Maritime shipping, one of the greatest contributors to pollution and carbon emissions on the planet, accounts for about 10% of oil used in global transportation, or 4.4 million barrels a day. According to HSBC, an average container vessel, consuming 80 tons a day of high-sulfur fuel, emits the equivalent in sulfur oxides of 46 million light-duty diesel vehicles running on diesel.
“Most ships use oil that contains 3,500 times more sulfur than the typical automotive diesel,” HSBC reports, “producing sulfur oxide emissions that cause respiratory symptoms and lung disease in communities around shipping ports.”
What is IMO 2020?
Founded in 1948, the International Maritime Organization (IMO), has been working to reduce the harmful impacts of shipping on the environment since the 1960s.
Next year, the IMO will again be at the forefront of a major ocean environmentalism endeavor when IMO 2020 goes into effect. This is one of several policy implementations being put into effect throughout the maritime industry in an effort to combat greenhouse gas emissions, and put the industry on a path towards zero emissions.
Through the end of this year, and for ships operating outside Emission Control Areas, the limit for sulfur content of ships’ fuel oil is 3.50% m/m (mass by mass), a limit that’s been in place since 2012.
On January 1, 2020, that limit will be reduced down to 0.50% m/m. According to the IMO, the interpretation of “fuel oil used on board” includes that which is used in main and auxiliary engines and boilers. This new fuel is commonly referred to as “Low-Sulphur Fuel”.
Meeting the New Requirements
The IMO says ships can meet the new requirement by using low-sulfur compliant fuel oil. The new regulations can also be met through the use of alternative energy sources, such as LNG. Some in the industry are even exploring using wind power through the use of modern sails (albeit for a very limited class of vessels, tailored for the bulk tanker fleets).
“This has been recognized in the development by IMO of the International Code for Ships using Gases and other Low Flashpoint Fuels (the IGF Code), which was adopted in 2015,” it states, noting that yet another alternative fuel is methanol, which is being used on some short-sea services.
Ships may also meet the SOx emission requirements by using approved equivalent methods, such as exhaust gas cleaning systems or “scrubbers,” which basically “clean” the emissions before they are released into the atmosphere. There are three types of scrubbers, known as open, closed, and hybrid loop systems. These systems allow vessels to operate using the higher sulphur content fuel oil.
Open loop scrubbers use ocean water as a wash and the waste byproduct of the system is discharged back into the water (a number of major ports around the world have announced that they will ban the use of open loop scrubbers within their territorial waters). Closed loop scrubbers filter out the sulphur and the waste is stored on board until it can be disposed of properly. A hybrid system allows a vessel operator to choose between operating the system as a closed or open loop.
While there is a high up front cost to retrofit vessels with these systems, the potential payoff is being able to still use the higher sulphur content fuel oil at a projected lower price than the low-sulphur fuel oil that will be required to be used by vessels that have not been retrofitted.
Feeling the Supply Chain Impacts
In a world where more than 90% of all global trade takes place on the ocean, IMO 2020 is expected to shake up the industry when it comes to be in January. “Unfortunately, the network of 59,000 vessels powering international commerce runs on sulfur-laden bunker fuel, and resulting emissions are causing problems on dry land,” Ashley Viens writes in IMO 2020: The Big Shipping Shake-Up.
Here are potential ways Viens says marine fuel may be affected by these regulations:
- High-sulfur fuel oil drop in price as the demand drops dramatically after January 1, 2020
- Diesel, a low-sulfur fuel oil, will be in higher demand and see a price increase
- Refiners benefit from higher profits as refining runs increase to satisfy the new regulations“Rising fuel costs means rising freight rates,” Viens points out, “with much of these costs being passed to consumers.”
As a result, it is to be expected that everything that runs on oil, including ocean vessels, airplanes, trucks, and railroads, will take a price increase starting in Q4 2019. On the ocean side of things, this was a major topic of negotiation this past spring during Trans Pacific contract negotiations. By and large the result of these negotiations is that some kind of fuel increase will be passed along to shippers, starting in Q4 2019. The size of these increases are relatively unknown, as vessel operators, shipping groups, industry analysts, and fuel providers have all provided wildly different estimates and predictions. The only thing everyone agrees on is that it will cost more to ship goods as a result of IMO 2020.
In IMO 2020 prep is already hiking cost to ship cargo by sea, Greg Miller says capacity is another issue shippers should be thinking about. Many vessel owners are opting to comply with the new regulation by installing scrubbers, he writes, and to do so, they must temporarily pull vessels from the market for installation. “This reduces the capacity of ships at sea,” Miller adds, “which increases charter and freight rates.”
While IMO 2020 “may have an impact on freight rates we all have an obligation to support environmental stewardship,” says John Nikolich, Vice President of International Transportation Management for Odyssey Logistics & Technology.
“Shippers should communicate openly with overseas trading partners, customers, LSP’s, senior leadership, and other key stakeholders to align on what impact IMO 2020 will have on their supply chains,” Nikolich adds. “This will ensure preparedness from every angle, come Q4 2019 and beyond.”
Odyssey is monitoring this initiative and will provide updates as new information becomes available.