Cleaning Up Bunker Fuels. But at What Cost?: January 2010

S P E C I A L R E P O R T
SHIPPING
Cleaning Up Bunker Fuels.

But at What Cost?
January 2010
By
William Bathurst
Managing Editor, Platts Marine Alert
and
Ellie Weir
Editor, Platts Bunkers
S PEC I AL RE PO R T: S H I P P I N G
introduction in force of European legalisation governing the use of 0.1%

sulfur fuels in ports and on inland waterways.
As Environmental pressure grows on the oil industry due
to their role in carbon emissions, so the shipping industry, After January 1 2010, all ships berthed in EU ports for more
which was exempt from the Kyoto protocol on cutting carbon than two hours are required to burn fuel of less than 0.1%
emissions, has come under increasing scrutiny to catch up sulfur and the sale of MGO with a sulfur content of more than
with other more strictly regulated industries. 0.1% was banned in EU member states.
Airlines have responded to this pressure and promised to Those vessels connected to shore power whilst alongside
cut annual carbon dioxide emissions of 650 million tonnes by (known as cold-ironing) are exempted. When cold ironing ships
50% by 2050. That amount of emitted greenhouse gas is half in berth switch to shore-side electricity in ports, and cut the
that produced by the global shipping industry so the need for need for burning MGO in port. This swap both cuts fuel costs
emissions and sulfur limiting legislation is evident within the for ships and also brings the promise of tax breaks from the EU
marine industry. as it would cut emissions significantly.
What is still unclear is how an industry, that has been

massively hit by the global economic slowdown, will cope with Implications of the legislation
the costs associated with cleaner and thus more expensive
Firstly, the most pressing implication for those in the industry is
fuels. This report will focus on the new legislation coming
the higher price associated with the switch to cleaner fuels as
into force in the shipping industry throughout 2010, and then
they are of course more expensive to produce.
analyse the implications of this legislation.
The largest cost for an operator is their bunker costs. When
MARPOL legislation bunkers are $200/mt, ships will move at higher speeds but
when prices double and ship values are halved or worse, ships
The legislation that comes into force in 2010 was drafted will steam at economical speeds to burn less bunkers saving
in October 2008 to revise Annex VI of 1978 International out of pocket expenses.
Convention for the Prevention of Pollution from Ships.
If a ship that can do 18 knots on 33 mt of intermediate bunker
The main changes to MARPOL Annex VI will see a progressive fuel per day slows to 15 knots, they will burn only 25 mt/day and
reduction in sulfur oxide (SOx) emissions from ships, with the will also take 20% longer to get to where the ship is going.
global sulfur cap reduced initially to 3.5% from the current 4.5%
from 1 January 2012 and then progressively lowered further Consequently if the ship saves 8 mt a day with bunkers at $400/
to 0.5 %, from 1 January 2020. This is however subject to a mt they save $3,200/day so with a time-charter value of a ship
feasibility review to be completed no later than 2018 and many at $20,000/day, 20% of that is $4,000/day meaning it would not
in the shipping industry already believe the target to be too pay to slow-steam.
ambitious.
However, if the time-charter value of the ship was $10,000/
This reduction however pales into insignificance in comparison day, then the extra time would cost $2,000/day and the bunker
to the sulfur limits applicable in Sulfur Emission Control Areas costs they saved would still be $3,200/day, meaning $1,200/day
(SECAs) which will be reduced to 1% from July 1 2010 (from savings. Then it does pay to slow-steam.
the current 1.5 %) and then further reduced to 0.1 %, effective
The practice has been in use for over a year on several tanker
January 1, 2015.
routes already but the global economic slowdown combined
Progressive reductions in nitrogen oxide (NOx) emissions from with over-ordering particularly in the tanker markets has
marine engines have also been agreed, with the most stringent caused a tonnage demand/supply imbalance. When tankers
controls on so-called “Tier III” engines or those installed on take longer to complete their journeys they are out of the spot
ships constructed on or after 1 January 2016 and operating in market for longer, which can help lend some support to the
Emission Control Areas. market.
The revised Annex VI will allow for an Emission Control Area In the tanker spot market however, it is the charterers’ decision
to be designated for SOx and particulate matter, or NOx, or all to allow slow-steaming and owners must seek their approval
three types of emissions from ships, subject to a proposal from for this to take place. Nevertheless, slow-steaming had been
a party or parties to the Annex, which would be considered for cited by tanker sources as providing an ongoing relief from the
adoption by MARPOL, if supported by a demonstrated need to overcapacity in the market.
prevent, reduce and control one or all three of those emissions
With ever cleaner fuels increasingly costing high amounts,
from ships.
the practice of slow steaming will become more and more
Alongside the MARPOL legislation, the EU has also been prevalent, sources in the tanker market believe particularly if
taking steps to limit sulfur in its member states’ seas, before the low sulphur premiums seen in the past re-emerge once the
the MARPOL legislation comes into force. The first test of this global economies pick up.
tightening environmental legislation has been the recent entry
2 | Cleaning Up Bunker Fuels. But at What Cost?

The below graph shows the premium for low sulphur 1.5% 380 “As vessels have to use gasoil 0.1% in port from the new year
CST bunker over High sulphur 380 in the port of Rotterdam over and many vessels are starting to run on gasoil [so there’s] not
the last two years. This peaked at $100/mt in 2008 although was a lot of demand, one has to stop buying and the sellers are
typically around $35-40/mt that year. A slow down in demand in stopping to put it on the market and so we have had to get rid
2009 brought that back down to $15-20/mt. of our dmb barges,” one trading source in Rotterdam said.
The greater expense is not of course restricted to marine fuel However while many traders and suppliers saw the buying
oil with lower sulphur distillates also being stronger. Platts patterns for distillates shift well in advance of the EU
began assessments of marine gasoil in the same port at the legislation, changes to storage had not been so successfully
beginning of this year and the current premium over marine migrated.
diesel oil shows that the cost to shippers of the switch to the
former was fuel was a premium of $20-40/mt. This of course “We have enough barges for MGO but tank storage is tight for
varies according to market conditions and in spite of tankers the moment in all parts of Hamburg, so we will see what comes
storing huge quantities of gasoil off the coasts of Europe. up in the next few weeks and months. We need storage tanks
Admittedly however, this gasoil needs to be blended to marine and this will be a problem, because for now we have a lot of
specifications. tanks for fuel or MDO but not for MGO. So we have to clean
tanks etc, [and to] clean a tank etc. costs a lot of money,” a
Another implication, with particular regard to the January source in Hamburg commented.
legislation is enforcement. The legislation itself states that fuel
changeovers must be recorded in ships’ logbooks a process As the new legislation comes into force and sulfur levels
which many sources have questioned and only time will tell are cut further and further, the bunker industry and ship
how this method of self regulation is successful. owners are already looking at their options to meet the new
requirements. However the biggest concern is what the
As EU ports have realized that ships distillate use will move increased pricing will do to the balance sheets of an industry
entirely from marine diesel oil to marine gasoil due to the sulfur already suffering from the global economic downturn and in
cap, they saw demand for diesel fall away from the middle of many sectors a heavy order-book.
2009.
The price of ship fuel is going to become and an ever more
Although some traders feel that the better supplied gasoil important consideration.
market may actually lead to prices for gasoil coming down.
“More demand will gain influence of the price, but I do not
think the prices will go massively up, because on the MGO side
we have a lot more [supply] competition,” one trader said.
Low Sulfur 380 CST Premium in the Port of Rotterdam (USD/MT)
Source: Platts
Cleaning Up Bunker Fuels. But at What Cost? | 3

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S P E C I A L R E P O R T

Cleaning Up Bunker Fuels.

introduction in force of European legalisation governing the use of 0.1%

What is still unclear is how an industry, that has been

2 | Cleaning Up Bunker Fuels. But at What Cost?

Low Sulfur 380 CST Premium in the Port of Rotterdam (USD/MT)

Cleaning Up Bunker Fuels. But at What Cost? | 3

North America EMEA Latin America Asia-Pacific Russia www.platts.com

© 2010 Platts, a Division of The McGraw-Hill Companies, Inc.

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