Opportune LLP’s process & technology group directors James Morgan and James (Jay) Campbell assess the impact of the latest attempt to hasten decarbonisation through a potential carbon levy
The year has been one of unexpected change and it has been no different for the maritime space. On 1 January, the International Maritime Organisation (IMO) started to enforce a new regulation (IMO 2020) that caps the allowable sulphur content of all global fuel oil used in ships from its former level of 3.5% m/m (mass/mass) to 0.5% m/m. The demand destruction in the oil markets led to a flood of traders chartering vessels for floating storage and high volatility in charter prices. Between March 2020 and May 2020, one-year very large crude carrier (VLCC) rates increased 100%. The spot rate was even more volatile, with the TD1 route (Arabian Gulf to US Gulf Coast) seeing over a 500% increase.
The most recent wave of change came in the form of a proposal to IMO from Trafigura introducing a carbon levy of between US$250 per tonne and US$300 per tonne of CO2 equivalent on shipping fuels.
What would the impact be to the oil industry if this carbon levy were instituted? According to Reuters, in 2018, the shipping industry was responsible for over 1Bn tonnes of CO2 emissions. Based on the United Nations Conference on Trade and Development, crude oil accounts for 17% of maritime cargo. This would imply that crude oil shipping is responsible for roughly 179,520,000 tons of CO2 emissions. In 2018, 1.886Bn tonnes, or 13,824M barrels (bbls) of crude oil, were transported via ship. The proposal has an undefined benchmark at which the levy would be applied; it is not exact math, but even if only 20% were applied, a VLCC voyage would have cost up to US$1.5M more. Given today’s VLCC rates, a 30-day voyage costs about US$900,000 for freight only.
“The Trafigura proposal would impact 97% of the oil tanker fleet and give any owners or charters of LNG-fuelled vessels a significant competitive advantage”
In 2019, there were about 7,400 crude oil tankers in use globally, of which only about 175 were LNG-fuelled vessels (just under 2.5%). The Trafigura proposal would impact 97% of the oil tanker fleet and give any owners or charters of LNG-fuelled vessels a significant competitive advantage in the market. While these levies will be assessed to the ship owner, it is all but certain that they will be passed along to any charterers. Ultimately, freight rates will be market driven, so this levy would be an additional hurdle for those owners using fuel with greater emissions. All of this results in increased cost to the end consumer.
Steering towards renewables
More energy companies are turning their focus towards clean and renewable energy options. Companies like BP, Shell, and Total have invested close to US$10Bn in renewable energy projects. While these investments have low initial returns, a proposal of a levy on high-carbon fuels, while providing subsidies for low-carbon fuels, may be a bit like Robin Hood – robbing from the traditional fuel oils to pay for their replacements and ultimate demise. It is also interesting to note that the company proposing the high-carbon fuel levy recently announced plans to invest US$2Bn into renewable energy projects.
What are the options for low-carbon fuels?
Regardless of the decision related to the carbon levy proposal, history has shown that the maritime industry will face new challenges each year. New regulatory changes will come and with those the continued need for companies to be able to timely and accurately track and report their voyages, fuel usage and emissions.
James Morgan and James (Jay) Campbell are directors in Opportune LLP’s Process & Technology practice
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