Owner indecision puts compliance at risk
Scrubber retrofit specialist Goltens has noted a reticence to invest in sulphur compliance that could cost ship owners dearly, writes Charlie Bartlett.
The ongoing debacle with the ballast water management convention, now delayed even further after 14 years of haggling at the IMO, might have convinced some ship owners that the implementation of the 0.5% global sulphur cap from 1 January 2020 might also be postponed.
Perhaps this is one reason for shipping’s apparent lack of initiative in gearing up for the cap. At the Dubai branch of Goltens – one company whose orderbook ought to be full of scrubber retrofits and engine modifications – Green Technology Solutions manager Matthew Plumtree indicates that little action has been taken.
“With ballast water you have a lead time and some wiggle room based on the IOPP [International Oil Pollution Prevention certificate] renewal date – whereas for sulphur, it’s a drop-dead on 31 December 2019. From a scrubber point of view, owners are taking their time to come up with a decision. There’s an expectation, still, that implementation is going to be delayed – even though at the latest Pollution Prevention and Response sub-committee meeting IMO have said they’re not going to allow any delay.”
With the deadline as it stands now less than two years away, a recent study by Skandinaviska Enskilda Banken, a Swedish bank, anticipates that as few as 2,000 vessels will be fitted with scrubbers by the 2020 deadline. The bank also expects the price of HFO to spiral downwards thanks to the dearth of vessels legally allowed to burn it, creating massive value for anyone who has a scrubber fitted.
However, the truth is that no-one knows what will happen to fuel prices. Other believe that the price of bunkers will rise for low sulphur heavy fuel oil because it will require more refining; and for conventional heavy fuel oil because bunker suppliers will have a captive market amongst those ship operators who have invested in scrubber technology.
But Plumtree still expects the inaction to continue, as owners wait until after 2020 to make a decision on scrubbers, taking into account the financial implications of this fuel cost differential in order to calculate the payback time. “It’s purely down to cost and the state of the market at the moment,” says Plumtree. “Ship owners don’t have large volumes of cash in their pockets to spend. Total cost of a project, including engineering and the scrubber itself, is around US$3 million.”
Owners can move to an ultra-low sulphur fuel oil option, although Plumtree notes that this option will also involve some retrofitting in most vessels. These vessels could opt for scrubbers once owners see how the difference in price between high-sulphur HFO and ULSFO evolves.
While refiners have assured the maritime industry that the necessary low-sulphur fuels will be available by the 2020 deadline, there is still a likelihood that the price difference between low-sulphur fuels and conventional HFO will be exacerbated, in part, by supply shortages in certain geographical locations. Recent projections suggest that the cost differential between HFO and low-sulphur HFO could be more than US$200 per tonne when the time comes. The question is, how long can owners afford to wait?
“For a typical scrubber project, from the moment you start, do a scan, and come up with a concept, get this reviewed and approved – you’re looking at a minimum project duration of 11 months. That’s eight months delivery on the scrubbers, and around three months of engineering. So if customers don’t make a decision now they’re not going to be able to install a scrubber in time,” says Plumtree.
Owners might not feel they have the spare cash to spend on scrubbers now, but if they are looking to test the market first, they will most likely be locking themselves into almost a year of high-priced fuel before eventually forking out. And by this point, they will be competing over a limited number of repair yard slots. On top of this, OEMs and repair yards will be at liberty to charge whatever the market will bear for the equipment and retrofit work.
Pravin Kirolikar, managing director of Goltens’ Dubai branch, argues that making the investment in a scrubber now is exactly what owners ought to be doing. “An owner who goes for a scrubber solution now mitigates all risk,” he says.
As well as availability in general, Kirolikar tells The Motorship, there are no guarantees that the low-sulphur fuels will be easily sourced at the global destinations where they are needed in order to support the industry. “The timeframe for the increase in production is two years. Many oil companies are not yet showing that they will have 0.5% available. Owners will have to find a solution.”
Seeking clarity on sulphur timeframe
Not far from Goltens’ Dubai office is the headquarters of the multimodal logistics firm Tristar, which in mid-2016 acquired Abu Dhabi-based chemical tanker operator, Emirates Ship Investment Company (EShips). Shailesh Bildikar, the company’s chief operating officer, is playing a waiting game when it comes to decisions regarding IMOs global sulphur cap.
“We still don’t know what the fines are, and the fines will be defined by the port states,” says Bildikar. “Most of our vessels have been drydocked before 2017 so they won’t need another drydocking until after 2021. So we don’t see ourselves taking them off-hire to go and have a scrubber fitted.”
Greater clarity is need from IMO before EShips will take the plunge. “There are still discussions going on about allowing HFO to be carried on board. So there is still not that clarity there yet. I think at the end of 2018 there will be consensus. There is also the discussion about closed or open-loop scrubbers and so on. So, we are looking for guidance from the IMO.”
Bildikar, like many in the industry, is holding tight for what he expects to be a patchy implementation. “We expect regional compliance. It depends where I want to trade but if I’m going into SECA areas I will already have to be compliant, so it isn’t a worry. In the US and Europe, we’ll probably see 80-90% compliance, Asia a bit lower, maybe 75%.”
Citing a Wood-Mackenzie report which came out in October last year, Bildikar draws comparisons to the ballast water management convention, and intimates that implementation of the sulphur cap is unlikely to go as planned. The capacity, both in the sense of fuel availability of fuel and drydock space, he argues, simply is not there.
“The report says that IMO will be phasing the implementation of sulphur compliance. They might say ‘the next drydock’. I do not think IMO will cut off all ships and demand they go to a yard straight away. I read somewhere there is capacity for around 700 installations a year – so when we’re talking about 15,000 ships, it’s impossible.”
While it is not rushing to fit scrubbers, EShips still has a worst-case scenario strategy for dealing with the fluctuations in bunker costs, should the cap enter force, as planned, in January 2020. “Because of the increase in the number of ships using MGO, the cost of bunkers will go up. So, you’re in a similar situation as when crude cost $150 a barrel. If charter rates don’t pick up, we will start slow steaming. Once that happens, the capacity levels off, and the rates climb. So, in the worst-case scenario that’s what we’ll see.
“It is true that we are not geared for [0.5% sulphur]. But that’s not so much of a worry because unlike with ballast water there is a payback. You will install a scrubber only if it makes sense for you, and that payback period might be two years, or five years – the bigger the ship the faster the payback.”
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