IMO 2020. Are you ready?

From January 1st, 2020 new rules concerning Sulphur emissions from fuel oil used on ships will come into effect.

Regulation 14.1.13 of MARPOL Annex VI ruled by the U.N. International Maritime Organization (IMO), stipulates that the Sulphur content of any fuel oil used on board ships must not exceed 0.50%, compared to the 3.5% allowed today.

This is a substantial decrease in Sulphur content that will take effect overnight, and it poses one of the biggest challenges for the maritime industry in decades. The consumption of high Sulphur fuel oil on a global scale is estimated to be about 4 million barrels per day, all of which must be replaced or discarded of by January 1st, 2020.

Shipowners are faced with a choice. Either to replace HFO with Low-Sulphur fuel oil, or to install exhaust gas cleaning technology such as scrubbers to clean out Sulphur from the HFO exhaust gasses. This would allow ships to use HFO after January 1st.

Both choices have their positive and negative aspects, and it remains uncertain which solution is the right one in the long run. Making the wrong choice can result in big economic loss.

Replacing HFO with a sufficiant amount of LSFO poses a challenge to the bunker industry. The time frame for this is short, as few ship owners are willing to begin using LSFO too early because of the remarkably higher price for LSFO. Today LSFO excesses the price of HFO with almost 50%. This price is only expected to rise as we get closer to 2020, and beyond, and it could easily be years before a true pattern of the LSFO and HFO price index will emerge.

Furthermore, it is far from certain that the oil refineries can produce a sufficient amount of quality LSFO in time to meet the deadline. If a vessel are unable to obtain quality LSFO, it will have to rely on distillates instead.  

It is not even clear if the oil refineries will be ready to the shift in fuel oil. Replacing HFO with LSFO would involve making significant investment in new or upgraded production facilities, and it is unclear how many oil refineries will make this investment.

A cost that will affect the price of LSFO, which is already high. This cost will most likely affect the transportation of goods and will ultimately be passed on to the costumers.

The other choice ship owners can take is to install exhaust gas cleaning technology such as “scrubbers”. These can be used to filtrate enough Sulphur from the HFO exhaustion to meet the demands. However even this solution poses a series of challenges. Today about 5% of the world’s fleet have scrubbers installed – most of them ferries and cruise ships – and with an annual installment of around 3-4000 scrubbers, manufacturers fear they won´t be able to meet a potential explosion in demand coming 2020.

Add to that, the fact the scrubber solution is not a cheap one in any means. Even though the solution might show itself to be the most cost friendly in the long run, an investment in scrubbers lies somewhere between $6 to $10 million in installing alone.

Furthermore, scrubber technology is not suitable for all ships, since it takes up a lot of space that might not be available. Only 10% of the world’s fleet is expected to have installed scrubbers by January 1st, 2020.

However, much like with the price index of LSFO, the uncertain nature of both price and availability of HFO post 2020, makes it difficult to predict whether it is the cost friendly solution in the long run. Ship owners who decide to use the scrubber solution, generally do not know if they can get access to HFO in a post-2020 world.