Compliance with the International Maritime Organization’s global sulfur limit for marine fuels will likely settle around 90% in the initial years after 2020 as most shipowners switch to 0.5% sulfur bunker fuels to meet the rule, a bunker industry veteran and senior partner at 2020 Marine Energy Adrian Tolson said.
Less than 15 months remain for the regulation to be implemented, but there have been widespread industry concerns in the past about the extent of compliance with the rule due to the magnitude of the change and the costs involved. Availability of 0.5% sulfur compliant bunker fuels has also been cited as a potential deterrent to achieving full compliance to the impending regulation.
However, this is changing as shipowners plan ahead and refiners make investments to provide such fuels, Tolson told S&P Global Platts on the sidelines of the 20th Singapore International Bunkering Conference and Exhibition.
“In the transitional months, mostly everybody [shipowners and operators] will look at purchasing distillates… but the shift to very low sulfur fuel oil will be fairly quick,” he said.
In the initial six months or so after 2020, the differential between HSFO and distillates could be as high as $450-$600/mt, Tolson said.
However, this is expected to narrow as the distillate market gets over the initial shock and HSFO availability dwindles due to the limited uptake of exhaust gas cleaning systems, or scrubbers, he said.
While there is momentum around LNG bunkering, its contribution in the global bunker fuel mix is only expected to be around 5% by 2030, Tolson said.
“LNG could be a cheap and viable compliant fuel option, but only if you can get through the infrastructure issues and build the volumes,” he said.
As the years progress, VLSFO is expected to become significantly cheaper than diesel, prompting its widespread use, Tolson said.
“While quality issues around VLSFO consumption have been a concern for some, I have far more faith in their use,” he said. “The sort of contaminants in 0.5% sulfur bunker fuels are not significantly much different from those found in 3.5% sulfur bunker fuels,” he added.
Concerns around stability and compatibility are also expected to diminish over time as refiners are increasingly developing fuels to overcome such issues, he said.
Compliance with the IMO 2020 rule is also likely to be spurred by strict enforcement by both flag states and port authorities, Tolson said.
“Compliance is primarily the shipowners’ responsibility… and most will be unlikely to risk non-compliance,” Tolson said, adding that errant players will have to deal with fines, penalties and detentions, as well as a possible loss of charter parties.
CHANGING INDUSTRY LANDSCAPE
While the product mix is set to change due to the 2020 rule, the industry is also re-organizing itself, Tolson said.
The role of independent bunker suppliers is being increasingly challenged amid increasing competition and shrinking margins, requiring many to reinvent themselves as 2020 approaches, he said.
“As we approach the post-2020 world, bunkering companies firstly need to position themselves as more than just basic suppliers, looking at every opportunity within the physical supply chain to add value, beyond the typical storage, distribution and supply process,” he said.
“What shipowners and operators really need is help in structuring their purchasing habits, utilizing technology, data and intelligence so that their procurement and buying process is fully optimized. This can yield 1% to 2% in fuel cost savings, which is significant when we consider the dramatic increase in prices post 2020,” he added.
Traditional oil companies and large commodity players will likely emerge as the major beneficiaries post 2020, but many of them may not want to deal with credit, logistics and claims, so there will always be room for suppliers, Tolson said.
In addition to the global sulfur cap rule, to meet IMO’s upcoming greenhouse gas emissions reduction targets, the industry will have to move to clean energy sources, from hydrogen-based fuels, biofuels, wind to battery power and so forth; distillates and hybrid products just won’t exist, he said.
Physical suppliers need to consider what their role and position in this new world looks like now, and begin the process of building a business model and brand that can deliver it and is fit for purpose, he added.