The “IMO Scramble” isn’t the name of a new breakfast dish at a fast-food restaurant. It describes the plight of ocean carriers, who find themselves woefully unprepared for a new mandate on switching to cleaner-burning fuel.
On January 1, 2020, The International Maritime Organization will begin enforcing a rule limiting the amount of sulphur in marine fuel to just 0.5 percent, down from the current cap of 3.5 percent. Vessel operators can meet the requirement by switching to fuel with lower sulphur content, installing “scrubbers” that reduce gas emissions to the equivalent level, or running on liquefied natural gas. The new sulphur cap is expected to affect approximately 96 percent of the world shipping fleet.
The need to reduce sulphur oxides (SOX) emissions from ships isn’t at issue. “The high-sulphur fuel we use today causes respiratory diseases,” said Soren Skou, chief executive officer of A.P. Møller Maersk A/S, owner of the world’s largest container-shipping company. He joined a number of other shipping executives and industry experts discussing the issue at TPM 2019 in Long Beach, Calif., the annual conference sponsored by IHS Markit and the Journal of Commerce.
IMO claims the use of lower-sulphur fuel will prevent more than 570,000 premature deaths between 2020 and 2025, with significant reductions in asthma, stroke, heart disease and lung cancer. In addition, lower sulphur emissions will cut down on acid rain and reduce harm to crops, forests and aquatic species.
Nevertheless, the switch is expected to carry a heavy price tag. Skou estimated the cost to container carriers at between $10bn and $15bn. Jensen put the number for the entire shipping industry at more than $670bn.
IMO’s program to cut back on SOX emissions began in 2005. Since then, the regulation has been progressively tightened. Nevertheless, many ship owners find themselves unprepared to adjust to the latest reduction, mandated by IMO 2020 to take effect less than nine months from now.
“This thing just crept up,” said Daniel Yergin, vice chairman of IHS Markit. Some carriers were banking on an extension of the effective date to as late as 2025. Few seemed to think that they could make a 2020 deadline.
“We don’t think industries are really prepared,” said Yergin. “So much remains shrouded in uncertainty, even nine months away.”
Whether there will be enough low-sulphur fuel to go around on January 1 remains a question. Refiners haven’t been clear about their ability to make the switch in time. An analysis by Navigistics Consulting foresees a shortfall of 1 million barrels a day of the new marine fuel in the first half of 2020. (Along with a surplus of the “dirtier” bunker fuel, which might be diverted to power generation.) And carriers, for their part, aren’t sure whether the new fuel will gum up ship engines.
As for scrubbers, they’re only suited for the larger ships, said Yergin. As of early March of this year, around 2,000 ships had been scheduled to be fitted with scrubbers by January, 2020 — just 2 percent of the total fleet. Jensen estimated that more than 90 percent of the world’s containerships will run instead on newly compliant fuels. As for the switch to LNG fuel, it could be the most expensive and technologically problematic option of all.
“Worst-case scenario is that the fuel supply is not there [on January 1],” said Stephen Jew, associate director with IHS Markit. “Then IMO will have no other option than to push the starting date by three to six months. I hope that won’t happen.”
Similar doubts about the impact of IMO 2020 have been voiced by shippers and freight forwarders. A survey by Drewry of that sector from last fall found a third of respondents claiming to have “poor” or “very poor” awareness and understanding of the new regulation. Four out of five said they had yet to receive clarity from carriers as to how the switchover will impact future fuel cost increases. Estimates range from 10 percent to as high as 50 percent.
Jensen said the industry will have no choice but to pass on the cost of the conversion to shippers. As of February 1 of this year, carriers began replacing their previous array of bunker surcharges with a single marine fuel recovery (MFR) mechanism. “It is causal, transparent and easy to understand,” Jensen said. “It helps our customers to plan.”
Even those carriers prepared to adjust to the new fuel requirement won’t be able to rest easy. Longer term, IMO wants to reduce greenhouse gas emissions by 50 percent by 2050, Jew said. Meeting that target will require a heavier reliance on LNG, with an accompanying increase in refinery and delivery infrastructure. Skou also spoke of the goal of achieving total carbon neutrality by 2050, possibly with the help of new biofuels.
But carriers have enough on their plate for the short term — specifically, scrambling to meet a deadline that everyone saw coming, but for which few undertook the necessary preparations. How they respond now will have a major impact on their future profitability, if not survival.
“As we see it, this is a transformative event,” said Yergin. “It creates risk opportunities, winners and losers.”