ITR Experts Say: New Ship Fuel Requirements Could Affect You

Impending regulation changes by the International Maritime Organization (IMO) have the potential to increase global shipping fuel costs by up to 25% as supply and infrastructure are not anticipated to be fully ready for the January 1, 2020, implementation. You may not own a ship, but, as a consumer, you ultimately bear the cost for such increases. Are you prepared?

The IMO aims to reduce global sulfur emissions, which can cause respiratory diseases and contribute to acid rain. The regulations will lower acceptable sulfur content in ships' fuel from the current 3.5% to 0.5%. In certain Emission Control Areas, which include most US and Canadian coastlines, the limit is 0.1%.

If ships do not meet the new regulations, they will face fines, possibly lose insurance coverage, and could be designated “unseaworthy” and banned from sailing.

The shipping industry currently consumes roughly 4 million barrels per day of high-sulfur fuel. Replacing a portion of that total with lower-sulfur distillate fuel could create demand for 1.5 million barrels per day of distillate. Refineries may struggle to meet this demand, driving up fuel costs for shippers as much as 25%.

Other than using more expensive, lower-sulfur fuel, ship owners will have the option to install exhaust-cleaning systems known as “scrubbers,” which reduce harmful emissions. Scrubbers strip sulfur as fuel is burned, allowing for the use of higher-sulfur fuel. However, scrubbers are expensive to retrofit; the equipment alone costs several million dollars per ship. Last year, fewer than 300 ships were retrofitted with scrubbers. Furthermore, although installation itself takes only 10-20 days, completing the required engineering plans can drag out the process to a year. Observers estimate that 2,000-3,000 vessels could be retrofitted with this technology by 2020, a far cry from the estimated global fleet of 90,000 ships, 60,000 of which are currently traveling international trade routes.

Alternatively, ships could be retrofitted with power units that utilize liquefied natural gas or liquefied petroleum gas as fuel, a similarly expensive solution.

Most of the global shipping fleet will not have retrofits installed by the time the IMO rules take effect and will be forced to burn more expensive, lighter fuels such as marine gas oil or ultra-low-sulfur fuel oil. Refineries would need to process an additional 2.5 million barrels of crude per day to meet demand for cleaner fuel – a tall order, with US refineries currently utilizing more than 95% of available capacity.

The impact would not be confined to the shipping industry. Demand for crude oil containing less sulfur may increase the price differential between "heavy" and "light and sweet" crude grades. Higher demand for distillates will also drive prices higher for related fuel grades. Jet fuel prices, for example, are typically pegged to diesel prices, and will likely increase as ship owners switch from heavier fuel grades. Airlines, and, ultimately, ticket purchasers, will carry the higher costs.

Lauren Saidel-Baker, CFA
Economist