Are Scrubbers Set for Take Off?

Malcolm Latarche
Malcolm Latarche

31 July 2018

When the IMO decided on the 2020 date for introducing the reduction in the global sulphur level in fuels, the CE Delft report on which the decision hinged forecast that 3,800 ships would have systems installed by the deadline. Currently the figure is well below that but is growing and it is worth noting that the Delft report also suggested that most systems would be installed from the second half of this year and through to 2020.

There is evidence that more shipowners are looking seriously at scrubbers probably because as the rising cost of bunkers begins to approach levels not seen for several years, the payback time for scrubbers has shrunk dramatically and could soon be back to being measured in months rather than years. The current bunker prices around the globe are much higher than the Delft report expected them to be in 2020 adding a further incentive to recalcitrant owners.

Changes in bunker prices over the years have meant that the attractiveness of scrubbers had first soared and then plummeted. Since most ships in the existing fleet do not have the option of running on LNG without major work that could involve replacing the engine, the choice has always been to burn distillates or install a scrubber and continue to run on HFO.

In 2012 when the price of HFO was around $600 per tonne and MGO touching $1000, the case for scrubbers was at its highest. However, at that time most shipowners chose to believe that the IMO’s second option for reducing the global cap for sulphur in fuel from 3.5% to 0.5% would be the logical choice and they would have at least a decade before a decision on strategy was needed.

Interest in scrubbers dipped after the crash in crude oil prices that began in 2013. By mid-2015, the differential between HFO and MGO had halved to around $200 extending the payback time for a scrubber to four to five years. Even that did not entirely kill scrubber sales but the fact that MGO prices were now around $150-$200 below what HFO was at its height was sufficient for many owners to take the view that maybe switching to MGO wasn’t the disaster they had earlier thought it might be.

Owners have since been disabused of the notion they had around 10 years to decide by the 2016 decision by the IMO to settle on the earlier 2020 date. More to the point, the IMO has made it clear that it is not inclined to consider phasing in or extending the deadline. Even worse for owners has been the more recent decision by the MEPC to ban even the carriage of non-compliant fuels unless there is a very compelling reason to do so.

A compelling case for scrubbers

The Delft report ‘s view that scrubbers would be an attractive option was based upon their payback time. Today, the cost effectiveness of scrubbers could be even better as when the Delft report was published in 2016, bunker prices were $252 for HFO and $452 for MGO. Table 32 in the report forecast the figures for 2018 would be $377 and $552 and for 2020 $466 and $616 respectively. It is difficult to say what the actual figures for 2020 will be but presently the global average for bunker prices stands at $472 for HFO and $732 for MGO already above the report forecast and significantly so as far as MGO is concerned.

Support for scrubbers among owners has always been difficult to gauge with some such as Grimaldi, DFDS, Star Bulk, Spliethoff and numerous cruise ship operators being firm supporters and others such as Maersk and Hapag Lloyd being firmly in the ‘anti’ camp. Many owners have begun to speak in favour of scrubbers, but none have so firmly demonstrated their commitment to them that tanker operator Frontline has done.

In late June it was announced that Frontline had taken a 20% stake in Singapore-based scrubber manufacturer Feen Marine. At the time of the announcement, Robert Hvide Macleod, CEO of Frontline Management said: “The economic case to install scrubbers is very compelling, particularly for larger vessels. Scrubbers installed on existing vessels provide the same benefit as those delivered from the yard on newbuildings and our solution comes at a much cheaper cost. Additionally, this transaction allows Frontline to secure the capacity to source a large volume of scrubbers, which we believe will present a challenge to many owners as the deadline for sulphur emissions compliance approaches”.

Macleod has highlighted a possible problem for owners of existing ships that might be candidates for scrubbers. As the deadline draws ever closer, so too does that for retrofitting ballast water treatment systems. That will put pressure on shipyard capacity (although both types of installation can be carried out alongside and drydocking is not necessarily required.) and on owners’ bank accounts for neither type of system comes cheap.

The question of finance may be less of a problem for scrubbers than for ballast systems as there is a clear financial advantage to installing a scrubber and costs can be paid back from the savings made on fuel payments. Earlier this summer, two banks – DVB and Deutsche Bank both talked publicly about the competitive advantage that scrubbers could confer. This seemed to be confirmed in early July when shipbroker Gibson began its weekly market report by saying that charterers of VLCCs seem willing to pay higher freights and daily hire rates for scrubber equipped tonnage.

A growing supplier list

Unlike in the ballast water treatment sector where multiple solutions have been proposed, scrubbers tend to use one of two options - wet or dry treatment with the former being the most dominant. Because the technology of scrubbing was already mature having been used in shore-based power stations for decades, the suppliers developing marine versions were more concerned in reducing the size and adapting to marine operations rather than re-inventing the wheel.

Since the first scrubbers were retrofitted in the first decade of this century, the list of suppliers has grown gradually. Today there are around two dozen system makers active in the market although more will almost certainly come on board if demand takes off. The sector has its own umbrella organisation in the Exhaust Gas Cleaning Systems Association (EGCSA) and includes most of the current suppliers in its membership.

Another indication that scrubbers are becoming more accepted is the number of new players entering the market. One of those is the marine consultancy Viswa Group which in an interview with Platts in June revealed that it is developing its own scrubbing systems.

Ram Vis, founder and CEO of Viswa Group said in the interview that he believed uptake of scrubbers is likely to see a dramatic rise in the future, with at least 60% of the current ships expected to opt for scrubbers by 2022.

Vis believes that the price differential between HFO and MGO could widen to as much as $500 per tonne by 2022. Even with a differential of just $200 the additional cost for a mega container ship would be $50,000 per day based on a consumption figure of 250 tonnes per day. Assuming the vessel sails for 300 days, the vessel will pay an additional $15 million each year for using MGO, he said and added that scrubbers for a vessel of such size cost about $6 million including installation. This translates into a return on investment of only about five to six months should a shipowner opt for scrubbers.•