10.04.2008 - Fuel could cause fundamental shift

Environmental rules agreed by the International Maritime Organisation (IMO) mean shipowners face revolutionary change.

By 2020, ships are to burn fuel with less than 0.5% sulphur in open seas and less than 0.1% in special near-sea areas.

Burning low-sulphur residual fuel may still be possible but it is a troublesome process that requires blending and could be costly. Exhaust scrubbers could also be used with residual fuel.

The most likely outcome is that almost all ships will burn distillate fuel such as diesel and coastal vessels may be forced to use gasoil or even cleaner fuels like LNG.

Tanker owners' association Intertanko was the first to approach regulators seriously with the suggestion to burn distillates.

A big issue for the industry will be how much it pays for fuel. At today's price, about $1,000 per tonne, low-sulphur diesel costs roughly double the price of residual fuel.

Two schools of thought have emerged on how things might develop.

In the first argument, growing demand for diesel around the globe will be too great for refineries, shortages will get worse and the price will just escalate further, when shipping switches over. By that time, demand for marine diesel will be close to 400 million tonnes annually. Add a proposed $50-per-tonne CO2 levy and the price of fuel will become an even greater headache for operators.

But on the green side, fuel efficiency will become an even more important factor in price competition and this will drive innovation and force owners to act more economically, which will improve shipping's environmental record. And here is the good news for brokers and shipbuilders the fuel-cost pressure could generate strong demand for a new generation of super-green ships.

According to the second argument, the money to be made by refiners in making more diesel will push them to act quickly. Some say they are ready to invest the $126bn to meet the demand from shipping. The ramp-up of production potentially will not only meet the demand from shipping but also lead to a considerable fall in price for marine diesel. In such a case, shipping will maintain its cost efficiency.

Refineries will have to meet demand eventually. Because even if an IMO review in 2018 finds that there is not enough clean fuel around, it has said it will still enforce the new sulphur limits at a later date in 2025.

One sure thing is that the IMO has bought time for operators and oil companies to get ready for this revolutionary change.

And the decision is probably just enough to see off the threat of more immediate, challenging and unilateral regulation from the European Union and US.


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