Source: International Maritime Organization.
From January 1, 2020, the International Maritime Organization (IMO) will limit the sulfur in fuel oil used on board ships operating outside designated emission control areas to 0.50% m/m (mass by mass), from 3.50% m/m. Of total global air emissions, shipping accounts for 9 percent of the sulfur oxides.
The IMO 2020 goes into effect January 1, 2020. However, shipping lines cannot wait until that date to become compliant. The change-over from one fuel type to another is complicated, and the IMO has prepared guidance for creating a Ship Implementation Plan (SIP). It's not just a matter of pulling up to a pump on New Year's Eve to load up compliant fuel.
The IMO recommends that the SIP cover the following areas:
1. Risk assessment and mitigation plan (impact of new fuels).
2. Fuel oil system modifications and tank cleaning (if needed).
3. Fuel oil capacity and segregation capability.
4. Procurement of compliant fuel.
5. Fuel oil changeover plan (conventional residual fuel oils to 0.50% sulfur compliant fuel oil).
6. Documentation and reporting.
Tank cleaning and potential inconsistencies in low sulfur bunker fuel blends necessitated the changeover process to begin in 2019. And so refiners will begin realizing the benefits of IMO 2020 in the third and fourth quarters of 2019.
The second item, tank cleaning, could take six months or more. The 3.5% bunker fuel that ships typically use tends to stick to the sides of fuel tanks and pipelines forming layers of sludge and sediments.
The layers of sludge may contaminate the compliant fuel, rendering its sulfur level above the 0.5% requirement. The storage system must be completely cleaned out, either manually or with chemical additives.
The tanks and system can be cleaned manually in dry-docking. Compliant fuels can then be loaded and the fuel can be expected to be complaint right away.
The cleaning can be done while the ship is in service. The time required depends on how many crew work on it. The residue has to be retained on board to be disposed of in shore reception facilities.
Or chemical additives can be used to clean the tanks and system over a few bunker cycles. This could take months before compliant fuel could be added. For example, Hoegh Autoliners began cleaning its vessels' bunker tanks in preparation for the switch to low sulfur fuels eight months ahead of the IMO 2020 start date.
Optimal marine engine operation depends not only on sulfur content but also on secondary fuel characteristics, such as viscosity and stability, and the co-mingling of fuels from different providers on vessels is inevitable.
Refiners and regional marketers have begun to offer new blends that meet the IMO’s requirements, but there are no standards. Potentially critical inconsistencies may emerge among fuels produced by different suppliers.
This is another reason why some shipping companies have indicated that they plan to comply with the mandate as early as the beginning of the fourth quarter in 2019.
Some shipping companies might opt for marine diesel, an established fuel that poses no compatibility risk, for their fuel needs. But this will be the most expensive option among the oil-derived products.
In Valero Energy Corp.'s (NYSE:VLO) Q2 2019 Earnings Conference Call July 25, 2019, the company discussed seeing people start to turn tanks already. “That's one of the reasons you see high sulfur fuel oil strength, is it's just a not a very liquid market today and ships are having trouble actually buying high sulfur fuel oil.”
Joseph Gorder, Chairman, CEO & President, said the company expected all along to see the effects begin in “late third to fourth quarter of this year… and we expect positive market impacts from the IMO 2020 implementation as bunker fuel terminals transition to lower-sulfur fuel oil.”
The transition in marine fuels to IMO 2020 has already begun. Complex refiners, such as VLO, will start realizing the benefits of selling the more expensive products in their earnings in the third and fourth quarters of 2019 before the full effect is realized in 1Q of 2020.
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This article was written by
Managing Director, Boslego Risk Services
Harvard College, Economics (Honors), BA
Undergraduate thesis: "OPEC Pricing Strategy."
Harvard Business School Case Study: "Industrialized World and Oil."
Stanford University Graduate School of Business, MBA
I founded Boslego Risk Services and became a recognized expert in the area of energy price risk management (hedging) and trading, providing oil and natural gas hedging strategies to major oil companies such as Exxon, Shell, Mobil, Chevron, Texaco and Phillips; to the national oil companies of Norway, Venezuela, Mexico, Canada, France and Italy; to major users of energy products, such as Delta Airlines, United Airlines, Burlington-Northern Railroad, and Canadian Pacific Railway.
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