New sulphur shipping rules in the Mediterranean next year will test the region's ability to supply the necessary bunker fuels, writes Bob Wigin

Marine gasoil (MGO) could be the big winner in demand terms next year when new International Maritime Organization (IMO) rules on the sulphur content of bunker fuels are introduced in the Mediterranean.

From 1 May 2025, the Mediterranean will become a new IMO emissions control area (ECA), where vessels will need to adhere to a 0.1pc sulphur bunker fuel limit, down from 0.5pc at present. That will create new demand for compliant fuels such as MGO and ultra-low sulphur fuel oil (ULSFO), but the relative lack of ULSFO production from Mediterranean refineries and the region's ready spot MGO supply mean that the latter looks set to become the most popular option among shippers, at least to begin with.

Mediterranean refiners as yet produce little ULSFO, but may be motivated to step up output next year if substantial spot demand develops. Vessels making regular journeys along the same route, typically container ships, are likely to set up term ULSFO contracts with suppliers, market sources say, but shippers looking for prompt spot volumes will initially need to look at MGO, which is already consistently available on a spot basis at most Mediterranean ports.

Speaking at this week's Argus European Crude Conference in London, Spanish firm Repsol Trading's head of market intelligence, Carmen Lopez-Contreras, said she has no doubt that sufficient 0.1pc sulphur marine fuels will be available for vessels once the new regulation kicks in. Repsol is already supplying ULSFO to some cruise ship and ferry operators, she said.

But the change will certainly put the region's supply capability to the test. A study carried out in 2021 by the Regional Marine Pollution Emergency Response Centre for the Mediterranean Sea (Rempec) projected that 16.7mn t of MGO would have been burned in the Mediterranean in 2020 had it been an ECA zone then, compared with a 2016 baseline of 542,000t.

Split shift

Some market participants have also suggested that European refiners' crude feedstock mix may not be well suited to ramping up ULSFO output, but trade data show this is less the case than in the past. Europe as a whole now takes a lot less medium sour Russian Urals crude and a lot more US light sweet WTI than it did three years ago, while, even in the Mediterranean, the sweet-sour split this year has been roughly 50:50, Vortexa data indicate, reflecting Opec output cuts and the impact of Red Sea shipping disruptions.

The Rempec study also projected high and low-sulphur fuel oil use in the Mediterranean would shrink from 15mn t in 2016 to 95,000t in 2020 under an ECA scenario. The biggest threat will be to 0.5pc very-low sulphur fuel oil, unwanted volumes of which could end up heading to markets east of Suez, traders suggest, as east-west price spreads widen.

But the outlook is slightly more complex for 3.5pc high-sulphur fuel oil (HSFO), which has been a surprising beneficiary of the IMO's tighter sulphur rules globally, as many vessels, especially container ships, have opted to comply by installing exhaust gas cleaning "scrubbers". This has allowed them to carry on buying HSFO, rather than switching to cleaner — and usually more expensive — alternatives.

In the Mediterranean, market participants note it would not make economic sense for many operators to fit scrubbers, as a large portion of the region's fleet is reaching the end of its life cycle. Scrubbers may struggle to clean exhaust gases from 3.5pc sulphur HSFO to a 0.1pc level. Some Mediterranean bunker suppliers say they are already receiving requests for non-standard 2.5pc sulphur fuel oil, which exerts less wear-and-tear on scrubbers.

Photo credit and source: Argus Media
Published: 27 November, 2024 

E.A. Gibson Shipbrokers Ltd (Gibson) recently released a Tanker Market report on the impact of Mediterranean Sea becoming an emissions control area (ECA) next May on tanker trades: 

The shipping markets are no stranger to emissions control areas (ECAs), following the establishment of ECAs in the United States, Baltic and Northern Europe. From the 1st of May 2025, the entire Mediterranean Sea will become an ECA, with the maximum sulphur content of fuel burned on board falling from 0.5% to 0.1%, unless fitted with an exhaust gas cleaning system (scrubber) capable of reducing stack emissions to this level. 

Following previous ECA introductions and IMO2020, refineries and bunker suppliers have shown they can adapt to the necessary changes in demand, however, there will be implications, both in terms of bunker prices and commodity flows in and out of the region.

Current bunker demand in the Mediterranean is estimated at around 21.5 million tonnes, with >50% consisting of 0.5% VLSFO. Come May next year, demand for VLSFO in the region is expected to fall, with ships that do stem the grade doing so to burn once outside the ECA. 

According to data from Marine and Energy Consulting Ltd, demand for VLSFO could fall to around 6 million tonnes/year, shifting to 0.1% MGO and ULSFO. In theory, HSFO demand should remain steady as ships fitted with scrubbers continue to burn high sulphur grades. However, with some scrubber systems unable to “scrub down” HSFO to 0.1%, it remains to be seen how many Owners will be forced to switch to other grades.

Ships trading in the region will therefore face higher costs, unless they are using a scrubber. For the year to date in Gibraltar, 0.1% MGO has averaged $798/tonne vs. $590/tonne for VLSFO (+35%) which should translate into higher freight rates, and for tankers, likely higher Worldscale flat rates in due course.

The ECA also has implications for the flow of refined products within, in and out of the region. A decline in demand for VLSFO is inevitable, which should facilitate export arbitrages from the region, most likely to East of Suez. At the same time, the Mediterranean should see its structural deficit of gasoil increase, with cargoes being imported from the US and Middle East. Trading of compliant grades across the region should also get a boost, at the expense of movements of VLSFO cargoes.

Overall, this suggests a modest shift from dirty to clean tankers for regional moves, although larger dirty tankers are likely to see some benefit from exporting surplus fuel oil to Asia. Bunker demand in the region will also be impacted (albeit to a lesser degree) by the upcoming FuelEU legislation which mandates a 2% reduction in the greenhouse gas intensity (GHG) from 1st of January 2025. Whilst the initial impact will be small, some demand will be shifted from conventional bunker fuels to greener alternatives.

The full Tanker Market Report can be found here. 

Photo credit: Shaah Shahidh on Unsplash
Published 17 October 2024

Representatives of bulk shipowner Oldendorff Carriers GmbH & Co. KG. and bunkering firm Peninsula, amongst others, met at the Fuel Oil Markets - Projections and Supply Chain Resilience panel discussion session during the 23rd Singapore International Bunkering Conference and Exhibition (SIBCON 2024).

Topics discussed included the increased uptake of traditional marine fuels and importance of robust risk management.

Jens Maul Jørgensen, Director of Bunkers, Oldendorff Carriers GmbH & Co. KG, noted the dry bulk segment to be welcoming more than a thousand newbuildings within the next three years. Data from shipyards have indicated most of these vessels, especially the bigger ones, having scrubbers onboard.

“The majority of the orderbook today, in all segments, is not dual fuel mainly due to costs. We cannot run away from that; the vessel need fuel to sail,” he explained.

Meanwhile, areas such as the Amsterdam–Rotterdam–Antwerp (ARA) region have seen even more high sulphur fuel oil (HSFO) than LSFO supplied every month, which shows demand for traditional HSFO to be increasing. 

New Emission Control Areas (ECAs) such as the Mediterranean Sea ECA taking effect from 1 May 2025 will also mean more consumption of low sulphur bunker products.

Jørgensen, who is responsible for purchase bunker fuels for approximately 750 bulk carriers, next highlighted the importance of managing proper exposure control due to fluctuating oil prices.

“If we don't hedge, we speculate. We must make sure that the prices are safe as nobody can predict what is going on in six months. Being in a open position will be a big risk, especially in this market, so proper exposure control is the key.”

Kenny MacLean, Chief Operating Officer, Peninsula agreed with Jørgensen approach towards managing risk.

“It's the same story, but we're buying bulk, and so it's progressively even more important. I think the bunker industry in general has had a bit of a checkered past with companies that haven't paid too much attention to their risk management,” shared MacLean.

“That's something that Peninsula is absolutely laser focused on. So obviously, all our purchases are hedged and that's of critical importance. 

“Other areas that are super important is making sure that you're getting economies of scale out of the purchases as well. But really, it's that hedging, derivatives, price risk management side that’s of critical importance in our industry in general.”

Concurring with Jørgensen’s observation of high consumption of low sulphur bunker products such as marine gas oil (MGO) within ECAs, MacLean added the similar regions have also been driving the increased use of biofuels. 

“What we try to do is have a very diverse customer base, and our supply decisions are pretty much based around aggregating that customer demand by being a bit more customer centric and really getting into our customers and asking, ‘What are the solutions that you're going to need?’” he said.

“It's our job as a bunker supplier to aggregate that fuel together and make sure that we can make it available in the right place at the right time, otherwise, you're going to be left just with a few very large bunkering hubs around the world. 

“It's incumbent upon bunker suppliers like Peninsula to make sure that if it's in the Mediterranean we've got the full range of products available so that when Jens knocks and says, ‘Actually, I'd quite like some biofuel guys’ we are there with the solutions ready and available.”

Photo credit: Manifold Times
Published: 17 October 2024