The International Maritime Organisation’s (IMO) upcoming mandate on limiting sulphur content in marine fuel is likely to weigh heavily on the entire bunker supply chain – including vessel operators, refiners, and the global oil market.
With each stakeholder expected to respond differently to the changes, this new mandate is likely to increase uncertainty on price formation and demand–supply dynamics of crude oil and petroleum products in both the near and long term.
With the aim of reducing sulphur dioxide in our atmosphere, the IMO’s upcoming mandate will require carriers to switch from cheap, ‘dirty’ bunker fuel (majorly IFO 380) to cleaner variants – with 0.5% (by weight) sulphur content – from the 1st of January 2020.
The mandate will apply across multiple countries’ jurisdictions – impacting carriers and companies in the bunker supply chain with a total demand of 3.9 million barrels per day. It’s a huge change, and will force significant changes and actions across the industry, bringing an almost unprecedented level of uncertainty to the bunker supply chain.
How will carriers and shippers adapt?
With carriers and shippers around the world currently planning their next steps in line with this new mandate, 3 main options have emerged – but each carries its own unique challenges and drawbacks:
Option 1) Switch to low-sulphur fuel oil (LSFO)
The simplest option is to switch to low-sulphur fuel oil, but LSFO is significantly more expensive than its higher sulphur equivalents. Plus, in some regions there is a significant demand-supply imbalance of compliant bunker fuels.
Option 2) Invest in scrubbers to remove pollutants from ships’ exhaust
Scrubbers will enable carriers to continue using the same fuels as they do today, but carry with them a high installation cost, and are currently limited in supply. Around 20% (by carrying capacity) of impacted fleets are expected to take this option, so availability is likely to be a major challenge in the near-term.
Option 3) Use liquefied natural gas (LNG) or other IMO compliant alternative fuels
While a potentially strong option, the infrastructure required to use LNG as a shipping fuel is currently limited in both scale and availability, making it a less appealing option for carriers with large-scale, widespread operations.
Significant change takes time (and consensus)
It’s important to recognise that this new mandate will impact everyone in the bunker supply chain, and while the immediate future seems unclear, everyone has a stake – and role to play – in establishing a sustainable ‘new normal’ across the industry.
The majority of the global oil majors, such as Shell, have committed to producing the required volume of compliant fuel to meet demand. However, due to the difficulty of creating these blends, the supply is anticipated to be restricted in the near term, and the availability is expected to be limited to major refining centres – such as Singapore – driving prices up.
Uncertainty amongst carriers is also slowing progress towards a stable new standard in the industry. With a predicted 3,500 vessels expected to have scrubbers installed by the end of 2019, oil majors are stuck having to decide whether it’s best to shift production towards low-sulphur fuels, or continue producing cheaper fuels that vessels fitted with scrubbers can utilise.
What’s the real impact going to be?
In practical terms, the uncertainty being felt across the bunker supply chain as IMO 2020 approaches is having three major impacts on the market:
- It’s driving costs and surcharges up: As carriers absorb the costs of either more expensive fuel options or installing scrubbers, the relative costs of shipping are rising – putting pressure on numerous other industries in the form of higher costs and significant surcharges
- Services are being disrupted: With costs rising, pressure is building for carriers to optimise the efficiency of their operations – leading many to reduce their overall capacity in the short and medium term, or shift towards ‘slow steaming’ to conserve fuel
- Disposal is emerging as a new challenge: As more carriers adopt scrubbers, they’ll need to find solutions to responsibly dispose of the sludge produced by them – which will weight further on their costs, and the complexity of their operations
Charting the best course forward
In an uncertain market awaiting the arrival of a mandate that will impact such a wide array of parties, it’s difficult to see a clear correct path forward. Instead of trying to build a long-term strategy for coping with the impacts of IMO 2020 now, companies at all stages of the bunker supply chain simply need to adapt their short and medium-term strategies and stabilise, to put themselves in the best position to weather this short-term storm of uncertainty.
Carriers should refocus on efficiency and maximising their margins, potentially limiting or cutting their cargo capacity to avoid overspending on more costly fuel options and having to pass higher costs into consumers. Refiners should start looking at low-sulphur distillate fuels now, and increase production to ensure a high level of future demand by disincentivising the adoption of scrubbers. And finally, shippers may benefit from delaying the creation of new contracts until they know exactly what their routes and costs may need to look like in the coming years.