With less than three years to go for the International Maritime Organization's global sulfur cap, bunker industry participants are still assessing how refiners and ship-owners will respond to the new rule that is set to disrupt the marine fuel product-mix as well as its pricing.
On October 27, 2016, the IMO decided to cut bunker sulfur limits from 3.5% to 0.5% from the start of 2020.
A key IMO Marine Environment Protection Committee meeting -- MEPC 71 -- is scheduled this week, where industry participants, among other themes, are also hoping to get more cues on fuel specifications, as well as on implementation and enforcement measures for the global sulfur cap.
The 2020 timeline is a firm one, Simon Neo, regional manager for Asia at the International Bunker Industry Association said, shrugging away hopes of a phased implementation harbored by some participants at the Platts Inaugural Bunkering and Storage Asia Conference last week.
About 90% of the marine fuel sold presently is 3.5%-S fuel. However, the global sulfur cap rule will prompt ship-owners either to start buying more expensive, cleaner fuels, including marine gasoil, or invest in emissions-cleaning technology for their vessels.
The shipping industry will largely chose gasoil because it is a simpler solution, some industry sources said.
However, supply fundamentals could limit its use, others said.
"We don't see marine gasoil as an answer. We see a fuel-oil-based solution. From post 2020, the high-sulfur fuel demand will switch to what we are calling a compliant fuel oil demand," Richard Gorry, managing director at JBC Energy Asia, said.
A theoretical global oversupply of 14-15 million b/d in the refining capacity exists. However, most of that oversupply is junk capacity, in other words, capacity that can never come back to the market. The effective spare capacity in the market is less than 2 million b/d, Gorry said.
Refiners don't have much room to produce more and more gasoil. They have not been focusing on adding capacities that will allow them to supply enough marine gasoil to meet the new demand coming from this regulation, said Gorry, adding that growth in conversion capacity is also quite limited and is mostly aimed towards meeting the clean fuel demand for ultra-low-sulfur diesel oil in other sectors.
"When the IMO rule comes into effect, the price of HSFO will drop off the cliff. Due to a price discount between HSFO and 0.5%-S fuel oil, we believe shipping companies will adopt abatement technology to take advantage of the big spread. In that market, when it exists, the payback period for scrubbers will become more attractive, resulting in a swift uptake of this technology," he said.
About 460 vessels had scrubbers globally, while around 4 million mt of marine fuel is estimated to have been scrubbed in 2016.
However, the number of ships with scrubbers is expected to reach 22,000 by the end of 2030, with about 142 million mt/year scrubbed, according to a study presented in January by Robin Meech, managing director of Marine and Energy Consulting Ltd., who is also the chairman of IBIA.
"From the ship-owner's point of view remaining flexible is very important at this point of time. There is no clarity on the eventual winner in the coming battle of fuels," said Anoop Singh, regional head of tanker research (East of Suez) at Braemar ACM Shipbroking.
To that end, shipyards are offering "scrubber ready" designs as the standard on new-builds these days. This means the piping, foundation, and power capacity to run a scrubber are built into the design and are priced in as well.
"Ship-owners can opt for scrubber till a few months before delivery of their vessels. That said, we do count about half of the firm new-build VLCCs ordered this year, to have opted to fit a scrubber," Singh said.
In order to meet the MARPOL Annex VI global sulfur requirement of a maximum of 0.50%, fuel blends can also be used.
For example, DMA, which has a maximum sulfur content of 1.50%, can be blended with DMA with a maximum sulfur content of 0.10%, or taking into consideration its lower flash point, even 15-ppm ULSGO can be used to produce a lower-cost distillate fuel, but so can HSFO.
Up until 2005, ISO 8217 included DMC, a fuel grade which was a blend of about 85% DMA and 15% RMG380. At the current prices, such a blend today could meet the IMO global requirement about $30/mt cheaper than DMA, said Bob Thornton, technical director of marine fuel at World Fuel Services.
Also, new fuel types are still appearing.
"A lot hinges on suppliers' and ship-owners' decisions in the next two years and more, as no single solution fits all," he said.
"But once you chose your option, it will be difficult to change."
