URSABLOG: Bunkering Down

I went for coffee with an old friend of mine in his office earlier this week to catch up with our news, and see all his colleagues. I left the meeting thoughtful however, because I heard a bit of news that illustrated the challenges ahead for shipowners still wanting to move their merchant ships around the world using petroleum based fuels, which is of course all of them.

This story has nothing to do with sulphur, high or low. A vessel was replenished with bunkers at a port, and a chemical analysis showed that they were fine. However noises from the engine room whilst at sea became more and more alarming until the main engine and all the generators ground to a halt leaving the ship adrift, without power, in the middle of the ocean. It turns out that while the bunkers were chemically in order, physically they were not: fine (and not so fine) granules of sand grit were also present which scratched the pistons to such a degree that they all had to be replaced.

The alarming thing is that this was not an isolated case: one P&I club alone is dealing with over fifty cases. The source of this problem has been traced back to Houston where the bunkers were manufactured and blended. I haven’t seen anything in the news about this, but then again I’m not surprised. The owners that suffered engine breakdowns are unlikely to want to publicise their problems, and the bunker suppliers certainly don’t want their blending practices known widely. It’s the same as a petrol station putting a free cup of sugar in the tank of every car pulling in to full up: not too good for business.

The dirty world of fuel oil and bunkers has long been beset with problems. The recycling of sludges and leftovers is common practice, as are the adding of chemicals to create the “cappuccino” effect to create volume at the expense of quantity. Singapore seems to be a centre of this type of activity. Add to that “magic pipes” between tanks, smuggling and the illegal selling of fuel oil to others en route, and that’s before you get to the corporate difficulties of bunker suppliers and traders, OW Bunker’s collapse and the travails of Aegean Petroleum amongst them. The rest of the news is not fit to print; I don’t want to end up swimming in an oil storage tank.

So with these pre-existing problems, what is going to happen when the sulphur cap comes in? The debate so far, long and tedious as it is, has focussed on the assumption that low sulphur fuel will be cleaner fuel, and supplied to qualities that can be easily verified. This, I would suggest, will be far from the case.

What will be the make-up of the bunkers being supplied? And where will the sulphur go?

Firstly, let’s be clear: all crude oil that comes out of ground is not the same. Some is thick and heavy, some is thinner and lighter. And crucially the amount of sulphur in crude oil varies from basically zero to 5.9%. This means that “sweeter” crude (needing less filtering and refining) will be more in demand, and therefore more expensive, with the “sourer” crude having to become relatively cheaper to find buyers. Crude tanker owners should take note.

One way to achieve low sulphur fuel oil is, apart from starting out with sweet crude, is to blend it with Marine Gas Oil (MGO), which has 0.1% Sulphur content. If you want to get standard High Sulphur Fuel Oil (HFSO) down to 0.5% you need to mix in 83% MGO. If you want to get Low Sulphur Fuel Oil (LSFO) down to acceptable levels you will still need a blend where MGO makes up 56%. If the bunker suppliers go down this route, the price of MGO only goes up – approaching in some estimates US$ 1,000 per tonne at current crude prices. And the spread of prices between 0.5% Very Low Sulphur Fuel Oil (VLSFO) and HSFO (and even LSFO) will be wide, although how wide of course, no one knows, not even the futures market. Some estimates are over US$ 680. That said, VLSFO and MGO at bunker ports are more or less the same. Whatever the pricing however, the production of MGO will have to ramp up quickly: 68% of bunker demand in 2020 will have to come from MGO. Product tanker owners should take note.

And where will the sulphur go? Well, scrubbers can be used of course. These systems take out the sulphur from the exhaust gases and either store them on the ship (closed loop systems) or get rid of them at sea (open loop systems). Open loop systems are under attack now by those coastal states who obviously don’t want the sulphur taken out of the atmosphere only to be concentrated and then pumped into their marine environment.

The drive for scrubbers is very popular of course, particularly with those in Scandinavian and other Baltic facing countries, naturally enough as forests in those areas suffered a great deal from acid rain - caused mostly by good old coal fired power stations in the United Kingdom. Ironically enough the victory of the Thatcher government over the miners in the strike of the mid 1980’s and the subsequent decimation of the mining industry helped solved acid rain in one go. Talk about unintended consequences.

One such Scandinavian bank, DNB, in syndication with ABN AMRO Bank, BNP-Paribas, Danish Ship Finance (them again)  and Skandinviska Enskilda Banken, has just announced a pioneering Green Loan of US$ 70 mill for the fitting of scrubbers on the Star Bulk dry bulk carrier fleet of “up to” 50 vessels. That this US$ 70 mill came bundled up in a total US$ 310 mill loan restructuring package for the whole fleet should not go un-noted however, and I suspect that the Green Loan was the condition for the other US$ 240 mill which, it should also be noted, has already been drawn. Well Star Bulk needed the restructuring, and the banks wanted to push their Green Loans, so I guess it’s a case of win-win except for the environment.

Why, you may ask, should the environment suffer? Surely we are taking the nasty Sulphur out of the environment. Well not exactly. Even Danish Ship Finance can not make it disappear. If scrubbers are used, then the high sulphur residue will have to be disposed of somewhere. In the chemical industry it is pelletised into briquettes, bagged and sold on to make fertilisers amongst other things. It’s particularly good for rape seed apparently, as well as for treating vines.

If scrubbers are not used, what will happen to the excess HFSO? It will be used in power generation mostly, which in countries like Pakistan and Bangladesh is a useful alternative to coal and LNG electricity generation. Even Saudi Arabia is ramping up production to generate power for their air-conditioning and desalination programmes. The sulphur will still end up in the air, but as it will be over the desert or poor people, it will be ok.

But, the very fact that the take up of scrubbers has been limited, and limited mostly to larger ships, it means that widespread availability of HSFO will be limited to the major bunkering stations; VLSFO availability will be far more widespread. LNG is still out of the picture: less that 1% of the world fleet uses it as a primary fuel.

Let’s leave aside the pricing issue for now (the market will decide after all) except to say that the price for everything will go up in the end (except HFSO which will go down). I mean shipping costs, delivered commodity costs as well as finished goods. The problems for shipowners are ominous. Different blends of VLSFO fuels are likely to be unable to be mixed, or even used one after the other, and their shelf life is likely to be short. Shipmanagers, unsurprisingly, are worried about safety issues. Ships will have to be further redesigned.

Let me put it another way. Imagine that a truck, happily wandering around Europe, able to fill up with fuel when it suits the driver, whether it’s cost, discount, quality, or any other reason. Suddenly, the law changes, and then he has to redesign the fuel tanks and feed lines to accommodate different fuel loading in different places. He will have to remember where and when he bought his fuel and hope the specification doesn’t change. He will have to also periodically clean the fuel tanks. And if he gets it wrong, he could end up stranded in the forest, broken down, waiting for a pick-up truck to rescue him.

This, in practical terms is what is faces shipowners and managers. It has long been the case in ecological politics that the polluter pays. But who is the polluter in this case? The shipowner? The fuel supplier? The manufacturer of the goods that are produced from raw materials and energy, and then transported to their final destination. Or the end user and consumer? The economists will tell you it will be the latter. The costs of disruption to this market have simply not been thought through.

As I write, I hear a rumour that no other than President Donald Trump has shown interest in the issue, and is now pushing for a extension of five years for implementation. Maybe Wilbur Ross has been whispering in his ear. However, his recent performance at the United Nations will not endear him to the IMO, and owners that have already fitted scrubbers will join the long line of people that are upset with his style of governance.

In the end however, disruption will lead to distortion, and I suspect an increase in tonne mile demand as the market adapts to new realities. We can see it happening already in the dry market, and it’s coming soon to tankers; brisk sale and purchase activity there shows that shipowners think so too. In the hyper-interconnected world we live in now this could prove interesting, but also dangerous for the economy, for trade, for the shipping market, for ships themselves, and most importantly for seafarers. Ironically this will come with a negligible improvement in the environment. Is this really a price worth paying now? 

Simon Ward

www.ursashipbrokers.com