GOVERNMENT WATCH
INTERNATIONAL | WASHINGTON | CUSTOMS | SECURITY | REGULATION
36 THE JOURNAL OF COMMERCE www.joc.com 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
joseph.bonney@ihsmarkit.com 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
