Shipping Faces 2020 'Scramble': IHS Markit

The shipping industry will experience rapid change and significant cost and operational impacts except for those companies moving to LNG and its alternatives post-2020, according to new analysis from IHS Markit.

The International Maritime Organization has brought forward the deadline by five years to 2020 for implementing stringent new rules on sulphur pollution from ships. A number of energy and engineering companies are engaged building vessels that can run on LNG, or on adapting LNG terminals to enable bulk-breaking to enable bunkering. Some are working on both sides of the market at once, to solve the chicken-and-egg problem that switching fuels can create.

IHS Markit said shipping and the refining sectors are "vastly unprepared.... Neither has made the necessary investments for compliance, which means that the 2020 implementation date will result in a scramble. Both industries are taking a wait-and-see approach until firm signals are in place by the IMO for compliance with the regulation.

“Shippers will face significant compliance costs by having to upgrade equipment or switch to more expensive fuels,” Kurt Barrow, a co-author and vice president of downstream research at IHS Markit, said. “Refiners will experience significant price impacts as they shift production to deliver more lower-sulphur fuels to the market and, at the same time, find a market for the higher-suphur fuels they produce. Refineries, like ships, do not turn on a dime, so it takes significant investment and market demand to retool a refinery to deliver new supply.”

Shippers will have several options to meet the new IMO regulations, IHS Markit said. Low-sulphur bunker fuels (primarily for smaller vessels), and liquefied natural gas (LNG) (primarily for new builds) will be part of the solution. However, IHS Markit researchers expect that on-board ship scrubbers, devices that clear harmful pollutants from exhaust gas, will be the primary compliance path for ships, which could continue to burn higher-sulphur fuels.

“From the shipping industry point of view, IHS Markit estimates that about 20,000 ships account for around 80% of heavy fuel-oil bunker fuel use,” said Krispen Atkinson, senior consultant, IHS Markit Maritime & Trade research. “Currently only about 360 ships have installed scrubbers, since there is currently no economic incentive for the ships to add scrubbers. However, based on the price spreads between low-sulphur bunker fuel and high-sulphur fuel oil during the scramble period, it will be economic for many of them to install scrubbers.” The payback period for installing a scrubber on the largest vessels, Atkinson said, would be two-to-four years in 2022-2025, and less than one year based on peak-price spreads in 2020.

A key uncertainty also lies in the actual level of compliance to the IMO regulation in 2020. “Not only is it hard to enforce compliance in the open seas, but it is still uncertain if sufficient supplies of compliant bunker fuels will be broadly available in all ports," said Sandeep Sayal, senior director of refining and marketing research, the other co-author.

Overall, the installations of scrubbers and some level of noncompliance will not be in time to halt the disruption on refined products markets, IHS Markit said. 

“When we account for all the supply and demand factors for the sour residual balance, including new conversion projects, capacity creep, scrubber and LNG capacity, as well as quality compliance, our bottom line is that a sizable portion of today’s fuel oil will be pushed into lower-price tiers, notably oil-fired power-generation plants,” Barrow said. “Refining capacity will most likely exist in 2020 to produce the low-sulphur bunker fuel, but higher overall crude runs will be required.”

As ship owners respond to the large-scrubber investment incentives, high-sulphur bunker fuel demand will rebound, although not to prior 2020 levels. Due to increasing demand and addition of debottlenecking capacity for residue conversion, IHS Markit estimates price spreads will moderate within a few years, but the timing of price recovery will be dependent upon a number of variables.

William Powell