The Road To Compliance 

Economics vary from case to case

Distillates are widely available, but more expensive, low-sulfur residual fuels are price volatile but cheaper than distillates. Installing a scrubber allows to use cheaper high-sulfur fuel oil (HSFO) but requires high investment cost, and the use of Liquid Natural Gas (LNG) requires even higher upfront investments but is cleaner.

• Shipowners need to assess each option on a case by case basis, depending on residual vessel life, routes, usage, etc.

There is no one-size-fits-all solution

Given the different possible options and shipowners deciding on a case by case, the likely result will be a split across a variety of solutions and providers.

• By 2025, experts expect bunker fuel demand to be split between residual marine fuels (38%), Marine Gas Oil (24%), HSFO + Scrubber (22%), and LNG (8%)

A niche market

The shipping industry represents less than 5% of the global oil demand. However, big oil suppliers (incl. Shell, Exxon, BP, Total, Sinopec, etc.) have already declared compliant fuels to be available at all major ports.

• Marine vessels consume globally, 4-5mn barrels of oil per day.

Fuel prices

While it is difficult to predict future fuel prices, relative price levels, and spreads are stabilizing after some volatility caused by the implementation of the new policy and the COVID-19 related oil collapse.

• Marine Gas Oil (MGO) is the most expensive and High Sulfur Fuel Oil (HSFO) the cheapest.
• Very Light Sulfur Fuel Oil (VLSFO) did spike to $700/t in early 2020 before falling to almost $200/t in April. Rates seem to be stabilizing at around $300/t (exact price varies depending on port location).

Scrubbers

Scrubber costs vary between $2-$10mn depending on size (linked to engine range), type (open/close loop, hybrid), and design (inline/ multi-inlet tower).

• The two leading scrubber providers are Wärtsilä and Alfa Laval.

Spreads are key

Economics of each option depends on the price spread between the different fuels used and their availability. VLFO-HSFO spread (called “HI-5” spread) is used as a base to calculate the payback period of installing a scrubber.

• “HI-5” spread seems to stabilize at below $100 per ton (currently at around $80 at Singapore port), bringing the scrubber payback period at about two years (vs. less than five months at January's spread levels).
• VLSFO prices collapsed during the economic downturn while HSFO remained more stable, supported by the seasonal cooling demand in the Middle East.

How To Make Ships Even Cleaner 

Alternative fuels to reduce CO2 emissions

The next major regulatory constraint will be the limitation of CO2 emissions, which are to be cut by 50% by 2040 (from 2008 basis). To comply, more drastic changes will be required, opening the door to alternative fuels.

• CO2 emissions could potentially be reduced to levels below 20g/MJ (vs. current 80-90 g/MJ).
• Shipping fuels with the lowest carbon footprint include methanol (from black liquor), hydrogen (from water), biogas, and biodiesel (from clean sources).

Energy efficiency or how to consume less fuel

Beyond burning cleaner fuels, ships also need to enhance their energy efficiency. The IMO has set energy-efficiency measures requiring, by 2025, all new ships to be 30% more efficient than the ones built in 2014.

• Improving vessel’s energy efficiency comes by improving voyage planning, using waste heat recovery systems, regularly cleaning underwater parts & propeller, replacing propellers with more efficient ones, etc.

Going one step further

Looking one step ahead, some nascent technologies might find their way in the shipping industry, including batteries, fuel cells, or wind-assisted propulsion.

• Batteries have great potential for short-distance applications but are technically limited for long-range deep-sea shipping.
• Fuelcell powered ships start to appear with some pilot projects such as the “e4ships” or the hydrogen superyacht to be built by Feadship for Bill Gates.
• Wind-assisted propulsion can be used as an add-on to reduce fuel consumption (efficiency gain up to 20%) but used mainly on slow vessels.

Catalysts

• Increased international pressure. E.g., the OCED putting pressure on the IMO by recommending new ships to be 60% more efficient by 2030 or developing & adopting a CO2 pricing system for maritime fuels.
• Technology transfer. Increased R&D spending in battery or fuel cell technologies (as seen in China, Europe, and Japan) for road transport can benefit the shipping industry through technology transfer.
• New Amendment on HSFO. Starting from March the 1st 2020, ships that are not equipped with scrubbers aren’t allowed to carry HSFO in their fuel tanks.

Risks

• Falling Gas Prices. Falling marine gas oil & natural gas prices, driven notably by COVID-19, makes MGO/LNG more profitable and therefore threatens the viability of scrubbers or other alternative fuel options.
• Lack of control. Infractions to the new IMO2020 regulation are subject to penalties, which can vary significantly between countries. Since no standardized penalty system exists, enforcement could remain uneven around the world, and some ships might keep using illegal fuel.
• Lack of cash. The shipping industry is one of the most affected by COVID-19, and carrier companies might not have the required capital to initiate expensive infrastructure upgrades such as scrubber installation.