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The coming of a new year often holds promise for the future. With the coronavirus pandemic dominating center-stage last year, many have their eyes keenly focused on new beginnings with the start of 2021. For some in the maritime industry, especially owners and operators of commercial vessels involved in international trade, 2021 brings a new set of guidelines for protecting vessels—the International Maritime Organization’s (IMO) guidelines on maritime cyber risk management.

These new guidelines, a milestone for maritime safety and security, are the product of collaboration and hard work among shipping industry leaders and IMO Member States. Some in the shipping industry consider this development to be game changing. Whether game changing or not, implementation of this new model is a vital step toward forging a uniform approach for combating cyber threats against vessels.

Notably, however, the 2021 guidelines leave an equally vital, and maybe just as vulnerable, part of the shipping industry—port facilities—without a similar set of principles. Now that the IMO’s vessel guidelines are in the implementation phase, Member States and maritime industry leaders should again prioritize cybersecurity and collaborate at the IMO to develop uniform cybersecurity standards for port facilities.

The IMO and International Maritime Regulation

Before exploring the need for port facility cybersecurity standards, it may be useful to review the IMO’s role in developing international regulations. In 1948, the Member States of the United Nations created the IMCO, which changed its name to IMO in 1982, to facilitate global cooperation with regulation and practices of shipping engaged in international trade. The IMO’s goal is to ensure safe, secure, and sustainable shipping, facilitating trade and friendly relations among all states. Because shipping is historically and inherently an international endeavor, the IMO depends on and promotes cooperation among its 174 Member States to build uniform regulations that support this essential goal. The IMO construct has remained durable and inclusive since its inception.

Few maritime regulatory regimes exemplify the IMO’s impactful work across the globe more than the International Convention for the Safety of Life at Sea (SOLAS). SOLAS is a treaty from the early 1900s drafted in response to, among other things, the infamous sinking of the RMS Titanic. After its initial adoption in 1914, SOLAS further evolved via multiple conventions over many years with the last convention adopted in 1974. Consequently, the treaty is commonly referred to as SOLAS 1974.

In general terms, SOLAS establishes minimum safety standards related to ship construction, equipment, and operation. Countries party to the treaty ensure vessels under their flags comply with SOLAS’s terms by way of nationally administered certification programs. At the time of this writing, 166 countries, representing about 99 percent of the world’s shipping tonnage, were contracting parties to SOLAS 1974.

Although the last SOLAS convention was adopted in 1974, the treaty has been amended various times since then via the IMO’s “tacit acceptance” procedures. And like SOLAS itself, these amendments often followed tragedy, such as when the International Safety Management (ISM) Code was added as a chapter of SOLAS after a 1987 ferry accident in Belgium killed nearly 200 people. Because casualty investigators found the company’s poor safety culture contributed to the accident, IMO Member States developed the ISM Code, a global safety management standard, to combat what one investigator called the “disease of sloppiness” on ships and ashore. Entering into force in 1998, the ISM Code has made “shipping safer and cleaner” for more than two decades.

The IMO’s 2021 Cyber Guidelines

The ISM Code serves as the foundation upon which IMO Member States have built the 2021 guidelines for cyber risk management. The guidelines were consigned in 2017 via three key declarations. First, in Resolution MSC.429(98), Maritime Cyber Risk Management in Safety Management Systems, the IMO affirmed a view that the ISM Code already requires mitigation of cyber risks. Per this view, cyber risk management is already encompassed in the code’s existing general requirement that companies establish safeguards against all risks to ships, personnel, and the environment.

Resolution MSC.429(98) also contains a second important declaration. In it, the IMO encouraged countries to “appropriately address” this preexisting requirement no later than January 1, 2021. Put in more practical terms, now that the anticipated deadline for IMO’s cyber guidelines has arrived with the start of this new year, the IMO encourages Flag States not to issue compliance documents to vessels if cyber risks are not appropriately addressed in the respective safety management system.

The third important IMO declaration is in a July 2017 circular, in which the IMO announced that its Maritime Safety Committee (MSC) and its Facilitation Committee jointly approved specific cyber risk management guidelines. Member States developed these non-mandatory guidelines in partnership with shipping industry leaders to promote compliance with the aforementioned preexisting ISM Code requirement to mitigate cyber risks. In the July 2017 circular, the IMO recommends vessels and Flag States utilize the guidelines during compliance checks to assess whether cyber risks have been appropriately addressed.

As a risk management regime, the ISM Code is expected to adapt well to the management and mitigation of cyber risks. Government officials and maritime industry leaders, experienced from roughly 18 years of ISM Code practice, are expected to rise to the challenge of applying the code in the emerging cyber arena. Moreover, by identifying in the ISM Code a preexisting, albeit seemingly dormant, cyber requirement and then complementing that requirement with non-binding industry guidelines, Member States avoided the lengthy process of amending SOLAS 1974 and the ISM Code.

This is all to say, harnessing the ISM Code’s risk management framework to mitigate cyber threats was an efficient approach. In 2021, Flag States will begin to utilize this approach and work toward global uniformity.

The Work that Remains to Secure Ports

SOLAS 1974 has been amended numerous times, often to implement subsidiary regulations such as the ISM Code. Another subsidiary regulation within SOLAS is the International Ship and Port Facility Security (ISPS) Code, the IMO’s comprehensive mandatory security regime developed after a different tragedy—the 9/11 attacks. Interestingly, as the IMO’s new model for addressing cyber threats was being considered, the MSC reported, via MSC 97/22, that some Member States felt ISPS might be more suitable for addressing cyber threats. Nonetheless, seemingly moved by the United States’ 2017 assertion that the ISM Code’s “application is sufficiently wide to include emerging risks associated with cyber-enabled systems,” the IMO chose to harness the ISM Code, not ISPS, to promote global maritime cyber standardization.

While tapping into the ISM Code’s wide framework was efficient, such resourcefulness also came with a major limitation. Unlike the ISPS Code that covers certain ships and the port facilities that serve them, the ISM Code, even with its broad risk management concepts, applies only to vessels. This limitation means owners and operators of port facilities around the world will not reap the protective benefits realized with 2021’s implementation of IMO’s new cyber guidelines.

Port facilities play a vital role in global trade and rely heavily on technology to operate. As the May 2020 incident at Iran’s Shahid Rajaee port terminal demonstrates, a cyberattack at a port facility can be crippling. Since 2017, each of the four biggest maritime shipping companies in the world have been the victim of a cyberattack, with a recent attack taking place only a few months ago in September 2020. Considering these events, one should have no doubt that port facilities across the globe are presently vulnerable to cyber threats and the potential that these vulnerabilities will be exploited is undeniably real.

With the reality of cyber threats in mind, Member States and maritime industry leaders should collaborate at IMO to develop uniform cybersecurity standards for port facilities, just as they did to protect vessels. Coincidentally, in 2016 the Islamic Republic of Iran offered this exact proposal to the MSC. In MSC 97/4, Iran stressed the critical need for cyber risk management guidelines specific to ports. This proposal, somewhat prophetically considering the 2020 events at the Port of Shahid Rajaee, underscored the serious consequences a cyberattack could have on a port and on critical infrastructure.

While the MSC did not act on Iran’s proposal, in December 2016 the MSC expressly thanked Iran for its recommendation and “invited interested Member States to submit a proposal” for consideration at a future MSC session. No record has been found that any Member State has submitted such a proposal. Now is the time for Member States to accept the invitation.

Conclusion

The IMO’s guidelines for managing cyber risks on vessels are a key development for the shipping industry. Flag States and shipping companies worldwide now have an industry-sponsored framework from which to recurringly assess cyber safeguards on ships. There is more work to be done, however, to appropriately protect the rest of the maritime transportation system. Like Flag States and their vessels, Port States and their ports require guidelines to ensure cyber risks are uniformly addressed at maritime facilities. With 2021 finally ushering in cyber standards for vessels, now is the time for Member States, in partnership with the maritime industry, to assemble at the IMO and develop similar standards to secure ports across the globe.

Commander Michael C. Petta, USCG, serves as Associate Director for Maritime Operations and professor of international law in the Stockton Center for International Law at the U.S. Naval War College. The views presented are those of the author and do not necessarily reflect the policy or position of the U.S. Coast Guard, the Department of Homeland Security, the U.S. Navy, the Naval War College, or the Department of Defense.

This article appears courtesy of CIMSEC and may be found in its original form here


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Life itself arose from the oceans. The ocean is vast and covers 140 million square miles, some 72 per cent of the Earth’s surface. The ocean has always been an important source of food for the life it helped generate, and from earliest recorded history it has also served trade and commerce, adventure and discovery. It has separated and brought people together.

Even now, when the continents have been mapped and their interiors made accessible by road, river and air, most of the world’s people live no more than 200 miles from the sea and relate closely to it.

Freedom of the Seas

The oceans had long been subject to the freedom of-the-seas doctrine – a principle put forth in the 17th century, essentially limiting national rights and jurisdiction over the oceans to a narrow sea belt surrounding a nation’s coastline. The rest of the seas were declared free for all and belonged to none. While this situation lasted into the twentieth century, by mid-century there was an impetus to extend national claims over offshore resources.

There was a growing concern over the toll taken on coastal fish stocks by long-distance fishing fleets and over the threat of pollution and wastes from transport vessels and oil tankers carrying noxious cargoes that plied sea routes across the globe. The threat of pollution was always present for coastal resorts and all forms of ocean life. The navies of the maritime powers were competing for a worldwide presence in surface waters and even under the sea.

United Nations Law of the Sea Convention (UNCLOS)

The United Nations is working to ensure the peaceful, cooperative, legally defined uses of the seas and oceans for the individual and common benefit of humankind. Urgent calls for an effective international regime over the seabed and the ocean floor beyond a clearly defined national jurisdiction set in motion a process that spanned 15 years and saw the creation of the United Nations Seabed Committee, the signing of a treaty banning nuclear weapons on the seabed, the adoption of the General Assembly’s declaration that all seabed resources beyond the limits of national jurisdiction are the common heritage of mankind, and the convening of the Stockholm Conference on the Human Environment.

The UN’s groundbreaking work in adopting the 1982 Law of the Sea Convention stands as a defining moment in the extension of international law to the vast, shared water resources of our planet. The convention has resolved several important issues related to ocean usage and sovereignty, such as:

  • Established freedom-of-navigation rights
  • Set territorial sea boundaries 12 miles offshore
  • Set exclusive economic zones up to 200 miles offshore
  • Set rules for extending continental shelf rights up to 350 miles offshore
  • Created the International Seabed Authority
  • Created other conflict-resolution mechanisms (e.g., the UN Commission on the Limits of the Continental Shelf)

Protection of marine environment and biodiversity

The UN Environment Programme (UNEP), particularly through its Regional Seas Programme, acts to protect oceans and seas and promote the sustainable use of marine resources. The Regional Seas Conventions and Action Plans is the world’s only legal framework for protecting the oceans and seas at the regional level. UNEP also created The Global Programme of Action for the Protection of the Marine Environment from Land-based Activities. It is the only global intergovernmental mechanism directly addressing the link between terrestrial, freshwater, coastal and marine ecosystems.

The United Nations Educational, Scientific and Cultural Organization (UNESCO), through its Intergovernmental Oceanographic Commission, coordinates programmes in marine research, observation systems, hazard mitigation and better managing ocean and coastal areas.

The International Maritime Organization (IMO) is the key United Nations institution for the development of international maritime law. Its main task is to create a fair and effective, generally accepted and implemented legal framework for the shipping industry.

Marine shipping and pollution

To ensure that shipping is cleaner and greener, IMO has adopted regulations to address the emission of air pollutants from ships and has adopted binding energy-efficiency measures to reduce greenhouse gas emissions from international shipping. These include the landmark International Convention for the Prevention of Pollution from Ships of 1973, as modified by a 1978 Protocol (MARPOL), and the 1954 International Convention for the Prevention of Pollution of the Sea by Oil.

Polar Code

In 2017, the International Code for Ships Operating in Polar Waters (Polar Code) entered into force. The Polar Code covers the full range of design, construction, equipment, operational, training, search and rescue and environmental protection matters relevant to ships operating in the inhospitable waters surrounding the two poles. It was an important regulatory development in the field of transport and trade facilitation, alongside a range of regulatory developments relating to maritime and supply chain security and environmental issues.

Piracy

MONUSCO peacekeepers land at beach to guard against piracy

In recent years there has been a surge in piracy off the coast of Somalia and in the Gulf of Guinea. Pirate attacks are a danger to the welfare of seafarers and the security of navigation and commerce. These criminal acts may result in the loss of life, physical harm or hostage-taking of seafarers, significant disruptions to commerce and navigation, financial losses to shipowners, increased insurance premiums and security costs, increased costs to consumers and producers, and damage to the marine environment.

Pirate attacks can have widespread ramifications, including preventing humanitarian assistance and increasing the costs of future shipments to the affected areas. The IMO and UN have adopted additional resolutions to complement the rules in the Law of the Sea Convention for dealing with piracy.

The United Nations Office on Drugs and Crime (UNODC), through its Global Maritime Crime Programme (GMCP) combats transnational organized crime in Africa focusing on countering piracy of the Horn of Africa and Gulf of Guinea. The programme has delivered support to states in the region by carrying out trials and imprisonment of piracy suspects as well as developing maritime law enforcement capabilities through the facilitation of training programmes. From the piracy prosecution model, prisoner transfers and training of members in the judicial system of the Atlantic and Indian Ocean, to full-time mentoring to coast guards and police units in Somalia, Kenya and Ghana, the UNODC GMCP has accomplished many successes in a challenging environment. This has been achieved through a variety of programmes aimed at promoting maritime safety and bolstering the countries’ rule of law and justice systems.

Resources:


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At times in the year running up to the start of the IMO 2020 global 0.5% sulphur cap on marine fuel it felt like a constant refrain of “the sky is falling, the sky is falling” from the shipping industry.

There were all sorts of often repeated dire warnings of likely widespread lack of availability of compliant fuels, mass breakdowns of vessels due to poorly blended fuels, large numbers of ship failing to get their tanks cleaned in time, and contentious detentions for non-compliance.  Ten days into 2020 it is fair to say the sky has not fallen, world trade continues as normal, and it is tempting to believe this has been closer to the Y2K bug in terms of being a non-event than the “once in a century” change it was flagged as being.

So has the transition been really that smooth? Well not exactly, but widescale dislocation of the shipping market has fortunately not materialised, however, there has certainly been an impact on the industry, and some of the possible problems could take a while to materialise.

Fuel price uncertainty

Price uncertainty for compliant very low sulphur fuel oil (VLSFO) remains and has spiked markedly in recent weeks as IMO 2020 came into force. According to Ship & Bunker the price of VLSFO in the world’s largest bunkering port of Singapore has softened slightly to $723.50 per metric tonne (pmt) compared to $740 pmt on 6 January, but remains sharply higher than the $520-550 pmt seen between July to November 2019.

At current levels compliant fuels – either VLSFO or similarly priced MGO – are at levels that equate to some of the highest prices owners ever paid for heavy fuel oil (HFO). Where prices will head remains very much up in the air, even if there is an expectation that VLFSO prices will soften as the market settles. What is clear is that owners are experiencing both high and uncertain fuel prices in the early days of IMO 2020.

Owners with scrubbers cleaning up

The multi-million dollar question for owners opting to install exhaust gas cleaning systems, or scrubbers, was would the fuel price spread justify the investment with a short pay back period. As of 10 January the answer is a resounding “yes” with the soaring VLSFO price noted in the previous paragraphs and the HFO price actually falling resulting a spread in the $300 pmt plus range currently.

So is it nothing but good news for scrubber owners? Not entirely. For those who joined the rush to install exhaust gas cleaning systems in the 12 – 18 months it’s turned out the process is more complicated than anticipated with widespread delays at yards taking ships out of service for significantly longer than expected with installations reported to take 45 – 60 days, rather than the advertised 30-day range, equating to longer periods of lost earnings. And whether owners will experience operational and corrosion issues will take a longer time to become clear.

Fuel unavailability

The unavailability of compliant fuels, particularly in smaller ports for vessels on the tramp trades, was an oft repeated concern in 2019. However, by and large it would seem compliant fuels are available. One of those who had flagged such concerns over the last year – International Chamber of Shipping (ICS) chairman Esben Poulsson – told CNBC on 1 January, “Availability was for a long time a concern, but from everything we are hearing availability is there.”

There has been some anecdotal evidence of owners that had not secured supplies in advance experiencing difficulties in procurement fuel on the spot market. Analyst Alphaliner reported at least six containerships idle off Singapore from the end of 2019 that appeared to be awaiting supplies of compliant fuel.

Fuel contamination and incompatibility

The nature of the new blended fuels being used to comply with IMO 2020 has raised concerns of contamination and incompatibility between blends leading to engine issues and possible breakdowns. Just 10 days into IMO 2020 is probably too early for evidence of widescale problems, if there are any, to have emerged. For example the fuel contamination that started in the Gulf of Mexico in 2018 took several weeks to emerge as a pattern of issues flagged up by fuel testers and months for the problem to spread globally.

Detentions for non-compliant fuel

At the time of writing there have been no reported detentions by Port State Control regimes for using non-compliant fuel despite some fairly high figures expected for non-compliance. Whether this is simply regulators being relatively lenient in the early phases of IMO 2020, and the fact it takes time to test fuel samples to prove non-compliance remains to be seen.

Early days

The early days of IMO 2020 coming into force have certainly had impact on the industry, not least in the months spent preparing for it, but so far it appears that preparation has paid off with fears of widespread major problems for global shipping not having transpired.

Source: seatrade-maritime


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The proposed amendments to the MARPOL convention would require ships to combine a technical and an operational approach to reduce their carbon intensity.

Shipping has had a mixed reaction to last week’s Intersessional Working Group on Reducing Greenhouse Gas Emissions from Ships at the International Maritime Organization (IMO), which agreed to make an existing target legally binding:

to reduce the carbon intensity of shipping by 40% compared with 2008 levels in the next 10 years.

The proposed amendments to the MARPOL convention would require ships to combine a technical and an operational approach to reduce their carbon intensity.

The proposed draft amendments would add further requirements to the energy efficiency measures in MARPOL Annex VI chapter 4. Current requirements are based on the Energy Efficiency Design Index (EEDI), for newbuild ships, which means they have to be built and designed to be more energy efficient than the baseline; and the mandatory Ship Energy Efficiency Management Plan (SEEMP), for all ships.

The SEEMP provides for ship operators to have in place a plan to improve energy efficiency through a variety of ship specific measures.

The draft amendments build on these measures by bringing in requirements to assess and measure the energy efficiency of all ships and set the required attainment values.

The goal is to reduce the carbon intensity of international shipping, working towards the levels of ambition set out in the Initial IMO Strategy on reduction of GHG emissions from ships.

These are two new measures: the technical requirement to reduce carbon intensity, based on a new Energy Efficiency Existing Ship Index (EEXI); and the operational carbon intensity reduction requirements, based on a new operational carbon intensity indicator (CII).

“The dual approach aims to address both technical (how the ship is retrofitted and equipped) and operational measures (how the ship operates),” the IMO explained in a release. The CII rating would be given on a scale – operational carbon intensity rating A, B, C, D or E. A ship rated D for three consecutive years, or E, would have to submit a corrective action plan, to show how the required index (C or above) would be achieved.

The draft amendments would require the IMO to review the effectiveness of the implementation of the CII and EEXI requirements, by 2026 at the latest, and, if necessary, develop and adopt further amendments.

The draft text will now be forwarded to the Marine Environment Protection Committee (MEPC), scheduled for November 16 to 20, where parties are expected to adopt the recommendations from the working group.

The International Chamber of Shipping (ICS) welcomed the package of additional CO2 reduction measures for the existing global fleet. ICS secretary-general Guy Platten maintained:

“Industry needs certainty, and this agreement provides a clear signal about the investments we need to make to further reduce our emissions, and ultimately becoming a zero emissions sector.” More circumspect was BIMCO, shipping’s other mega association. “Important elements are still missing, it is impossible to judge the effect,” a BIMCO release noted.

“The IMO initial strategy’s ambition to improve carbon efficiency of the fleet by 40% by 2030 compared to 2008 is silent on how carbon efficiency shall be measured.

Thus the 2030 ambition may, or may not, result in lower total emissions from the fleet – it all depends on the metric chosen and resulting change in operational behaviour of ships,” BIMCO noted.

John Butler, CEO of liner lobbying group, the World Shipping Council (WSC), commented: “Whilst it is easy to criticise the outcome of the intercessional, it is worth remembering that anything short of a global solution represents long-term failure on climate change.

We need to stick with this hard work, but the task is urgent, and we must move further, faster.

As long as our only fuel options are carbon based, GHG reductions will be limited. Efficiency is important, but it will not solve the problem.”

A host of NGOs were less than impressed with the deliberations at IMO last week, suggesting the hybrid, compromise measures, known as J/5, agreed upon will not cap, let alone reduce, shipping emissions this decade.

“We urge all countries to reconsider their support for the J/5 decision ahead of MEPC75 this November 16 to 20, and reject it, unless it can be fundamentally strengthened,” said John Maggs, president of the Clean Shipping Coalition, which had observer status at the talks.

Faig Abbasov, shipping programme director at Transport & Environment, said:

“Governments have ridden roughshod over the Paris Agreement by agreeing a measure that will see ship emissions grow for decades to come.

The UN maritime agency again showed the world it can only deliver cosmetic changes. EU countries should work through the European Green Deal to fill the gap left by the IMO.”

Source: turkishmaritime


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The IMO Assembly, meeting for its 31st session (25 November-4 December 2019) adopted a resolution on “Preserving the Legacy of the World Maritime Theme for 2019 and achieving a Barrier-Free Working Environment for Women in the Maritime Sector”.

The resolution urges governments, maritime administrations and the industry to endeavour to reach a barrier-free environment for women, so that all women can participate fully, safely and without hindrance in the activities of the maritime community, including seafaring and shipbuilding activities.

The resolution notes testimony from women from across the various maritime industries which demonstrates that barriers and obstacles still exist at every level. The work towards gender equality, including the fostering of a safe environment for women in the maritime sector, remains incomplete and should continue to be pursued.

IMO member States have pledged further firm action in coming years to advance gender equality throughout the maritime sector and reach a barrier-free environment, following a year of action to “empower women in the maritime community” – the World Maritime theme for 2019.

Governments, maritime administrations and the maritime industries should consider ways to continuously identify and overcome existing constraints in all aspects of the maritime sector, particularly with regard to recruitment, promotion, training, capacity-building and technical cooperation.

The resolution encourages sharing best practices in achieving gender equality. It also encourages efforts to collect, consolidate and analyse data relating to the participation of women in the maritime sector, in order to establish an evidentiary foundation that will set baselines, identify gaps and inform policies aimed at removing barriers and increasing female participation in the sector.

The resolution also encourages IMO, and its relevant subsidiary bodies to take into consideration gender equality, including the fostering of a safe environment for women in the maritime sector, and integrate these considerations into their work. Open dialogue and wider engagement between the Member States and observer delegations is encouraged.

Creating a barrier-free environment for women will help achieve the global Sustainable Development Goal (SDG) 5 on gender equality.

Source: issuu


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About 90% of global trade moves in the approximately 51,000 ships composing the world fleet. In the meantime, the insatiable demand for the fuel that drives maritime global trade is estimated at 2.1 billion barrels (88.2 billion gallons) annually, or 244 million gallons per day.

The noxious emissions, largely sulfur oxides, as well as nitrous oxides and particulate matter, have become a major environmental concern and have been proven to adversely affect global health as they’re discharged into the atmosphere. According to a Goldman-Sachs study, burning standard bunker fuel (Heavy Fuel Oil or HFO) accounts for almost 90% of a sulfur emissions globally, with the largest 15 vessels producing more sulfur than the combined total of all the world’s automobiles.

The International Maritime Organization (IMO) regulations limiting sulfur content of bunker fuel to 0.5% (down from 3.5%) will take effect on January 1, 2020. A small portion of the 51,000 ships in the global fleet already burn compliant fuel, but the remainder will have only four viable options, including one temporary “hall pass” to comply with the law: convert to low-sulfur (e.g., MGO, VLSFO, diesel) or a blend of HFO and low-sulfur that meets the emission standards; install expensive scrubbers and continue to burn HFO, the cheapest grade of fuel; convert to LNG by replacing HFO-burning ships with new LNG vessels; or obtain waivers/non-compliance. For the latter, IMO-2020 provides waivers in a situation where compliant fuel is not available (ships would be required to present a record of the actions taken to attempt to achieve compliance).

Goldman Sachs estimates that the overall impact on consumers in 2020 could be as much as $240 billion, as the added costs cascade across global supply chains, adding approximately $40 billion in increased shipping costs. “This is the largest regulatory change in the oil space ever, and it will have a massive effect far outside of shipping,” says Svelland Capital portfolio manager Kenneth Tveter.

Analysis by the commercial maritime and refining industries indicate about 84 million gallons/day of shipping fuel will transition to low-sulfur alternatives, with some estimates reaching as high as 168 million gallons/day. This tectonic shift means significant additional demand for middle distillates, the fraction of the refined barrel that includes ultra-low-sulfur diesel for truck and rail freight, as well as domestic barge operations.

One strategy, first deployed on a significant scale during the excess capacity of the last downturn, was slow steaming. It saved in fuel cost and used up a portion of the idle capacity, filling out vessel strings that needed more ships due to slower speeds. With operating costs such a vital element for vessel owners, slow steaming and super-slow steaming will invariably arise again. The impact on cost is undeniable, but the lengthening of supply chain lead-times will prove problematic.

This will drive further examination of alternative supply sourcing (i.e., near-shoring or on-shoring.) For supply chain professionals, this is a bit like navigating into a traffic circle in the dark, in the rain, with no lights and trying to find the right exit. Derek Leathers, CEO of national trucker Werner Enterprises posed an insightful question: “Does this do anything broader, for example, to impact near-shoring versus off-shoring? Will it tip the balance?”

The new world order will produce a significant ripple effect, especially when combined with rising labor costs in China, increasing tariffs and longer cycle times. A significant shift in manufacturing to more favorable total cost of ownership (TCO) options will be on the table. Planning for potential impacts and outcomes can’t start soon enough.

The fallout

There is little question that costs will rise: The key question is where the hammer will fall and who will bear the additional cost.

The world’s two biggest container shipping lines—Denmark’s Maersk and Swiss headquartered MSC—say that they face annual extra costs of more than $2 billion each. In the meantime, 25 logistics company executives told Reuters recently that they would pass along any IMO-related costs, such as ship upgrades or more expensive fuel, to customers.

But that’s not all, as the ripple effect is predicted to wash ashore in North America and affect domestic land transportation. While IMO rules don’t apply to domestic modes, they will face new competition from ships for low-sulfur fuel. This is expected to raise the cost of diesel fuel and much as 100% and also affect availability of supply in certain key markets. In summary, we can expect large-scale disruptions in global supply chains as the upheaval in fuel markets takes root and carriers scramble to comply.

Fuel availability will be more challenging under the new rules because blend specs and compatibility remain non-standardized. “At the moment, no one knows which types of fuels will be available at what price, specification or in what quantity,” says Esteban Poulsson of the International Chamber of Shipping. “We could be faced with an unholy mess with ships and cargo stuck in port.”

A reasonable hypothesis is this: All responsible marine vessel operators will be compliant with the IMO-2020 regulations. Some will convert—as some already have—to distillate fuels. Some—estimates say less than 5%—will install scrubbers. Some will resort to HFO/low-sulfur blends. Some will replace aging vessels with LNG-fueled ships.

The net effect will be a surge in demand for distillate fuels as both a source for burning directly and for blending. Refining capacity will not keep up with demand, leading to rising prices for diesel fuel in major markets, like North America.

“Rarely do you see such a potentially massive disruption,” says John Kartsonas, managing partner of Breakwave Advisors. “Delays, a reduced active fleet supply, slow steaming and port congestion can push freight rates to decade highs—and beyond.”

Regardless of the magnitude this change will have, and its ripple effect along the supply chain, it should be viewed seriously by all modes and equally so by those who buy transportation services from these carriers.

North American domestic impact

Predictions are that the wholesale conversion of the ocean-going vessel fleet will significantly increase the demand and competition for fuels used by other modes, with a consequential rise in price—some estimates say as high as 100% increases—and possible constriction of availability.

We were curious about how shippers viewed IMO-2020: Was it high on their radar or buried in the back-scatter? Logistics Management partnered with Breakthrough, a leading transportation energy management firm, in creating a survey to assess the attitudes and readiness of shippers to cope with the impending changes:

More than 90% of the respondents have little or no awareness or knowledge of IMO and the impending regulations, and 80% have done no analysis or forecasting relating to impact on their domestic transportation cost. While the IMO sulfur cap was announced more than 10 years ago, vessel operators said little or nothing to their customers until recently (Q4, 2018). This gave a false sense of security, even to those who have been actively monitoring progress.

Our going-in presumption was, for North American-centric shippers (meaning those spending the bulk of their transportation dollars on truck, rail and barge freight), the level of awareness was not high and the impact not viewed as relevant or of great magnitude.

Bolstering the survey, we interviewed a cross-section of senior-level executives from the ocean, rail, truck and shipper communities, as well as several from the refining and energy markets. A consistent theme was people were “generally aware” of the new IMO-2020 regulations, but had not done any significant analysis to assess the effect on their business.

BNSF Railway burns more fuel than anyone in North America, with the exception of the U.S. Navy. Railroad veteran Matt Rose shepherded BNSF through a drastic rise in fuel costs during the past 20 years. “Fuel went from about $770 million in 2000 to a peak of $4.6 billion,” he said.

“At one point, fuel was 10% of operating cost, and at its peak it equaled labor cost at 32%,” adds Rose. “Railroads will have to make choices on fuel for the longer term. Going to LNG is billions of dollars in infrastructure and equipment cost. The net price of fuel would have to go up $0.75 to $1.00 per gallon before it would drive a major shift.”

While a 50% increase in the cost of diesel would achieve this, the timing and capital to convert would be large in scale and likely need to extend to most, if not all, the Class I railroads, due to interoperability of equipment.

Derek Leathers runs one of the nation’s largest motor carriers. As CEO of Werner Enterprises, Leathers has his eye on the ball. “We very much have this on our roadmap and have discussed at the board level. It will put more demand on refining capacity, which will have more of an impact in our space. Diesel will have more homes to go to, so our best response is to push the envelope on MPG.”

Source: logisticsmgmt


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LONDON (Bloomberg) – Historic rules to clean up pollution in the shipping industry are two weeks from taking effect, but there are signs that enforcing the new legislation will prove tricky.

The International Maritime Organization, part of the UN, is trying to curb the release of sulfur oxides that it says are bad for human health and contribute to acid rain. Shipowners and oil companies have spent billions of dollars getting ready. However, countries home to around 15% of the world’s oil-refining capacity have so far failed to sign up to the pact that’s designed to slash emissions of the pollutant starting in January.

Not Ratified. And even among the nations that back the rules, some important ones don’t look likely to start with an aggressive implementation. South Africa, which sits on shipping lanes connecting the east and western hemispheres, doesn’t have the domestic laws in place to enforce the rules. The United Arab Emirates, home to the biggest vessel-refueling center in the Middle East, intends to avoid a draconian start to enforcement.

“It will be devastating if not everyone complies,” said Clea Henrichsen, a special adviser at the Ministry of Environment and Food for Denmark, where sulfur content in the air more than halved in two years after introducing an emissions cap. “It’s awful now in terms of air pollution around the world.”

Laying Down the Law. For its part, the IMO says that any country that ratified the rules made a commitment to implement them from Jan. 1.

While the IMO sets the regulations, it’s down to individual states to put them into practice, inspecting vessels and having a legal framework in place to punish those that aren’t compliant. But what that will look like in reality is still unclear in several locations.

“Most states are keeping their cards really close to their chest,” said Alessio Sbraga, a partner in the shipping team at Holman Fenwick Willan LLP in London. “There’s a general lack of transparency. That’s concerning because, in the first place, robust and consistent enforcement will be important for a level playing field.”

South Africa has agreed along with 95 other IMO member states to enforce the rules in its waters. But legislation to make that possible won’t be ready in time.

“That bill is not going to see the light of day until sometime next year,” said Edmund Greiner, a maritime lawyer for Shepstone & Wylie’s Cape Town office, who advises the South African Maritime Safety Authority on issues relating to marine pollution. “Without that bill coming into force of law as an act of parliament, we can’t do anything in South Africa to enforce the provisions.”

Sobantu Tilayi, the acting chief executive officer at SAMSA, said he hopes to see the laws passed by the first half of 2020.

“Our allowance for the parliamentary recess was not enough in hindsight, that’s how it got affected,” Tilayi said. “In terms of the South African constitution, we need an enabling legislation to give force to our accession and that is the part that has been delayed. Because of where we are in the region, we provide that assurance to international shipping and so we cannot afford to be found wanting on any of these matters.”

Against the Clock. Jamaica doesn’t have the domestic laws in place either. The suggested legislation has been before parliament for some time but is yet to be passed, said a spokeswoman for the national Maritime Authority. It is not alone: fewer than half of the 20 member states of the Caribbean Memorandum of Understanding have laws to enforce IMO 2020, according to the organization’s Secretary General Jodi Barrow.

Shipping companies fear that lax enforcement might tempt some to cheat. That’s crucial because fuel is normally the industry’s single biggest cost, so non-compliant firms could glean a competitive edge. The legislation is supposed to mean that ships either consume fuel with 0.5% sulfur — down from a 3.5% limit in most parts of the world today — or that they need on-board equipment called scrubbers to prevent the sulfur from being released into the atmosphere.

Strict implementation is “extremely important, because if you use high sulfur fuel oil you can save immensely on costs and there is a very high potential for fraud,” said a spokesman of Hapag-Lloyd AG, a Hamburg-based container shipping giant.

Other countries are simply heeding calls from the shipping industry to take a pragmatic stance on enforcement, at least to start with. The United Arab Emirates, for example, is anticipating that it won’t begin by penalizing non-compliant ships, according to the head of the nation’s Federal Transport Authority. That’s a potentially vital stance given the country is home to the port of Fujairah, which provides fuel for thousands of ships each year as they come and go from the Persian Gulf.

Fine Disparities. As well as questions about how the regulations will be enforced, there are also significant differences in terms of fines and penalties that companies can expect to pay if they breach the rules, according to Carol Holness, a Durban-based transport lawyer for Norton Rose Fulbright LLP who has looked into the largest maximum fines in countries’ legislation.

If South Africa’s bill from September passes into law unchanged, rule-breakers would risk a fine of 3.2 million rand ($220,000), or five years’ imprisonment, or both. In Belgium, penalties for burning overly sulfurous fuel rise to more than $8.9 million. That doubles for re-offenders.

“There’s just such a wide variation in terms of what countries are doing,” said Holness.

Searching Ships. When South Africa’s laws do come into play, SAMSA may also struggle to check ships enough to manage cheating. In 2018, around 2% of the ships that called at its ports were inspected, according to data from the Abuja MOU, a port-state control organization.

Tilayi says regional rules mean a maximum of around 5% can be inspected. A more common figure for inspections in Europe and Asia is roughly 20%, according to Chris Cote, an analyst at ESAI Energy LLC. Singapore, one of the most important maritime hubs globally, inspected 7% of vessels in 2018, according to the Tokyo MOU.

In practice, sulfur checks may differ from other inspections. Some ports are deploying drones that can identify those vessels that need a closer look.

Even if all the countries that have ratified the rules do their best to enforce them, though, some regions around the world will have to play catch up. Many nations have years of experience enforcing sulfur caps, but around 100 haven’t signed up to the IMO agreement yet. These countries include Argentina, Colombia, Ecuador, Israel, Iraq, Mexico, Pakistan and Egypt, according to the latest IMO data available. The Suez Canal, a trade artery between Europe and Asia, passes through the latter country.

All together, the combined oil-refining capacity of the non-signatories is 15 million barrels a day, according to a report by OPEC.

Preparatory Work. While non-signatories won’t be able to enforce the rules, most ships will have to pass through countries that are participating in the regulations, an IMO spokeswoman said.

“So on a practical level, they would need to comply — since they would not want to be emptying tanks out and cleaning them were they to be contaminated with non-compliant fuel oil,” she said.

“IMO member states, the shipping industry and fuel oil suppliers have been working tirelessly to prepare for this major change in the sulfur content of ships’ fuel oil,” IMO Secretary-General Kitack Lim said on the organization’s website on Wednesday. “I am confident that the benefits will soon be felt and that implementation will be smooth.”

The IMO said it had set up an email hotline to deal with queries from member states and the shipping industry.

So-called flag states, the locations where most of the world’s ships are registered, have also signed up to the agreement and those that ratified represent 97% of the fleet, according to the IMO.

When the standards do kick in, up to 20% of vessels could initially be breaking the rules, said Richard Chatterton, an oil analyst for BloombergNEF in Singapore. But the international pressure to comply means that “it would be folly for a shipping company to ignore the reality of the markets.”

“Because everyone who’s invested in a scrubber, everyone who invested in updating a refinery, everyone who’s invested in rejigging their supply infrastructure — it’s just going to be an absolute mockery if they don’t enforce compliance of the rules that have precipitated billions of dollars of investment,” he said.

Source: worldoil


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Oil markets will go through a major transformation as new regulations covering the sulphur content of marine fuels take effect from January 1, 2020 and may have an impact on the regional countries due to high level of sulphur content in their crude.

The International Maritime Organisation (IMO) has ruled that from January 1, 2020, marine sector emissions in international waters will be slashed. The marine sector will have to reduce sulphur emissions by over 80 per cent by switching to lower sulphur fuels. The rules define that the global 0.5 per cent sulphur cap will enter into force in 2020, and more than 70,000 ships will be affected by the regulation.

The IMO 2020 rules have been estimated to affect as much as 3.5 million barrels per day of demand for high sulphur fuel oil, the shipping industry’s traditional fuel.

Industry insiders said that the UAE ratified the IMO 2020 rules in May and it won’t rush to punish non-compliant ships when new rules will be effective from January 1. They said the UAE holds strategic position in the region because of Fujairah Port where thousands of ships go to refuel each year when calling at ports in the Middle East.

Federal Transport Authority chairman Abdullah Al Nuaimi said recently that the UAE will adopt a flexible approach toward those ships that breach the environmental regulations when they enter into force on January 1.

“The ships rejected by another port for non-compliance should not call in the UAE,” according to one official. “The UAE is developing a new maritime trade law that will help standardise penalties across ports,” he added.

Substantial industry attention has focused on how refiners, traders, ports and the shipping industry will adjust but the sulphur content of refined fuels is largely a function of the content in the original crude oil. For a region that produces a relatively sour barrel, the Middle East could face changes in the demand profile for its crude exports post 2020.

As Mena grades are on average heavier and sour, their long-term demand will be a function of the appetite of highly complex refineries, mainly located in Asian markets. Crude exported from Mena is generally of medium to heavy gravity and sour, although there is a wide variation by country.

“In the GCC, however, most crudes are classified as sour and yield a relatively larger share of fuel oil, precisely the opposite of what markets will be looking for as baseload crudes to meet IMO rules,” said Edward Bell, commodity analyst at Emirates NBD Research.

“On a weighted average production basis, the UAE’s main grades come in at an API of 38 and sulphur content of 1.1 per cent. For export markets, the UAE’s crude quality is likely to become lighter as Murban (39.7, 0.8 per cent sulphur) takes up more of the share of exported barrels as grades such as Upper Zakum (33.9, 1.8 per cent sulphur) are fed into an upgraded and expanded refinery at Ruwais,” Emirates NBD Research said in a note.

Bell expects that the full impact of IMO 2020 on Middle East exporters will be clouded so long as Opec production cuts remain in place.

“Mena exporters of sour crude grades will need to maintain their investment in upgrading refineries or targeting export markets capable of processing their crude in order to remain competitive in a post-IMO world.”

He expects markets will end up in a surplus for 2020, with a particularly heavy oversupply in H1 2020. He sees considerable upside barriers in their way and thus substantial gains look difficult.

“We expect Brent prices will record an average of $57 per barrel, down $2.50 per barrel from our previous forecast and a drop of 11 per cent year-on-year from our 2019 price target. For WTI, we expect prices at around $55 per barrel, down by $1.90 per barrel from our previous expectations and a drop of 5.5 per cent from our 2019 target.”

The Opec group of oil producing countries and their allies – including Russia – have agreed to a production cut of 500,000bpd in addition to their current agreement, bringing production 1.7 million bpd below October 2018 levels.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, expects global oil demand growth to increase modestly to 1.1 million barrels a day in 2020 after slowing to an estimated multi-year low of 0.9 million bpd in 2019.

“Against this backdrop, we retain our Brent crude forecast for 2020 at $62.5 per barrel, though we adjust our 2019 estimate marginally down to $64.0 per barrel from 64.7 per barrel,” Malik said in a note.

Francisco Blanch, head of commodities and derivatives research at Bank of America Merrill Lynch, projects an average Brent price of $60 a barrel in 2020.

“We believe spot prices could rise to around $70 a barrel by mid-year. Diesel prices, further boosted by a big surge in marine gasoil demand on the back of IMO 2020 regulatory changes, could approach $100 per barrel in the first half of 2020,” Blanch said.

Slava Kiryushin, Dubai-based global head of energy at DWF, expects there to be an oversupply.

“Even the new shipping fuel regulations set to be implemented in January 2020, known as IMO 2020, are not expected to change this trend despite potentially leading to an increased demand for low-sulphur gasoil and diesel. No doubt that the growth of the oil supply is a sensitive topic for Opec+ members as 500,000 barrels a day were agreed to be cut from Opec’s supply. Overall, the market is less optimistic over the ‘revival’ of the oil price,” he said.
Source: Khaleej Times


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On Jan. 1, 2020, new emissions standards from the International Maritime Organization (IMO), designed to curb emissions produced by maritime shipping, will go into effect. The new standards will further limit the acceptable levels of sulfur in ship fuel.

The standards are likely to have a profound impact on the global logistics industry, as nearly all – more than 90% – of the world’s trade remains carried by sea.

What the new standards change

The new rules will further limit the acceptable sulfur content of marine fuel, ratcheting it down from the existing 3.5% to 0.5%. As a point of reference, most current marine fuel averages a sulfur content of around 2.7%.

The change to sulfur limits will be the first the IMO has made since it established the original 3.5% limit in 2005.

The rule change isn’t complicated, but it will likely have wide-reaching effects on the logistics industry, fuel production and global trade. Experts from the oil and gas industry have gone as far as describing the new rules as “the biggest change in oil market history,” according to CNBC.

The new standards will require the shipping and cruise industries to turn from cheaper, dirtier crude oil to products that are cleaner and less polluting, but more expensive – or face fines levied by the IMO.

The IMO did not change its regulations beyond the sulfur limit. As a result, ships can continue to use high-sulfur fuel, so long as they use an exhaust cleaning system to scrub their emissions, or if they mix that fuel with another variety that brings the total sulfur content below the 0.5% limit.

Why the IMO changed its standards

Experts predict the reduction in sulfur content to reduce the amount of sulfur oxide produced by global maritime transit. They say it should improve the health of those living in communities near ports, major shipping routes and coasts, which are typically the most impacted by maritime pollution and emissions.

In its reasoning for the change, the IMO cited a study which predicted cutting emissions of sulfur oxide could prevent more than 570,000 premature deaths between 2020 and 2025.

The same study estimates that the cost of the rule change will be approximately $30 billion per year, or around $277,000 per prevented death.

Residents in the coastal regions of India and China, where shipping lanes are densest, can expect to see some of the most significant health benefits.

The fuel change is substantial, but not the most restrictive standard on sulfur content the IMO imposes. Ships operating in emission control areas established by the IMO – which include the Baltic Sea and the area around Puerto Rico and the U.S. Virgin Islands – already need to comply with a 0.1% sulfur content limit.

Some shipping companies have expressed worries about their ability to comply with the new standards, but the IMO has been steadfast that the regulation will become active on Jan. 1, 2020.

How shipowners are responding

In the same way they can manage product shipping on land, logistics companies will need to turn to new technology – and possible fuel types – to reduce their production of sulfur oxide and come into compliance with the new IMO regulations.

The rule change leaves shipowners with a few different options for compliance, including switching from high-sulfur fuel to marine gas, very low-sulfur fuel or liquefied natural gas, as well as systems that clean engine exhaust.

Major oil producers BP and Royal Dutch Shell have already announced that they are producing very low-sulfur fuels that will fall under the 0.5% limit. The IMO has prepared, however, for shortages of compliant fuel at smaller ports with fewer available resources.

Marine energy and shipping consultant Adrian Tolson predicts most shipowners will switch to marine gas, natural gas or low sulfur-content oil, while a smaller portion – around 20% – will install exhaust gas scrubber systems to help control their emissions of sulfur oxide.

Shippers will need to begin planning now, if they haven’t already. By the time the IMO starts enforcing its regulations in early 2020, shipping companies should already have identified alternative fuel sources that will bring them into compliance with these new standards.

While the shipping and cruise industry will likely be the most impacted by the rule change, ships of all sizes will need to comply with the regulation. They will also need to meet the standards regardless of whether their voyage is international.

How the new IMO standards may change maritime shipping

The new rule change isn’t complex but is likely to cause significant changes in the maritime shipping and oil and gas industries. Shipowners and energy companies have been preparing for the shift by looking to new fuel sources and equipment that could reduce their production of sulfur oxide.

The new standards will be costly to the shipping industry – but, if successfully enforced, could save hundreds of thousands of lives.

In the future, as sustainability, environmental stewardship and climate change become more pressing priorities, these sorts of rule changes may become even more prevalent.

Source: freightwaves


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The shipping industry has known about the mandated shift to low sulphur fuel for approaching three years, but details remains elusive about the availability and pricing of compliant products.

The International Maritime Organization (IMO) announced in October 2016 that only fuels with a sulphur content below 0.5pc, down from the standard 3.5pc, can be used from 1 January 2020. With global consumption of 3mn bl/d, it is a monumental change and its effects will be felt well beyond bunker fuel markets.

While high sulphur fuel oil (HSFO) can be converted to low sulphur (LSFO), the capacity to meet global demand simply does not exist. The lead time⁠—especially as some were initially unconvinced it would happen on time, if at all⁠—was insufficient to build facilities. To add pressure, a credit trading scheme was not set up to bail out laggards (as the European Union did when it mandated ultra-low sulphur diesel [ULSD] in emission control areas).

This means the industry has three realistic compliance options and the consensus among analysts is that it will adopt each in roughly equal measure: LSFO; marine gasoil (MGO); and retrofitting on-board scrubbers to filter HSFO. Consultancy Channoil suggests that 10pc may cheat, concentrated in areas where supply is almost impossible or policing lax, but compliance will be rigorously enforced after a three-month window.

“The regulation is quite clear,” says Charles Daly, chairman of Channoil. “There will be penalties if you are caught carrying non-compliant fuel oil. No relief will be given unless there is an absolute case that the master could not get compliant fuel or that, by not doing so, he or she would be endangering the ship. Compliance is going to be strongly regulated.”

Each of the three option’s attractiveness will depend on the relative prices that emerge and how they play out over the next few years. Unhelpfully, “no provider has said where compliant fuel oil is going to be priced,” says Daly.

Significant price spreads will open up between high and low sulphur crudes, according to Stuart Dunphy, director of business consulting for northern Europe for software provider AspenTech. “There will be market imbalances⁠—and these will open up opportunities for those refineries in a position to capture them over the next four or five years the imbalances are expected to last.”

Price prediction

Analysis of the forward price curves of HSFO, LSFO and MGO do not yet reflect the scale of the change and may lead some to underestimate problem. The curves remain relatively flat despite “there being widespread concern that there may be insufficient supply to meet demand for LSFO,” says Dunphy.

“We all need to realise that IMO 2020 is real⁠—it will be large and disruptive,” says Rick Joswick, head of oil pricing analytics at consultancy S&P Global Platts. “Some are sceptical about how disruptive this will be. But the only reason prices have not moved is because the change has not yet happened. The price effects will occur once demand changes, at some point before the January cut-off date.”

He estimates that bunker suppliers will buy in October and shippers will buy from November. This translates into HSFO supplies into Singapore, the world’s largest bunker market, falling significantly during September or October. “That is when we should see price effects,” he says. “It is like a tsunami. It is still hidden beyond the horizon⁠—but it is going to hit us.”

There are convincing reasons why the forward curve for distillates has not spiked in the way one may have anticipated. Several attributes from today’s pre-IMO spot market are still informing the curve: the cost to store inventory, the cost of carry, inventory levels and hedging activity. “It functions perfectly for these factors-hedging and incentivising storage/draining of stock⁠—but it is not anywhere near our forecast yet,” says Joswick.

In 2008 there was a huge spike in distillate cracks, caused largely by the Chinese Olympics, of a similar magnitude to those expected to result from IMO 2020. “Every time during that excursion⁠—up and down⁠—the forward curve looked like a series of horizontal lines. It did not predict anything at all. It was useless as a forecast but very useful for indicating inventory levels, as it is intended to do,” he says.

One may have expected substantial hedging against a risk of a big event that will happen in less than six months, but other real-world factors are in play. “Think about it from the perspective of a shipper,” says Joswick. “These are hard times⁠—many have no capital and poor credit. They could choose to do nothing and hope for the best. Or, they could ask the board to borrow money and pre-buy at a price that is higher than today’s, in the belief it will go even higher. That is a tough sell.”

That said, some have evidently started hedging. The spread oLSFO over HSFO was roughly $100/t but a big purchase in a thin market caused this to double. “We believe it will double [again] to nearer $400/t at its peak, in Q1 or Q2 next year,” says Joswick.

Creating compliant fuels

Long-term, it is possible that demand will be met by converting HSFO to LSFO to a common standard. In the meantime, a slew of small and large companies has promised to create compliant fuel from a wide variety of sources and methodologies⁠—which may or may not be compatible with each other.

The major refiners have coitte to supply 0.5pc but only in mega-ports such as Antwerp, Rotterdam and Singapore, and some other important ones such as Marseille. “It is selective,” says Daly. “A ship owner does not want to have 0.5pc sulphur in its tanks and end up in another port and not be able to get it. The new fuel oil could be completely incompatible with other supplies⁠—from what we have seen, they can be very different. You could end up in a similar situation like the one last year, where 150 ships off the American coast ended up stopped at sea with blocked engines.”

Some refiners have reportedly been unwilling to provide details or samples⁠—perhaps because final specification has not been decided but possibly in the hope of locking in customers that will be operating under the fear of being left dead in the water. “Bunker fuel has been commoditised for many years,” says Channoil associate director Mark Waddington. “The majors are trying to turn low sulphur fuel oil into a niche piece of marketing and lock their customers in.”

Daly adds that major oil suppliers have been very slow in giving samples to the IBIA to test compatibility. “The marketing implication is that if a ship owner bought fuel from a major supplier in Antwerp, they would be obliged to buy it from the same supplier in Singapore to guarantee compatibility. This might erode competition and result in ever higher prices. The days when ship owners obtained discounts for surplus HSFO are over.”

While there is a giant pool of HSFO⁠—of consistent quality around the world and a home for which every refinery is seeking⁠—there is not a sufficient pool of low sulphur residuals that have not already found a more profitable home. Bunkering has traditionally been a price-taking activity so producers will not want to invest heavily to create a consistent product. Suppliers need to divert streams from other sources, which could be anything from slurry oils to Indonesian waxy residuals. IMO standards do not ensure compatibility-it governs the sulphur content not the specification-and compatibility testing is tricky and relative, rather than absolute.

“Shippers are scared of incompatibility,” says Joswick. “From their perspective, compatibility is not just a minor economic issue. If the filters become plugged it could leave them adrift on the rocks⁠—just for $50/t saving.” A 0.5pc fuel could be paraffinic, aromatic, a residual blend or take many other forms. “They could look completely different and not be able to be mixed⁠—there could be dangerous compatibility issues,” he adds.

There is no compatibility issue with HSFO because there is such a broad pool of residuals to draw from; refiners do not need to search for obscure sources. As demand for LSFO will at least initially exceed supply, refiners will be motivated to search in fragmented and narrow pools as well as blend-in gasoil.

Marine gasoil

The LSFO supply deficit and compatibility issues will push cautious shippers towards MGO. “There is a really good case here for using marine gas oil,” says Daly. “It is ubiquitous, it is cleaner, it extends engine component life by about 50pc, it carries more calories for the equivalent tonnage and it does not need pre-heating.

“But the big, big advantage is compatibility. It is compatible ubiquitously and there is very little risk of the filter blocking you get with fuel oil. It is also cheaper and easier to clean up in the case of an oil spill.”

Joswick agrees there will be high demand but is “worried about how the refining industry can supply enough middle distillate”. The severity of the price shock will depend on the availability of stocks in October, when demand begins to rise. So far, distillate stocks are not being built onshore as “weekly data is at usual levels or below”, according to Joswick.

The refinery maintenance season has reportedly taken out an unusually high amount of capacity—in part due to tweaks to refineries ahead of IMO⁠—and weak margins have deterred refiners from operating at maximum capacity. “We are looking for 3mn bl/d of [shipping fuel demand by the time we get to Q4]. The highest stockbuild ever achieved in a timeframe [of now until then] was 60m bl, so pulling that down over six months provides only 300,000bl/d [of additional supply],” says Joswick.

Longer term, shippers could benefit from the automotive trend from diesel to electric. “As demand from the transportation sector declines⁠—due to diesel cars being replaced by EVs and hybrids⁠—gasoil is going to become cheaper relative to crude oil, at which point the ship owners will see the benefits of converting to the cleaner diesel fuel,” says Joswick.

High to low sulphur

Converting HSFO to LSFO is another longer-term option. Nothing of scale was built for IMO 2020 only because it takes between four to six years to build something of meaningful scale⁠—which could have meant new capacity opened just as the price spike was receding.

Instead, the industry has been repurposing existing units, such as a Japanese desulphurisation facility that had been used to supply the country’s dwindling LSFO to power business. A refinery in the US Virgin Islands is being restarted for compliant fuel as are smaller, easy-to-use facilities in Fujairah, in Malaysia and Antwerp.

Another untapped source of supply is from US refineries. Refiners that run a mix of high and low sulphur crudes typically dump the residuals in a common tank that is destined for a coker. If the price moves enough, it will be economically attractive for a refiner to segregate the low sulphur residuals and divert it to the bunker market. And, if the price of unwanted HSFO gets low enough, Russia has the capability to burn it for power generation instead of gas.

“The price spreads-low versus high sulphur crude, gasoil versus fuel oil-have to open up enough so that things get redistributed and units get used in different ways,” says Joswick. “It is a stretch, but the world can balance. It requires wide price spreads to enable things that are not currently economic to occur.”

Most refiners will be winners, according to Joswick. Deep conversion refiners will be big winners while simple refineries that only take high sulphur crude and make HSFO will do a bit worse. He says that heavy sweet crude producers (such as Australia, Sudan and West Africa) are seeing values go up. “People are already starting to buy so they have some on hand when it is time to make bunker fuel.”

“It is like a tsunami. It is still hidden beyond the horizon—but it is going to hit us” — Joswick, S&P Global Platts

The value change between sweet and sour crude will “not be earth shattering”, probably around “several dollars per barrel”, he predicts. The differential will not be wide enough to make it economic for crude to be left in the ground⁠—so the residual HSFO will need to find a new home.

“HSFO has got to price itself in somewhere,” says Waddington. “The problem is the world is dependent on all of the crude oil streams and a certain amount of that crude is high in sulphur. We cannot get away from that, even if we change the specification on bunker fuel oil. Heavy fuel oil has to find a home somewhere, whether that is pricing its way in scrubbers, being tanked for few years, used to make roads as bitumen or burned in power stations.”

The future is not bright for the refineries that cannot remove the sulphur. “Those refineries that continue to produce HSFO after the IMO change will potentially find it harder to market their product and risk going out of business,” says Daly. “Unless they invest a minimum of $0.5bn, a lot of small refineries will probably have to close.”

More complex refineries need to strike a balance between desulphurising high sulphur crude and purchasing much more expensive stocks of low sulphur crudes. “This is the kind of optimisation problem for which refineries need to find a solution,” says Dunphy. “IMO 2020 makes things such as planning, business processes and feedstock selection/evaluation even more important. People will be forced to look at different crudes to ones they have processed in the past.”

The increasing demand for low sulphur fuels will transfer beyond traditional shipping fuels to other middle distillate markets. For example, as gasoil competes with diesel and jet fuel for some uses, the prices of diesel and jet fuel should also be expected to increase. Logically, the worst of this disruption will occur during 2020 and taper from 2021 as the shipping industry finds a new equilibrium.

Scrubbers

The third compliance option shippers can choose is to install scrubbers. These allow the shipper to continue using HSFO and clean out the sulphur onboard.

If ships have scrubbers installed before January 2020 analysts estimates the payback would take roughly one year, after which it would receive an ongoing cost advantage. But global capacity to install scrubbers has been insufficient to meet demand before the deadline. Platts estimates that approximately 15pc of FO demand will be covered by scrubbers at the start of the year and coverage will rise thereafter.

Closed-loop scrubbers use a recycled stream to contain the sulphur, which must then be disposed of as toxic waste, at a cost. Closed scrubbers use a caustic solution such as sodium hydroxide, producing sodium sulphate. It is corrosive so specialist tanks are needed; ports will have to add discharge facilities for this to be a viable widespread option. Sodium sulphate could be recoverable and useful.

The alternative is open-loop scrubbers, but these have an environmental impact that is unacceptable to many. “Some people are concerned about open-loop scrubbers,” says Joswick. “These use seawater and are cheap but just discharge into the ocean, which may seem to defeat the intent of the law, if not the letter.”

Back in 2007, the IMO stated its primary intention was to protect human health and its secondary intention was to reduce sulphuric precipitation that was destroying inland lakes. Since that the time people have become much more concerned about acidification of the oceans, which can have very adverse effects on marine life including the widespread bleaching of the Great Barrier Reef since 2016.

“Open-loop scrubbers take sulphur oxides out of the air and pump the resultant sulphurous water wash into the oceans,” says Daly. “How long do you think it will be before Green politicians pick up on this?”

However, Joswick notes that a Japanese government study found the practice does not harm the environment, so the debate remains live for now.

Global availability

The three major bunkering centres in the world⁠—Singapore, Rotterdam and Fujairah⁠—will remain the largest due to their location and existing infrastructure. But how and from where they receive supply is likely to change dramatically.

For example, Singapore is supplied by a wide network of countries with the biggest contributions, of 16pc and 10pc respectively, from Russia and the US. A further 21 countries supply more than 1pc eac⁠h—Bahrain, Belgium, Brazil, Colombia, Egypt, Greece, India, Indonesia, Italy, Kuwait, Latvia, Malaysia, Malta, Mexico, Netherlands, South Korea, Saudi Arabia, Taiwan, Thailand, UAE, Venezuela⁠—and a similarly long list supply less than 1pc. This global network will need to be completely redrawn.

HSFO will need to go somewhere. “HSFO prices will have to come down to compete with coal, or even undercut coal [for it to be used for power],” says Daly. “But a lot of the climate change pressures are coming on to developing countries as well. Why would they not just go one step further [than HSFO] to LNG?”

One destination is for it to be broken down in cokers, most of which are in the US, India or China. “The challenges and opportunities are different for each region,” says Dunphy. “It is an opportunity for US refineries as a lot of them have cokers⁠—a residue destruction unit that produces coke rather than fuel oil⁠—but a bigger challenge for European ones. If you have not already started to build a new coker by now it is already too late for the 2020-25 window.

“A new equilibrium will likely be found by 2024-5. In the intervening years, refineries that can capitalise stand to make a lot of money, but the flipside is that some are going to struggle. It depends on whether you have the right processes and configurations, and whether you are in the right part of the world.”

The problem will be partially alleviated in the medium to long term without a dedicated effort. There are several huge refining projects in the Middle East and Asia, at various stages of planning and construction, that will be fed by low sulphur ME crude and therefore produce LSFO. They can not open soon enough for the global shipping industry.

Source: petroleum


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