Bunker procurement strategy: comply with ECAs and remain competitive
Alok Sharma, head of marine at system development company Inatech, which specialises in fuel procurement strategy systems, explains how proper planning can reduce the financial pain of compliance with sulphur emissions regulations.
Rising fuel costs and the oversupply of freight capacity is creating a highly competitive market. With fuel costs making up 60% of the total cost of shipping, there is huge pressure to reduce the cost of bunkering.
Incoming emission control regulations are likely to cause even further increases in fuel costs. Operators have several options to ensure they comply with regulations. Such options are either expensive or difficult to implement. Many operators are failing to realise that an effective fuel procurement strategy can allow them to comply with ECA regulations, keep costs low and avoid other more expensive and disruptive options.
To comply with the 1 January 2015 0.1% sulphur limits in ECAs, and the future 0.5% global sulphur cap, ship owners and operators have several options.
LNG is a reliable and safe fuel option. However, the bunkering infrastructure is not yet widespread. It has not been used widely in industrial shipping, so crews need additional training. Fitting to existing ships is not a simple task. The move to LNG is likely to be slow.
Systems to clean exhaust gases, i.e. scrubbers, can be retrofitted, eliminating the need for new fuel infrastructure. Scrubbers are proven to efficiently remove SOx and particulates but are an expensive option requiring long-term maintenance. Their size makes them unsuitable for some ships.
Many ship owners and operators are opting to bunker with low sulphur distillates, which are widely available and already in use by many shipping companies.
However, low sulphur distillates, like gas oil and low sulphur diesel, pose further issues for operators. They are more expensive with 1% low sulphur 380cSt fuel averaging a $60 premium per ton and 0.1% low sulphur gas oil selling at a $300 premium in Rotterdam. Premiums in other ports are likely to be greater. Depending on the number of ECA ports in a voyage, the increase in total voyage cost can be anything between 8% and 30%.
Recent demand for distillates has led to a decline in the quality of fuel. Bunkered fuel is at risk of contamination by higher sulphur fuels, especially if the quantity of sulphur is very close to the limit. The fuel may be below the SOx limit when bunkered, but contamination in the tank and pipes can push the fuel over the limit, leading to fines. Most port authorities will, following IMO guidelines, allow no margin for error in sulphur emissions. The ship could thus be held liable for fines of up to $25,000 per day of non compliance
One way of mitigating ECA regulations in an easy and economical way is to implement an effective fuel procurement strategy. This can be as simple as a document listing reliable fuel suppliers or a commitment to get up to date market information before bunkering fuel.
The ideal fuel procurement strategy is made up of several key components.
1. Planning – if ship operators wait until they’ve run out of fuel before putting together their bunkering plan, they have little option but to buy fuel from the nearest port. This could be expensive, due to the wide variation in fuel prices, often hundreds of dollars per tonne.
2. Negotiation – bartering for a better deal is key to keeping fuel costs down. Forewarned is forearmed so having up to date information about the bunkering market puts buyers in a better position to negotiate with fuel traders.
3. Long term outlook – should buyers be looking at spot purchases or fixed term contracts? If the price of fuel is likely to drop, buyers will not want to be tied in to a long contract. If the price is looking to rise, what is the optimum length of contract? Thinking ahead about fuel prices will save money in the long term.
4. Claims – off-spec fuel will become even more of a problem for fuel buyers when emissions regulations are tightened. Buyers will need to compile lab reports and fuel delivery notes to help claims. It’s important to know as much as possible about the fuel sellers beforehand. Are they trustworthy? What is their record for selling high quality fuel? Having this information to hand will ensure you aren’t caught out and forced to make an expensive claim later on.
5. Supplier mix – Tracking suppliers on key performance KPIs allows buyers to be better informed about local market conditions. By a rating system for suppliers, buyers can ensure that they deal with good suppliers and minimise disputes.
Technology makes a fuel procurement strategy easier than ever. Software can help with all the elements. Up to date global market information helps buyers with planning, negotiation and long-term outlook. Options can make available real time information about credit lines, inventory and finances.
Such ‘dashboards’ are great for allowing potential fuel buyers to view market and financial information. In addition, users can customise their strategy by recording information about price, reliability and quality of a supplier, helping to make informed decisions. Fuel procurement software is able to keep track of incoming fuel test reports and raise a claim if the results show off-spec fuel, letting the buyer focus on other operations.
One large shipping and trading organisation with more than 500 vessels has effectively and progressively reduced bunkering costs an average of 4%-5% by ensuring that its buyers employ a consistent process when contracting and procuring fuel globally. The system ensures that the buyers have the correct information to be able to plan, execute and monitor bunker deals. By systemising the energy supply chain it makes buyers more proactive to changing market conditions. Analysis enabled by technology helps constantly refine strategies and tactics, giving a competitive advantage in tough market conditions.
With months until the ECA sulphur emissions limit is implemented, ship operators are running out of time to decide which route they want to take. Increasing numbers of companies are turning to technology. The cloud is making it possible to access financial information and market data on the move. Technology can help with planning, negotiation, strategy and compliance, creating a well-defined fuel procurement strategy ready for 2015.
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