Insights and News /

16 June 2017

What price for saving the world? The impact of low sulphur fuel regulations

Former U.S. Vice President Dan Quayle once said “I do have a political agenda. It's to have as few regulations as possible”. Whilst this mantra is a panacea for some businesses and sectors, history has proven that regulations can benefit both businesses and consumers. The recent changes in global fuel shipping regulations, set out by the International Maritime Organization (IMO) are set to drive up freight rates and could result in consumers and businesses being exposed to higher prices. 

In late 2016, the IMO announced it had agreed on a deal to limit sulphur in bunker fuel to 0.5% by 2020. This comes on the back of a 0.1% sulphur limit being imposed on all vessels traveling in Emission Controlled Areas (ECA) since 2015. This supranational decision will not only help reduce emissions from one of the world’s most polluting transport sectors, it will also help shipping operators through standardisation of fuel sulphur content – avoiding a range of national regulations which can make international shipping and fuel management more complex. On a practical level all vessels globally will be forced to shift to burning low sulphur fuels, such as Marine Gasoil (MGO) or Liquefied Natural gas (LNG) or alternatively stimulate exhaust gas scrubbing. However, the flip side of these new regulations will be the impact on costs - MGO and LNG are more expensive than the commonly burned, soon to be non-compliant, Fuel Oil (FO). The changes in regulations could result in some shipping operators seeing increased bunker costs of 50% and even more in extreme cases.  This does not include the capital costs associated with compliance in order to accommodate burning dual fuels (MGO and LNG) or scrubbers.

Estimates from industry analysts indicate that fuel costs for the shipping industry could increase by between $30 - $60bn in 2020. This is particularly significant as fuel costs already account for up to 70% of vessel operating costs. John Butler, the CEO of the World Shipping Council, has estimated that container lines alone may see cost increases of between $5 - $30bn. The cost exposure is expected to be similar to that seen when a number of countries, primarily in Europe and North America, introduced Emission Control Areas (ECAs). As the latest IMO regulation will apply to its 172 member states, the demand for lower-sulphur fuel for the 2020 deadline will further ramp up the pressure on pricing.

What can be done? Carriers will need to improve the efficiency of their fuel bunkering operations, reducing operational costs and trimming overheads, particularly where sources of lower sulphur fuel may be scarce in some geographies. Refining operations will also need to adjust to the change through both asset optimisation and further cost savings. There are opportunities for refiners with the capability to increase compliant output to drive additional margin, producing supplies to meet forecast demand. Refiners may also need to adjust their equipment and cracking processes in order to maximise the lower-sulphur output. Suppliers of LNG need to invest in the infrastructure to support the fuel distribution network, taking advantage of additional LNG coming online globally and output ramping up, and the demand will come. Commodity traders will need to take into account the changes when pricing longer-term physical delivery contracts, and will also need to be cognisant of opportunities to maximise returns where they have access to volumes of lower sulphur fuels. Finally, end consumers of all shipped products may have to accept higher end product prices, with firms focusing on low emission supply chain product marketing to offset consumer reluctance for price rises.