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IMO 2020

Stolt Tankers: Managing the transition to 2020 low-sulphur regulations

Mark Martecchini, President of Stolt Tankers, discusses IMO 2020’s impact on the industry and company.

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Stolt-Nielsen recently conducted an Q&A interview with Mark Martecchini, President of Stolt Tankers, to ask about the company’s transition towards IMO 2020 and the development’s impact on Stolt Tankers:

The past decade has seen the International Maritime Organization (IMO) adopt ever-tightening regulations restricting Sulphur emissions from ships' fuel.

The last change, in 2015, mandated a Sulphur cap of 0.1% for fuel consumed in Sulphur Emissions Control Areas (SECA) in Europe and the United States.

On January 1, 2020, the sulphur cap for fuel consumed by ships on the open sea will be cut from 3.5% to 0.5%. Mark Martecchini, President of Stolt Tankers, discusses this change and the challenges it poses for Stolt Tankers and the wider shipping industry.

Mark, we have been through regulatory changes before, including changes to Sulphur caps in fuel consumed by Stolt Tankers' ships. What's different this time?
Shipping is continually undergoing regulatory changes driven by safety and environmental improvements, which also increase costs. Twenty-five years ago, we saw the introduction of double-hull standards for tankers. From 2007 through to 2015, we managed the introduction of Sulphur Emissions Control Areas (SECAs) and the lower-sulphur fuels mandated by them. Today we are in the midst of installing ballast water treatment systems at a cost of some US$55 million across the fleet. But the 2020 change lowering the Sulphur cap on the open ocean will have a far greater impact. There are 56,000 ships larger than 500 gross tonnes trading today. Most of these will be affected by this SECA standards required 300,000 barrels per day (bpd) of fuel production to shift from 1.0% to 0.1% Sulphur. The 2020 change will require 13 times that volume – 3.6 to 4.0 million bpd – to drop three times as much sulphur. Less than two years from today, 75% of marine fuel consumed will have to change.

The OECD International Transport Forum estimates that the 2015 SECA sulphur reduction increased fuel costs for one sector – container shipping – by $500 million, or an average cost increase of 2.5%, a relatively small impact. But the OECD estimates the impact for 2020 change as $5 to $30 billion on container shipping alone, or a cost increase of 20-85%, depending on fuel price changes and ship size/speed. The magnitude of these changes threatens the survival of the entire shipping industry, unless cost increases are passed on.

What will happen to fuel pricing with these changes?
That's the most studied question in our market today, by ship operators, refiners and fuel suppliers alike. It depends how fuel refiners and suppliers change their refining and blending processes, and what pricing will result from this big shift in demand for an undersupplied product. It also depends on what choices ship operators make in their fuel selection.

Fuel price forecasting is complex; the total marine fuel market is about 5.2 million bpd, or 11% of total fuel consumed globally in all transport sectors. Transport consumed about half of global oil production – which as we've recently seen, is itself subject to price volatitily.

Industry sources have estimated the impact of a ‘base case' shift, from today's IFO 380 to MGO (see sidebars for explanations of fuels and low-sulphur options). So far in 2018, we paid on average $375 per tonne for IFO 380 and $600 for MGO, a premium of $225. Most estimates for the premium in 2020 are in the range of $300-400, but some estimates exceed $600.

That is a large cost increase. This regulation and implementation date has been known for some time; why haven't refiners and fuel suppliers started to increase production of low-sulphur fuel earlier?
Good question. High investment cost is one reason. Refiners under margin pressure prefer to delay investments in non-core business, and marine fuels are a secondary market for them. While we can't speak for others, the sustainability challenge from low-sulphur fuel in 2020 will hit all chemical operators. The market for diesel for cars and trucks is far larger than the marine market and, with increasing negativity in Europe (and elsewhere) on the environmental viability of diesel compared to hybrid and electric cars, we may see demand for low-sulphur fuel simply shifting from land to sea. For all these reasons, refiners are late in making the necessary supply shift.

What about alternative fuel options?
I'm sure alternative low-sulphur fuels will come available – some already are, and we are testing them – but how widely available, and their comparative pricing, remains to be seen. The magnitude of these changes threatens the survival of the entire shipping industry, unless cost increase are passed on. In the past, whenever fuel regulations and the supply chain have changed, brining different formulations and technical challenges, problems from out-of-specification fuel spiked, increasing costs and lost time. We can expect the same to happen in 2020, but worse than before.

Current low-sulphur blends are priced at 5-10% below the price of MGO, compared to IFO 380 which is 38% below MGO. If current price differences are a guide, and in an undersupplied low-sulphur market with a sudden supply shift stock, we expect suppliers to keep prices for these alternatives fuels closer to MGO than to IFO 380, in which case the savings from alternative fuels will not be as significant as some may think.

With so many supply and pricing challenges, is there any change that the IMO will delay implementation of these regulations to 2025? Can ship operators avoid compliance?
I wish that was an option, but there is no indication of this happening. The IMO has considered many studies and believes there will be sufficient low-sulphur fuel available to proceed with implementation. But sophisticated modelling by some market forecasters does show there is a considerable risk of a supply gap of at least one million bpd from the expected four million bpd supply shift. There will be a market-clearing price, but with such a large supply gap the cost penalty could be economically unsustainable for the industry. This risk is missing from the regulatory agenda.

Responding to industry concerns that individual ship operators might try to avoid compliance, the IMO is also expected to implement regulations that ban the carriage of fuel oil that does not comply with the new rules, unless a scrubber is installed on a ship.

Are you considering technical solutions on existing or new ships, to reduce the impact of these regulations?
Stolt Tankers is taking a multifaced approach to low-sulphur fuel. We have taken delivery of 14 deepsea newbuildings in China in the past two years: six of 38,000 dwt from Hudong-Zhonghua, and eight of 33,000 dwt from New Times (in conjunction with our JV partners). We have spent a total of $16 million fitting the last two ships in each series with wet hybrid (open/closed loop) scrubbers. We could expand to a total of 20 ships fitted with scrubbers depending on operating experience and economics.

If and when we build new 6,000 dwt ships for the European coastal trade, we expect to build them with LNG dual-fuel engines. With short voyages, and a ready supply of LNG bunkers at Northern European ports, we believe LNG offers the best option. The rest of the Stolt Tankers fleet will either switch to MGO or alternative fuels, depending on availability, usability and cost efficiency.

What strategies are other ship operators adopting to manage this transition?
We have seen a wide range of strategies being adopted, ranging from LNG for newbuildings, to scrubbers, to switching to alternative fuels. Even within a single industry sector, or within an operator's fleet, different approaches are used depending on ship size, trading area and investment ability. Weak earnings and less LNG availability on tramping trades means tanker and bulker owners are less inclined to fund technical solutions, with most planning on MGO or alternative fuels.

It looks like relatively little investment in technical solutions, either LNG or scrubbers, considering the size of the worldwide fleet. Why is that?
It appears that technical solutions will not have a large impact on fuel supplies by 2020 at the current installation rate. There are 242 ships using LNG as fuel, aside from LNG carriers consuming cargo boil-off. One market source expects 2-3% of the fleet will use LNG fuel by 2020.

Scrubber installations are more numerous than LNG; sources estimate there were 450-500 ships fitted at the end of 2017. As scrubbers have a lower cost and can be retrofitted, estimates of ship installations by 2020 range from 1,000 to 3,000, but this is far less than earlier forecasts.

A number of market sectors have existing mechanisms to pass on fuel costs to customers. With oil tankers, most ships are either on timecharter, where fuel cost is passed directly to the customer, or ships trade in the spot market, where the Worldscale pricing mechanism adjust for changes in fuel cost. Container markets have the BAF (bunker adjustment factor). There is less incentive to make large investments up front when operators can pass costs along, especially when operating margins are thin and future outcomes are uncertain.

What is the expected impact on Stolt Tankers?
Like everyone else studying this change, the impact depends on three things: the change in market fuel prices, the impact of technical solutions or alternative fuels, and the extent of costs passed through to customers.

In 2017, Stolt Tankers consumed 529,000 tonnes of IFO 380 and 124,000 tonnes of MGO across all fleets. If alternative fuels are not available or competitively priced, and for a ‘base case' with MGO priced at $300 over IFO 380 – a conservative estimate, $75 above today's level – then Stolt Tankers would have a fuel cost increase of $160 million. Our operating profit in 2017 was $111 million; we cannot sustainably absorb this extra fuel cost. The freight revenue increase needed to counter this cost varies by trade, but for deepsea trades it works out to around 16%.

So where does that leave Stolt Tankers, and the chemical tanker industry, for that matter?
While Stolt Tankers was profitable in 2017, other publicy reporting chemical tanker operators were not. 2018 is expected to be an even more challenging environment, with fuel costs up and freights flat. While we can't speak for others, the sustainability challenge from low-sulphur fuel in 2020 will hit all chemical tanker operators. Fuel efficiency will become an even more important differentiator, but that is nothing new for us; we already focus on reducing fuel costs. And the Stolt Tankers fleet already benefits from having a larger average ship size compared to others; larger ships generally have a fuel cost advantage per tonne of cargo carried.

While the outcome will be driven by market forces, we will be asking our customers to bear extra costs when the shift happens in 2020, to maintain a viable chemical tanker industry available to carry their cargoes safely around the globe. The magnitude of cost increases is likely to impact some trade flows, especially for commodity products where freight represents a higher percentage of total supply chain cost, and in arbitrage situations. We look forward to working with our customers towards an equitable and sustainable solution to this change – a change which will protect the environment but must now be funded.

Source: Stolt-Nielsen
Photo credit: Stolt-Nielsen
Published: 27 August, 2018

 

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LNG Bunkering

Titan completes successful LNG bunkering op of E&S Tankers ship in Antwerp

Bunker barge “FlexFueler001” delivered 110 mt of LNG bunker fuel to chemical tanker “Liselotte Esberger”, marking a milestone since it was the first time Titan delivered to a vessel of E&S Tankers.

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Titan completes successful LNG bunkering op of E&S Tankers ship in Antwerp

LNG bunker fuel supplier Titan on Monday (19 February) said it executed a successful LNG bunkering operation for E&S Tankers, a joint venture of Essberger Tankers and Stolt Tankers as an operator of chemical tankers within Europe. 

The refuelling operation took place at the port of Antwerp on 15 January. 

“Our vessel, FlexFueler001, flawlessly delivered 110 mt of LNG to the Liselotte Esberger, marking a milestone since it is the first time we deliver to a vessel of E&S Tankers,” it said in a social media post. 

“This operation underscores our dedication to sustainable shipping practices and showcases our commitment to environmentally friendly solutions. We're proud to collaborate with E&S Tankers and look forward to furthering our shared mission.”

Titan completes successful LNG bunkering op of E&S Tankers ship in Antwerp

According to E&S Tankers website, the 7,135 dwt Liselotte Essberger arrived in Hamburg from a shipyard in China on 5 December 2023 and was christened the following day.  

The vessel is first of a total of four newbuildings ordered by the firm that are equipped with LNG dual-fuel engines.

Related: E&S Tankers launches second LNG dual fuel chemical tanker “John T. Essberger”

 

Photo credit: Titan and E&S Tankers
Published: 20 February, 2024

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Shipping Corridor

Report: Korea-US-Japan green shipping corridors can lead to significant environmental impact

Creating green shipping corridors between South Korea, the United States and Japan’s top two busiest routes can reduce up to 41.3 million tCO2 each year, says Korean NPO Solutions for Our Climate.

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Report: Korea-US-Japan green shipping corridors can lead to significant environmental impact

Korea-based non-profit organisation Solutions for Our Climate (SFOC) on Tuesday (13 February) said creating green shipping corridors between South Korea, the United States and Japan's top two busiest routes – Busan-Tokyo and Yokohama; Busan-Los Angeles and Long Beach– can reduce up to 41.3 million tCO2 each year. 

This is equivalent to annual emissions from over 9 million passenger vehicles in the United States.

“We evaluated the anticipated impact of several proposed KoreaUnited States-Japan green shipping corridors involving ports of Busan (KRPUS), Incheon (KRINC), and Gwangyang (KRKAN) —South Korea’s three major container ports,” SFOC said in the report. 

Each of the three South Korean ports will have the most significant environmental impact if connected to ports of Tokyo (JPTYO)/Yokohama (JPYOK) in Japan and ports of Los Angeles (USLAX)/Long Beach (USLGB) in the United States. 

“If container ships that travel KRPUS – JPTYO/ JPYOK and KRPUS – USLAX/USLGB are converted to zero emission ships, we can expect significant reduction in global carbon dioxide emissions, approximately 20.7 million tCO2 and 20.6 million tCO2, respectively,” it added. 

Accordingly, reducing GHG emissions in the global maritime shipping will require coordinated multilateral commitments and actions.

The green shipping corridor initiative is a global effort to align the shipping industry with the 1.5°C trajectory. It aims to:

  • Create maritime routes in which mainly zero-emission ships travel
  • Run ports with 100 percent renewable energy
  • Enforce mandatory use of on-shore power for docked vessels.

“With increasing global shipping emissions, green corridors are key to decarbonising the sector,” SFOC said. 

“Our latest report on green corridors comes on the heels of South Korea and the United States' announcement to work together to implement cross-country green shipping corridors between several of their key ports.”

 

Photo credit: Solutions for Our Climate
Published: 14 February, 2024

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Alternative Fuels

Ports of Rotterdam and Shannon Foynes to develop European green fuels supply chain corridor

Ports will also potentially work together on market development in this new market and jointly find final off-takers for supplies from Ireland including maritime fuels sector.

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Ports of Rotterdam and Shannon Foynes to develop European green fuels supply chain corridor

Port of Rotterdam, Europe’s largest port, on Tuesday (30 January) said it has signed an agreement with Ireland’s largest bulk port Shannon Foyne with a view to developing a supply-chain corridor for exporting green fuels into Europe produced from the west of Ireland’s limitless wind resource.

The agreement will focus on market and trade development for vast volumes of green hydrogen and its derivatives produced at the planned international green energy hub on the Shannon Estuary. The Memorandum of Understanding signed by the ports identifies significant and identified scale-up volumes of green hydrogen commencing with proof-of-concept volumes by 2030.

Europe’s overall green hydrogen strategy for 2030 is to import 10 million tonnes of renewable hydrogen by 2030 for use in heavy industry and transport sectors that are traditionally reliant on coal, natural gas, and oil. The Port of Rotterdam intends to facilitate volumes of 40 million tonnes from across the world by 2050, a significant proportion of which can come from the Atlantic resource.

Further opportunities will also be explored under the MOU, including building coalitions with interested and suitable commercial parties and adding other parties to the MOU to help achieve a joint supply chain process for delivering the first proof-of-concept volumes before 2030.

The MOU also provides for engaging relevant public stakeholders to support the initiative and sharing of information regarding the potential supply of green hydrogen and green hydrogen derivatives, such as green ammonia, green methanol, etc, as well as sharing best practice information on areas such as desalination, high voltage electricity, industrial clustering around the H2 molecule and green ship bunkering processes.

The two ports will also potentially work together on market development in this new market and jointly finding final off-takers for supplies from Ireland. These would include maritime fuels sector, sustainable aviation fuels, green fertiliser and facilities with direct green hydrogen fuel requirements such as the steel industry.

René van der Plas, Director International at the Port of Rotterdam, said: “The port of Rotterdam is already Europe’s leading energy hub and recognises the significance and opportunity for all European citizens and industries arising from the green transition. To that end, hydrogen is one of our priorities and we are working hard towards establishing infrastructure, facilities and partnerships that will help deliver on this.

“This agreement with Shannon Foynes Port is one such partnership and can support our efforts to set up supply chain corridors for the import of green hydrogen into north-west Europe from countries elsewhere with high potential for green and low carbon hydrogen production. Shannon Foynes Port is an ideal partner in that respect.”

Patrick Keating, CEO of Shannon Foynes Port Company, said: “With the largest wind resource in Europe off our west coast, we have the opportunity to become Europe’s leading renewable energy generation hub. That will deliver transformational change for Ireland in terms of energy independence and an unprecedented economic gain in the process. In delivering on this, too, we can make our biggest ever contribution to the European project as we become a very significant contributor to REPowerEU, Europe’s plan to end reliance on fossil fuels.

“We can produce an infinite supply of renewable energy here and there are already a number of routes to market emerging for that energy. One such route to market is the development of a supply chain into Europe.”

“This agreement with the Port of Rotterdam is a key step towards enabling that. The port of Rotterdam already works on introducing the fuels and feedstocks of the future with major oil and gas companies and its broader port community of over 3,000 commercial companies. It can be a key supply chain corridor for exporting green fuels from the Shannon Estuary into Europe. This is very significant recognition and validation of the potential for hydrogen production generated in Ireland to be exported into Europe.”

 

Photo credit: Port of Rotterdam
Published: 31 January, 2024

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