Low sulphur fuel oil: With new rule 14 months away, ship owners all at sea

Indian ship owners, like their global peers, are all at sea over a new global rule on using low sulphur fuel oil on board ships, which will come into force in 14 months to check sulphur emissions.

Beginning January 1, 2020, ships must use fuel oil on board with a sulphur content of not more than 0.5 per cent m/m (mass/mass), sharply lower than the current global sulphur cap of 3.5 per cent m/m, according to rules framed by the International Maritime Organization (IMO). Ships can meet the requirement by using low-sulphur compliant fuel oil or continue to use high sulphur fuel oil by fitting exhaust gas cleaning systems or scrubbers.

“We are watching everyone and preparing in the background,” says Anoop Kumar Sharma, Chairman and Managing Director at Shipping Corporation of India Ltd.

“We have an option of installing scrubbers on big vessels such as very large crude carriers and Suezmaxes,” he said on the disruption expected in the way the global shipping industry operates.

Ship fuel (bunker) accounts for about 5 per cent of overall oil demand, but contributes to some 25 per cent of the sulphur emissions from oil.

The Great Eastern Shipping Co Ltd, India’s biggest private ocean carrier, is also evaluating the techno-feasibility of putting scrubbers on a few of its ships.

Till a year ago, fleet owners were not keen on installing scrubbers at all and were planning to use low sulphur fuel oil. That thinking has given way to a realisation that it made “sense to spend money and install scrubbers on modern and larger vessels,” an industry source said.

The rethink was prompted by the widening price differential between the low and the high sulphur fuel, which is now $300 per tonne.

A big saving
The saving is huge considering that oil super tankers and Suezmaxes burn as much as 50 tonnes of fuel oil a day. Installing a scrubber is estimated to cost some $3-5 million per ship. Fleet owners reckon that the investment in scrubbers can be recouped in 18 months.

“Still, it is quite a fluid situation,” says a shipping industry executive. “There is lot of uncertainty between now and January 1, 2020,” he said.

“Nobody knows for sure what will be the price difference between the low and high sulphur fuel oil. How do you predict the gap, it’s such a big expense?” says Sharma at SCI.

Out of the total bunker oil demand estimate of about 4 million barrels per day (bpd), around 15 per cent is already the low sulphur fuel usage. By 2020, it is estimated that the demand for low sulphur fuel may go up to about 2.5 mn bpd, a jump of over 60 per cent from the current 15 per cent, posing a challenge to refiners to meet the demand.

“If oil refiners think that low sulphur fuel oil will fetch them higher prices and make more low sulphur fuel, will there be enough high sulphur fuel available to cater to demand from those who have installed scrubbers,” he wondered.

Another concern relates to whether or not the current price differential will remain. “If it widens, it is great; but if it narrows, my payback period on putting scrubbers increases,” he said.

“Ship owners are waiting to see what the refiners are doing; the refiners are waiting to see what the fleet owners are doing,” the industry executive said.