Industry Insight: The Shipping Industry's Response to ECA 2015

Choosing the right investment towards compliance to 0.10% sulphur emissions in select ECA areas with effect from 1 Jan 2015 led to many debates in the last one year.

The problem was two pronged- firstly, multiple options to comply with such as LSMGO, low sulphur fuel oil blends, HFO with scrubber, LNG, methanol, biofuels etc. and secondly, the need to balance long term and short term considerations of availability, risk, cost and payback of investment.

With the deadline now past, a review of the announcements made by a total of 70 companies- top 10 companies across seven categories* in the EU SECA gives a good sense on what has been happening in terms of adoption of new technologies, especially in the last six months. Collectively, these companies own a fleet of ~5000 vessels.

55 out of 70 assessed companies have disclosed their compliance strategies publically. Limited information was available for bulk ships and tankers. Results show that passenger and ro-ro categories have decisively moved towards scrubber technology with 75% of assessed companies voting in favour of the technology. LNG offers promises for the future, however, reach has been limited to coastal/inland shipping. Majority seems to be moving towards marine gas oil (MGO). Growth prospects for other alternates seem limited at the moment.

Scrubber technology has been adopted by 17 out of 70 companies assessed. Top investors in the technology are Brittany ferries (~$500m), Carnival Corporation ($400m for 70 vessels), DFDS (more than $150m) and Royal Caribbean Cruise (15 vessels) using technologies from Alfa Laval, Wartsila, Belco Marine and Yara Marine (formerly Green Tech Marine).

The global oil price drop seems to be impacting the scrubber adoption negatively, the orders nearly doubled for the six month period of Apr'14- Sep'14 while in last four months growth has been ~19%. The vessels count opting for scrubber technology stands at 160 as on 31st Jan'15 as compared to 135 in Sep'14. The single largest order was from Royal Caribbean Cruise in Dec'14 for retrofitting 13 of its vessels, the deliveries are scheduled between 2015 and 2017.

LNG as compliance fuel is being considered by 20% of the companies studied mostly passenger category. Top investors in the technology are Universal Marine, BC Ferries and Fjord Line.

A 13% rise has been recorded in LNG propelled vessel orders in the last four months. As on 31st Jan'15, confirmed order book for LNG propelled vessels stands at 78 as against 69 in Sep'14. The key contributor to the order book has been container category with 125% growth and 10 orders over the period.

Concerns regarding availability of bunkering infrastructure and global oil price drop (~50% since Sep'14) are the key inhibitors to the technology. There was an important order cancellation in Oct'14 from Brittany Ferries for 4 vessels- 3 retrofits and one new build.

Various other alternative fuels are also being discussed. ExxonMobil's low S fuel oil blend HDME50 is being used by vessel owners in the ARA region. Lukoil and Cespa have also come up with low S fuel blends. Stena Line has considered methanol for its cruise Stena Germanica scheduled in 2015. Biofuels, ethanol, fuel cells as marine fuel are also being studied. Though the growth prospects seem limited for the above alternates on account of availability, safety and compatibility related risks.

LSMGO has been the fuel of compliance for vast majority especially the containers, bulkers and tankers. Key investors in the technology are Maersk Line, MSC, Eimskip, Tallink and Hurtigruten.

The reasons adding to the attractiveness of the fuel are prior knowledge regarding the fuel, minimal investment on vessel infrastructure, well established bunker supply chain and favourable oil prices.

In the wake of oil price uncertainty, we might expect the slowed down activity to continue in terms of adoption of other technologies such as scrubber and LNG. However, when global 0.5% S limit gets enforced in 2020 or 2025, there would not only be the fuel price concern but the supply sufficiency of global refineries to cater to the increased low S fuel demand. The vessel owners would keep on exploring the right compliance strategies tailor made to match their requirements.

Note: * The categories assessed are- container (deep sea and short sea treated as separate), passenger, ro-ro, general cargo, bulk carriers and tankers.