Scrubbers, low-sulphur fuel and price hikes: Can you believe what you hear?

Paul Gunton
Paul Gunton
ShipInsight

08 November 2018


Shipping companies that are still to decide between the two options for meeting the 2020 sulphur cap – scrubbers or low-sulphur fuel – can gain some insight to help make their decision by considering the views of some major ship operators and a forecast into fuel price trends by the International Energy Agency, which expects gas oil prices to rise when the sulphur cap comes into effect. But a scrubber industry leader has doubts about some shipowners’ public statements about their intentions.

In response to ShipInsight’s reports during IMO’s Marine Environment Protection Committee (MEPC 73) last month, a ship operations manager with the job title of ‘IMO 2020 lead’ – but who asked not to be named – got in touch to describe his company’s approach to addressing emissions. It can be summed up in one quote from our conversation on Monday (5 November): he said he has “not seen one good argument as to why not to fit scrubbers on at least part of your fleet.”

Fact Scrubbers

His view was formed after “running many economic models” taking account of costs, downtime and other factors and talking to “hundreds of different technical groups”, he said. It is the opposite of the opinions expressed by tanker operator Euronav, which has been strongly critical of scrubbers, as ShipInsight reported a few days ago.

“All [propulsion] systems now are high-sulphur systems,” this operations manager pointed out, and decisions about whether to use scrubbers or low-sulphur fuel are based only on their economics, he said. Scrubbers “have an economic payback period and, most importantly, they function on a fuel that we’re familiar with,” he said. He also reported that scrubber-equipped vessels are achieving premium charter rates.

Operators that decide not to fit scrubbers, must prepare their ships for low-sulphur alternatives “and that takes months”, he said, so he is concerned for shipowners that are not yet making those preparations.

Another operator whose comments and actions are worth noting is Maersk, which appears to have changed its attitude towards scrubbers. Back in February, ShipInsight reported that not only had Maersk “publically discounted using scrubbers” in favour of low-sulphur fuel oil but was then “considering LNG as well”.

But by 12 August its stance had changed. During a conference call with analysts that day following its Q2 results statement, Maersk’s CEO Soren Skou was asked whether he anticipated “any increased investments into retrofitting ahead of the IMO 2020 implementation.”

His answer was illuminating: “I don’t think it’s feasible to retrofit ships with LNG propulsion. So for us, it’s really about scrubbers,” he said. He immediately confirmed that “we don’t like the solution … We think that the sulphur should be taken out of the fuel at the refinery. … But we are experimenting with various things and we may also invest in a few scrubbers simply to understand the technology.”

A month later, Reuters reported an email exchange it had had with Niels-Henrik Lindegaard, head of Maersk Oil Trading, who told the news agency that “as part of the preparations [for 2020] we have decided to invest in new scrubber technology on a limited number of vessels.” In the Reuters report, he did not describe these as experimental installations but he did echo Mr Skou by insisting that “we still believe the best solution remains with compliant fuels from refineries on land.”

There is no doubt that Maersk remains committed to using low-sulphur fuel: Reuters recalled Maersk’s agreement, announced in August, with the tank storage operator Royal Vopak to establish a bunkering station for 0.5% sulphur fuel in Rotterdam, which will meet about 20% of Maersk’s global demand for compliant fuel, and quoted Mr Lindegaard as saying that the operator is “looking into more bunkering facilities like this”.

While preparing this article, ShipInsight contacted Maersk’s Copenhagen headquarters for clarification on the operator’s current views on scrubbers and mentioned a suggestion from one ShipInsight source that the number of scrubber installations that Maersk is actually planning is well into three figures.

In reply, Maersk’s senior press officer Mikkel Elbek Linnet said that the company “never comments on rumours/speculation in the industry” but added that “the number you have heard is very far from what we have said.” He added that he could not confirm the report of ‘hundreds’ of scrubbers that we had received but did not take up ShipInsight’s further invitation to say that the number does not reach those levels.

Instead, he provided the company’s standard ‘statement on scrubbers’, which matched the information that Reuters had quoted, including the reference to fitting scrubbers to “a limited number of vessels.” The statement also said that “Maersk is looking into all possible and available opportunities to ensure we are ready to comply with the 2020 sulphur cap, that is compliant fuels, LNG and scrubbers.”

Any owners that have already decided to switch to low-sulphur fuel will be concerned to hear that the global cost of diesel fuel will rise by at least 20-30%, according to Christophe Barret, senior oil market analyst at the Paris-based International Energy Agency (IEA). He was speaking during the lunch break on the second day of last month’s MEPC 73 when he set out the IEA’s analysis of the impact of the 2020 sulphur cap on fuel markets.

His presentation had been much anticipated. During what is normally a quick piece of administration to adopt the meeting’s agenda during the opening session on the committee’s first day, some delegations had wanted to rearrange the week’s programme so that its discussions on the reduction of greenhouse gas emissions – which would include addressing the 2020 sulphur cap and the carriage of high sulphur fuel – could be scheduled to take place after the IEA presentation. This would be “in the interest of better-informed decisions,” one delegation suggested.

Nearly 20 minutes was taken up by many interventions from the floor supporting or opposing the proposal to change the timetable before MEPC chairman Hideaki Saito ruled that the majority of those who had spoken opposed a change to the timetable and the IEA presentation went ahead at the scheduled time and was well attended.

Mr Barret said that there are about 1Mbpd of gas oil available to cover the switch to low sulphur fuel before it has an impact on land-based consumers. On the face of it, this will be sufficient, because his figures indicated that there will be a demand for 960,000bpd for ships that make the switch. However, a further 300,000bpd will be needed for those that will use blended fuel, making a total of around 1.25Mbpd needed for the marine sector, with 0.25Mbpd coming from what is currently land-based consumption.

Because the relationship between demand for gas oil and its cost is not very elastic, as economists say, it will require a large price change to decrease land-based demand sufficiently to release that quantity for marine use, the IEA analysis showed. Mr Barret explained that the analysis behind his presentation was first published in March, when the necessary price rise was estimated at 20%-30%, but said that its assumptions had changed since then.

At that time, IEA had predicted that about 30% of the current HFO usage would convert to gas oil, but it now expects that proportion to be about 40%, pushing up the marine sector’s requirements and, with it, the price rise needed to secure sufficient volumes from land-based consumers. Mr Barret did not indicate what that revised price rise will be; a new forecast will be published in March 2019.

He also said that the impact will depend on a number of factors including the number of scrubbers installed across the industry and he noted that there had been a “recent acceleration in orders”.

This was confirmed this week by Don Gregory, director of the Exhaust Gas Cleaning Systems Association. He told ShipInsight this week that most of his members are ‘maxed out’ with orders so shipowners wanting to fit a scrubber before January 2020 will now struggle to find a supplier with capacity to meet that deadline.

So he is sceptical about claims by some owners that they will rely on low-sulphur fuel rather than scrubbers, not least because some charterers – who pay for the fuel – will prefer to use ships that can use HFO. “There appears to be a market reaction from the ‘don’t haves’ to create a distraction by putting out information that suggests that they don’t support scrubbers, but the reality is that many of these organisation are actually [fitting them],” he said. He accused them of making “unfounded statements that, if they were challenged, they would find difficult to defend.”

How big a role do you think scrubbers will play in meeting 2020 sulphur rules? What action is your company taking? Email Paul Gunton with your views.