Blog July 17, 2018

Searching for a sulphur strategy

By Nicola Byers

Despite the arguments, the claims that it can’t be done, the huge additional costs likely to hit consumers and the mind-boggling complexity, it looks like the powers that be have decided it is going to happen anyway. No, we’re not talking about Brexit, but the 2020 Global Sulphur Cap.

The International Maritime Organisation (IMO) decided almost two years ago that January 1 2020 was going to be the implementation date and, despite calls for a delay to 2025, it is sticking with that date as the moment when a global sulphur cap of 0.5% on marine fuels comes into force.

So, with less than 18 months to go, what are the options for the shipping industry in general and for intermodal logistics and tank leasers and operators in particular? At this stage it’s hard to predict anything with confidence, as so much depends on what path most ship owners and operators take. But whichever way it goes, compliance is clearly going to lead to profound changes – what some are calling a paradigm shift – that will affect all stakeholders in the industry. As fuel supplies change, the flexibility offered by tank containers and the reassurance given by track-and-trace technology will play a vital role.

There is still debate about whether compliance by 2020 is even possible. A group of consultants led by CE Delft found that enough distillates could be produced to meet demand, based on an optimistic assessment of expansions in secondary refining units. But a rival study by consultants Ensys and Navigistics concluded that refining capacity will not be sufficient in 2020, estimating that 60% to 70% additional sulphur refining capacity would be needed.

Both reports agree that, at a very basic level, there are two options – keep using the 3.5% fuel but installing Exhaust Gas Cleaning Systems – scrubbers – to reduce emissions, or use different fuels. Exactly which kind of alternative fuel is still unclear. Fuels that fall under the cap include blends of several refinery streams, or middle distillates such as marine gasoil. A small number of vessels may also convert to liquefied natural gas and possibly LPG and methanol.

Some businesses are already preparing for this. In the US, Crowley announced in June that it has added 40 cryogenic tank containers to be used for transporting LNG. For further advice on the LNG supply chain, it is worth looking to Japan, where the terrain was too mountainous to lay down a gas pipeline grid. The country has a dense network of receiving facilities and delivery systems and launched its first LNG-powered boat back in 2015. Ship-to-ship transfers from LNG bunker tankers to LNG-powered ships will soon be common.

Different fuels – different problems

This diversity creates problems. It is possible that a ship could have two types of fuel bunkered that are compatible with the cap but incompatible with each other, leading to ships losing power. Ship owners will need to become far better at training their staff to carry out fuel system audits and to understand and be vigilant for the risks that using different kinds of fuel can create.

The complications thrown up by the options for new fuels (and worries about their availability) could make scrubbers a simpler solution. The problem here is cost – fitting a scrubber to an existing ship costs between $1.3m and $3m. As one industry observer said, you are essentially installing a mini refinery on a ship – why not build a bigger refinery on land? The economic benefit is also unclear – scrubbers only make sense if the price of 3.5% fuel is going to crash after 2020. If lots of scrubbers are installed, that price crash may not happen.

Slow steaming

Given that compliant fuel is going to be more expensive, some shippers are arguing that the best way to react is to cut their speed to reduce fuel consumption. Slowing by just 1 knot, or 1.2 miles per hour, could allow oil tankers to save as much as 17 percent on its fuel consumption, according to some analysts. This would have a big effect on tonne mile and potentially a positive impact on the tanker market. But if everyone does that, it will limit the number of available vessels, risking a rapid increase in freight costs.

So, where does that leave tank container leasers and operators in particular? As confused as everyone else. A massive switch from bunker fuel to marine gasoil would fundamentally redraw trade flows. Importing countries could become exporters overnight and vice versa. In an era of rapid change, harnessing technology and being ready to adapt are crucial and tank containers are a crucial piece of the puzzle. Tracking and monitoring technology can add flexibility to supply chains and play a fundamental role in helping all parts of the industry adapt as the consequences of the sulphur cap play out.

No more “wait and see”

Surprisingly, even with 18 months to go, there are still people arguing for a “wait and see” approach. This is based on a belief that there is no advantage in being an early mover and, perhaps, a hope that if they are completely unprepared by 2020, the IMO will have no choice but to delay implementation. But the IMO could call the bluff of these late adaptors. Talk of mass non-compliance (the option that no-one likes to speak openly about) is also unlikely to work. Various shipping associations – BIMCO, ICS, INTERCARGO, INTERTANKO among others – have called for a “practical and pragmatic” approach to compliance initially. Whether that happens remains to be seen, but, from a legal perspective, there is no transitional period. Those who do make the significant investment needed to comply will not look kindly on those trying to take a free ride.

The bigger picture

At this point, it’s worth taking a step back and remembering that sulphur dioxide causes acid rain and asthma among other things. This cap will lead to significant environmental benefits. And there are precedents for this. Ultra low sulphur fuel (0.1% maximum) is burned in Emission Control Areas. When these fuels first started to be used in 2014, there were concerns about how engines would react to them. While compliance has been a challenge, global trade has kept flowing.

Given the number of options, any estimate of the cost to the industry contains a number of assumptions. The most common estimate of increased annual cost is between $40bn and $60bn. Those costs will, in some form or other, be passed on to consumers. The effect on global trade, at a time when commitment to globalisation is decreasing and tariffs are increasing, remains to be seen.

In terms of next steps, preparation is vital. Before implementation, fuel needs to be sourced and crews need to be trained in how to use it. Barges, storage tanks, ships tanks all need to be cleaned ready for low sulphur. Tank cleaning facilities need to be available in the right locations. As one observer said recently during a debate, there is still enough money to be made for all parts of the industry – we just need to accept the change and make some difficult, long term decisions now in order to create a better environment in the future. Doing nothing is not an option.