Three Ps for 2020

Unni Einemo, Director & IMO Representative, IBIA

To be where we need to be by the end of this year, many elements of the three Ps should already be in place. I am, of course, talking about what needs to happen for a successful transition to the 0.50% sulphur limit which takes effect on 1 January 2020.

The three Ps are: Plan, Prepare, Practise.

Exactly what that means varies between stakeholders; refineries have different timelines and concerns than ship operators. Various players in the bunker supply industry have others, depending on which links in the supply chain they take part in. The International Maritime Organization (IMO) is working hard to put comprehensive guidelines in place to ensure the regulation is effectively implemented.

The trickiest part of all this are the uncertainties created by the inter-dependency of all these stakeholders; they all rely on others to meet their needs and/or do the right thing. Will there be enough supply? Will scrubber uptake be high? Will ships comply?

Uncertainty about the answers to these questions puts stakeholders at risk of making the wrong investments or being put at a disadvantage if others aren't being penalised for failing to play by the rules. Hence we see heavy emphasis on the need for effective enforcement of the regulation.

In November 2018, the technical manager of the chemical tanker company Ardmore Shipping, told the IBIA Annual Convention that for Ardmore, compliance with the 0.50% sulphur limit "is not a 2020 problem, it is a 2019 problem" because when we get to 2020 it is too late. Wise words! This company is already well down the line with the three Ps.

Three Ps for shipowners

Most owners should now have the first part of their plan ready, namely a decision regarding which route to compliance they intend to take. Owners also need to prepare the hardware, whether that is installations and/or retrofits of scrubbers, and considering potential changes to their tank and fuel system configurations to prepare their ships to be better equipped to deal with a variety of fuels, for example splitting larger fuel tanks into smaller ones to enable effective segregation of fuels, and ensuring tanks have flexibility to heat fuels when necessary.

Another element of their planning and preparation is to talk to bunker suppliers about their fuel requirements, whether that is high sulphur fuel oil (HSFO) to use with scrubbers or low sulphur fuels to comply in 2020.

Also, plan for the 'switch': what's needed with regards to tank cleaning and fuel purchasing to achieve compliance by the start of 2020. Timing will be a critical and challenging factor to get right with impact on the overall cost weighed up against the risk of not being compliant in time.

Then there's practice. Crew may have to deal with more varied fuels; awareness and training could help them manage better. They could get some practice ahead of time by trialling one or more of the ultra low sulphur fuel oils (max 0.10% ULSFO) on offer for operations in emission control areas, as these are probably quite close in nature to the very low sulphur fuel oils blends we can expect (max 0.50% VLSFOs) to come into the market for 2020. This would be good practice to get used to managing changeovers between potentially incompatible fuels. In fact, they can learn from changeovers between marine gas oil used for ECA compliance and HSFO as well, as these can also be incompatible. It is also possible to buy VLSFO on a trial basis now to get experience.

The supply equation

Do we have the same three Ps for the supply side? Certainly, and there's at least one more: Prediction. The latter is causing a lot of bother due to the inherent unpredictability of all forecasting.

The shift from a 3.50% to a 0.50% sulphur limit for global shipping is a transport fuel specification change on an unprecedented scale for the refining industry to adjust to. Back in 2016, when the IMO decided to implement that change in 2020, it was on the basis of a study predicting that the global refining industry could cope. There have been other forecasts arriving at a different conclusion, and as we stare down the barrel of this massive challenge, opinions remain divided.

In January, IBIA took part in a forum called "IMO 2020 – Are you ready? Debate with the Specialists!" hosted by Euro Petroleum Consultants. It offered insights from a variety of refining experts and consultants. It demonstrated a few things very clearly: firstly, that the refining industry is paying attention because this will have a major impact on their product markets; secondly, even if there is a concerted effort within the refining industry to meet demand from shipping it will be a challenge; thirdly, there will be a global race for middle distillate molecules to bridge the gap when refinery bottoms will no longer be the major component of marine fuels.

Refiners will need a strong price incentive to divert sufficient molecules into the marine fuel supply pool and hence sufficient supply is not guaranteed. Also complicating the picture is that refinery models are typically not capturing certain marine fuel quality criteria such as the compatibility of blend components, lubricity, flash point, and cold flow properties. So concerns persist about sufficient supply from the refining industry, with the added concerns about fuel quality.

Predictions aside, the event in London also demonstrated that where some see problems, others see opportunities. There were several refinery consultants presenting solutions that can help refineries maximise production of low sulphur marine fuels. These included optimising blending with specialised equipment, maximising use of delayed coking to upgrade residues, and novel desulphurisation processes that essentially converts HSFO to VLSFO with, allegedly, lower capital investments required than refinery upgrades to increase cracking and coking capacity.

What about the other three Ps then? Some refiners have already planned ahead and made the upgrades needed to cut HSFO output and boost higher value products. These are generally not specifically aimed at meeting demand from shipping, but rather any market where they can get the best price for their various refinery streams. Some refiners and commodity traders are specifically preparing VLSFOs that meet ISO 8217 marine fuel specifications, in particular the oil majors and traders who are already active in marine fuel marketing.

Today, the majority of bunker fuels are not sold directly to ships from refiners. Traders play a key role in sourcing cargoes which may meet specifications at the refinery gate, but they may equally source a variety of cargoes that can be blended to meet marine fuel specifications. If the price is right, the balance might shift toward refiners in 2020, but traders will continue to play a major role in sourcing, blending and distributing compliant fuels to ports around the world.

Elsewhere in the supply chain, there's planning and preparation to do with regards to the supply infrastructure, in particular reallocation of storage tanks and cargo tanks on bunker barges from HSFO to low sulphur products. The same principle applies here as to ship's fuel systems: cleaning is required, getting the timing right is critical, and they need to consider the need for segregation of potentially incompatible fuels.

Practice is more difficult in the supply chain because until the demand is there, suppliers cannot produce, distribute, store, and supply large quantities of 2020 compliant fuels. But IBIA encourages those that will produce these fuel blends to develop trial products now, have them tested against ISO 8217 specifications, keep an eye on their shelf-life and preferably run trials and engine performance testing.

Compliance levels

One of the uncertainties and subject of much speculation is how good compliance will be. Alongside uncertainty about the extent of scrubber uptake, which has largely been expected to grow rapidly from a relatively low share of the global fleet in 2020, this has been cited as a reason for refiners to hold back on costly upgrades to convert more HSFO to high value products.

Is it possible to estimate what percentage of vessels will be compliant by January 2020? Maybe it is, but whether you put the estimate low or high it seems to cause controversy and how useful is it? From a preparation point of view, there seems little point in trying to put a number on this because from both the supply and shipping side, the focus needs to be on preparing to comply and speculating too much on compliance levels may be counterproductive.

Those that intend to comply are anxious that enforcement is effective so they are not put at a commercial disadvantage. IMO is providing a good framework for enforcement but it is difficult to predict how robustly it will be applied around the world and it will likely vary between countries. However, a large number of countries are well prepared to enforce effectively and most ships will, sooner or later, call at ports in these countries and hence be subjected to thorough inspections.

Ironically, the biggest cause of non-compliance in 2020 could prove to be a lack of availability rather than wilful cheating if refineries and the supply chain logistics struggle to cope to meet the increase in demand for low sulphur fuels.

That's why it is important to have a well-developed mechanism to ensure ships are not unduly penalised if, despite their best efforts, they are unable to obtain compliant fuel. Work is underway at the IMO to develop a standard fuel oil non-availability report (FONAR), as provided for in Regulation 18.2 of MARPOL Annex VI. It's important to note that FONARs are not exemptions, and it will be up to port state control officers at the ship's next port of call whether they accept the FONAR as evidence the ship did all it could to obtain compliant fuel. PSC could then decide that the ship won't be penalised but it will nevertheless be reported as a deficiency. They could even decide that the ship must debunker and take onboard compliant fuel, which is not a penalty but a pretty effective deterrent as this would be time-consuming and costly.

All in all then, the best course of action is for all parties to try their best to be ready for 2020, because doubts foster inaction. Society will judge the entire sector harshly if it fails.