Navigating Fuel Tumult

Pandemic Prompts Bunker Confusion

By Carly Fields

Could Jan. 1, 2020 go down in history as shipping’s Y2K moment? Twenty years earlier at the start of the millennium there was hysteria at the prospect of computers across the globe becoming useless at the stroke of midnight because their programmers had not factored the switch to 2000 in their date formatting. It turned out to be a damp squib, which was anticlimactic after the mass hype in the lead up to the event.

The buildup to and the entry into force of the International Maritime Organization’s, or IMO, Regulation 14.1.13 of MARPOL Annex VI followed a disturbingly similar track. Many a conference panel tackled the thorny issues of who would pay the significant price tag for ensuring compliance, whether that be through installing scrubbers to clean exhaust gases of heavy fuel oil, or factoring in the predicted hefty premium for buying very low-sulfur fuel oil. Then there was the “will they, won’t they” debate of whether to install scrubbers. It was a fraught time.

When the clock rolled over into Jan. 1, 2020, the world did not end. Shipping did not fall on its sword. The entry-into-force passed by without much fanfare and carriers simply got on with the job of moving cargo. Sure, there were gray areas, namely the spread between the cost for low- and high-sulfur fuels and whether those that had installed scrubbers would feel vindicated in their decision.

Fast-forward a few months and as BIMCO’s Peter Sand so aptly put it: “The sulfur cap already seems like ancient history. It’s the tale from the past.” When the Covid-19 pandemic took hold, all that planning for IMO2020 became redundant as oil prices crashed.

As of May 31, West Texas Intermediate was US$32 per barrel, down from US$57.80 per barrel at the start of the year.

Marine fuel rates have tracked down, too. At the key bunkering hub of Singapore, higher sulfur intermediate fuel oil 380, or IFO380, was at US$205 per ton on May 29, down US$161.50 from the start of the year. But more important to IMO2020 has been the narrowing spread between high- and low-sulfur fuels. On Jan. 1, 2020 the spread between IFO380 and very low-sulfur fuel oil was US$367.50 per ton. By May 29 that spread had contracted to US$59.50 per ton.

That, said Sand, might be the only silver lining for the shipping industry. “Who foresaw that [the fall in oil prices]? This was by no means forecasted,” he said in a Breakbulk365 webinar. The price decline encompasses the Covid-19 challenges, the breakdown of the OPEC+ alliance, the subsequent production cuts and the evaporation of global oil demand to the extent of some 20 million barrels of oil in April.

“These are quite staggering numbers,” he said, “but from the shipping industry perspective, if you look at the decline in marine gasoil low-sulfur prices from Singapore you see the peak on Jan. 8 coming all the way down. This pandemic has been swift, harsh and dramatic on the way it has brought down prices for key commodities.”

To Scrub or Not to Scrub

The scrubber debate is a particularly interesting wrinkle of the pandemic. David Jordan, regional director, Asia for MSI, pointed out that Covid-19 has inadvertently shone a spotlight on the ongoing economic viability of scrubbers, which is dictated by payback time, which in turn is dictated by the price differential between heavy fuel oil, or HFO, and very low-sulfur fuel oil, VLSFO. Speaking in a webinar for the Baltic Exchange, Jordan noted that the collapse in the oil prices has severely impacted that spread. “The question is how is this price gap differential going to develop going forward. Our forecast is for US$100 per ton for full year 2020. This gap will widen moving forward, but at these levels it really does complicate the economic argument for scrubbers as a long-term viable solution.”

Add to this that retrofitting a scrubber has become more complicated because of Covid-19. Beth Bradley, a partner with law firm Hill Dickinson, noted that the pandemic has led to serious delays to existing orders for the retrofit of exhaust gas cleaning systems. This is particularly true for those vessels where the work was scheduled to take place in Chinese shipyards. There have also been cancellations as owners and operators seek to cut costs. Combine this with the narrower price differential between the two fuels and the immediate prospect of a larger uptake of exhaust gas cleaning systems seems “doubtful,” she said, especially if prices remain low for a significant period of time.

Given the lower VLSFO prices, it would be easy for multipurpose ship operators that opted not to fit scrubbers to feel smug. Speaking to Breakbulk, BBC Chartering CEO Ulrich Ulrichs said that is true, but for him the “final verdict is still out there. Nobody could foresee the Covid-19 crisis, which has an impact on oil prices this year, maybe even next year. So, the evaluation can still change in the coming years.”

BBC took the decision to order scrubber-ready ships when uncertainty on the fuel price spread was at its height. The first of the six-strong newbuild series of F500 MPVs, the 12,400 deadweight-tonne BBC St. Petersburg, was delivered in May 2020. Ulrichs said that the option to make the remaining ships scrubber-ready is under review and will depend on costs. That said, he points out that the world economy will recover eventually, pulling oil prices back up, at which point the spread between low- and high-sulfur fuels could widen once again. “And then scrubbers might still make sense for ‘young’ tonnage,” he said.

Quality Concerns

Speaking at an IMO2020 panel discussion at Breakbulk Middle East in February 2020, Ulrichs said that the carrier had, at that time, seen issues with fuel quality. Speaking in May, he confirmed that while quality problems continue to dog the industry they are less dramatic now. These, he pointed out, are not relative to sulfur content but are instead related to the pour point and flash point of fuels. Issues often stem from the blending process.
Hill Dickinson’s Bradley agreed with Ulrichs’ assessment, citing issues related to blended fuels that have a propensity to sediment. But that niggle aside, she said that implementation of the global sulfur limit in marine fuels had been progressing smoothly at the start of the year with reports of high levels of compliance until the Covid-19 pandemic hit. “Three months on and the disruption to international shipping caused by Covid-19 has pushed sulfur cap issues well and truly from the headlines.”

The Covid-19 pandemic and the ensuing recession is also expected to seriously suppress newbuilding activity over the coming 18 months, viewed as another silver lining by some. Not only will this give the multipurpose fleet a chance to recover, it will also give many shipowners some breathing space to assess the feasibility of a number of fuels, according to MSI’s Jordan. Additionally, “those promoting alternative fuels are likely to step up their efforts to get their solutions into shipowners’ consciousness in readiness for the next wave of serious newbuilding which we believe is likely to emerge after 2025,” he said.

Costs of Compliance

Compliance checks have also been hit. In the buildup to the Jan. 1, 2020 entry into force deadline, there was much talk of suitable penalties for non-compliance with IMO2020. In one example, the Maritime and Port Authority of Singapore stated that “captains and owners of vessels that burn overly sulfurous fuel could face as long as two years in prison from the start of 2020.” Then there are the harder-to-quantify costs of reputational damage and time delays for ships caught burning high sulfur fuels.

But Covid-19 has disrupted compliance inspections. The UK’s Maritime and Coastguard Agency, or MCA, in charge of implementing British and international maritime law and safety policy, announced in March that it had suspended sulfur cap compliance checks in all UK ports as part of its Covid-19 containment measures. Checks to enforce the International Maritime Organization’s global sulfur limit in marine fuels outlined in MARPOL
Annex VI requirements fall under suspended routine Port State Control, or PSC, inspections. These include routine inspections of compliance in the sulfur-capped Emission Control Areas of the North Sea and English Channel.

Speaking to Breakbulk, Simon Graves, assistant director – technical performance at the MCA, confirmed the restrictions were still in place in late May. However, he clarified that as a responsible regulator, the MCA was continuing to monitor vessels that call at UK ports. “If, as a result of reviewing information sent to us, we think it’s appropriate, we will inspect those vessels,” he said. Graves added that the MCA will follow a risk-based approach to surveys and inspections when the phased releases of lockdown in the UK allows for a resumption of its activities.

The Paris Memorandum of Understanding, an organization that brings together 27 participating maritime administrations and covers the waters of the European coastal states and the North Atlantic basin from North America to Europe, confirmed that the trend is not restricted to the UK. Secretary-General Luc Smulders told Breakbulk that the number of PSC inspections in the Paris MoU region had decreased significantly as a result of Covid-19. As a result, he says it is not possible to provide substantiated statements regarding ships’ compliance with IMO sulfur requirements. That said, he did concede that some member authorities within the Paris MoU might still have the ability to detect those who may be in breach of regulations by using drones or other technologies. “But verification on board the ships themselves remains a challenge under the current circumstances,” he added.

The decision to gradually increase the number of inspections as lockdowns are eased at varying pace throughout the region is a matter for the individual states to decide. Port states such as the UK have the right to inspect vessels in their own coastal waters, which stretch 200 nautical miles out from their coasts. Beyond that, flag states are responsible for ensuring compliance with the sulfur regulations.

A Year to Forget

With port states rightly focused on Covid-19 containment and recovery, the requirement to meet IMO2020 has fallen largely off the radar. If there were concerns of an uneven playing field before, those have now been magnified. Responsible carriers that invested heavily in preparations to be ready for the Jan. 1, 2020 deadline could now find themselves in a market where those that haven’t are able to undercut freight rates in what is already a difficult market.

Hill Dickinson’s Bradley said that the reduced risk of enforcement makes it difficult to “ascertain a full picture relating to compliance and enforcement until sometime after the pandemic has receded.”

And ship operators continue to feel the financial pinch, despite the narrower spread between the high- and low-sulfur fuel. Despite refusing to sign any contracts that did not include a bunker clause prior to the Jan. 1, 2020 deadline, BBC Chartering was still “far away from covering cost” on spot earlier in the year. While this situation has improved, that is largely a result of reduced exposure as bunker prices have dropped as a result of Covid-19 pandemic and the impact it has had on global economies.

“Unfortunately, at this stage Covid-19-related issues like market uncertainties, confusions, quarantines, and health and safety concerns need much more attention than IMO2020 related issues,” Ulrichs said.

So, while the Jan. 1, 2020 deadline rolled over without too much fuss, compliance questions, pricing puzzles and pandemic planning may see the shipping sector live up to its Y2K-esque hype before 2020 comes to an end.  

Carly Fields has reported on the shipping industry for the past 20 years, covering bunkers and broking and much in between.

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