The impact of IMO 2020 — the requirement promulgated by the International Maritime Organization (IMO) that ships begin using lower-sulfur fuel on Jan. 1 or equip their ships with scrubbers to remove sulfur from engine exhaust — may be less disruptive than was feared, according to the chairman of the U.S. Senate Committee on Energy and Natural Resources.
“There is still some disagreement over what those exact impacts will be,” said Sen. Lisa Murkowski, R-Alaska. “But I’m glad to see a consensus — or at least something resembling a consensus — among many analysts that the impacts of IMO 2020 will be less than what was projected just a year ago.
“What’s critical now, with implementation just a few weeks away, is for compliance to continue at full speed. There is no stopping IMO 2020, and I certainly hope that no one will construe this oversight hearing was an effort to do that,” she added during the Dec. 10 hearing.
Derrick Morgan, senior vice president at American Fuel and Petrochemical Manufacturers (AFPM), testified that “it is becoming increasingly clear that refining and shipping industries are prepared for IMO 2020. Major bunker fuel refiners and suppliers have been testing fuels for much of the year, and very-low-sulfur fuel oil (VLSFO) is already being supplied at major ports around the world.” VLSFO is a new product blended specifically to be compliant with IMO 2020 and made heavily from vacuum gasoil, which is an unfinished diesel-like product.
He said the International Energy Agency has reported that “ports, shipowners and refiners have stepped up preparations, and major bunkering hubs such as Fujairah, Rotterdam and Singapore are said to have large volumes of compliant fuel available.”
AFPM said the U.S. refining industry has a competitive advantage by investing $100 billion in the past decade to increase U.S. competitiveness and produce cleaner fuels.
“As a result of these investments, the U.S. is well-positioned to be a leader in producing and supplying lower-sulfur marine fuels to a global shipping fleet and realizing the environmental and health benefits expected from IMO 2020,” testified Morgan.
“Likewise, OPEC, in its 2019 World Oil Outlook released on November 5, projects the impact of IMO 2020 will be less severe than previously expected. OPEC attributes this to a lighter global crude slate that will allow refineries to more readily produce compliant fuel,” Morgan said, adding that many refiners and ports/blenders have either started to supply or announced plans to supply 0.5% sulfur fuel.
Jamie Webster, a senior director of the Center for Energy Impact at Boston Consulting Group (BCG), testified that the IMO regulation is expected to reduce ships’ sulfur emissions by as much as 80%.
BCG expects 92% of ships will use low-sulfur bunker fuel to comply with the IMO regulation. IMO 2020 will reduce the maximum sulfur content in marine fuels from 3.5% to 0.5% by weight globally. In so-called emission control areas (ECAs), ships are already required to use fuel with a sulfur content of no more than 0.1% or be equipped with scrubbers. One ECA extends 200 miles from much of the coastline of the U.S. and Canada, and there are others in the Caribbean, North and Baltic seas.
Assuming crude oil costs $60 per barrel, BCG estimates low-sulfur fuel will be 50% to 80% more expensive than high-sulfur fuel.
Ship & Bunker said on its website Dec. 11 that the average cost at 20 ports around the world for the high-sulfur bunker fuel traditionally used by most oceangoing ships — IFO 380 CST fuel oil with a 3.5% sulfur content — was $343 per metric ton. The average at the same 20 ports for VLSFO was $583 per mt, or 70% more than IFO 380. At the same ports, marine gasoil, a diesel-like product, averaged $655, 91% more than IFO 380.
Prices tend to be lower at major bunkering hubs like Rotterdam in the Netherlands, Singapore and Fujairah in the United Arab Emirates.
BCG expects 4,000 oceangoing vessels — about 7% of the world’s fleet of 60,000 vessels — will use scrubbers to meet the IMO 2020 requirement when the regulation kicks in on Jan. 1. However, the carrying capacity of those ships could be larger since some companies have said during earnings calls that they have decided to equip the larger ships in their fleets with scrubbers but not smaller ships.
BCG added that the share of the world fleet using scrubbers could double, especially if the premium price for cleaner, low-sulfur fuel remains high. Since scrubbers remove sulfur after combustion, ships equipped with scrubbers can continue to use the lower-cost high-sulfur fuel. With most ships expected to switch to low-sulfur fuel, BCG estimates the price of IFO 380 will drop and a company will be able to realize about a 25% savings from using high-sulfur fuel when compared to the cost of high-sulfur fuel in 2018.
Less than 1% of ships are expected to use liquefied natural gas (LNG) as fuel, which also would allow them to comply with IMO 2020 requirement since LNG is 85% to 95% methane along with a small percentage of ethane and even less propane and butane, all simple hydrocarbons without any sulfur.
“With current technology and costs, there are few cases that are economic for companies to use LNG ships,” according to Webster. While it costs $4 million to install a scrubber on a new ship and $7 million for a retrofit, BCG estimates the cost of retrofitting a ship to run on LNG is $20 million and that a new ship will cost 20% to 40% more than a conventionally fueled ship. But compared to the cost of high-sulfur fuel in 2018, BCG believes LNG could result in a 60% reduction in operating expenses.
BCG estimated “compliance will result in an additional $25 billion to $30 billion in fuel costs for liners from 2020 to 2023. These costs will be borne across the ecosystem to include shipping liners, freight forwarders, cargo owners and, finally, end consumers.”
John Butler, the president and chief executive officer of the World Shipping Council, said, “When you look at the price increase directly to the vessel operators, the carriers, it’s substantial because it hits in one place. By the time that increase is spread out across the value of the cargo on the ship, it’s quite diffuse.”
The forwarding company Flexport in a November 14, 2018 article estimated that “compliance is estimated to increase the cost of port-to-port moves by 10-20%, which will likely be paid for by the end user.” To put things in perspective, it said shipping 40-inch TVs from Shanghai to Los Angeles will cost shippers 50 cents more per unit.
“Consumers, with no control whatsoever over how the products they buy are transported, will face higher prices that could lead to inflation and increased bank rates,” said Flexport.
Linda Capuano, the U.S. Energy Information Administration (EIA) administrator, told the committee, “We anticipate that the IMO 2020 regulations will put upward pressure of about $2 per barrel on light, sweet crude oil prices in 2020, which will moderate in the following years. However, the regulations will have a longer-term effect on petroleum supply, demand and trade flows. We expect the IMO 2020 regulations to put upward pressure on light, sweet crude oil prices in 2020 because of increased demand for that crude oil to produce lower-sulfur marine fuels. As a result, we are forecasting the price difference between light, sweet crude oil and heavy, sour crude oil to be wider next year.
“However, as a result of the slowing growth in global gross domestic product and the resulting slower growth in global oil demand, we expect global oil inventories to increase and, in general, put downward pressure on oil and petroleum product prices,” she added.
The December 10 issue of EIA’s Short-Term Energy Outlook said “Brent crude oil spot prices averaged $63 per barrel (b) in November, up $3/b from October. EIA forecasts Brent spot prices will average $61/b in 2020, down from a 2019 average of $64/b. EIA forecasts that West Texas Intermediate (WTI) prices will average $5.50/b less than Brent prices in 2020. EIA expects crude oil prices will be lower on average in 2020 than in 2019 because of forecast rising global oil inventories, particularly in the first half of next year. “
“We expect the effects of IMO 2020 regulations on crude oil prices to be less significant than the effects on petroleum product prices,” said Capuano.
However, she cautioned “smaller, more remote ports across the world may face logistical and fuel-availability issues in the short term. Although the largest and most active ports have supplies of both high-sulfur and low-sulfur fuels, these fuel-availability concerns are real at smaller or more remote ports. However, we believe that new logistical supply patterns will develop over time and shipowners will adjust to these potential short-term dislocations of fuel.”
Butler said, “The single most important thing that governments around the world can do is to make it clear by words and action that they will require compliance with this new regulation. Markets are already adjusting to the requirement for cleaner fuels, but markets function best when there are clear signals about what the demand will be. Any unnecessary uncertainty in the fuel markets will simply extend the time that it takes for supplies and prices to reach equilibrium. From the perspective of ocean carriers that will purchase this cleaner fuel, it is imperative that we have a level commercial playing field on which all participants are playing by the same rules.”
Looking to the future, the IMO has adopted a strategy to reduce greenhouse gases to 50% of 2008 levels.
Butler said because of that, the WSC and other maritime organizations are planning in December to make a lengthy and detailed proposal urging the IMO to establish a research and development body, funded with a fee on marine fuel, to look at the question of what are the fuels of the future in order to reduce greenhouse gas emissions.
“We can’t get there with existing technology,” he said.
A letter to Murkowski and Joe Manchin, D-W.Va., the committee’s ranking member, from a group called the Coalition for American Energy Security (its members include both WSC and AFPM) said that despite concerns about IMO 2020 driving up prices, “distillate prices remain lower in 2019 than they were in 2018.”
The coalition pointed to an economic analysis from Charles River Associates that it said found that under IMO 2020, gasoline prices will see no discernible change and that diesel prices may change by 4 cents per gallon — less than the average monthly change in diesel prices over the last four years.
