The International Maritime Organisation’s new regulations on low-sulphur fuel are changing how global shipping is powered. Yet these regulations appear to be just the vanguard of a coming wave of environmental regulation that may see the world’s shipping fleet transformed in the decades ahead. In the race for cleaner, more efficient vessels, renewable fuel options such as biofuels are entering the fray, even as engineers are coming up with radical new designs for next-generation wind-assisted cargo vessels.
The environmental case for low-sulphur fuel is clear: Just 15 large container ships can produce as much sulphur oxide as all the cars in the world. Shipping has long been one of the world’s most polluting industries. However, from 1 January 2020, strict new limits will be imposed on shipping’s sulphur oxide emissions.
The International Maritime Organisation (IMO) will impose new regulations requiring the sulphur content of ships’ fuel to be cut dramatically from 3.5% to 0.5%. Sulphur oxides have been linked with respiratory problems in humans, and acid rain. The new regulations are a triumph in terms of protecting human health and the environment. However, analysts Wood MacKenzie estimate that these measures could cost the shipping industry US$60 billion annually.
The new scope and reach of the new regulations provide a potent example of the power and reach of the IMO as an international regulator. Many in the shipping industry believe that this is just the beginning of a wave of environmental regulation which will impact the shipping sector. As a result, large shipping companies are even anticipating likely future trends in regulation when purchasing new ships, or upgrading their fleet’s powerplants. In 2018 the IMO announced a plan to lower shopping’s greenhouse gas emissions to half of the 2008 levels by 2050. This makes future regulation as to greenhouse gas emissions highly likely. However, for the moment, it is the impending requirement to reduce sulphur emissions which is exercising ship operators around the world.
Shipping is responsible for 2 per cent of global carbon emissions, but 13 per cent of the world’s sulphur oxide emissions. HSBC estimates that a single container ship burning 80 tonnes of fuel per day emits the same amount of sulphur oxides as 46 million diesel cars. This is because cars use highly refined fuel, where most of the sulphur has been removed, whereas ships use relatively unrefined heavy fuel oils.
The shift to low sulphur emissions is causing significant costs and complications for ship operators who are racing to achieve compliance by the end of the year. The stakes are high. The owners of a non-compliant vessel could face fines, or might even have their vessel declared unseaworthy, which would mean that it could not put to sea until it is compliant. There are also risks that insurance could be invalidated by non-compliance.
The IMO’s sulphur cap was announced in October 2016. Since then, ship operators worldwide have had to carefully consider how to best adapt their fleets. The main options being considered are to use more-expensive low sulphur fuel, to convert ships to liquefied natural gas (LNG) or to install abatement technology, which captures sulphur oxide emissions.
Abatement technology involves fitting “scrubbers” to existing ships, which remove sulphur from the exhaust fumes. These systems spray alkaline water over exhaust emissions, capturing sulphur oxides. These ships can then continue to burn cheaper high-sulphur heavy fuel oils. While abatement systems are costly, low-sulphur fuel costs around €250 more per ton than standard heavy fuel oil. However, when demand for low sulphur fuel rockets early next year, some analysts predict that this price differential could rise to $380 per ton.
Should a large container ship burns 300 tons per day, and low sulphur fuel costs $380 per ton more than standard fuel, a scrubber will save $1.14 million on fuel – in a single day. Such phenomenal savings suggest the scrubber option could make real economic sense. However, uncertainty around future fuel prices and future regulation makes these benefits difficult to predict.
A 2018 survey by maritime consultants Drewry found that 66% of ship owners were planning to use more expensive low sulphur fuels instead of fitting scrubbers. The main reasons cited were the €5 to 10 million cost to fit a scrubber, and fears that future environmental regulations may restrict or ban their use. Another survey by Swedish financial services firm SEB also found that just 2,000 vessels out of a total merchant fleet of 60,000 will have scrubbers fitted by the 2020 deadline.
LNG is becoming increasingly popular for new-build ships, however the network to fuel LNG ships remains limited. Maersk has confirmed that it is looking at converting ships to LNG. Hapag-Lloyd has announced plans to convert 17 vessels to LNG at a cost of US$20 to 25 million per vessel. Given such high conversion costs, it is understandable that many companies are reluctant to make the switch to gas. However, LNG is increasingly popular when new ships are being ordered. The Drewry survey found that 24% of owners would consider purchasing new LNG-ready ships. However, ship operators’ clearly favoured method to achieve compliance is to simply purchasing low-sulphur fuel.
Another way to achieve compliance is to mix cheaper heavy oil fuels with existing 0.1% low sulphur fuel oils. 0.1% sulphur fuels have been widely available on the market since 1 January 2015, when 0.1% became the required sulphur level for ships in the existing Sulphur Oxide Emission Control Areas (SECAs).
The existence of these areas means that ships entering the English Channel, or approaching the US coasts, for example, must switch over to fuel with less than 0.1% sulphur content. Fuel that meets the 0.1% requirements of the SECAs typically costs twice the price of standard fuel.
Thanks to SECAs, ship operators have gained some useful experience in powering vessels with low sulphur oil. However, there remains an element of uncertainty as to what technical and engineering challenges may emerge as the world’s entire shipping fleet switches over to low sulphur fuel on a permanent basis.
It is clear that further environmental regulations loom on the horizon. In 2018, the IMO adopted an ambitious target of lowering shipping’s greenhouse gas emissions to half of its 2008 levels by 2050. LNG offers a CO2 reduction of around 20% when compared with oil. However, this apparent reduction is offset by the fact that another greenhouse gas, methane, is emitted when LNG is produced. Low sulphur fuel offers no significant CO2 reduction over standard fuel.
Biofuels provide a promising option in terms of CO2 emissions, as they are capable of providing CO2 emission reductions of up to 90%. Biofuels can be derived from the waste from agriculture or forestry, or from dedicated crops. Existing engines can be converted to run on biofuels. However, biofuels remain costly, and the infrastructure and technology is not yet sufficiently developed to be widely adopted.
Another low-carbon option is to return – in part – to the traditional method of powering ships: wind. Plans are already afoot to build a four-masted cargo ship, powered by a combination of diesel electric engines and sails. Engineers are exploring a variety of options to power ships with wind, including sails, kites and rotors. Wind is expected to once again play a significant role in powering the ships of the future.
The sulphur regulations that come into effect on 1st January 2020 will affect all ships regardless of size. In light of the IMO’s 2050 CO2 reduction target, it’s likely that future regulations will focus increasingly on CO2 reductions. This will lead to further challenges for ship operators, but may also lead also to a new era in ship design.
The global switch to low sulphur fuel offers a lesson for the industry: Ship operators need to anticipate future regulatory trends before they happen, and choose vessels that are easy to adapt when the regulatory environment shifts.
A cargo ship can have a lifespan of 40 years or more. This means that is it perfectly reasonable to expect that a ship commissioned today will still be plying the oceans in 2060 – ten years after the IMO’s target to halve CO2 emissions will have elapsed. Given the pace of technological development, we cannot imagine how such ships will be powered. The adoption of modular ship design would mean means that future ships could be easily adapted and retrofitted with new powerplants or even different superstructures.
Indeed, the future removal of bridges and crew accommodation to make space for cargo is a very real possibility, if automated shipping becomes as commonplace as some predict. Since self-driving cars are already on American streets in experimental form, the reality of largely or completely autonomous ships may well be upon us sooner than we expect.
Environmental regulations are often viewed as a cost for ship operators. Yet there is a prize for those ship operators who innovatively adopt new designs, new powerplants and new technology such as automation. They may be the first to benefit from lower fuel costs and lower crew costs, thereby making their fleet more competitive – and more profitable.
Duygu Doğan, Partner
This article is published in Maritime Risk International