A mixed bag at MEPC 70
Clarity for ship owners, oil companes and technology providers as 2020 global sulphur cap confirmed
Clarity on costs and timeframes for environmental compliance is critical for ship owners. In that respect, the 70th sitting of the IMO’s Marine Environment Protection Committee last month was a mixed bag, writes The Motorship editor Gavin Lipsith.
The two most pressing issues going into the meeting were without doubt the date of the promised global sulphur cap and, with the Ballast Water Management Convention set to enter force on 8 September next year, a firm timeframe for installing systems.
The industry now has the clarity it needs on the sulphur cap, with a 1 January 2020 deadline by which compliance measures – fuels with less than 0.5% sulphur (be it diesel or an alternative such as LNG) or installed exhaust gas cleaning technology – must be in place. But this will be no easy choice, and is unlikely to be painless.
The agreement to the sulphur cap date at MEPC 70 followed the outcome of a fuel availability study, by a consortium led by CE Delft, which found that global shortages of compliant marine fuel are improbable. Looking at some of the assumptions of that study gives an indication of the choices facing ship owners.
The study anticipates (in its base case) that 3,800 ships will install scrubbers by 2020, enabling them to continue burning heavy fuel oil (HFO) – around 36 million tonnes of it in 2020. Fixed costs for scrubber installations are assumed to be between US$1.9 million (for an open-loop system installed on a newbuild vessel) and US$2.8 million (to retrofit a hybrid open/closed-loop unit), with variable costs of US$38/kW to US$58/kW. Operational costs include additional fuel to power the units (estimated at around 1% more fuel) as well as cleaning, maintenance and sludge removal – for a bulk carrier with installed power of 17MW, this could translate to operational costs of US$20,000 a year.
CE Delft concludes that for most ships with power of 20MW or greater, scrubbers could be a cost-efficient solution. Below 5MW, scrubbers only make sense (if at all) for newbuilds. But this cost efficiency depends heavily on the spread between HFO and low-sulphur fuels – a spread that is likely to shift dramatically as demand and production adjusts to the 2020 deadline.
Looking at LNG, for now the most prominent alternative fuel enabling sulphur compliance when the cap comes into force, CE Delft anticipates that by 2020 around 170 vessels (excluding gas carriers) will use LNG as a primary fuel. That equates to a conservative estimate of total demand for LNG bunker of 12 million tonnes (including gas carrier consumption), and considers the expected price spread of LNG against other compliance options, the installation cost of engines and storage (assumed at US$1.4 million per MW for newbuilds) and the development of gas bunkering infrastructure. Demand for LNG will account for 5.3% to 6% of global demand for marine fuel in 2020, the study projects.
Between them, users of scrubbers and LNG will account for around 15% of marine fuel oil demand in 2020. A further 39 million tonnes, representing just over 12% of demand, will be for fuel oil with a sulphur content of 0.1% or lower, required by ships (not using scrubbers or LNG) sailing in sulphur emission control areas. That leaves an estimated demand of 233 million tonnes for fuel with 0.1% to 0.5% sulphur, which will be the compliance method of choice for all but 4,000 vessels, per CE Delft’s base case.
MATCHING SUPPLY AND DEMAND
Those projections enabled the study authors to project that global refinery capacity would be able to accommodate demand for compliant fuel by 2020. But there will be regional challenges. As the study notes: “Interregional transport of marine fuel will be required. If supply and demand is to be balanced in all regions, the Middle East and in some cases Europe and Latin America may have to export fuel with a sulphur content of 0.5% or less to other regions.”
Increased transportation of bunker fuel will no doubt be welcomed by product tanker owners and operators, but does little to provide certainty on which ship owners can base their compliance choices. On top of projecting costs of heavy fuel oil and low-sulphur oils – particularly difficult given today’s market, but essential for assessing the cost effectiveness of alternative means of compliance - they must now also consider whether their bunkering patterns will need to change.
The study highlighted these potential risks, and at MEPC 70 the member states took their view. Ships now have three years to make their compliance choices. It might be a difficult choice, but the certainty required is now in place.
The same cannot yet be said of the Ballast Water Management Convention. The ‘in force’ date is now set, but arguably more important is when exactly ships must install their systems. At MEPC 69 earlier this year, the committee agreed to a draft resolution stating that most ships should install systems from the date of the first renewal of their International Oil Pollution Prevention (IOPP) certificate after the convention’s entry into force – a window of no more than five years. At last week’s meeting, the committee – which had hoped to finalise the installation timeframe under Regulation B-3 of the convention - considered proposed alternatives that would give ship owners a seven-year window.
The alternative proposal considers allowing vessels whose first IOPP renewal survey falls within two years after entry into force to comply only after their second IOPP renewal survey – a nod to concerns raised over both drydocking capacity and the availability of systems approved under the new G8 testing and approval guidelines (more on those below).
MEPC will consider the dates, which relate to Regulation B-3 of the BWM Convention, at its next meeting in mid-2017. It aims to decide on the implementation schedule before circulating amendments to this regulation, which can only happen once the convention is in force. So whether or not ship owners would welcome those extra two years to install systems, there will be no certainty on the timeframe until next year.
There were important steps though on the ballast water management front. The long review of G8 guidelines was concluded, with more robust testing and approval processes to be applied to systems from 28 October 2018. Further, those guidelines will be made mandatory, turned into a code, once the convention is force – hopefully reducing discrepancies between standards applied across flag states. The committee also asked the ballast water review group to begin work on guidance on contingency measures if BWM systems do not work properly, as well as formalising the process of data gathering and analysis in the ‘experience gathering phase’ that will follow entry into force (see pages 36-39 for more details).
MORE NOX ECAS
More ship owners will now be required to meet Tier III NOx emission limits after MEPC 70 established the next two NOx Emission Control Areas (NECAs) - the Baltic Sea and the North Sea. The two NECAs, which were the subject of applications seeking simultaneous designation, will be enforced from 1 January 2021. Ships with keels laid after that date will be required to meet dramatically reduced NOx emission limits, requiring either exhaust gas after treatment (selective catalytic reduction or exhaust gas recirculation) or use of LNG.
According to Dutch environmental assessment agency PBL, Tier III NOx compliance in the North Sea ECA alone will cost ship owners €282 million burden over nine years, with around 60% of the costs coming through capital expenditure – either installing LNG engines or exhaust gas after treatment such as selective catalytic reduction or exhaust gas recirculation. But the price is a small one compared to the anticipated reduction in human and environmental health impacts, estimated at up to €2 billion.
An intriguing point in the NECA discussions was how to prevent the phenomena witnessed before the introduction of the North American and Caribbean NECAs on 1 January 2016. Directly before that date, around 1,200 keels for new ships were laid, meaning those vessels did not need to comply with the new limits. The Baltic and North Sea delegates (represented at by delegates from Finland and the Netherlands respectively) said they had not considered whether this could be prevented for their designations.
THE CARBON QUESTION
While ship owners would have been looking to MEPC 70 for decisions on the sulphur cap and ballast water management issues, in the wake of the Paris Agreement on Climate Change there was arguably more focus from third parties on the IMO’s approach to decarbonisation. The MEPC has already established a three-stage approach to reducing carbon emissions: gathering data, analysing it and then making decisions on reduction targets or other measures.
At MEPC 70, the first stage of the process was formalised. On 1 March 2018, new MARPOL amendments will enter force implementing a mandatory data collection system on fuel consumption. Ships of 5,000 gross tonnage and above must collect consumption data for each type of fuel oil they use, as well as other data including proxies for transport work. These ships account for approximately 85% of CO2 emissions from international shipping.
But before the meeting it was clear that several parties – including several ship owners and flag states as well as environmental lobby groups – wanted more. A handful of submissions to the committee called for IMO to work towards establishing its ‘fair share’ of a global carbon reduction target. Many of those submissions argued that work towards establishing a target could be carried out in parallel to the three-step process, without pre-judging the outcome.
MEPC 70 approved a roadmap (2017 through to 2023) for developing a “Comprehensive IMO strategy on reduction of GHG emissions from ships”, which foresees an initial GHG strategy to be adopted in 2018. The roadmap contains activities, including further IMO GHG studies, with relevant timelines and provides for aligning this work with the three-step approach mentioned above.
After requests from some delegations, the committee also agreed to hold an intersessional working group meeting on reduction of GHG emissions from ships, the first of which will be held back-to-back with MEPC 71 in mid-2017.
Realistically, the MEPC then has committed to presenting a final strategy for reducing carbon emissions in 2023. Naturally this is a disappointment to many observers. But, given the dramatic impact that strategy may have on the industry – see our coverage on Lloyd’s Register’s decarbonisation perspectives opposite – it is a realistic timeframe.
At a glance: MEPC 70 outcomes
- Global sulphur cap implementation date decided (1 January 2020);
- Revised guidelines for approval of ballast water management systems adopted (28 October 2020);
- Mandatory data collection system for fuel oil consumption adopted (1 March 2018);
- Roadmap for reducing GHG emissions approved (initial reduction strategy 2018);
- North Sea and Baltic Sea emission control areas for NOx approved (1 January 2021);
- Energy Efficiency Design Index phase 2 (1 Jan 2020-31 Dec 2024) requirements maintained;
- Bunker delivery note amendments (high-sulphur fuels delivered to ships with SOx abatement) approved;
- Unified interpretations for SCRs under NOX Technical Code approved;
- Papua New Guinea Particularly Sensitive Sea Area (PSSA) designated;
- Revised oil pollution response manuals (contingency planning, response in ice/snow conditions) approved.