The refining and shipping industries are scrambling to adapt to the global low-sulfur bunker fuel deadline that is less than three years away.
The International Maritime Organization (IMO) deadline for using bunker fuel with 0.5 percent sulfur content is set for Jan. 1, 2020, five years earlier than many previously expected. Some vessel owners have already added scrubber systems and taken other steps to comply with the tougher emissions rules.
However, both the global refining and shipping industries face significant investments and rapid change before widespread compliance can be achieved, according to an IHS Markit report released in August.
“The two industries are vastly unprepared,” said Sandeep Sayal, senior director of refining and marketing research for IHS Markit and one of the authors of the report. “Neither has made the necessary investments for compliance, which means that the 2020 implementation date will result in a scramble. Both industries are taking a wait-and-see approach until firm signals are in place by the IMO for compliance with the regulation.”
Shippers face significant compliance costs for upgrading vessel equipment or switching to more expensive options. Refineries face expensive retooling to add capacity to meet demand for the new fuel.
Shipping industry experts predict some regional shortages of the low-sulfur fuel in 2020 in ports where there is little to no refining capacity nearby. Vessels running between two ports where the fuel is not available could run into compliance challenges.
“Compliance is going to certainly be a problem at least in the short term until the marketplace identifies these regional markets where the low-sulfur fuel is needed,” said Kathy Metcalf, president and CEO of the Chamber of Shipping of America.
Refining capacity in developed regions such as North America and Europe should be adequate. But marine users of low-sulfur fuel will face competition for supply from land-based vehicle operators that also require the 0.5 percent product.
“Refineries will sell where they can make the most profit, thus the margins on each user sector will be very important,” Metcalf said.
Shippers have several options to meet the regulations, including low-sulfur bunker fuels, liquefied natural gas (LNG) and onboard ship scrubbers to clear harmful pollutants from exhaust gas. The report said shipowners would likely opt for scrubbers for most existing ships so they can continue to burn higher sulfur fuels.
IHS Markit estimated that about 20,000 ships account for 80 percent of heavy fuel oil usage worldwide. However, only about 360 ships have installed scrubbers, since there is currently no economic incentive for shipowners to add them, the report said.
IHS noted that, based on the price spreads between low-sulfur bunker fuel and high-sulfur fuel oil, the payback period for installing a scrubber on the largest vessels would be two to four years in 2022-2025, and less than one year based on peak price spreads in 2020.
Metcalf said the shipping industry is watching the performance of scrubbers that already have been installed, some of which are not operating as expected. There’s also concern about sufficient shoreside capability to handle the used catalyst streams.
“The industry is working very hard to be ready for 2020, but there is still a lot of uncertainty regarding adequate supplies of low-sulfur fuel, its expected cost and the concerns we have with scrubbers,” Metcalf said.