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March 18 2019

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4 The Journal of Commerce | March 18 2019 www.joc.com Mark Szakonyi IT WOULD TAKE something major to stall the International Maritime Or- ganization from implementing the low-sulfur rule, and yet questions remain about supply, how engines will handle the transition to low-sul- fur fuel, and whether President Trump would inject himself into the equation. Whether the mandate takes ef- fect on Jan 1, 2020, and enforcement kicks in in March — as the IMO and its 171 member countries are on track to do — or if the mandate is delayed, this is just the beginning. The container shipping sector and the broader freight shipping indus- try face intensified environmental regulatory pressure. The IMO, however, isn't prone to changing course, with its acceptance of a two-year delay of a ballast water rule in 2017 a rare exception. The rule — requiring the container ship- ping industry to reduce the sulfur content of marine fuel from 3.5 percent to 0.5 percent — is put- ting the refining industry to the test. Refiners have only known since late 2016 that the mandate was go- ing forward, when the IMO rejected an attempt by the Baltic and Interna- tional Maritime Council (BIMCO) to stall implementation because of supply worries. Those concerns were warranted; the rule means a slashing in demand for 3 million barrels daily of high-sulfur fuel and the creation of a new type of fuel without a stan- dard criteria. While US port and industry sources say they are somewhat con- fident the industry will have enough of the new fuel type, refiners say they'll be ready, but they have been coy on exactly how they're making such a massive shift. Energy analysts at IHS Markit, parent company of The Journal of Commerce, warn that the refining and shipping industries aren't ready. The Jan. 1 low-sulfur rule will result in a "scramble period" of a few years when a new equilibrium of supply and demand will be deter- mined by refiners and shipowners, analysts predict. When approached with the ques- tion of low-sulfur fuel availability and fueling infrastructure, refiners generally respond, "We should have it, but we're not ready to talk about it," said Peter Lindsey, regional man- ager in Seattle at KPI Bridge. On March 5, at the 2019 TPM Conference in Long Beach, Ha- pag-Lloyd CEO Rolf Habben Jansen played down concerns of low-sulfur fuel compatibility, saying container carriers would be testing how ship engines handle the new fuel type months before the rule takes effect. Others, however, aren't as confident. "Shipowners are concerned about fuel oil compatibility issues causing problems with ship en- gines," said Buddy Myers, knowledge expert and team manager at Boston Consulting Group. If incompatible blends are mixed in a fuel tank, a precipitate of tar-like material may form. This material can cause fuel system plugging, and in turn create reliability problems with a ship's engine," Myers said. There's a general consensus in the energy market that there will be wider middle distillate crack spreads, meaning that the price of crude oil and the products refined from it, including diesel, jet fuel, and other middle distillates, will increase. This regulation will also offer support to the gasoline crack spread, as refiners around the world take steps to maximize middle distillate production at the expense of gaso- line volume. In short, low-sulfur fuel production will put upward pricing pressure on other fuels crucial to freight shipping. The IMO rule will be imple- mented regardless, but Daniel Yergin, IHS Markit vice chairman and Pulitzer-prize-winning energy expert, gave a caveat: "In two words: Donald Trump … As we see a spike in distillate prices, this will affect people who use heating oil to heat their homes in the winter and the autumn in really crucial states like Pennsylvania." Trump won the state of Pennsyl- vania in 2016 with just 48.2 percent of the vote, with a large swath of support coming from rural counties strongly supporting his pro-coal agenda. There are few, if any, procedural openings for the United States to stall the rule through IMO process- es. The US in October failed to get the IMO onboard for a so-called ex- perience-building phase — initially promoted by countries including the Bahamas, Liberia, and Panama — that would allow one-time waivers if vessel operators were able to prove the lower-sulfur fuel wasn't available for bunkering at certain ports of call. Trump could unilaterally reject the mandate. Or he could simply shake things up via Twitter. "I've seen first hand the immedi- ate impact of his tweets on wanting low oil prices," Yergin said. "The IMO is a treaty that's in place and can't be overturned, but we've seen the US withdraw from other things," such as the Paris Climate Accord. It will take more than a tweet, however, to stall rising environmen- tal regulatory pressure. The IMO in April 2018 agreed to move forward on a plan to cut greenhouse gas emissions in half by 2050, based on 2018 levels. JOC email: mark.szakonyi@ihsmarkit.com twitter: @MarkSzakonyi Low-sulfur caveats The Journal of Commerce (USPS 279 – 060), ISSN 1530-7557, March 18, 2019, Volume 20, Issue No. 6. The Journal of Commerce is published bi-weekly except the last week in December (printed 25 times per year) by JOC Group Inc., 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Subscription price: $595 a year. Periodicals postage paid at New York, N.Y., and additional mailing offices. © All rights reserved. No portion of this publication may be copied or reprinted without written permission from the publisher. POSTMASTER: Please send address changes to The Journal of Commerce, Subscription Services Department, 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Letter From the Editor "Shipowners are concerned about fuel oil compatibility issues causing problems with ship engines."

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