To Our Valued Customers:
Starting on January 1st, 2020, the International Maritime Organization (IMO) will enforce a new 0.5% global sulphur cap on bunker fuel content, lowering the current limit of 3.5%. The new regulation, called the Marpol Annex VI, is part of a growing effort from IMO to combat environmental concerns stemming from the harmful emissions of carrier vessels.
The regulatory requirements: Heavy-fuel oil (HFO) is a sulphur-rich source of energy which, in 2016, accounted for over 70% of a mixed grade of bunker fuels and is commonly cited as a major source of environmental harm. The 2020 IMO regulation demands that carriers to burn fuel with less than 0.5% sulphuric content--which is considerably lower than the previously allowed 3.5%.
How will carriers and refiners respond?: The switch from the 3.5% sulphur content bunker fuel to the new compliant fuel will be a gigantic undertaking for both carriers and refiners. Oil refiners will need to create the infrastructure to produce an abundance of Marine Gas Oil (MGO), the regulatory-compliant 0.5% fuel. Since it is near-impossible for refiners to produce enough MGO to satisfy demand before the IMO regulation is implemented in 2020, there is likely to be a widespread blending of the high-sulphur fuel with diesel, which will lead to much greater demand for diesel. This shift in production is slated to cost he industry approximately $60 billion, according to a recent Wood-Mackenzie study. On the other hand, carriers must make a choice between purchasing the compliant fuel or installing “scrubbers” on their vessels. Scrubbers are mechanisms which are able to lower the sulfuric output of currently-in-use bunker fuel. However, most carriers will not be able to install these on all of their fleets in time for the regulation to go into effect.
The macro effects: Wood-Mackenzie maintains that shipping fuel costs will spike up to 25% in 2020 as a result of the sulfuric cap. Switching to MGO is a very costly solution for carriers, and in full compliance, freight rates may increase by nearly $1 per barrel. Costs may increase by $24 billion in 2020. However, if all carriers used compliant fuel, the spike could be as high as $60 billion in 2020 alone. While shippers are expecting a 20-50% ROI for installing scrubbers on their vessels, their production and installation will be halted by a variety of elements, such as manufacturing capacity and dock space. Wood-Mackenzie also asserts that only 2% of the world’s global fleet will have 2%.
We are here to help! Should you need any additional information or assistance, please feel free to contact your Laufer sales or customer support personnel.