One year ago, ACT News published an article calling attention to the possible worldwide ramifications of the January 1, 2020 change in marine fuel specifications. The International Maritime Organization (IMO), the United Nations affiliated body that sets standards for environment, vessel safety, and regulations for shipping across the globe, will soon require that all ocean-going vessels (OGVs) either burn fuel that contains no more than 0.5% sulfur or meet a functional equivalent by installing on-board emission control equipment that will filter sulfur from vessel exhaust.
By way of review, the OGVs of the world have been burning petroleum-based fuels with high sulfur content for the past few decades—anywhere between 3.5% and 4.5%. These marine fuels, known as “bunker fuel” or “heavy fuel oil” (HFO), are from the bottom of the oil barrel and consist of the material that is left over after the higher-grade fuels, such as jet fuel, gasoline and diesel, have been refined out. HFO is so filthy that it has the consistency of cold molasses at ambient temperatures and must be preheated to 219 to 261° F in order to properly flow through pipes from a ship’s fuel tank to its engine.
Dirty marine fuels have long been in the cross hairs of international environmental regulators. Pollution from marine vessels is blamed for thousands of deaths each year in and around the planet’s major harbors. The IMO projects that the stricter fuel sulfur requirements will prevent more than 570,000 premature deaths around the world in just the first five years of its implementation (2020-2025) and will reduce shipping’s negative impact on human health from marine air pollution by 68%.
The IMO projects that the stricter fuel sulfur requirements will prevent more than 570,000 premature deaths around the world in just the first five years of its implementation and will reduce shipping’s negative impact on human health from marine air pollution by 68%.
Uncertainties on the Horizon
What is less understood, and what there remains tremendous uncertainty about, is whether the world is ready for this massive transition. No one seems to know exactly how much of the new low-sulfur marine fuel will be needed each day, whether the world’s refineries have the capacity to refine millions more barrels of low-sulfur fuel daily, and what the impact will be on fuel prices throughout a world economy still dependent on petroleum.
The international agency causing this hubbub seems to think everything will be just fine. In 1973 the IMO created, and the nations of the world ratified, the International Convention for the Prevention of Pollution from Ships (also known as MARPOL – an abbreviation of “marine pollution”). MARPOL has many elements, and the section that deals with air pollution from ocean going vessels, Annex VI, came into effect in May 2005. Decisions on standards, strategies, targets, and deadlines to reduce air pollution from ships are set by the IMO’s Marine Environment Protection Committee (MEPC).
In October 2008, MEPC adopted revisions to MARPOL’s Annex VI related to limiting the sulfur content of marine bunkers. MEPC established low sulfur fuel requirements on vessels operating in Emission Control Areas (ECAs), generally recognized to begin 200 miles of the coast of nations that adopted them (such as the U.S.) as well as requirements for low sulfur fuels everywhere else. At the 2008 meeting, the IMO’s MEPC first told the world that the international limit for sulfur in marine bunkers would drop to 0.5% in 2020.
Many hoped that the IMO would back off this stringent proposed marine fuel spec. The primary complaint lodged against this regulation is that there would not be a sufficient supply of compliant fuel in time for the 2020 deadline and that the cost of marine shipping would skyrocket. There was substantial logic behind this fear. After all, one of the reasons that bunker fuel became the fuel-of-choice for international shipping was precisely because it was so dirty and hard to handle that its uses were limited. Besides serving as a marine fuel, bunker fuel could be used as a substitute for coal in power generation and metal smelting, but little else. The oil industry was happy to have found a willing buyer for millions of barrels a day of what amounted to sludge.
The primary complaint lodged against this regulation is that there would not be a sufficient supply of compliant fuel in time for the 2020 deadline and that the cost of marine shipping would skyrocket.
But the hopes of opponents to the new fuel spec were dashed in October 2016 when the MEPC concluded that availability of the new, 0.5% sulfur marine fuel would not be an issue. This ended the last procedural opportunity for opponents of the low-sulfur fuel requirements to delay its implementation.
Four Strategies for IMO Regulation Compliance
There are four strategies that steamship lines can adopt to comply with the regulations. They can blend low-sulfur fuels with more conventional bunkers, install “scrubbers” that remove the sulfur by flushing the exhaust with seawater, convert to alternative fuels like liquefied natural gas (LNG), or purchase and use the compliant low-sulfur fuel. It is the fourth strategy, purchasing and using the compliant low-sulfur fuel, that the vast majority of the world’s 90,000 ocean-going vessels are anticipated to pursue.
Generally, most analysts project that 70% to 80% of the world’s vessels will comply with the IMO 2020 regulation by using 0.5% or lower sulfur marine fuel. This fuel is very similar to the distillates that are used in most diesel vehicles. Approximately 10% of the fleet will meet the new requirements by installing scrubbers and continuing to use the higher sulfur fuels. A smaller percentage will convert to LNG—as of now, there are only about 300 LNG vessels in operation or on order. The remaining balance will either try blending or will attempt to evade compliance.
Generally, most analysts project that 70% to 80% of the world’s vessels will comply with the IMO 2020 regulation by using 0.5% or lower sulfur marine fuel.
Compliance with the regulation will depend on the willingness of the IMO’s participating nations to enforce the fuel requirement. The IMO does not have independent enforcement capability, and thus relies on member nations to ensure that cheaters are identified, caught, and punished. The only way to determine whether a vessel is operating within the regulations or not, is to board it, take samples of the fuel, and conduct tests to ensure that the fuel meets the requirements. Offenders can be fined and vessels can be confiscated. All of this, however, depends on the resolve and capability of the host nation.
Most observers believe that compliance with the new fuel spec will be high. Influential stakeholders, such as insurance providers, key cargo shippers, and most of the world’s major ports whose air quality is impacted by HFO use, will require that OGVs comply with the new regulations. In addition, there has been much more consolidation in the shipping industry over the last decade, leaving less opportunity for cheaters to burn non-compliant fuels. Finally, the IMO recently approved a ban on vessels that carry HFOs but are not equipped with scrubbers.
The Impact is Still Unclear
At the time of the original article, the IMO deadline was 19 months away. Now, however, that deadline looms closer as it is only six months away. Has international concern regarding the disruption diverting millions of barrels a day of low-sulfur fuel product from existing end users to the marine sector abated in the last year? Clearly, with the deadline for this radical transformation in the world’s energy economy only months away, there is still a great deal of doubt and anxiety regarding whether or not the international community is prepared for this deadline.
A recent Forbes analysis suggested that uncertainty surrounding the impacts of the new requirement on global trade are very high. The author of this piece, Alan Gelder, global head of refining and chemicals at Woods Mackenzie, predicts that, “certainties are few and far between, with more unknowns than knowns.” Ominously, Gelder writes that, “There is a wide range of potential outcomes depending upon how the shipping and refining sectors respond to this legislative change.”
Most experts agree that the demand for lower sulfur marine fuels around the world will impact U.S. markets. Ironically, refineries in the U.S. are actually in the best position to respond to the demand for cleaner fuels. This is due to the fact that, in the U.S., both marine and on-road diesel fuels must already conform to much lower sulfur requirements. But the rest of the world does not have the same refining capacity as the U.S., and many expect that American refiners will begin to export low-sulfur fuels in order to meet increasing demand in other parts of the world. This will have upward pressure on the price of diesel in the U.S. Tony Odak, chief operating officer for John W. Stone Oil Distributor, LLC, stated in a recent Waterways Journal Weekly article, “…the price of fuel will go up. There are no ifs, ands or buts about it.”
It is clear that the impacts of the IMO regulation will reverberate far and wide, and well beyond just marine shipping.
It is this wide range of possible impacts that has so many in the shipping and fuel industry nervous. Many key industry groups in the U.S. continue to voice their anxiety surrounding whether the country will be adversely impacted by the move to cleaner marine fuels. On May 13th, the leaders of three major industry groups wrote a letter to several Trump cabinet secretaries, urging the Administration to take action to ensure that the nation is not adversely impacted by the IMO 2020 deadline. The three organizations—the American Trucking Association, Airlines for America, and the New England Fuel Institute—said in their letter that, “there is consensus…that our industries will be negatively affected by the IMO 2020 pricing pressure.”
A survey of the most recent writings on the ramifications of IMO 2020 on the shipping industry reflect this overriding concern and widespread uncertainty regarding the future. Some predict that it may take as many as five years for the market to adjust to the new reality of low-sulfur fuel consumption of the marine sector. Others assert that that transition will happen quickly with relatively little pain. Whatever happens, it is clear that the impacts will reverberate far and wide, and well beyond just marine shipping.