To scrap or not to scrap?

Retrofitting of scrubbers or other sulphur compliance options is a difficult decision for owners of older vessels Retrofitting of scrubbers or other sulphur compliance options is a difficult decision for owners of older vessels

Innovative technical and financial options are needed if owners of older ships are to avoid scrapping vessels in the light of onerous environmental regulations.

Owners of older vessels facing scrapping rather than bear the costs of environmental regulation have been thrown a lifeline by one of the world’s biggest shipbuilders. Hyundai Heavy Industries’ new Global Services division plans to offer ballast water management and SOx abatement system retrofits to older vessels built at Hyundai yards. Its intimate knowledge of its own vessels - and its leverage with system suppliers - are likely to translate into competitively priced installations. For ship owners, that may offer a new perspective on a very difficult decision.

The idea of stranded assets - in the case of shipping, vessels that are prematurely retired - is not a new one. But few could imagine a decade ago that environmental regulation might be responsible. In fact, today ship owners are facing the ‘scrap or invest’ dilemma on two fronts. From September, the IMO’s Ballast Water Management Convention will require ship owners to install a ballast water management system by 2022 at the latest, depending on their IOPP survey date (if the current timeframe stands). That could represent a system and installation investment of between US$262,500 and US$5.5 million for a Suezmax tanker with a maximum ballast pump rate of 2,500m3/h, according to a 2012 estimate by the American Bureau of Shipping. Annual operational costs could vary from US$17,186 to US$93,997 depending on the chosen system.

Those investments alone are enough for ship owners to begin thinking about early scrapping of older vessels. But the second environmental factor, the global 0.5% fuel sulphur cap from 2020, could be even more costly. In the words of Jakub Walenkiewicz, principal market analyst for DNV GL, speaking at a press briefing in Høvik last month: “The ballast water issue will have to be resolved one way or another over the next few years. Sulphur is a completely different animal. The choices you make now will ultimately set the competitiveness of your company beyond 2020.”

According to estimates by DNV GL, the cost of a sulphur scrubber for an Aframax tanker is around US$5 million, with a payback time of between 2.5 and 6 years depending on the price difference between the heavy fuel oil that can be burned with scrubbers and the low-sulphur oil needed otherwise. If operators look to use LNG, initial investment would be around US$11 million, with a payback period that could stretch well beyond ten years.

Faced with such costs and uncertainties, it is not surprising that owners are considering the drastic option of early scrapping for older vessels. Many will undoubtedly find their way to the breaker’s yards and innovative installation and financing options are sorely needed if owners of older vessels are to extend the life of their assets.

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