From 1 January 2020, a new 0.50% global sulphur cap on marine fuels will come into effect. This is a significant reduction on the 3.50% global limit which is currently in force and the new cap is certain to have a dramatic and immediate impact on the shipping, bunkering and energy sectors. These sectors will have to work together to meet this new challenge.
Senior figures in the maritime community have said that the enforcement of the new global cap will "turn the whole bunkering industry upside down." This is true – but it is a revolution that has been a long time in the making.
The 2020 deadline was confirmed at the 70th session of the International Maritime Organization's (IMO) Marine Environment Protection Committee (MEPC).
That we were heading for a 0.50% cap was already certain, as this was set down in Annex VI to the IMO's International Convention for the Prevention of Pollution from Ships (more commonly known as MARPOL). What was still up for debate going into MEPC 70, however, was the deadline for the new sulphur limit.
the key point is that the review did give the green light for the 2020 start date, as the 2008 amendment required
Amendments made to MARPOL in 2008 set out a timetable for a 3.50% cap in 2012 and a 0.50% cap in 2020. But when that timeline was adopted it was also agreed upon that a review should be undertaken to determine whether the energy industry would be able to provide sufficient quantities of compliant fuel in time for 2020. And if the review indicated that the energy sector would not be able to produce enough compliant fuel by 2020 to support the switch, the introduction of the 0.50% cap could be deferred to 2025.
Although there were some in the industry who hoped that MEPC 70 might opt for the 2025 option, or even come up with a new compromise solution with a "phased-in" implementation, a 2020 start-date was always the likely outcome.
Firstly, the review into the energy sector (which was undertaken by the Netherlands research institute CE Delft and published in July of this year) concluded that there would be sufficient refining capacity by 2020 to meet the global requirement for compliant marine fuels.
This conclusion was dependent on some important assumptions; notably that there would be a slowing in demand for distillates from other industry sectors, which would in turn mean that a greater share of this fuel would become available for the marine industry. But the key point is that the review did give the green light for the 2020 start date, as the 2008 amendment required.
Secondly, the political momentum for a 2020 start date has been considerable – and perhaps unstoppable. In December 2015, at the Paris climate change conference (COP21), 195 countries adopted the first-ever universal, legally-binding global climate deal. Following that landmark agreement, any "backsliding" on marine pollution would not have been acceptable. The European Union, in particular, was intent on seeing the cap come into effect in 2020.
The countdown begins...
So, the upshot of MEPC 70 is that the marine industry and its fuel partners have been given notice that they must be ready in just a little over three years for the full implementation of a 0.50% global sulphur cap.
This will be a huge undertaking but it is not unexpected. The industry has already had many years to prepare for this reckoning.
Given that the average level of sulphur in marine fuel oil in 2015 was 2.45%, according to the IMO's own monitoring, these limits were not so onerous
MARPOL Annex VI was first adopted almost two decades ago back in 1997 and came into force in 2005.The global sulphur cap was first set at 4.50% and, as we mentioned earlier, this was subsequently lowered to 3.50%. Given that the average level of sulphur in marine fuel oil in 2015 was 2.45%, according to the IMO's own monitoring, these limits were not so onerous. However, the maritime community and their bunkering partners have had to meet rigorous targets in the Emission Control Areas (ECAs) – where a 1% sulphur limit was introduced in 2010, and a 0.10% cap in 2015. This experience in the ECAs will be invaluable preparation for 2020.
The ECAs established under MARPOL Annex VI are: the Baltic Sea; the North Sea; the "North American area" (which includes designated coastal areas off the United States and Canada); the Hawaiian Islands and the "United States Caribbean Sea area" (which covers waters around Puerto Rico and the United States Virgin Islands).
Importantly, the ECAs will still apply after the 0.50% global cap is introduced in 2020. Furthermore, there are areas – China is an example – where local legislation has been introduced for sulphur emissions over and above the MARPOL Annex VI rules. There is also a good chance that we may see more examples of localized action in the future.
Knowing that a 0.50% global cap was definitely going to happen (whether in 2020 or 2025), prudent shipping companies and bunker suppliers have already been honing their strategies and making their preparations years in advance.
For many, this has been a case of not just planning, but also doing. With the introduction of the ECAs, bunker suppliers have already begun to establish their sources of low sulphur fuel supply and, crucially, they have developed the skills and expertise required to make sure that their fuel is compliant. And they have learned how to cope with fuels that are on the borderline of compliance.
As the shipping industry's demand for gas oil will rise, we will see more land based quality product make its way into the marine supply pool.
Shipowners operating in the ECAs have also notched up experience of buying and working with compliant fuels as well as learning how to document and prove their compliance.
It makes sense to gain experience of using ultra low sulphur fuel oil (ULSFO) now – in order to be prepared for the operational and supply issues ahead of the 2020 deadline.
There are also issues to be considered when using gas oil. As the shipping industry's demand for gas oil will rise, we will see more land based quality product make its way into the marine supply pool. This could mean more bio-diesel – and therefore fuels containing Fatty Acid Methyl Ester (FAME). The new ISO 8217 Final Draft International Standard recognizes this with new grades (DFA, DFZ and DFB) which allow a FAME content of 7%, while the "de minimis" tolerance levels for DMA, DMB and DMZ have been upped from 0.10% to 0.50%. CIMAC has said that blends with up to 7% FAME can be used in the same way as conventional marine diesel on board ships. With both positive and negative factors when blending FAME and gas oil, CIMAC has issued a guideline with best practise while using FAME blended fuels.
Exploring the options
Shipowners and operators have been exploring the different options available to them. In addition to buying low sulphur fuel, they can reduce their sulphur emissions by installing exhaust gas cleaning systems (EGCS or scrubbers). Quite a few shipowners have already followed this path. Indeed, the CE Delft study estimated that around 3,800 ships would be fitted with scrubbers by 2020 (and this was one of the assumptions on which it based its conclusion that the industry would be ready for the 0.50% global cap).
While some shipowners have been investing in LNG-fuelled ships, suppliers have slowly been building up their delivery infrastructure. LNG.
When the 0.50% global cap comes into effect, the price of higher sulphur fuel oil will drop – and so ships equipped with scrubbers (and therefore able to use the cheaper fuel and still comply with the emissions regulations) could be in a strong position. But of course one has to balance these potential fuel savings with the cost of installing and maintaining the scrubbers. It has been estimated that the payback could be anywhere between three and five years – but this will depend on future oil prices and the high/low sulphur differential.
Using alternative fuels is another avenue that some shipowners have followed. Liquefied natural gas (LNG) is the best known and has been winning support. While some shipowners have been investing in LNG-fuelled ships, suppliers have slowly been building up their delivery infrastructure. LNG, as one might expect, could be a viable fuel option for LNG carriers. It could also see more growth in the short sea shipping sector, where its take-up by shipowners could develop in tandem with a local supply infrastructure. LNG might also see more interest from the cruise ship and container sectors – if there is sufficient supply capacity. A mass switch-over to LNG is probably not on the cards; but LNG will at least be making a contribution in helping the shipping industry and its fuel partners meet the 2020 requirements.
The IMO has recognised the use of LNG with the introduction of the International Code for Ships using Gases and other Low Flashpoint Fuels (known as the IGF Code), which was adopted in 2015.
The shipping and bunkering companies that have already started to use and supply alternative fuels and technologies have made a considerable investment. Indeed, one of the arguments put forward for sticking with a 2020 implementation was that the committed early adopters' should be acknowledged and rewarded. Slipping back to 2025 would have placed them at a financial disadvantage from those who chose to save their money and hang fire.
Moving forward, all shipowners will have to make sure their ships are ready to run with compliant fuel – both in terms of the global cap and within the ECAs – and their crews are fully prepared for the operational and administrative challenges that this will bring.
In addition to LNG, shipowners can also look at other "clean" energy sources, such as methanol, ethanol, biofuels, solar power and fuel cells. They won't be appropriate for all ships, but they will play their part in the overall energy mix.
BDNs, sampling and fuel availability
When the global bunker cap does come into effect, ships taking on fuel oil will continue to receive a Bunker Delivery Note (BDN) which states the sulphur content and this must of course be below 0.50%. MARPOL samples will also be taken for verification. There has been talk that FONARs (fuel oil non availability reports) may be used in some cases where supply is erratic, particularly in the start-up phase of the new regulations – but this is not official policy and shipowners should not see this as a way of bending the rules.
The issue of availability does present another important question: the CE Delft report concluded that there will be sufficient quantities of compliant fuel – but will there be enough good quality compliant fuel? In situations where fuel oil availabilities are tight, will bunker buyers sometimes have to compromise on some of their desired quality specs, in order to meet the sulphur cap requirement?
One piece of advance planning that all shipowners must do is obtain an International Air Pollution Prevention (IAPP) Certificate from the Flag State for each of their ships. This certificate includes a section that says the ship uses fuel oil that complies with sulphur regulation or uses "an approved equivalent arrangement."
IMO has not set specific sanctions and/or fines for not complying with the new regulations: instead these will be determined by the individual States. But we can be sure that the consequences to non-compliance will not be trivial.
Channels of communication
Communication will be vital in the run-up to 2020. The world's refining sector, the fuel storage operators, the port and flag state authorities and, of course, the bunkering community will have to work together constantly to make sure that the tanks are full with the right kind of fuel on 1 January 2020. And on every day thereafter.
Shipowners and bunker suppliers will have to share information about their plans, so we can match the expected demand and supply.
In a situation where a shipowner is buying a fairly constant volume of fuel on a contract basis from just a few suppliers for ships operating on a set schedule, this should be relatively simple.
But for shipowners lifting bunkers in ports all over the world and buying on the spot market from suppliers whom they have perhaps known only fleetingly, there could be considerable uncertainty.
A global partner for a global challenge
In many cases, bunker buyers will be looking to their trading partners to bridge this information gap – and this will become an increasingly important part of the trader's role in the post-2020 bunker market.
A global organization such as World Fuel Services (WFS) does not just extend credit, it also provides credibility. Fuel buyers can have confidence that they are dealing with a partner who, with extensive expertise, is fully familiar with the fuel supply situation in every major port and has a clear understanding of each supplier's reputation. Indeed, WFS will have a close knowledge not just of the supplier but of every player in the supply chain.
Preparing for 2020 will be a costly business; and for companies that get their strategy wrong, it will be a very costly business indeed.
In the run-up to 2020, there will be a flood of information and speculation about the industry's readiness for the 0.50% cap. Some of this information will be vitally important, much of it may be irrelevant or contradictory, some of it will be misleading or just plain wrong. But rest assured that the WFS technical team will be tracking all the developments, filtering out the noise and getting the real news to their customers. And their experts don't just pass on generalised information; they work closely with clients, developing strategies which precisely meet their own specific needs and operational requirements.
Switching over to lower sulphur fuel oil and distillates; perhaps installing scrubbers and even considering a move to alternative fuels – is an undertaking that will require an investment of billions from the shipping industry. Preparing for 2020 will be a costly business; and for companies that get their strategy wrong, it will be a very costly business indeed. WFS will be helping its clients make the right investments that will bring an environmental and operational return, and avoid the mistakes that could put their business in jeopardy.
The global sulphur cap is part of the IMO's response to a global environmental problem. Now, in order to meet the cap challenge, the shipping community needs to draw upon trading partners, like WFS, who have a global vision, and the global presence to put ideas into action.