The marine industry is now waking up to the reality of what will happen on January 1, 2015, when permissible emissions of sulphur dioxide in the ECAs are reduced to 0.1%. For ship owners and operators the decision regarding which strategy to apply to cope with the regulation is yet another threat to their competitiveness. Uncertainty reigns and to take no action is a huge gamble that the ship owner is unlikely to win.
The combined effect of the slowdown in the global economy, the credit crisis, low freight rates, fluctuating oil prices and widespread consolidation constitute the “perfect storm” for the shipping industry. Ship owners and operators are under huge pressure to remain competitive. Now, with financial markets and national economies slowly showing signs of recovery, and with bunker fuel oil already accounting for as much as 50% of a vessel’s operating costs, yet another problem is fast approaching. Most people in the industry knew it was coming, but many have tended to repress the knowledge, or just “hope for the best”.
In October 2008 the Marine Environment Protection Committee (MEPC) of the International Maritime Organization (IMO) agreed on the progressive reduction of the maximum sulphur content in fuels used onboard ships. The revised MARPOL Annex VI regulations reduce the global sulphur cap to 0.5%, effective from January 1, 2020. The limit applicable in Emission Control Areas (ECA) will be reduced to 0.1%, effective from January 1, 2015. To date, the designated ECAs are in Northern Europe and comprise the Baltic, the North Sea and the English Channel. From August 1st 2012, the North America and the US Caribbean will become an ECA as well.
The sulphur regulation has been ratified and it seems unlikely that it will be changed. Thus, by now, if ship owners and operators are to remain profitable, or even in business after this date, they should have strategies in place for dealing with the situation. However, it seems that many haven’t.
Dissension from various quarters
IMO agreed the timetable for lowering the sulphur limit in the ECAs back in 2008 and the legislation was ratified. Yet there has been resistance to the speed and scale of the sulphur reduction plans among EU member states, both from shipping lobby groups and some politicians, particularly in the Baltic region.
However, it is very unlikely that it will be delayed or disappear. Although EU member states are under pressure from ship owners’ associations they will be very reluctant to go back to IMO to change this hard won legislation. They first need to align all other EU member states before they can go back to IMO – and therefore it is very unlikely.
Raising false hopes
All this dissension is giving false hope to ship owners and operators, some of whom do not even realize that the new regulation has already been ratified, and it could lead to a dangerous state of apathy. Given the advent of exhaust gas cleaning technology in most other sectors, it seems that this will inevitably become part of environmental compliance for all ships.
One would think that the attention of ship owners and operators would be focused on rigorously planning for the regulatory change, analysing every facet of their operations and trading routes and understanding how the 0.1% sulphur limit will impact their business.
MGO – the simplest option, but costly
To comply with the new regulation, the ship owner has three options. The simplest is to switch from burning heavy fuel oil (HFO) to low sulphur marine gas oil (MGO). However, the cost of achieving compliance this way will be a huge increase in the fuel bill and painful uncertainty regarding future fuel costs. Switching to MGO could mean a fuel bill that accounts for 60-70% of total ship operating costs.
The difference in price between MGO and HFO is currently USD 300 to 330 per tonne and, in the past, we have seen price differences in excess of USD 500. The price gap is extremely sensitive to the world economy. While the economy is currently down, we can expect an improvement at some point with an increasing price gap as a result.
In addition, analysts predict a shortage of distillate fuels. Europe already imports 30 million tonnes a year and, once the new regulation takes effect, another 50 million tonnes will be needed. Also, distillate fuel for marine consumption will have to compete with land based fuel consumption. No investments in new refining capacity are expected.
LNG – even more costly
Another alternative is to run the ship on liquefied natural gas (LNG). However, the market price for LNG is currently unrealistic and there are other drawbacks. There is no worldwide fueling infrastructure and the insulated tanks required onboard are three times larger than normal fuel oil tanks. The onboard requirements are also very strict.
Also, there is some doubt surrounding the environmental impact of burning LNG. Although it is a clean fuel, if perfect combustion is not achieved, there can be a small release of methane, which is a relatively potent greenhouse gas.
Exhaust gas cleaning, viable in many cases
The third option is to install an exhaust gas cleaning system. While the maximum sulphur content in fuels used onboard ships will be limited to 0.1% from 2015, exhaust gas cleaning systems that reduce the emission of sulphur oxides to the same extent are approved by IMO.
An exhaust gas scrubber removes sulphur oxides from the ship’s exhaust gas by scrubbing it with sea water or fresh water. The technology enables ship owners to continue operating on HFO instead of expensive MGO, while still meeting the strict IMO regulations regarding sulphur oxide emissions.
Attractiveness of scrubber systems
For newbuildings installation of exhaust gas cleaning technology is not a problem and seems to be a logical, future-proof step. In fact, it would be hard to understand the reasoning of a ship owner with a vessel at the design stage that will operate in the ECAs, who did not install such a system.
When it comes to retrofitting a scrubber in an existing ship, a number of factors affect the attractiveness of the proposition. Heading the list, of course, is whether or not it is feasible given the type, size, design and construction of the vessel. The vessel’s operating profile and annual fuel consumption in the ECAs are also important considerations.
In financial terms, the larger the ship and the more hours it is in operation, the more fuel it burns, and the more attractive the proposition is in terms of savings on the fuel bill.
The cost of retrofitting a scrubbing system, including the downtime involved, can be high. However, if the ship regularly operates within the ECAs, the payback time is said to be between one and two years.
Obviously, the opportunity to continue burning HFO is a highly positive factor in terms of keeping down fuel costs and allowing the owner to remain competitive in an extremely tough market. Some owners have chosen this route already with favourable results, although others are reluctant to act.
Why is market acceptance so slow?
The lobbying and other forms of dissension mentioned previously are one possible factor. Ship owners are perhaps still hoping for a reprieve from the new regulation and uncertainty leads to reluctance to invest. Some owners simply don’t want to be “guinea pigs” for the new technology.
Then there is the eternal triangle between the ship owner, the charterer, and the scrubber manufacturer. The ship owner approached by the manufacturer says: “Yes, I want to purchase a scrubber, but my charterer is not willing to pay”. The charterer is focusing on the charter fee he is paying the ship owner and seems unaware of the forthcoming legislation.
It is already a fact that 50% of the operating costs of a vessel are defined by the fuel bill and in many cases the fuel costs exceed the charter fee. Therefore one would expect the owner to install a scrubber, absorb the cost, and maintain a reasonable level of fees to the charterer in 2015, in order to safeguard his company’s competitiveness in the long term.
Currently the triangle is a deadlock. Yet, it will come as no surprise to hear that, in January 2015, charterers are saying to owners, “you expect me to pay double the price for fuel? Why there is no scrubber installed?”
Some ship owners are reasoning that, OK, payback time is 1-2 years but that starts in 2015, why invest now? Thus, many owners will wait until the last minute and, at that point in 2014, chaos will reign. Ballast water treatment legislation will be looming, so they will need to change ballast water treatment systems, and they will also need exhaust gas scrubbers installed.
By then all the repair yards will be fully booked and scrubber suppliers will be unable to keep up with demand. So many ship owners will simply be too late. They will be forced to operate their vessels on expensive, low sulphur MGO while waiting for scrubber supply to catch up with demand. During that time they will lose their competitiveness, possibly their customers.
‘Pure thinking’ for the marine industry
Under the conceptual name “Pure thinking”, marine supplier Alfa Laval has a range of sustainable solutions designed to help the industry comply with IMO’s increasingly stringent environmental regulations relating to many aspects of ship operation.
The range comprises PureBallast for ballast water treatment, PureVent for crankcase gas cleaning, the PureBilge oily water separator for bilge water treatment, the new PureDry separator for recovering re-usable fuel from waste oil (waste fuel recovery), and the PureSOx exhaust gas cleaning system.
PureSOx – a hybrid scrubber system
With a cleaning performance down to 0.1% sulphur or less, PureSOx, is the first multiple inlet system on the market, i.e., it can be configured to utilize just one scrubber to clean the exhaust gases for the main as well as the auxiliary engines.
René Diks, Manager, Marketing & Sales, Exhaust Gas Cleaning, Alfa Laval: “For the retrofit market, where space and weight are critical issues, it is beneficial to be able to supply a single scrubber that handles exhaust gases from all the ship’s engines. Other advantages include lower energy consumption, less piping and lower maintenance costs.”
PureSOx can operate on either sea water or fresh water. The ability to operate the system in sea water mode provides savings on caustic soda and fresh water consumption. In areas with low alkalinity the system will switch to fresh water mode. In this mode the water used for cleaning the exhaust gas is circulated in a closed system with no discharge to the environment. Alfa Laval high speed separation technology is used to clean the effluent to ensure compliance with water discharge criteria. This technology is well proven and with a footprint smaller than many other water cleaning solutions. The high speed separation technology is with no doubt the solution which generates the least sludge quantity with the possibility to clean the wash water beyond the IMO criteria if required in the future.
To minimize the energy consumption of the scrubber, the water flow is automatically adjusted to the engine power. The system is also designed to vary the water flow depending on the sulphur content in the fuel.
Leading the way…
Based on their own experiences, Alfa Laval reports that ship owners are slowly starting to conclude that installing a scrubber system to clean exhaust gas is the most viable alternative to deal with the upcoming change in the sulphur regulations.
Alfa Laval recently signed a contract with Spliethoff, one of the largest ship owners in the Netherlands, covering the retrofit of a multiple inlet PureSOx exhaust gas cleaning system on board one of Spliethoff’s vessels which operates mainly in the North European ECA area. Since the vessel’s engines have a combined rated output of 28 MW, this will be the largest marine scrubbing system ever sold.
Another Alfa Laval system is in operation on DFDS Ficaria Seaways. This system treats the exhaust gas of a 21 MW MAN main engine and, to date, has completed more than 4,000 operating hours. The scrubber design is modular and flexible with a high degree of operational flexibility as well as future possibilities for upgrading of the equipment.
What conclusions can we draw?
One thing is certain, sulphur emission reductions and fuel costs are going to be the main topic in the boardrooms of ship owners and charterers during the coming 12-18 months.
Exhaust gas cleaning is not the answer to every ship owner’s problems. In the future, technology for making MGO and LNG more financially viable will be needed, and perhaps completely new fuel alternatives. But the technology available right now and offered by a number of companies as a financially viable solution for ship owners to meet future sulphur legislation and remain competitive is exhaust gas cleaning.
On the other hand, manufacturers of exhaust gas cleaning systems agree that there will be a glut of orders around 2015 which will be difficult to handle – and it is necessary to face the fact that the new sulphur legislation is unlikely to be postponed.
The clock is ticking – consider your options carefully, while there’s still time.