IMO 2020 Regulations and Fuel Price Impact Explained
The global shipping world in 2020 will see a challenge no other petroleum-dependent industry has witnessed to date. The repercussions could prove to be a game-changer and, though many questions remain, set the stage for high fuel prices.
IMO 2020, In a Nutshell
The International Maritime Organization (IMO) has decreed that vessels must no longer use fuels that regularly now include 5,000 to 35,000 parts per million of sulfur. That change took place globally on Jan. 1, 2020, but preparations for a lower-sulfur bunkering fuel have been underway with implications on analysts radar in the 2019 oil market.
The Backstory on Low-Sulfur Fuel Oil
The change facing the market is the product of years of discussion and negotiation – some political and some practical.
Historically, shipping fuel has been a huge outlet for what could be considered dirty, somewhat unwanted fuel – stuff deemed unfit for burning near population centers.
In 1973 the IMO, the United Nations’ agency responsible for overseeing the safety, security and the prevention of marine and atmospheric pollution from ships, began regulating marine pollution. The regulating entity was called the Marine Environment Protection Committee (MEPC) – and the program was dubbed MARPOL (short for Marine Pollution).
The original MARPOL in 1973 was never actually enforced and was later amended. That iteration – MARPOL Annex VI in 1997 – was adopted industry-wide. It came into effect in May 2005 and moved the sulfur limit of shipping fuel from unlimited sulfur content to a hard cap of 4.5% sulfur maximum for any marine fuel.
In 2008 the IMO came out with a timeline for continued emission reductions and established the Emission Control Areas (ECA), a 200-mile buffer around the U.S. shoreline and other designated areas around the globe.
- Within ECAs: Marine fuel maximum sulfur content allowed was 1.5% in 201 and then was reduced to 0.1% in January 2015.
- Outside ECAs: Marine fuel maximum sulfur content was 4.5% prior to being reduced to 3.5% in January 2012, and then to 0.5% in January 2020.
This Paves the Way for a Costly New Fuel and MANY Unanswered Questions
All of this leads to the global shipping industry facing the use of a new, cleaner and much more expensive fuel worldwide in 2020.
The timeline between now and 2020 is considered too short to build the number of process units needed to convert high-sulfur fuel oil to the new 0.5% spec. So, a new fuel must be created.
Several companies have been blending and testing with the hopes of marketing a fuel that is both available and compatible in ports globally. The exact cost and specifications of the fuel are still being worked out and will become more apparent as 2020 nears.
Bottom line: The price for the lower sulfur material is expected to be much higher than high-sulfur fuel because of limited supply and high demand – some $300/mt to $500/mt more to start.
For shipowners, the pain point is deciding how, and even if, to comply. They can cut emissions and save money over time by installing scrubbers to keep using the cheaper high-sulfur fuel oil. Or they can burn LNG, the new 0.5% sulfur fuel or a blend of “dirty diesel.”
Dirty diesel is basically diesel with a higher sulfur content than the mandated on-road diesel. Mostly likely, dirty diesel will be the result of having mixed a large portion of on-spec diesel of 500 ppm with a heavier fuel that will raise lubricity and the sulfur content and lower the API.
LNG-powered vessels are an option. There are very few currently, but they could become more popular as older ships are scrapped and newbuilds are designed to run on that fuel.
Estimates are that perhaps 2 million barrels per day of that heavy fuel demand will give way to marine fuels that rely on diesel and jet fuel cuts from refiners, or even from the feedstock that goes through catcrackers.
Shipowners could also opt to chance it by not complying, though penalties are expected to rise dramatically.
There’s also a potential maintenance nightmare: There are concerns that the dirty-diesel blend option will cause problems with the ship engines because of compatibility issues as well as engine fuel settings.
In all, IMO 2020 is a massive transition that will require a dramatic adjustment in the global supply chain and there’s a lot of uncertainty across the industry on the impact of global regulation enacted in a relatively short time period. Whether it’s Nike shoes made in China or wheat harvested in Iowa, the cost of shipping goods – via, ship, truck or rail – will be impacted by the new regulations.