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Sept.4, 2017

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GOVERNMENT WATCH INTERNATIONAL | WASHINGTON | CUSTOMS | SECURITY | REGULATION 36 THE JOURNAL OF COMMERCE SEPTEMBER 4.2017 By Joseph Bonney FEARS OF STEEP prices for low-sulfur fuel mandated by an International Maritime Organization rule on ship emissions are overblown, an analyst at the Center on Global Energy Policy at Columbia Univer- sity says. In addition, poor enforcement may blunt the impact of the fast-approach- i ng 2020 g loba l cap on sh ip su l f u r emissions, Antoine Halff says. "At the very least, noncompliance is likely to act like a de facto safety valve in the event of a run-up in low-sulfur fuel costs," Halff said in a report that suggested the caps on sulfur emissions may be less disruptive than many fear. Ocean carriers worry that the new rules will squeeze refiners' capacity to meet demand for low-sulfur fuel, and cause prices to spike. They are also concerned that lax enforcement could allow less scrupulous carriers to ignore the International Mari - time Organization's rule. Forecasts of the annual cost of meeting the rule, approved under Marpol Annex VI in 2008, range from $5 billion to as much as $100 billion. Fifty-three member states approved limiting bunker fuel sulfur emis- sions to 0.5 percent, down from the current 3.5 percent threshold. The IMO didn't specify how carriers must comply with the new rules. Options include emission scrubbers, clean-burning liquefied natural gas, and low-sulfur fuel. High capital costs and planning require- ments have deterred most carriers from investing in scrubbers or LNG-powered ships. This has left low-sulfur fuel as the default option, meaning that "regulators may have unwittingly entrenched the role of oil in ship- ping for decades to come," Halff said. The International Chamber of Shipping has said low-sulfur fuel costs about 50 per- cent more than dirtier residual fuel, and that increased demand will cause the differential to widen after 2020. Prices for regular bunker fuel have been rising. Average per-barrel prices at major ports surveyed by Bunker World are forecast to rise 34 percent this year, to $307 a barrel. Halff, former chief oil analyst at the International Energy Agency, said supply and demand trends remain unclear. He noted that shipping companies already are reducing fuel consumption, and said he expects refiners will meet demand for fuel blends that meet low-sulfur requirements. Still uncertain is how tightly countries will enforce the new IMO rules. Halff said most carriers, especially large container lines, plan to comply, but that some may try to skirt the new requirements and risk a fine if they're caught. Major carriers have urged regulators to crack down on competitors seeking an unfair edge. Maersk Line said the increased cost of meeting the new rules "underlines the importance of robust enforcement to secure a level playing field in the industry." Estimating it will cost $2 billion to meet the rule, Maersk Line said it is seek- ing alternative fuels rather than betting on scrubbers. The top global carrier said that although scrubbers look cheaper at first, there is the additional cost of devoting specialized personnel for the heavy main- tenance required to keep them humming. Halff said enforcement will be "a daunting challenge … Efforts to beef up enforcement currently focus on tightening paperwork checks at ports, which is a cheaper but less-effective approach than actual emis- sion checks by flyover or satellite." Like the shipping industry, refiners "show few signs of having taken concrete steps to prepare for the IMO rules," Halff said. "With a few notable exceptions, most refiners, unsure of the shipping industry's response, seem to have taken a wait-and-see approach to the new standards." However, Halff predicted refiners will adjust. He said demand for low-sulfur diesel may be less than forecast, and that demand for high-viscosity fuel in large ships' engines may require hybrid low- sulfur fuel oil mixtures that not place extreme stress on refiners' production of distillates. "The global sulfur cap goes a long way to cut harmful emissions, but will not be as transformative for the shipping industry nor as disruptive for oil markets as might be expected," Halff said. IHS Markit analysts say they expect low-sulfur bunker fuel will be available at major refining and bunkering hubs, but that questions remain over availability at remote locations and on uniform standards for formulation of low-sulfur fuel for ships. IHS Markit forecasts the new low-sulfur fuel will cost between $500 and $650 per metric ton by 2020. Halff noted that the shipping industry already has reduced consumption by using more-efficient ships, slow-steaming, and improving f leet network management. Hapag-Lloyd reported an 8.4 percent year-over-year decline in per-TEU bunker consumption in the first quarter of 2017. "With digitization set to further reduce the oil intensity of shipping, oil demand growth from the marine sector will likely remain below forecast, which will help blunt the effect of the global cap," Halff said. JOC Contact Joseph Bonney at and follow him on Twitter: @JosephBonney. REPORT DOWNPLAYS COST OF LOW-SULFUR FUEL Carriers fear refiners may not be able to meet demand, escalating prices

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