THE world’s shipping industry now has fewer than 12 months to take steps to ensure compliance with the IMO’s sulphur cap without further strangling their profit margins, with the new regulations set to take effect on 1 January 2020.

The regulations
The response to the regulations will be a constant source of discussion over this coming year and, for those who aren’t acutely aware of why the regulations were introduced, below is a short summary.

Most of global trade is conducted by ocean vessels, which rely on heavy fuel oil (HFO) to get from point A to point B. Those ocean vessels powered by HFO emit greenhouse gasses, which account for around 2.5% of global greenhouse gas emissions.

For many years, HFO has been the cheapest, most efficient fuel but also the most polluting fuel.

In order to address the environmental impact of HFO, “emission-control areas” of the sea were introduced in 2015 to minimise airborne emissions from ships. This motivated shipowners to explore alternative options but wasn’t enough to sufficiently address the environmental impact.

In 2016, the Paris Agreement attempted to address the environmental impact of greenhouse gases, but that agreement didn’t apply to the shipping industry.

So, the IMO stepped in by adopting a climate-change strategy in line with the Paris Agreement and announced the regulations in October 2016.

In order to be compliant with the regulations, the main marine fuel options for shipowners beyond 2020 are:

  • Using LNG as fuel for newbuilds/converting ships to be LNG-compatible;
  • Using existing engines to burn low-sulphur fuel oil, most likely 0.1% low-sulphur marine gas oil (MGO) or a blend of existing sulphurous HFO with no or low-sulphur fuels such as MGO; or
  • Continuing to use HFO and scrubbers to achieve alternative compliance.

Scrubbers
Scrubbers are air-pollution control devices that ships can install to remove harmful emissions. They are essentially mini-refineries installed on vessels.

While the regulations aim to stop the burning of HFO, shipowners can implement scrubbers as an alternative compliance method so they can continue to burn high-sulphur bunker fuel and still comply with the regulations.

However, there are initial capital investments required to install scrubbers which can run into the millions of dollars depending on the number required and capacity of the ship’s engines. Space is often limited on vessels, so fitting a scrubber is not always an option and there is still debate as to whether the initial capital outlay is an economically viable long-term solution compared to the other options.

Compliant Fuels
One of the top concerns for shipowners is that the alternative fuels such as MGO or low-sulphur fuel oil may face compatibility issues with current vessels and capacity issues resulting in price volatility.

Once the regulations come into force, the bunker sector will need more than 1m barrels per day of MGO and, given there are already price concerns regarding MGO (some forecasts have MGO increasing in price by 20% relative to Q3 2018 due to high demand after 2020), this option hasn’t filled shipowners with confidence.

Along with capacity problems, there is also a concern that alternative fuels may be incompatible with current vessel’s engines, potentially leading to catastrophic engine failure resulting in vessel collisions, grounding and marine pollution.

LNG as a marine fuel
LNG is increasingly being looked at as a long-term solution to ensure compliance.

Using LNG to fuel ocean vessels isn’t new. Ferry fleets and cruise ships have been using LNG as a primary source of fuel, but the freight shipping sector hasn’t widely adopted LNG. The traditionally conservative shipping industry has been reluctant to deviate from the tried and true HFO fuel particularly during a prolonged downturn in freight rates.

That reluctance is primarily fuelled by underdeveloped LNG bunkering infrastructure. The need for dedicated storage space, a gap in supply-chain logistics, significant capital outlays for new ships and uncertainty as to the projected costs of LNG marine fuel are all significant hurdles to its enthusiastic adoption, despite the apparent environmental benefits.

LNG may be the best marine fuel for maintaining performance, improving air quality and meeting the regulations.

However, it is an expensive transition for shipowners to make in a short period of time to be compliant by the 2020 deadline.

To support shipowners and operators assess their position and decide how to proceed, an organisation named SEA\LNG commissioned an independent report which revealed a strong investment case for LNG as a marine fuel in the container shipping market.  SEA\LNG is an industry coalition of players in the shipping industry working towards having LNG be the primary marine fuel option.

The key finding of the report is that LNG as a marine fuel delivers the best return on investment compared to installing scrubbers or using other compliant fuels.

It is conceded that the report is limited in its analysis but the conclusions are compelling and it will be interesting to see whether the investment case changes once the research expands to different types of vessels and liner trade routes.

BIMCO bunker clauses
To help the industry transition to compliance, BIMCO announced two new clauses as part of its suite of Standard Bunker Clauses for Time Charter Parties, namely a Marine Fuel Sulphur Content Clause and a Fuel Transition Clause.

The Maritime Fuel Sulphur Clause deals with the basic obligation to comply with the regulations but does not deal with issues around specifications, grades, quality or suitability of the fuels which should be dealt with by existing bunker clauses.

The Fuel Transition Clause is a “single use” clause. It is not part of the suite of standard bunker clauses but should be used together with the other bunker clauses, including the Marine Fuel Sulphur Content Clause, for ships delivering into a time charter before 1 January 2020 and redelivering after that date.

BIMCO have announced that a standard scrubber clause is due to be published around March – April 2019. One could draw an inference that BIMCO’s decision to prioritise alternative compliant fuels or LNG over a scrubber clause may be an indication of where the market may head.

Moving forward
While there are many unanswered questions, and further research will surely be available over the coming months to help shipowners decide on how to comply with the regulations, there is definitely momentum for businesses to implement LNG, with some players already doing so.

Hapag-Lloyd has announced it is building 17 eco-friendly ships which will be powered by LNG including one containership which will be retrofitted with a dual engine so that it will be able to function either on LNG or low-sulphur fuel oil.

Further, one of the key commercial barriers to LNG – LNG bunkering infrastructure – is slowly being improved.

Many ports in Europe have or are updating their infrastructure. Australian ports such as Fremantle and Dampier have introduced LNG bunker offerings with other Australian ports securing funding and/or support for LNG import terminals. It seems only a matter of time before more Australian ports are offering LNG bunkering services too.

Time will tell which option the market runs with, but LNG is proving to be a compelling option as the 2020 deadline draws closer by the minute.

* Adam Vrahnos is a Transport, Shipping & Logistics lawyer at Holding Redlich

This article appeared in the March 2019 edition of DCN Magazine

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