Maritime Emissions Rule Triggers Split in Shipping Costs
Date: Monday, December 23, 2019
Source: The Wall Street Journal
Shipowners that bought scrubber exhaust systems expect big edge in fuel spending over vessels using cleaner fuel
An environmental rule hitting the maritime world at the turn of the New Year will open a steep divide in operating costs across shipping markets.
A large share of vessel operators have chosen to limit their sulfur emissions with exhaust systems called scrubbers that trap sulfur created by fuel-burning engines.
The systems cost several million dollars but will allow the operators to avoid buying new low-sulfur fuel that oil traders say will be some 30% more expensive than conventional bunker fuel. That will give ships with scrubbers a big cost savings that companies expect to use to get an edge in competition for international cargoes.
“There is a significant premium for scrubber-fitted vessels next year,” said George Lazaridis, head of research at Athens, Greece-based Allied Shipbroking Inc. “Those who put money into them made a big bet and now it’s payback time.”
The gap is growing out of an antipollution mandate by the International Maritime Organization, the maritime regulating arm of the United Nations. Starting Jan. 1, some 60,000 oceangoing vessels must cut their sulfur emissions by more than 85%.
The approved methods are scrubber exhaust systems or burning cleaner fuels that have been developed as an alternative to the heavy-polluting bunker that has long powered commercial ships.
Shipping-industry executives expect the mandate to add some $50 billion in fuel costs over the next four years.
The fuel switch is the first step in a decadeslong plan that will eventually push the industry toward carbon-neutral vessels.
The International Energy Agency estimates that by 2025 there will be some 5,000 ships using scrubbers, covering about 30% of world-wide tonnage. Scrubbers typically last for up to five years, after which operators will move to use low-sulfur fuels.
Shipowners say they are making a clear economic calculation in putting off the fuel switch for now.
“There are significant fuel cost savings with scrubbers and we’ll have them on half of our fleet by the second quarter,” said Robert Hvide Macleod, the chief executive of Norway-based tanker giant Frontline Management A/S.
Frontline, owned by Norwegian ship magnate John Fredriksen, is one of the world’s biggest tanker operators, with 72 crude carriers in its fleet.
“The scrubbers cost us between $2 million and $4 million per ship, and we expect a payback on the investment over the next nine to 18 months,” Mr. Macleod said.
The cost of buying and installing the scrubbers is being weighed against fuel expenses that make up around half of a ship’s operating costs.
Clarksons Platou Securities said in a research note this week that the price difference between heavy oil and low-sulfur fuel blends was about $300 a ton in Fujairah, in the Middle East, and $285 a ton in Singapore.
A dozen shipping and bunkering executives said in interviews they expect the low-sulfur fuels to cost about $240 more per ton than conventional fuel by the end of next year.
Still, the upfront costs for scrubbers are stretching budgets at many carriers. Sweden’s Stena Line, one of Europe’s largest ferry operators, shed about 30% of its workforce to pay for scrubbers.
Danish container shipping giant A.P. Moller-Maersk AS said it is keeping its options open but added that using cleaner fuels is the preferred choice for much of its fleet because it expects the cost to decline as refiners increase output.
Maersk, which operates a fleet of more than 700 vessels, says the cleaner fuels could raise its fuel spending by about 40%, or $2 billion annually.
Critics contend scrubbers are a poor method for cleaning air. Some shipping groups say the systems merely push airborne sulfur pollutants into the sea. And some operators say scrubbers have leaked and corroded during sailings.
“We have used them for 50,000 hours. It’s like a salt water shower that cleans the exhaust,” Mr. Macleod said. “There were some teething problems, like software issues to get them going at the start. But overall they work quite well, and it’s an approved IMO method.”
Stamford, Conn.-based Dorian LPG Ltd. , the biggest U.S.-listed operator of propane gas carriers, will have scrubbers installed on 12 of its 22 very large gas carriers by March next year.
“I’ve heard people describe scrubbers as cheating the system,” said John Hadjipateras, Dorian’s chief executive. “But we don’t see them as a compromise. In fact, in some areas they are ahead of the game because burning heavy fuel oil and having it scrubbed contributes less overall greenhouse emissions than the refining process to get low-sulfur compliant fuel.”