• Intra-EU Rotterdam B30 now costs $127.74/mt less than VLSFO
• Premium of $32.88/mt for EU to non-EU voyage
• Falling biofuel premium to deliver lower FuelEU pooling costs

The ongoing conflict in the Middle East has delivered surging bunker prices, but also a significant change in calculations for those comparing total compliance costs for conventional versus alternative fuels.

Prices for biofuel blends have been much more resistant to the Middle East supply shock than those for conventional bunkers, with biofuel production largely situated outside the conflict zone. The average price for VLSFO in Rotterdam this month has been 73% higher than the pre-war average in February, while B30-VLSFO prices at the Dutch port saw just a 31.5% gain over the same period.

This is delivering a significant change to how biofuel blends compare to conventional bunkers, when the full cost of compliance with the EU emissions trading system and FuelEU Maritime is added to the cost of the fuel.

Taking in all compliance costs, Ship & Bunker estimates Rotterdam B30 cost $127.74/mt less than VLSFO on an intra-EU voyage so far this month, compared to a $12.40/mt discount in February. On a voyage between the EU and elsewhere B30 came at a $32.88/mt premium this month, down from $140.17/mt in February.

Calculating the Change

Calculating the change in costs requires analysing the underlying fuel price, the EUA cost for EU-ETS compliance and the value of pooling under FuelEU Maritime's system for trading under- and over-compliance.

VLSFO at Rotterdam has cost $796.78/mt on average this month, up from $460.53/mt in February, while the B30 cost has been $990.28/mt in May, from $753.28/mt in February.

Each tonne of intra-EU VLSFO consumption requires the purchase of 3.2 EUAs, and B30 requires 2.24 EUAs - and half that amount for EU to non-EU voyages. That means the intra-EU EU-ETS compliance cost for VLSFO has been $282.13/mt this month and was $284/mt in February, while for B30 the May cost has been $197.49/mt and February's was $198.80/mt.

Under FuelEU Maritime's current carbon intensity thresholds, each tonne of intra-EU VLSFO consumption delivers about 0.07 mtCO2e of excess GHG emissions, and each tonne of a typical B30 blend a 0.85 mtCO2e deficit, or half that amount on EU to non-EU voyages. Under the pooling system VLSFO users can pay to cover their undercompliance, and B30 users get paid for their overcompliance.

Taking pooling values from market participants, that puts intra-EU VLSFO's FuelEU pooling cost at $17.50/mt in May and $16.26/mt in February, while B30 consumption delivers FuelEU pooling revenues of $219.10/mt in May and $203.68/mt in February.

As can be seen, because EU-ETS and FuelEU compliance costs have remained largely static since the start of the Middle East conflict, the significant narrowing of the B30 fuel premium to VLSFO has been enough to make B30 significantly more attractive.

How Will the Market Adjust?

The increased price advantage for biofuels is unlikely to last long.

With B30's current $127.74/mt discount to VLSFO for full fuel and compliance costs on an intra-EU voyage, one would expect the majority of ships on this type of voyage to shift to using biofuels if the discount persists.

In the latest available data, biofuel blend sales at Rotterdam climbed by 0.6% on the year to 104,630 mt in the first quarter, while conventional bunker sales sank by 28.1% over the same period. Further increases should be expected in the second quarter.

The implementation of the RED III regulation in the Netherlands, which sets quotas for renewable fuel sales by bunker suppliers as of this year, is another factor driving increased biofuel sales at Rotterdam.

Any increase in demand as the market adjusts is likely to raise the premium for biofuels versus fuel oil.

FuelEU pooling values are also likely to fall, as this market is in large part driven by biofuel's premium over fossil fuels.