The bunker fuel market is being swept by dramatic changes. These changes will reshape the market and will affect bunkering operations, commercial shipping and global refining. The most significant changes will be triggered by the reduction of sulfur content in bunker fuel proposed by the International Maritime Organization (IMO). The IMO is introducing regulations to reduce the maximum sulfur emissions for all vessels within the Emission Control Areas (ECAs) from the existing sulfur limits of 1% to 0.1% in January 2015, in Western Europe these areas include the North Sea, Baltic Sea and the English Channel. All vessels travelling through ECAs will need to switch to low sulfur fuel such as marine gasoil (MGO), or use an exhaust gas scrubbing system.
The IMO also approved a decrease in the maximum permissible sulfur content outside of the designated areas from the current level of 3.5% to 0.5% in 2020. The proposed cap will be subject to a feasibility study review regarding fuel availability, due to be published in 2018. The review will determine if the deadline for compliance is maintained or pushed back to 2025.
Nevertheless, the European Commission has decided not to wait for the review and has committed to implement the 0.5% sulfur limit by 2020. This decision has caused dismay among shipping operators and European refiners alike as it adds another layer of complexity to bunkering operations and undermines the European refiner’s already precarious competitive position compared to other regions if implementation is delayed elsewhere until 2025. The implementation of the new bunker fuel specification for worldwide maritime transportation is likely to cause considerable challenges for both commercial shipping and European refiners. For shipping companies the challenge is to remain competitive, adopting the most cost effective strategy of either switching to more expensive marine fuels or investing in scrubber technology. European refiners face the double challenge of trying to raise funds for much needed investments and evaluating which investment will offer the best returns.
The real ‘game changer’
Residual oil has been the fuel of choice within the bunkering sector; however, future IMO sulfur limits will lead to a significant reduction in consumption of residual fuels by the bunkering market. From 2015, bunker fuel vessels operating within the ECAS must burn compliant marine fuel subject to the IMO fuel quality provision of 0.1% maximum sulfur content. This step change in fuel quality will require vessels to consume marine distillates in place of low sulfur residual fuel. The challenge in European markets will be the availability as well as the pricing because the transfer to low sulfur and thus cleaner fuels (marine gasoil and marine diesel) will increase fuel costs considerably. According to a study by the Swedish Maritime Administration, switching to marine gasoil will increase transportation costs by as much as 20 - 28%. In Europe, the rise in demand for low sulfur fuel will be met by increasing imports into the region.
The greatest challenge for bunkering operations and for the global refinery industry is, however, the switch to low sulfur fuels on a worldwide basis as proposed by the IMO after 2020/2025. The previous change of sulfur content from 4.5% to 3.5% applied to global maritime transportation did not pose significant challenges since the average global sulfur level for residual fuels was approximately 2.7% according to the IMO. The drastic sulfur reduction in marine fuel from 3.5% to 0.5% in 2020 (subject to the IMO feasibility study in 2018) will be the real ‘game changer’. To blend marine fuel to this lower level will in many cases require the use of both low sulfur residual fuel oil and marine distillates. It is technically possible to produce heavy sulfur fuel oil (HSFO) at 0.5% sulfur using very light crudes, however these crudes are in short supply in the market.
While the change to the 1% sulfur limit in the ECAs and the 3.5% sulfur cap from 2012 was handled relatively easily by European refiners through the optimisation of crude slates, product blending and without major refining investments, the proposed new regulations for both the ECAs and global maritime transportation will impose considerable pressures on both bunkering operations and European refiners for the supply of low sulfur fuels. European refiners will need to weigh their investment decisions, the investment required to supply low sulfur fuels to the bunker fuel market will have to compete with the less risky option of investing to meet the inland diesel market requirements. Risk for European refiners is linked to uncertainty of bunker fuel prices (the price will need to increase sufficiently to support investment), competition from other refinery centres and shipping company’s strategies.
The greatest uncertainty concerns the availability of sufficient low sulfur fuel to supply the bunker markets in the future. In order to comply with the shift in demand to lower sulfur grades in the bunker fuel market several options need to be considered:
- Scrubbing technology.
- LNG vessels.
- Increase refining capacity and refinery upgrades.
Cleaning the sulfur from ship exhaust is a viable option but the shipping industry has not shown much interest in adopting the technology. Installing scrubbing technology is very costly especially if the vessels spend little time in the ECAs. The technology costs approximately e 3 million for a small vessel (often more than the cost of the ship) and as much as e 12 million for a larger ship, and could significantly extend the time the ship is out of service in order to be refitted. There are also other hurdles to overcome concerning waste disposal issues and environmental/monitoring issues. The lack of space for the scrubbing equipment is also one of the main deterrents for investment in existing ships.
Switching to LNG offers many advantages such as current competitive LNG prices and clean technology. However, vessel conversion from fuel to LNG is very expensive and in many cases not feasible. There are only a small number of LNG vessels operating in international waters and the reason for such scarcity is linked to concerns regarding LNG availability, safety issues and lack of infrastructure logistics to support LNG fleets. The case for switching from fuel to LNG is dependent on pricing and logistics issues, resolution of such issues can make a good case for LNG new builds in the future.
Finally, expansion of refinery capacity and investment in refinery upgrading is likely to be required to increase availability of low sulfur fuels. European refiners will be under pressure to carry out these investments but within the context of very slim margins the investment case is difficult to justify. The best option for shipping companies in the short term is to switch to marine gasoil (MGO), which for the most part does not require any substantial fuel engine modifications but the fuel costs will be substantially higher.
The implementation of the IMO new sulfur limits for bunker fuel is raising important issues of availability of low sulfur fuels in world markets particularly in Europe. Estimates indicate that the supply of low sulfur fuels to bunkering markets could be problematic when the global IMO sulfur limits become mandatory either in 2020 or 2025. It is becoming increasingly clear that refining capacity will need to be expanded and refinery upgrades must be carried out to meet the rise in global demand for low sulfur fuels.
Scrubbing technology could offer European refiners a lifeline to enable them to continue to produce HSFO but to date there is little evidence of significant uptake of the technology. European refiners are facing hard choices that in some cases mean investing in upgrading technology or shutting down. There are very few alternative markets to explore as most regions of the world are switching away from HSFO consumption. The IMO global maritime regulations are likely to have an adverse effect on European refiners unable to make the necessary investments in residue upgrading triggering further refinery closures.
Written by Luisa Sykes and Valentin Kotlomin, Euro PetroleumConsultants, UK.
Adapted for the web by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/special-reports/04112014/the-winds-of-change-1562/