Feature: The Current Business Models for Suppliers and Intermediaries Will Not Work Beyond 2020; What Can the Bunker Industry Learn from Aviation?

Frank Coles, the CEO of Transas, recently wrote an interesting article titled, "The 5 Things Aviation Can Give to Shipping." Transas provides navigation systems to the maritime industry. Coles looks at how both segments address "human and organizational challenges" in the areas of safety, standardization, adherence to procedure, reduction in administrative burdens, and global traffic control. Although shipping incident rates have declined, the causes are still due to human error and "up to 80% of incidents and accidents in shipping are the result of either mistakes being made in the work force, or by a simple failure to take action to avoid an incident escalating."

Aviation's "more sophisticated and mature" approach in addressing these challenges is what differentiates it from its counterpart. Of course, the 'human cargo' element of Aviation is one very good and obvious reason for the higher consideration to safety which ultimately leads to recognition and value. Shipping suffers from too many workarounds in standard operating procedures, a central issue recently coined as "behavioral adaptation" by the European Seahorse Project. These workarounds were prevalent in "reporting paperwork, personal protective equipment, work-rest hours, navigational rules and standards, and hot-work and permit to work." Imagine for a moment if Aviation tolerated any of these workarounds.

As it pertains to administration, both segments have moved in opposing directions. Aviation has "achieved a reduction in administrative duties required in the cockpit through automation," while Shipping has actually increased the "paperwork required by the bridge, despite concepts such as the European Single Window." Ask any captain and they tell will you they spend more time on paperwork than commanding their ship. Finally, Aviation's very strict global traffic controls are well documented yet shipping has no such global controls. "The majority of collisions and incidents happening in busy shipping lanes and ports relatively close to land" should require more traffic control centers working in unison to "have a significant impact on safety."

At first blush, this might be an unfair comparison given the practicality, reasonableness, jurisdiction, and flag states imbedded in Shipping. Looking beyond all this, however, it stands that Shipping could learn a fair bit from Aviation, especially when it comes to standardization, procedures, and administration.

These factors motivated me to consider how the Aviation Fuel distribution infrastructure could teach its Marine counterpart a thing or two, especially as we approach the 2020 IMO implementation of the global 0.5% sulphur cap.

Aviation and Marine

The Aviation and Marine fueling businesses are fundamentally one and the same. On one side, there are 'consumers' made up of commercial airlines and ship carriers, private aircraft and yachts, military sea and air fleets, and on the other side, there are 'suppliers' consisting of refiners, major, state and independent oil companies and distributors. In between, you have intermediaries (considerably more in marine) with global networks that provide competitive pricing, credit, centralized purchasing, along with an array of ancillary services such as quality control, logistics coordination, and risk management. This is where the similarities end.

The differences pile up in the distribution systems. The jet infrastructure is tightly regulated and standardized to ensure safety and product integrity. Jet fuel is shipped to airports via pipelines, trucks, railcars, and barges. In many instances it is piped directly to airports from the refinery. The fuel is stored in fuel farms inside the airports, and due to jet fuel's homogeneity, suppliers can comingle inventories. The fuel is delivered 'into wing' using hydrants connected to underground pipes. Stringent quality controls along the entire supply chain using advanced technology sensors provide immediate data to all operators, users, and service providers. Now compare if you will this closed, efficient system to the open, inefficient Marine distribution system. While both are fundamentally similar, a lot more transpires in the unregulated and less standardized Marine system before the fuel reaches its ultimate destination, a topic for another discussion at another time.

Back to the IMO. While the 2020 decision gave us a clear timeline, it did not provide any clarity as to how and where ship-owners will buy their 0.5% sulphur. The IMO's verdict was based on two remarkably conflicting studies by EnSys and CE Delft. These studies are so contradictory in fact that veteran industry expert Rudy Kassinger, while speaking to Ship&Bunker, labelled them as little more than "a best effort to take on an unanswerable question," or - my favorite - an "exchange of ignorance" as neither had a clue as to "what the world's 100+ refiners are planning to do in future years."

What we do know is that refiners do not intend to change crude slates or desulphurize high sulphur fuels to produce a 0.5% sulphur bunker fuel by 2020. According to Kassinger, "the refining industry [would] have to invest at least $100 billion to convert all the residual fuel no longer being used by the marine industry into clean products."  Bravado aside, refiners will need to find a home for their high sulphur streams and the large, ratable shipping companies, scrubbers in hand, will be the willing partner. The two are just not yet on the same dance floor.

Speaking to Platts recently, an IMO delegate shared how "...it's hard to take a rational decision when you're faced with so few facts ... we're asking another industry to do something we want them to do, and it's not clear what the results will be." There is no reason why the marine fuel industry cannot come up with the right results.

Standards

Marine should consider mimicking aviation's standardizations, starting with one uniform fuel - why not 500 cSt? Next, it absolutely needs to reengineer the distribution and into-ship delivery systems. Major hub port authorities should follow Singapore's lead and enforce mandatory and uniform use of mass flow meters, supported by digital services and more open source technology that includes products the likes of Vortex Development Group's E-BDN electronic delivery receipts. All of this will further facilitate compliance with the IMO's Regulation 22A regarding mandatory fuel consumption data collection systems for international shipping.

Adrian Tolson, Senior Partner at 20|20 Marine Energy, has correctly proposed that larger hubs should be the domain of those who can manage "a logistics operation that is more focused on barging, rather than bunkering economics" adding "there isn't money in these markets - they are oversold, overmanaged, overtraded and are subject to market forces that are not part of the marine fuel sector." I would add 'overblended'. One beneficiary in all this could be Aegean Marine, who already has the right infrastructure to become a major logistics operator.

The IMO needs to push once and for all for a uniform bunker contract. If Shipping has endured a hundred years of standard charter party agreements, so too can it withstand a standard bunker contract. If standardization means transparency, so be it; given the uncertainties ahead, it is not unreasonable to expect this. As Tolson sums it up, "rationalization is the by-word in today's bunkering industry and major physical suppliers, just like major bunker traders will have to get used to this." One thing is certain: the current business models for suppliers and intermediaries will not work beyond 2020.

A more level playing field is required. Buyers, sellers, refiners, traders, blenders, barge operators, and physical suppliers need to get in sync. Adherence to process ensures process compliance. Marine, like Aviation, must become "less tolerant of deviations for operating procedures." There cannot be any workarounds.

It is no secret that Marine is burdened with outdated administrative processes. A complete reengineering of the traditional linear business model that automates processes and workflows is necessary. Marine needs to become more reliant on technology led marketplaces that connect buyers and sellers, creating efficiency and transparency.

There are too many intermediaries in Marine, and all but a handful are terribly undercapitalized, which is partly where the blame lies for the current industry-wide problems. Post 2020, the successful ones will have prospered not just by meeting customer needs, but by getting ahead of these needs, using technology to improve operational and financial performance. Customers today are becoming conditioned to expect each iteration of a product or service to be better and faster; they want more and better options, quicker responses, wide-ranging optimizations, shorter waits, more relevant and personalized offerings, and improved outcomes.

Gradual change accelerates to rapid change. Say what you want about the current state of marine, but its resilience is unquestionable. Whether that's good or bad is also the subject of another discussion, suffice it to say that over the years a lot of very good people have contributed a great deal of effort and time to raise the standards. There is still a lot to do. We need big ideas and the way to achieve this is to put forth lots of ideas.

Not convinced? Take a look at Maersk's most recent "The New Direction" presentation summarizing the implementation of its major corporate transformation: "... while customers will continue to be served by Maersk they will be transformed by digitization."

The more value you create, the more valuable you become.