SHIPOWNERS and operators could be making decisions ahead of the 2020 global sulphur cap that will cost them more than their competitors.
In its simplest description they have, in reality, three options for compliance regardless of whether considering newbuildings or existing tonnage: use scrubbers to then burn residual fuels, use low sulphur gasoil blends (or distillates in the areas where emission rules are more stringent) or use liquid natural gas (which has no sulphur in it).
Things are never simple though. It all comes down to total costs, both initial investment capital and the ensuing operating costs, and for that the relative fuel costs and fuel availability are the important, but unknown, key factor according to Iain Mowat, Senior Analyst at Wood Mackenzie. Specifically, the issue of the future availability of traditional residual fuels will be key, he warns.
Fluctuating fuel prices and tightening environmental laws indicate that decisions made now may not be the most cost efficient post 2020.
Fluctuating fuel prices
The International Energy Outlook 2016 by the U.S. Energy. Information Administration reports that between 1986 and 2012 world consumption of residual fuel oil decreased from 13m barrels per day to less than 9 million. OPEC estimates that global demand will decline by a further 1.7m barrels per day between 2014 and 2040 as a result of policies and regulation.
Both Mowat and Robin Meech, Managing Director of Marine and Energy Consulting, agree that this global decline of residual fuel will impact the shipping sector, probably after 2030. However, operators need to be fully aware of how their decisions made now will affect their operational costs in the future.
Meech predicts that residual fuel oil will be about $350/tonne by 2020, while marine diesel oil, with a 0.1% sulphur content, will soar to $630/tonne and 0.5% fuel to $580/tonne. The EIA assumes the cost of 0.5% fuel to be high as refineries will need substantial investment to upgrade their processes. Furthermore, they will only do this where there are good returns and therefore availability of certain fuels could be limited in some areas.
Although residual fuels seem an attractive option in terms of cost, as oil refineries become more efficient in their refining processes, the formation of residues decline and therefore availability could be limited. An opposing argument is that as long as there is demand for residual fuel, refineries will ensure they are still part of the process. In developing countries where refineries are not as well placed this may be more difficult.
Clean Marine, a scrubber maker, is reportedly working with BP to give shipowners as much information on the price and availability of HFO post-2020.
An alternative to traditional marine fuels is LNG.
While Mowat suggests that the industry is experiencing a hiatus in the uptake of pure LNG-powered ships because of the uncertainty in oil prices and availability, Meech’s fuel price prediction of LNG in 2020 at $350/tonne shows it to be an attractive option. By 2030 he thinks it could be $480/tonne Mowat believes the industry will see more dual-fuel powered ships as a result of maintaining competitiveness where oil prices are uncertain and environmental regulations are tightening.
A ship with a dual-fuel engine and the ability to operate on either 0.5% fuel and LNG also gives it a potentially stronger resale value beyond 2030. If Meech’s fuel price predictions are correct, then a ship being resold with the ability to operate on either indicates its potential for a stronger resale value. Furthermore, if the availability of residual fuel is limited then a ship using this with scrubbers is less likely to gain a good resale value.
Contrary to Meech’s estimates, Frode Helland Evebo, Chief Sales and Marketing of marine scrubbers manufacturer Clean Marine believes the availability of residual fuel will decline only temporarily. He predicts that there will initially be increasing demand for LNG and less demand for residuals, which will lead to a drop in price. This will then increase its attractiveness and generate a significant return to it in a few years.
James Ashworth, Lead Consultant at TRI-ZEN International, thinks scrubbers or alternative fuels are not a viable long-term option as they will not meet tightening CO2 targets. He believes LNG will have a much bigger role in shipping in the future. The demand for LNG will move forward and the infrastructure the fuel needs, will follow, he says.
Financing change
In an industry that is heavily dependent on banks and loans, shipping is facing some difficulties when it comes to financing.
According to Urs Dur, Managing Director of Clarkson Capital Markets, most shipowners have been able to borrow the majority of money from banks to finance a new ship. Today, most banks are unlikely to lend more than half.
Currently there is a huge risk associated with shipping finance. Deloitte reports that European shipping banks are under pressure to reduce shipping exposures due to funding constraints giving owners less access to capital.
Mowat said that banks are more likely to give funding to a technology or a fuel they feel confident in. Furthermore, Finnish-based law firm, Neptun Juridica, reports that banks are far more likely to invest in bigger stronger shipowners as they see less risk.
The European Investment Bank and Dutch bank ABN AMRO recently announced the launch of a €150m investment plan to finance newbuild and retrofit green shipping projects.
The decision for a large capital sum to be injected into projects and technologies to make shipping greener indicates a clear market signal from shipowners and operators that they are struggling to acquire the finance needed for such investments.
Fathom-News
editor@fathom-mi.com
