In January 2020 the shipping industry, and those supplying its fuel, face one of the biggest challenges in decades. How is the sector preparing for the next adaptation of the MARPOL Convention?
Since the mid 2000s, the shipping industry has been required to meet standards on air pollution. However, the sector and its supply chain are facing an uncertain future as the International Maritime Organization (IMO) prepares to strengthen regulations at the end of the year, and the “stakes are high for operators,” says Duygu Doğan, senior associate at Kılınç Law & Consulting.
As of 2005 ship operators have had to control the level of sulphur oxides (SOx) their fleets produce under Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL Convention). SOx, a biproduct of burning the unrefined heavy bunker fuel, is known to be harmful to people and the planet but the damage it causes can be catastrophic, as Doğan explains: “Sulphur oxides have been linked with respiratory problems in humans, and acid rain.”
According to HSBC Oil and Gas Research, a single container ship burning 80 tonnes of fuel per day emits the same amount of sulphur oxides as 46 million diesel cars. A Finnish study published in 2016 warned their adverse health effects could result in more than 570,000 premature deaths worldwide between 2020-25. With statistics like that, it is no surprise steps are being taken to cut levels of emissions even further.
In 2008 the IMO strengthened its global emissions limits and introduced Sulphur Emissions Control Areas (ECAS), where even more robust requirements applied. The global limit was set at 3.5% m/m (mass by mass) and just 0.1% in ECAS, which covers coastal areas of the Baltic Sea and North Sea, Canada and the US, including Puerto Rico and the US Virgin Islands.
On 1 January 2020 those limits will be cut again: “The IMO’s new regulations require the sulphur content of ships’ fuel to be cut dramatically, from 3.5% to 0.5%,” explains Doğan. “Alternatively, the regulations allow ship operators to fit scrubbers, which spray alkaline water over exhaust emissions, capturing sulphur oxides.”
The challenge these regulations pose the industry – comprising more than 94,000 vessels, according to the United Nations – are significant, with concerns that many are not ready: “Ship operators are racing to achieve compliance by the end of the year, but the shift to low sulphur emissions is proving costly,” says Doğan. “Low sulphur fuels cost more, and the installation of scrubbers typically costs between $5m and $10m per ship.”
Meeting IMO regulations is costly
According to a 2018 survey by maritime consultants Drewry, 66% of ship operators are opting for low sulphur fuels; however, that comes at a price too. “Low sulphur fuel costs around €250 more per tonne than standard heavy fuel oil,” Doğan says, “and some fear that when the new regulations kick in demand will skyrocket, with analysts predicting the price difference could rise to nearer $400.”
Another option is liquified natural gas (LNG), with one in four ship operators (24%) considering making LNG-ready ship purchases according to Drewry.
“LNG certainly does seem to be becoming increasingly popular when new ships are being ordered,” remarks Doğan. Some are converting their existing fleet, such as Hapag-Lloyd which has announced plans to convert 17 vessels, costing in the region of $25m per vessel. Maersk has said it is also looking at converting existing ships.
Non-compliance is not an option
With uncertainty over fuel prices – but the expectation they will only rise – the shipping industry faces some significant challenges. According to Wood MacKenzie, it could cost the sector up to as $60bn a year, something Doğan claims will “inevitably result in increased shipping costs and, in turn, inflate the cost of shipped goods and raw materials”.
It’s fair to say the global shipping industry is in a state of flux and not likely to change any time soon. Although the IMO regulations were announced more than three years ago, many shipping companies remain undecided on how best to meet them. But meet them they must.
“The owners of a non-compliant vessel could face fines, or might even have their vessel declared unseaworthy which would mean it could not be put to sea until it becomes compliant. There are also risks that insurance policies could be invalidated,” Doğan warns.
Doğan believes the new regulations will result in a significant reduction in global sulphur emissions, benefiting human health and the planet. “This won’t happen overnight,” however, says George. “Refiners, ship owners, bunkering companies and traders will all play a key role in delivering this clean energy transition.”
Futureproofing the shipping industry
For ship operators already satisfied they are compliant, there is no time for complacency. “An interesting knock-on effect of these regulations is that their global scope provides a potent example of the power and reach of the IMO as an international regulator,” continues Doğan.
“Many in the shipping industry believe that their eventual success may encourage the IMO to implement further environmental regulation. Ship operators need to anticipate future regulatory trends before they happen, and choose vessels that are easy to adapt when the regulatory environment changes,” she concludes.
Duygu Doğan, Partner
Kılınç Law & Consulting based in Istanbul, Turkey, which specialises in energy law. The firm is expert at handling applications to the country’s public authorities, such as MENR and EMRA, as well as preparing agreements for project finance.