VIEWPOINT: Total's Move Away From Fuel Oil May Unnerve Shipowners With Scrubbers

For shipowners with scrubber-equipped tonnage, the reported retreat by French oil producer Total from fuel oil sales will be unwelcome news.

Scrubber-equipped ships seeking fuel oil may start finding empty shelves before long. Image Credit: File Image / Pixabay

On Friday news agency Reuters reported the French company is considering ending sales of fuel oil to power generation companies as it seeks to reduce its carbon footprint.

"We want to stop selling fuel oil for making power," the agency reported CEO Patrick Pouyanné as saying in an interview earlier this month.

The agency's report makes no mention of sales to shipowners with scrubbers -- but if its supposition that the move has been prompted by the environmental impact of fuel oil is correct, the same logic might be applied to marine sales of the heavy product.

Defenders of scrubbers will be keen to point out the lower carbon emissions of fuel oil versus marine gasoil, but at that point their opponents will mention the potential harm from scrubber washwater on the marine environment.

Fading Scrubber Skepticism

While skepticism towards scrubbers from some sections of the shipping industry is starting to fade as shipowners see the wide spreads between high sulfur fuel oil (HSFO) and very low sulfur fuel oil (VLSFO) this year, the wider question about the long-term viability of the systems is still hanging over the industry.

With VLSFO-HSFO spreads of around $200/mt or more, any shipowner with a scrubber operational now will not struggle to earn back its capital expenditure from fuel bill savings in relatively short order.

But beyond the immediate financial considerations about whether the investment would pay for itself, shipowners with these systems installed will want to make long-term plans around how long they will be able to use them for.

With IMO 2020 in mind, refineries have been bearing down on their HSFO production for years now; fuel oil exports from Russia, the world's largest producer of the fuel, have roughly halved from 10 years ago to around 35 million mt/year.

With most of the marine market now moving away from HSFO, most oil producers with refineries modern enough to do so will now be looking to continue that process and reduce HSFO output as much as possible. 

Last year Saudi Aramco told price reporting agency S&P Global Platts it intends to cut fuel oil production from its own assets to zero by 2024. 

If, on top of the clear financial incentive to reduce fuel oil output where possible in favour of more lucrative products like diesel, refiners now see shunning the HSFO market as an opportunity to burnish their green credentials as well, we may see a much more rapid decline in production.

Would it be too cynical to suggest that some refiners might take green opposition to fuel oil as an opportunity to gain a little credit for what they were planning on doing regardless?

It will be difficult to eliminate fuel oil production worldwide without expensive upgrades to some of the simpler refineries in regions like the Mediterranean that are unlikely to support the cost, but output can still be significantly reduced from its current level.

HSFO Supply Longevity

The question for shipping companies with scrubbers in this environment is, for how long will you be able to secure fuel oil supply at the right ports at reasonable prices?

Proponents of the emissions-cleaning systems would point out that, by and large, these shipping companies are no longer at the whim of the spot HSFO market; most with scrubbers have signed term contracts to guarantee their supply over a longer period. 

But nevertheless, these contracts are unlikely to completely protect shipowners against a rise in prices caused by suppliers steadily withdrawing from the market.

Most will be priced at a fixed differential against spot HSFO barge or cargo prices, as assessed by companies like Platts.

If the cargo prices start to jump as a result of supply dropping over time, their bunker prices will start to shoot up as well. 

For the shipowner which can already see the day rapidly approaching when its scrubber investment has paid for itself, all of this may seem a distant concern; once that date has arrived, its bunker buyers will be happy to take HSFO from any supplier willing to sell it at a discount of at least a few dollars to VLSFO. 

But that doesn't solve their operational problem of their longer-term bunker procurement plans. 

At some point in the not-too-distant future, they're going to need a new fuel.