As a specialized agency of the United Nations, IMO is the global standard-setting authority for the safety, security and environmental performance of international shipping. Its main role is to create a regulatory framework for the shipping industry that is fair and effective, universally adopted and universally implemented. IMO through its working also supports the UN Sustainable Development Goals (SDGs). From 1 January 2020, international bunker fuels have needed to meet a much tighter maximum sulphur specification of 0.5 percent, versus 3.5 percent previously, due to the new regulations implemented by the IMO. These regulations are commonly called IMO 2020. This regulation is expected to effectively eliminate one of the largest sources of sulphur emissions, accounting for roughly 10 percent of the global total from all sources. In fact in the Emission Control Areas (ECAs) i.e. in the North American, Canada and the US Caribbean Sea Areas, the sulphur discharge limits have been restricted upto 0.1 percent or less.
According to estimates the shipping sector consumes 3.5 million b/d of High-Sulphur Fuel Oil (HSFO) in which the sulphur content capped at 3.5%. In order to meet the current demand, globally, crude oil refiners will only be able to produce 1.5 million b/d of very-low sulphur fuel oil (VLSFO) which capped at 0.5%. It will significantly improve air quality, reduce climate change effects and limit the environmental impact of the oil and shipping industry.
Restrictions for shipping companies to comply with IMO 2020 will affect other industries as well. It’s not just the bunker prices and refinery industry due to which global trade will likely to experience instability in freight rates for quite some time. The increased competition for low-sulphur crude oil will drive up the competition between shippers and global steel and aluminium industry as well. Needless to say that shipping freight rates will also increase because of higher fuel costs, pushing up prices all goods transported by sea. Almost 90 percent of the global trade is carried though sea transport. About 55,000 ships are plying the global waters at any point of time. According to the some researches, global fleet has almost 10,000 tankers.
An increase in freight rates for transport of raw materials, such as iron ore and coal, will defiantly be a triggering factor to increase costs for the steel production. But Needle Coke would likely to play a significant role in nurturing the future industrial trends. In addition to steel and aluminium manufacturing, the electric vehicles production will also be affected due to increased shippers demand for low sulphur fuel.
The share of fuel used for bunkering only accounts for 4-7% of global oil demands, but their importance for refiners as the world’s largest sink for the hard oil; or simply known as the law quality remains at the bottom of the petroleum barrel with high impurities and sulphur content, enhanced its significance as well as economic share in the global market. Argus Media, which is a specialized energy communications and analysis firm, states that maritime shippers/ bunkers alone account for 47 percent of the global demand for this end funnel product.
The experts have already raised concerns over the stability of supply of low sulphur fuel due to the new IMO 2020 restrictions. It may seems a simple environment friendly ruling, but the ramifications of this change ripple across the shipping industry, shipping , trading, environment and freight rates. Its implications will also go down to crude oil producers, refiners and other consumers.
Another factor that will trigger the freight rates will be the expected rise in use of marine gasoline and Liquefied Natural Gas, which is also an expensive fuel choice. The statistics of 2018 states that there were about 122 ships fuelled by LNG, compared to a total oceangoing fleet estimated at 55,000 vessels. That number is expected to go beyond 220 mark by 2022. Graph one (Source Platts) shows the past pattern about the consumption of various types of fuels and the future anticipation of the shippers for bunkering.
The projected forecast is expected to have a greater share of Very Low Sulphur Fuel Oil (VLSFO) and Distillates. However modern ships will go for LNG due to for being extremely environmentally compatible option. IMO 2020 will lead to about 2 million b/d increase in marine gasoil (MGO) shipments. But price differentials, between distillates and LNG for shipping business will also implicate the trading pattern. HSFO demand will be sustained by non-compliant vessels which account for about 10% of global fleet (an estimated figure for the year 2020). It is believed that some ships may be due to non compatibility or non availability of low sulphur fuel, will continue to follow use traditional oil.
In the past two years, tanker freight rates have been increased and they were fund to be at times less than half break-even levels. From an economic perspective, when we look at implications of IMO 2020, particularly for ECAs, some key strategic questions are also significant; will there be adequate number of oil tankers available to meet the trading requirements of these areas? And what would be the expected charter cost these ships will have? Thirdly and most importantly; because it will have a direct bearing on the consumers that how much will be rise in price of traded goods that a common man has to bear?
According to critiques the prices of petroleum products have been very volatile in due to recent global political and strategic scenarios so the increase in freight rates should not to be attributed to IMO 2020 alone. The global flow of Oil from Middle East will likely to be effected by this in the emerging scenarios because they produce heavy crudes with rich Sulphur contents, on the other hand, producers of light crude will enjoy good flow of money in coming years for against increased demand.
Non compliant ships with these fuel regulations will also put for demolished. Therefore, the crude oil tanker has been witnessed to have highest growth in past few years as compared to the main shipping fleets with a growth rate of 6.3% in 2019. BIMCO is currently forecasting that the crude oil tanker fleet will grow by around 1.5% in 2020 and 2021. Thus the effects of IMO 2020 have also been seen, in terms of rise, on global shipping and breaking industry.
Demand for oil shipments in 2020 also anticipated to increase as sophisticated refineries would improve their output to meet energy needs. Thus, IMO 2020 will also increase global refinery throughputs by 1.6 million b/d from January 2020.
By choice, or by regulatory restrictions, quality of fuel has become a key concern of the consumers. Battery-powered and hybrid ships; their prospects are brightening but they are still in fancy. Upcoming LNG-fuelled vessels are expected to remain dedicated to specific routes on ECAs. Adapting to the energy transition by improving the refining technology is the most import way out to deal with this changing scenario. Further, to meet the current and future demand, the refiners also have to invest into modern technology so the sulphur can be extracted from the hard crude at source.
[box type=”note” align=”” class=”” width=””]Writer is a maritime researcher at National Institute of Maritime Affairs/NCMPR[/box]