The "payoff is quick" after making profits from the wider spread between fuel grades, he said.
Some owners could struggle to find financing for scrubbers, Paul Nix, general manager of terminal operations at Gulf Petrochem Pte. Ltd., said from Fujairah in the United Arab Emirates. "The shipping industry is not in very good shape at the moment, and to get credit from the banks to install scrubbers will not happen in a large scale," he said.
There’s a third option for shipowners: ignore the new rules and hope they don’t get caught. While that’s the least expensive, the legal and reputation risks will likely keep most shippers toeing the line, according to JBC Energy GmbH.
"The big ship owners, they can’t afford to be non-compliant," said Alex Poegl, an analyst with JBC in Vienna. “There are smaller players who could benefit from that on a cost basis."
Since nobody has jurisdiction over the high seas, each country’s local port controllers, such as the Coast Guard in the U.S., would enforce the IMO’s rules.
"Flag states have to issue ships with appropriate certification that they comply," said Lee Adamson, the IMO’s head of public information in London. "Without that certification, other signatory states and other port states aren’t going to want those ships in."
Small Penalties
The penalties for noncompliance are small, compared to millions of dollars for scrubbers and cleaner fuel. The biggest civil fine the U.S. Coast Guard can impose is $71,264, although willful violations could be referred to the Justice Department for criminal prosecution.
The light fines may tempt some owners to ignore the regulations, said Antoine Halff, a senior research scholar at Columbia University’s Center on Global Energy Policy.
"Non-compliance may be the No. 1 response to the new standards," said Halff. "In terms of financial penalty or any other penalty it’s not effective. You make money by being non-compliant even if you get caught."
In February, Columbia hosted the heavy hitters of the shipping industry at a closed-door meeting in London to talk about the future of their fuel consumption. The shipowners were comfortable to talk freely about their plans to blow off the IMO’s restrictions, according to Halff.
"Ship owners seem very brave right now, but when faced with European or U.S. port authorities I am not sure they will be as bold," 20/20 Marine Energy’s Tolson said. "Right now I think they are trying to get a reaction until compliance gets sorted out."
Bloomberg News by Laura Blewitt
