This is a very big and interesting topic. I think that the industry has never been faced with a regulatory challenge before of this scale.
On the picture that I’ve got in front of you here, to begin with, are these sea lions. I think it’s a good metaphor for describing the state of the industry now. There are stakeholders both on the shipping, supplier and customer side who are alert and ready. They are waiting, prepared for what’s coming. And there are others, on the other hand, who are still [soundly asleep]. I think that it is wise for all of us to consider which of these categories we find ourselves in.
Regulation, but not as we know it
We’ve got a situation here which is a regulation but a completely different kind to what we’re used to.
First of all, this will involve for most vessels a change in the fuel that the industry is running on. And that of course will have profound operational and technical consequences.
It will also mean that there is a big change in OPEX – operating expenditure – coming, because simply put, the fuel that the industry uses today is the cheapest available.
There is a lot of uncertainty regarding what’s coming next in terms of compliance paths, no matter which of the paths in question we are talking about.
As a first for environmental regulation of any kind, we have a commercial aspect which stands against the cost.
And if all of that wasn’t enough, we have concerns around fair competition as well which is something that is muddled with this regulation.
Uncertainty and high costs – the stakes couldn’t be higher
So ultimately what it really boils down to is that there is a combination of two things which really raise the stakes, and those are the uncertainty and the fact that all of this is going to cost a lot of money. Those in combination is what should be driving attention to this challenge.
All choices are equal, but some are more equal than others
When we look at it, there are 3 major compliance routes. There are low sulphur fuels; there are high sulphur fuels used in combination with scrubbers; and then there are LNG dual fuel solutions where LNG and MGO are being used in combination.
In practice though, there are going to be very few vessels using LNG that aren’t already LNG tankers. They will represent a tiny portion of the overall industry.
Of the remainder, the vast majority of those vessels will be complying with low sulphur fuels. So if you look at the world fleet of over 50,000 vessels, we may have up to 2.5-3 thousand scrubbers that will be installed by 1 Jan 2020 if everything goes to plan, and several hundred vessels that will install LNG solutions.
So the emphasis here is on low sulphur fuels.
Fuel supply factors
To a lot of people, it may seem that fuels are the easy compliance route, and that’s a view that we would certainly dispute.
First, there is the cost aspect of it, and we are in crystal ball territory as far as cost goes. It’s the same as trying to predict what the price of oil will be a year and a half from now. Nobody can tell you that with confidence, and not least because the major product that will be used for compliance is very low sulphur fuel oil (VLSFO) – less than 0.5% sulphur fuel – currently doesn’t exist. So we don’t even have historical data to guide us.
So cost is one aspect, then there is the type of fuel. There are products that will be used in 2020 which are very familiar to us already. MGO is a clear example of that. You can consider it as your standard, friendly beer. But there will also be exotic cocktail type of fuels that will come to the market, and those are very low sulphur fuel oils. It’s better to think of them as a group of fuels with a common characteristic that being less than 0.5% sulphur rather than one specific type of product by itself.
In addition to that we’ve got quantity issues to think about. Will you be able to get a sufficient supply of the product that you need in the location where you want it?
Then we’ve got a compatibility issue, and that’s where two batches of what is normally the same fuel may or may not be mixable. And if they’re not mixable, and they’re not compatible, then you get a waxy solid forming in your fuel tank and basically there are very few options to dig that out. So it’s something to avoid.
That problem can be reduced by keeping the separate batches of fuels separated from one another. And the possibility for doing that will vary according to how many fuel tanks there are in a vessel, so it’s vessel design specific.
We are into a subtopic which is pretty complex at this stage, and the crew factor is incredible important. The emphasis on crew training is absolutely essential.
And finally, we’ve got quality issues which has been in the press quite a bit. That’s because the kinds of issues with fuels being […] the standards for fuels but yet at the same time being unusable are expected to become more frequent as we go past 1 Jan 2020.
All of these factors are all related. If you’re having trouble with one of them, you might have trouble with your entire strategy. Using fuels for compliance is going to be a difficult situation. I think being prepared and spending time on the details considering your bunker planning and arrangements very carefully are going to certainly put you in better stead than leaving everything to the last minute.
Enforcement – the ‘carriage ban’
On the enforcement side there were a couple of developments which I think are going to be quite influential here.
One is on a new regulation which is probably going to be formally adopted called the carriage ban. Carriage ban on non-compliant fuel to give it its proper name. What it will do is it will prohibit having fuel of greater than 0.5% sulphur on board unless that vessel has a scrubber.
If you think about it, there should be no reason for having that kind of fuel on a vessel post the implementation of this, which is March 2020.
It would have the effect of strengthening the hand of the enforcers because they would no longer have to prove where fuel was being used. If they find above 0.5% fuel on a vessel and that vessel doesn’t have a scrubber, then non-compliance is judged at that point.
In addition, this is a regulation that works well with remote sensing technologies which have been used extensibly in the ECA areas. These are the drone technologies and bridge sniffers which can help fairly reliably determine vessels that are probably compliant from those which are probably not compliant. And so you can see how these work closely together.
This is going to be a powerful tool. There is a question of course, which remains, whether it will be used, because tools are only effective if they are put to use. And that part is not certain at this stage. What the enforcement arrangement will be in different flag states is quite hard to determine.
FONARs – a free pass or a red card?
Another issue which comes up in terms of fuel is FONARs – Fuel Oil Non Availability Report. In some circles, it has been suggested that these will be like a ‘get out of jail’ free card. I think that it would be a big mistake to view it that way. One thing to be very clear about is that this is a declaration by a vessel that it has tried best efforts, but not been able to source compliant fuel. It is not a compliance exemption awarded by any authority. It is something a port state can take into consideration when it considers the compliance scenario around the vessel.
Of course it would be operationally undesirable to load high sulphur fuels into a tank which had already been stripped and cleaned because that cleaning process to remove residual high sulphur fuel is time-consuming and rather expensive. And there is the additional likelihood that surplus high sulphur fuel, in other words fuel which remains on board, once the vessel gets report that compliant fuel is available, it is entire likely that that fuel would have to be offloaded, again, because of the carriage ban.
So I think that ship-sized FONAR loopholes are pretty unlikely.
For all compliance paths: know what you don’t know
So what I hope has been made clear is that for all compliance paths, and not least for fuels, we have a lot of factors that are unknown and which should be given careful consideration before making choices and going forward.
To recap, there is the cost side of it. What will fuel cost in 2020? That’s an interesting question, but of course you can ask the same questions for 2025 or 2035 because that isn’t any less significant.
Then there’s the regulatory development aspect of this. There are additional local sulphur regulations which are propping up, but in addition to that, there is a very big regulatory development process around greenhouse gases which is under way. It’s interesting and important to consider what impact that regulation might have on the compliance choices you make for sulphur. It’s not easy to pick a strategy based on this, but it is certainly important to consider.
There is the technical feasibility of any of the sulphur 2020 compliance paths, including fuels. Will they work with the kind of ship that I’ve got? If you change from one fuel type to another, you need to be sure that your lubrication regime is able to match with the new kinds of fuel, and that the machinery can cope with fuel of different temperatures and different viscosities.
And then of course, there is the supply side. Will you be able to get the fuel which you need in efficient quantities and locations necessary, not just in 2020, but much further out into the future as well?
All of these factors are manageable with the right level of focus and intention.
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Questions from the audience
How to you minimise the increase in OPEX?
I think that the answer to that is to take a balanced approach to compliance for your fleet. That starts with recognising the importance of looking at vessel specific compliance choices. If you tried to take a one size fits all approach, even if that was possible – and I’m not sure that it actually is – you will sub optimise your compliance cost. The best choices for a vessel will be governed by a range of factors. They include the age of the vessel, the type of vessel it is or where it trades, the availability and cost of different fuels where the vessel operates, for example. Once you’ve taken all of these into account, it’s quite likely that you’ll find that a variety of or a couple of compliance paths will actually give you the best outcome.
Certainly, for our fleet, we found that it makes sense for us to have a combination of scrubbers on some vessels and to use compliant fuels.
How much do you expect OPEX to rise?
That is like asking how long is a piece string? Of course, it’s connected to what the oil prices will be. If you look at what the analysts are saying, you very quickly form the conclusion that they don’t agree, and what they say varies over time anyway.
But one thing we can try and put in as a factor to this general question is that today fuel differential is around $210 / $215 / $220. That’s the difference between high sulphur fuel oil and marine gas oil – 0.1% fuel oil. If you look at the future’s market, it will have a greater differential. That is the future for 1 Jan 2020. […]
However, there are quite a number of prominent oil industry analysts and some of the major commodities banks who believe that the future’s market is mispricing both high sulphur fuel oil and marine gas oil, and that it is possible that we will see a differential around 1 Jan 2020 of up to $700 per tonne. That’s a differential between high sulphur fuel oil and marine gas oil. At that stage, we are talking about a range from today[‘s differential] of around $200 out to $700. I think what that really illustrates that it’s a very uncertain picture of what we should anticipate.
I might add another point to that which is that I’ve just been talking about 2 of the 3 fuels which will be involved in the 2020 scenario. The one which is actually going to be most important from a compliance perspective is very low sulphur fuel oil – our 0.5% fuel. There isn’t any information on what that is going to cost yet but it is likely that it will be marginally discounted from 0.1% marine gas oil prices rather than marginally marked up from high sulphur fuel oil prices.
There is a formula which is used by some big banks to give an indication of what that product might cost and it’s based on a very simple formula which is that if you take 5/6 of the price of marine gas oil and you add 1/6 of the price of high sulphur fuel, that will give you something which is probably in the region of what very low sulphur fuel oil will cost. The formula is just based on the ratios of those two products that you would need to create a product which has 0.5% sulphur. It’s not scientific, but it may give you a good indication of what to expect.
In your opinion, how positive or negative have conversations been with fuel suppliers when it comes to meeting that 2020 deadline?
Our experience at Wallenius Wilhelmsen has been quite positive. I think that the experience that a shipping company will have when dealing with the challenge around both fuel quality and quantity will depend quite a large extent on the size of the company, the size of the fleet that it operates, as well as the way it operated its fleet.
We are a liner company, so that means that we know where our vessels are going to be weeks and months in advance. That in turn allows us to plan our bunkering far in advance. Because we can do that, it helps us to consolidate our bunkering into fewer ports. […] If you are a large returning customer, it helps to move you to the front of the line at the fuel pump. And the same margin is implied in terms of access to relatively good quality fuel.
What I’m not saying is that we think this will be easy. We don’t. We think that this can be a big challenge, but I think that compared to some, we are not sailing for the eye of the storm at least.
What is the single biggest challenge when it comes to hitting that 2020 deadline for your fleet?
I think that most aspects of the challenge are well under control. […]
To get that transition on the stroke of midnight… That is the part of the art – you could say – of running a fleet and down to running the individual vessel level. So I think that’s a really big challenge, and preparation is going to help hugely.
Of course the commercial challenge with 2020 is critically important. I think ours is an industry, generally speaking, where we don’t enjoy enormous margins so there is going to be a passing of costs. That adds a new kind of dimension to the regulatory challenge – something that we’re not familiar with in this industry before. Normally when there’s a regulation, you turn to the engineers and there are technical and operational decisions to be made. But this is something different and how well we deal with that will remain to be seen. But certainly, there’s no shortage of focus on that.
What do you think needs to happen at regional authorities to ensure that the playing field is level and there is an achievable goal in sight?
I think this is a very important question as well. Given that fuel is such a large part of the cost space and that we’re in a very competitive industry, if you have some companies who are choosing to go with non-compliance and taking their chances, then we get a favourable cost position relative to all of the companies who are doing things the correct way.
That’s the level playing field scenario that you’re talking about. Enforcement plays a critical role in ensuring that fair competition continues. […] This is something which is a sovereign matter. It is not the IMO’s responsibility to enforce this; it’s at the individual state level. And of the roughly 90 countries that have got the obligation to enforce the 2020 carriage ban, there are only about 30 of them – the ECA countries – who have prior experience of this. It is quite a technical subject. […]
Some countries have got effective, proportionate and dissuasive penalties, and that’s the language used in the European Sulphur Directive, just as an example. But there are some who have penalties which are far smaller than the potential benefit. That could be the economic benefit that could be achieved from non-compliance.
So there is anxiety on that. I think that the situation is certainly improving and developments like the carriage ban will help strengthen the hand of enforcement agencies. But like so much in relation to 2020, continued focus and effort is still required.
Will current compliance solutions for example scrubbers and LNG still be around in 2030 and 2050 by which point the industry is looking towards decarbonisation?
That is a great question. I think the importance of that question, I think, will become increasingly obvious as the next number of weeks pass by. As many of you may be familiar, the IMO set a greenhouse gas reduction target. […] There should be at least a 50% reduction in total greenhouse gas emissions from shipping by 2050, relative to 2008. If you factor in the increase and size of the world fleet you’d expect over that time, we are probably talking about a reduction on a per vessel basis of somewhere from 70-85%. So that does raise questions on compliance choices for sulphur, because all of the compliance choices basically involve a little increase in CO2. That’s when you take a well-to-wake perspective, including on LNG, although that can be marginally lower, I suppose.
But that 2050 target is going to be reached with the help of regulation that IMO is drafting right at the moment. […] Although it seems like a far off challenge, it actually is deceptively urgent and current. It adds to the dilemma for shipping companies. I think that maybe you could argue that at least staying with a liquid fuel solution that you leave the door open for switching to biofuels or biodiesels, or at least fuels that have a component of biodiesel, somewhere down the line. Really, it’s something which is shrouded in a lot of uncertainty but wants a lot of attention.
What kind of pressures do you think seafarers will face post or come 2020?
I think that among the challenges for the crew in relation to 2020 is managing a more complex fuel situation than what is already the case.
To give you an idea, some of the 0.5% products require heating; others do not require heating. So obviously if you heat a product that doesn’t require heating then you are going to have a pretty serious safety problem. And that is just one indication of how this will become more complex. What I described earlier with compatibility of fuels is expected to become a more significant issue post 2020 than it is now. The same goes for fuel quality issues. […] It is something that is operationally critical, and you can’t overstress the importance of that point.
Additional questions from the audience
What is your view on future HFO availability, given the small number of vessels fitted with scrubbers?
Perhaps the first point to consider on availability is that there’s a critical difference between what fuels are produced and what actually makes its way onto bunker barges. Obviously, it’s the latter that matters for ship operators. Naturally availability of HSFO will be linked to demand, which means major bunker ports are likely have HSFO available long after it has disappeared from minor bunker ports. We replenish at major bunker ports, so we are confident that HSFO will continue to be available throughout the 2020s.
Is seafarer training sufficient for this new regulation? For better implementation.
The importance of crew training cannot be understated. Some may view low sulphur fuels as the easy option, but hardly anything could be further from the truth. Within our organisation there has been a huge focus on this area for a long time already and it will continue. What arrangements are in other companies is not something we know or would comment on, but if you’re a shipper and you’re in doubt it would seem advisable to ask your carrier about it.
What level of importance do you place on fuel use reduction methods in light of 2020? For example, port optimisation and 'just in time' shipping? Which strategy do you favour in this respect?
Fuels are the biggest single item in our cost base and we pay for our fuel ourselves – optimising the efficiency of our fleet is therefore a permanent and central business objective for us. In that sense, the 2020 global cap change doesn’t herald a new era for us, rather it reaffirms our existing commitment to efficiency. There are many tools and techniques we employ in the name of efficiency ranging from operating our various fleets as one to optimise vessel deployment to initiatives regarding hull fouling to applying real-time big-data analytics to fleet performance.
I consult shipowners with smaller fleets(<15vessels) in South Europe/ Middle East Region. All my clients consider the scrubber cost to be high and are opting for a change in MDO. Any recommendations for such smaller shipowners as shifting to MDO is their best option.
The right solution for compliance is vessel specific. Even differences in trades of sister vessels can warrant taking different compliance approaches. To give a useful recommendation therefore requires very detailed knowledge of the vessel’s technical, operational and commercial details / circumstances, which is all to say that I’m not well placed to answer! It may be that VLSFO, which is likely to be lower cost than MDO, is worth considering. However, fuel quality issues could be most severe for smaller operators – particularly those in the spot market –, so MGO’s higher price could be justified to avoid those difficulties.
Global Head of Sustainability, Wallenius Wilhelmsen
As Global Head of Sustainability for Wallenius Wilhelmsen, Roger works with a wide range of corporate activities ranging from regulatory affairs to innovation and new business development to addressing the ever increasing Environmental, Social and Governance interests and demands of customers and financial stakeholders. In addition, Roger is the founder and Chairman of the Trident Alliance, a group of shipping companies campaigning for robust and effective enforcement of maritime sulphur regulation for the mutual benefit of the environment, health and fair competition.
Before starting his current role in 2017, Roger spent two years as VP, Global Head of Key and Liner Accounts at Wallenius Wilhelmsen Logistics (WWL), a commercial assignment with a significant marketing and communications aspect that spanned the automobile, heavy equipment and breakbulk segments. Prior to that he was WWL’s VP, Head of Environment for three years. Roger holds an engineering degree from the University of Dublin, Trinity College.