With the global sulphur cap barely a year away, 20|20 Marine Energy senior partner Adrian Tolson and senior associate Per Funch-Nielsen advise that now is the time to act
As former President of the United States George W Bush once remarked, “the reason the Oval Office is round is there are no corners to hide in.” The metaphor implies taking responsibility for your actions and with the 2020 global sulphur cap closing in, every shipowner or charterer should take note.
Post 2020, ships will remain the cheapest - and sometimes only - option for moving large quantities of commodities, so there is likely to be a limited impact on volumes transported. But as Poten & Partners warned in September, shipping costs are set to rise considerably for charterers of tankers after 1 January 2020. According to its analysis, charterers using vessels fuelled with marine gas oil (MGO) could face a 33% premium over a ship equipped with a scrubber that can legally burn HFO.
What is more, Drewry has estimated that the spread could be as high as US$300 per tonne in 2020. Early adopters of scrubbers among tanker owners, such as DHT and Frontline, will have a clear advantage over their competitors, given bunkers currently account for circa 30% of a vessel’s operating expenses; a figure that could rise significantly post 2020.
It is currently speculated that little more than 2,000 vessels will be equipped with scrubbers by 2020. But outside of the major hubs, there are likely to be few ports guaranteeing HFO supply because around 90% of the global fleet is expected to burn MGO or distillate blends. This is especially pertinent for clean tankers, the varied trading routes and size constraints of which make investing in a scrubber a less certain proposition.
"The global sulphur cap is already changing the structure of the oil market and will soon begin to substantially disrupt the supply-and-demand equilibrium as well"
This issue extends beyond the MR market because, as Drewry notes, there is enormous uncertainty about whether the spread between HFO and MGO/LSFO will last long enough for companies to get their money back on fitting scrubbers.
Whatever happens, the reality is that the global sulphur cap is already changing the structure of the oil market and will soon begin to substantially disrupt the supply-and-demand equilibrium as well. Once you take into account on-going refinery expansion and low-refined product inventory levels, there are clearly going to be opportunities to be exploited.
We expect to see large-scale redistribution from bunkers’ production areas to the purchase places of bunkers, but this will not necessarily benefit the LR and MR segments. Tanker owners are ordering new ships almost as fast as older tonnage is being scrapped, and we know of at least five VLCCs that have carried diesel on their maiden voyages this year – a move which eradicates the demand equivalent to seven or eight MRs at both ends.
That said, VLCC owners are not having everything their own way. A substantial portion of the VLCC fleet is 15 years or older now, and this bars them from some charterer’s lists. Traders may not have a problem with their age, but oil majors have corporate reputations to protect and are conservative when regarding vintage tonnage. A two-tier market now exists, as there was between single-hull and double-hull tankers 10 years ago.
The traditional trading conditions for the tanker market will become a thing of the past; whether you see that as positive or negative depends to a large extent on how you see the repercussions of the changes in fuel demand playing out.
There is uncertainty about what the fuel supply chain will look like in less than 500 days’ time. As such, owners and fuel buyers need advice and counsel on how to implement and manage the solutions they have chosen to ensure compliance, mitigate risk, and keep their costs as low and as controllable as possible.
This is not the time to do nothing; now is the time to react. If your fuel supply chain fails post-2020, you only have yourself to blame.