Bunker industry prepares for radical change
A diverse fuel future, a potentially turbulent transition to the 2020 sulphur cap and the perennial question of business ethics are prime concerns for the 'voice of the global bunker supply chain, says Justin Murphy, CEO of the INternational Bunker Industry Association. He talks to Stevie Knight.
A veteran of the shipping industry (previously CEO of Acuity and Brightoil Shipping), he sees “radical changes” to the bunkering industry landscape ahead and is overhauling the role of the association. Firstly he has been active in tackling the problematic, longstanding issue of the industry’s few rotten apples with a diverse ethics working group, a code of conduct to be published this year and a compliance-based certification scheme.
However, he’s also preparing IBIA for a role in a future where a broad spectrum of bunkering ‘fuels’ (including even batteries and shore power) will mean knowledge is at a premium. And of course, he has a view on the challenges of the global sulphur cap, now less than two years away.
Firstly, you say the figures just don’t support the belief that a significant proportion of ships will be meeting the 2020 sulphur cap with scrubbers or LNG?
You could get the impression from conferences and journals that LNG and scrubbers are the predominant focus for the industry. But the global fleet is 70,000 to 80,000 vessels and in terms of actual figures, there’s still only 110 LNG-powered vessels that aren’t gas carriers. When it comes to vessels fitted with scrubbers it’s less clear, but I’d say there will be around 700 ships in 2020; that’s only 1% of the total. So, 98% of people will have chosen either gas oil or distillate blends for their fuel strategy come 2020.
Will there be enough to go round?
To put it in perspective, the marine market today accounts for just 4% of total distillate sales. Although shipping is an interesting segment, it is not the energy companies’ major preoccupation. So while I’m sure that the marine sales teams will be saying lots of nice things to their customers, those responsible for the whole refining processes’ ‘profit and loss’ will be looking to see if other markets are buying at premium, and that’s where the output will go.
But there could be an issue with the supply itself. It’s often thought if there’s an upsurge in demand for distillates, then refineries would just start cranking up to meet it. However, recently I had an interesting conversation with a refinery specialist who explained output is an optimisation game and refineries are looking for that optimum every day of the year within extremely tight margins. So suggesting that there would be slack capacity is quite misleading - that just won’t be the case. In short, while there may be a little flexibility, don’t expect whatever you want to turn up whenever or wherever you need it.
In fact I see MGO trading at a premium and a lot of that will be absorbed into other, distillate blends. These blends don’t generally exist at the moment, so people are preparing for a new type of fuel they don’t have any experience of, and that is also causing some anxieties amongst the ship owners.
There’s an added problem. While owners are keen to hear clear messages about what’s going to be available, the sellers of those products, both suppliers and terminals, are also having to make a lot of decisions about which fuel grades to stock. So they are equally keen to hear the intention of the ship owners. It makes for a circular argument.
Can’t the oil suppliers help by signalling their readiness with one or other type of fuel?
You hear calls from some quarters, asking why can’t suppliers and energy companies make a co-ordinated effort and come up with a plan but the fact is they would be breaking the law if there was some suggestion they were colluding – so they deliberately don’t compare notes as they know they’d quickly find themselves at the sharp end of a court case.
Likewise, commercial sensitivity means they won’t disclose what their individual strategies are as it gives someone else a chance to copy or outflank them. And they also don’t want to commit too early because though they’ll be making some educated guesses and, inevitably, things will change... so they’ll want to be able to evolve their strategies. The market is bound to take some time to settle.
Singapore tightened up its bunkering practices around a year ago. How has that affected the business there?
Following Singapore’s Maritime and Port Authority’s mandatory introduction of mass flow meters on all bunkering barges, some companies - like Panoil, Transocean and Universal Energy - either had their licences revoked or not renewed... Frankly, when it started at the beginning of last year, a number of people might not have thought it would reach those levels. The MPA has been quite brave.
However, it has to be said, Singapore has been very sensible in the way the process has been managed, the MPA gave people time to adjust, sanctioning operators by awarding violation points rather than going in hard. During the first six or seven months there were a number of transgressions - some accidental, some deliberate, some based on lack of understanding.
But by the time we got to July and August, several companies had accumulated a significant number of points and were shown to be serial violators of the law and lost their right to trade.
Unfortunately there’s a ripple effect and some innocent third parties also felt the impact as a result of credit obligations not being met.
So, there have been casualties. But although the effects from the first shock will continue for a while, in the next six to 12 months things should settle down. I believe the Singapore authorities were also aware of the potential outcomes so they won’t have blindly followed it through – they will have thought about it and decided it was still worthwhile.
Certainly as the MPA continues to do a good job, the amount and frequency of transgressions will reduce because the warning signs for not doing the right thing are now daubed in bright red paint on the wall. People have seen their contemporaries go under.
Overall, there’s been a slight reduction of licensed suppliers – some have cut back operations voluntarily, though this might also be for economic or strategic reasons. What we can see is that margins have been affected; it’s a competitive business after all. But Singapore is the largest bunkering port in the world, it still has growing volumes and ship owners now appreciate the fact that previous questions over volume integrity have been addressed: there’s a far greater degree of confidence in delivery and there’s a rising trust in the metering system.
Will we now see more mass flow meters installed at other ports?
Firstly, you have to understand mass flow meters alone aren’t the answer – after all, a number of other ports already have them in place. What the MPA has managed so well is a combination of three elements: firstly there’s the technology – the meters themselves. Then there’s the regulation governing the MFM-equipped barges - in Singapore it’s called TR48 and you’d need a local equivalent. But there’s also the willingness for the legitimate enforcement of compliance. You can’t do it with one part missing: you need all three elements in place for success.
However, looking at it from IBIA’s vantage point, bunkering suppliers, port authorities and ship owners are intrigued by Singapore’s experience and yes, they are definitely looking to benefit from it themselves.
Where and when this will be implemented next it’s difficult to predict, but given the number of the conversations IBIA is having with ports both large and small in a variety of locations around the world, I’d say it’s likely that over the next two or three years some of them will follow suit.
When it comes to new concepts, I’d say that as a rule the shipping industry isn’t conservative without due reason. Digital and other technology is embraced where it offers a proven solution – for example in the bunker segment we have procurement and trading platforms, delivery systems like flow meters and so on, but with all of these things, it has to be fit for purpose, scalable, economically viable - and proven. Businesses quite reasonably ask, ‘why should I be the one to take the risk when I can stand back and learn from other’s mistakes?
However, there are changes ahead...
In the longer term, say over the next 20 or 30 years, the diversity of propulsion is going to rise, maybe not at the dynamic rate suggested in the press, but it will grow. For example, Scandinavia is often cited as the pioneer in LNG, batteries and so on, but it’s not just Scandinavia these days, there are now LNG powered vessels on the Yangtze in China.
All this means the bunkering industry will become more diverse – with a broader set of fuels - and at the same time more niche – as some of those fuels settle into particular geographical locations.
This, along with the squeeze on margins, will have an effect in the long run: I believe we might see bigger global players taking a large share of the market, and at the same time, smaller niche local suppliers enjoying healthy margins.
But the generalists, that aren’t large players or specialists, they will find the sustainability of their business a challenge. Obviously we’ll have to wait and see...though it appears increasingly likely.
You are already looking at what effect these shifts are going to have on IBIA?
Given the likelihood of the niche ‘fuels’ taking a larger slice of the market, a trade body like IBIA can play an important role. Yes, we will have to change and we are looking at the groundwork right now: we will probably need working groups with a special focus on LNG, methanol, LPG, hydrogen, hybrid, batteries, even wind – but it will make a broad spectrum of knowledge available to our members.
Finally, what's your view on the ethical standing of the bunkering industry?
If I take a big picture view, the overwhelming majority of the bunkering industry is doing the right thing and are good corporate citizens. However, many express frustration that a handful are engaging in practices that don’t help the collective cause.
So IBIA has taken it on itself to lead the debate and created a geographically diverse ethics working group from every facet of the bunker industry. There are some big, long term ambitions but we are starting with a grounded, practical approach and so there’s a code of ethics to be published later this year and a compliance-based certification scheme on the way.
But everything has to cater from the very smallest, two-person company to those employing over 100,000 people. The energy majors and bigger, listed ship owners – which will probably have compliance and risk management departments already - are in the minority of our membership. The majority aren’t anything like this size – but still, a lot of people have told us they want to demonstrate they are operating to higher standards, that they are ethically compliant and doing much more than suggested by negative headlines in the press.
I call it the ‘untold story’ of the bunker industry. This isn’t a PR exercise, we are not looking to whitewash the truth but rather we want to provide a balanced perspective that reflects the behaviour of the majority of our members. Their voice needs to be heard.
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