By David St Amand, guest writer
Mr. David St. Amand, President, founded Navigistics Consulting in 1994. Mr. St. Amand is a maritime economist/business analyst specializing in commercial shipping. He holds a B.S. in Naval Architecture and Marine Engineering from Webb Institute and an M.B.A. from the Amos Tuck School of Business Administration at Dartmouth College. Mr. St. Amand is an experienced consultant having previously held senior positions with the consulting firms of Booz, Allen & Hamilton and Temple, Barker & Sloane/Mercer Management Consulting (now Oliver Wyman). His industry experience covers a wide range of activities including transportation planning, marketing, finance, operations, and engineering.
Having worked on the IMO’s MARPOL Annex VI Regulation 14 marine fuel’s sulfur regulation (more popularly known as the IMO 2020 Rule) since before it was approved in 2008, I’ve heard lots of questions on the topic over the years. For refiners, the three leading questions by a long-shot are:
1 – Will the IMO’s 0.5% sulfur rule be delayed past 2020?
2 – What are the prospects for scrubbers?
3 – What’s the outlook for enforcement of the IMO’s 2020 rule?
As with most pundits, I have my own opinions on each of these and will share them with you here.
Will the IMO’s 2020 rule be delayed?
My response, absolutely not. Very simply, if it is delayed, say three years, then it won’t be the IMO’s 2020 rule but would become the IMO’s 2023 rule. That just doesn’t sound right. But all kidding aside, the answer is still absolutely not. To understand the response requires insight into the workings of the IMO. The International Maritime Organization is a specialized agency of the United Nations with responsibility for the safety and security of shipping and the prevention of marine and atmospheric pollution from ships. As the IMO says on its website (www.IMO.org):
As a specialized agency of the United Nations, IMO is the global standard-setting authority for the safety, security and environmental performance of international shipping. Its main role is to create a regulatory framework for the shipping industry that is fair and effective, universally adopted and universally implemented.
In other words, its role is to create a level playing-field so that ship operators cannot address their financial issues by simply cutting corners and compromising on safety, security and environmental performance. This approach also encourages innovation and efficiency.
The IMO does not develop the laws or regulations, but rather it is the forum for its member states to discuss and agree on the form of those rules. Once the member states of IMO discuss and “approve” a rule (usually by consensus in a large group setting at its London headquarters but occasionally by a roll call vote), it is then circulated to its member states for “adoption.” Once member states with a certain percentage of the internationally trading vessels (on a gross ton basis) adopt the rule, it is considered an IMO regulation that can be enforced by the adopting countries. “Adopting” an IMO rule requires that a member state passes legislation making the IMO rule part of the member state’s laws. The U.S. passed the IMO’s Annex VI amendments creating the IMO 2020 rule back in 2008 as part of the “2008 Amendments to the Act to Prevent Pollution from Ships.” The IMO’s 2020 rule is a “law” in the U.S. and, therefore, cannot be altered by the IMO.
Amendments to IMO involve a complicated process to reach consensus at IMO (i.e., reach “approval” of the change) which is then circulated to member states for ratification. This is at least a 24-month process. Current estimates from those experts on this subject at IMO are that any modification to the IMO’s 2020 rule cannot take effect until at least the summer of 2021. Indeed the “Carriage Ban” (prohibits the carriage of noncompliant fuel onboard a ship not equipped with a scrubber – to be discussed later) has fully been agreed to but must obtain final MEPC approval in October 2018, and after that happens will likely come into effect in March 2020, and it has been in the works for over one year.
There has been no formal request presented to IMO’s Marine Environment Protection Committee (MEPC – the IMO body responsible for Annex VI) to delay the IMO’s 2020 rule. It is not even being discussed. There is a submission to MEPC 73 (the October 2018 meeting) to delay implementing the “Carriage Ban.” While there has been speculation in the press regarding delays of the IMO’s 2020 rule, it is not even on the MEPC’s agenda and any attempt to introduce a delay has fallen on deaf ears at IMO. Having attended all IMO meetings relating to the 2020 rule since 2016, I can assure that there is no delay to the 2020 rule happening at IMO. Writing to your representatives in Congress would be more effective at this point in time.
What are the prospects for Exhaust Gas Cleaning Systems (more popularly known as “scrubbers”)?
Try telling someone from Britain that you are in London for a scrubber meeting and watch their expression turn quizzical. Apparently, “scrubber” is British slang for prostitute (this fell into the “one learns new things everyday” category for me). Scrubber economics are great, but they are dirty, nasty things that ship-owners and crews hate, if they don’t hate them already, they probably will in the future. I’ve seen some pretty nasty pictures of scrubber installations with leaking valves and yellow puddles, remember H2O plus SO3 equals H2SO4 aka sulfuric acid, which wasn’t yellow based on my very old memories of college chemistry lab. The IMO 2020 Rule, however, is really pushing scrubbers on everybody.
There are concerns that regulations regarding scrubber wash water discharge will increase. Currently wash water overboard discharge is regulated regarding pH, turbidity, and PAH. There are concerns regarding outright bans on wash water overboard discharge. Currently, numerous ports (e.g., all those in Connecticut and Germany) ban scrubber wash water overboard discharge. The U.S. EPA’s Vessel General Permit that defines what ships are allowed to discharge overboard is up for renewal later this year. There is no expectation of a nation-wide ban in the U.S. but give it a few years and anything can happen.
Another thing to consider, the state of California says scrubbers cannot be used to meet the state’s 0.1% sulfur fuel rule that applies within 24 miles of the state’s coast (ships with scrubbers will need to run 0.1% sulfur fuel with or without a scrubber installed).
Ship-owners are already facing a multi-million dollar cost for ballast water treatment systems and really don’t want to plunk down even more to retrofit their ships with scrubbers.
Other ship-owner concerns regarding scrubbers:
- What happens if your scrubber breaks down and you don’t have 0.5% sulfur fuel onboard? Will you be subject to fines? Ship arrest?
- What about transient SOx spikes during maneuvering? Same questions follow, Will you be subject to fines? Ship arrest?
Those are “implementation / enforcement” issues that still need to be worked out at IMO.
Another big concern from the ship-owners’ perspective, will HSHFO be available in all ports? As a refiner, you are probably thinking, “We are going to be swimming in resid until we figure out the whole 0.5% sulfur heavy fuel oil manufacturing process.” However, the concern with shipping companies is whether it will actually be available for delivery to their ship. A bunker supplier would need to keep a barge “dirty” for delivering HSHFO but will the demand be sufficient to keep a dedicated “dirty” barge. Consider the practicality of the situation, with compliant 0.5% sulfur fuel, the sulfur content consumed on the ship must be less than 0.5%. You can be certain that sulfur giveaway will be minimized and there will be no tolerance for sulfur contamination in the delivery process (IMO is gearing up for enforcement of the 0.5% limit as close to the fuel injectors as possible).
Based on ships that have scrubbers installed or for new ships with scrubbers ordered, somewhere between 14 and 18 million tons per year of fuel will be consumed on those ships of the 300+ million tons per year of HSHFO expected to be consumed on ships in 2020 (absent the 2020 rule). This represents about 5 to 6% of the total. Refiners’ fears that scrubbers will keep HSHFO as the dominant marine fuel, thereby stranding any investments in upgrading capacity, do not appear to be borne out. Time will tell, however, as ship-owners may be economically forced to install scrubbers. Remember though, if all ships fitted scrubbers, the marginal cost ship supplied to the market would be burning HSHFO and the marginal economics would be based on HSHFO fuel costs. In that scenario, no ship-owner would be compensated for their scrubber investment. Scrubber economics are dependent on nonuniversal adoption of scrubbers.
Enforcement – As stated earlier, IMO is a forum for developing rules for international shipping and has no enforcement power at all. The members of IMO are the trading nations of the world with interest in shipping (member states). A country in which a ship is registered (i.e., flies its flag) is referred to as the Flag State. The country of the port at which a vessel calls is referred to as the Port State. Currently, all enforcement action on the high seas (i.e., outside of territorial waters) is the purview of the Flag State (referred to as Flag State Control). Currently, on the order of 60% or the world’s ocean-going fleet is registered in Panama, Marshall Islands, or Liberia.
The about-to-be-passed Carriage Ban (an amendment to the IMO 2020 Rule) will enable enforcement of the IMO 2020 Rule to be conducted under the auspices of Port State Control. The most recent meeting at IMO on the 2020 Rule (July 2018 meeting of the 2020 Rule Implementation Working Group of the Pollution Prevention and Response (PPR) Subcommittee to MEPC) saw the phrase “practical and pragmatic” first uttered in relation to the IMO 2020 Rule. Hitherto, the only reference to implementation was accompanied by phrases such as “level playing field” and “consistent approach” to implementation.
Our expectation is that less than 10% of marine fuel used onboard after 1/1/2020 will be done in contravention of the IMO 2020 Rule. Be aware, however, that the IMO 2020 Rule includes Regulation 18 of MARPOL Annex VI that allows ships to use noncompliant (>=0.5% sulfur fuel) if compliant fuel was not available. A ship must document its efforts to obtain compliant fuel but is not required to deviate from its intended voyage to obtain compliant fuel. How this whole nonavailability scenario will play out is a mystery that is still to be solved in developing the implementation plan at IMO. As they say, “Stay Tuned.”
TM&C constantly monitors changes and proposed changes in regulations which can impact all segments of the petroleum industry. Many of these are associated with transportation fuels, affecting not only demand, but also production costs, compliance challenges, and other aspects of petroleum refining. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (with the last update released in mid-August 2018) and our various other studies. TM&C also assists clients involved in all aspects of transportation fuel production, blending activities, planning and compliance-monitoring. More information on these publications and our other work involving oil industry developments and dynamics can be obtained by contacting either one of us, visiting our website at turnermason.com or calling Cindy Parker at 214-754-0898.