Oct-2011

Options for lower-sulphur marine fuels

Adjusting to new sulphur specifications for bunker fuel requires careful planning, taking into account market dynamics

Karl Bartholomew and Antonios Panagiotopoulos, KBC

Article Summary

Over the past decade, regulators have made significant efforts on the improvement in fuels quality, driven mainly by environmental considerations. On-road transport fuels — gasoline and diesel — were the fuels most affected, as they comprise the bulk of refinery output and consumer demand. Beyond these transport fuels, regulatory initiatives expanded to controlling the qualities of industrial and residential distillates, fuelled by efforts to reduce emissions.

As a result of these environmental initiatives, we have seen massive investments in the refining industry in the US and globally to meet new sulphur specifications —often at low or no capital recovery. Now, the focus has turned to marine fuels, although they comprise a relatively small amount of global demand for oil products. Most refinery residue production worldwide is sold to firms that blend and operate bunkering facilities.

The purpose of this article is to provide a framework on how to meet the upcoming quality requirements for marine fuels. By identifying future trends in supply and demand, as well as the regulatory requirements based on the International Maritime Organisation’s (IMO) MARPOL Annex VI, this article comments on the problems of identifying the actual size of the bunker market, the implications of these new regulations, as well as to examine the available options for action.

Global bunker fuel oil demand
There is a great degree of uncertainty among analysts regarding the actual volume of global bunker demand. Many of the countries reporting consumption data to various energy agencies do not do a consistent job defining how much distillate or residue actually goes into marine fuels.

Bunkers demand monitoring is by definition a hard task, since the actual consumption of the fuel does not occur inside the geographical borders of a country. In this sense, the monitoring of the actual demand/supply becomes harder to track for the individual country’s statistical services or even for global energy services such as the International Energy Agency (IEA). Actual consumption happens at sea, and refuelling often occurs in ports other than the departure country’s.

There are two primary methods used to estimate fuel consumption and emissions from marine shipping. One method uses marine fuel sales data in combination with fuel-related emissions factors. The use of marine fuel sales to estimate emissions, also called the top-down method or fuel-based method, could be a reliable method of estimating total fuel consumption and emissions if we could rely on the volumes of marine bunker fuels sales that are reported. Marine bunker supply data are mainly collected by the EIA (the US Energy Information Administration), IEA and United Nations Framework Convention on Climate Change (UNFCCC).

The second means for determining marine fuel demand is an activity-based, bottom-up method. This approach is based on fleet activity and tries to estimate world fleet consumption and emissions by calculating the consumption for all possible ship type and size brackets. This method needs information on ship movements and characteristics (vessel type and size, engine type and age, fuel type, and so on), as well as the corresponding fuel consumption figures and emissions factors for each type of ship. 

Various study groups and companies that use the bottom-up approach estimate that current bunker demand is approximately 370 million t/y1, and by 2020 the number will increase to 450–500 million t/y. These numbers are almost double those of the IEA’s bunker demand projections. Again, bunker demand statistics are not well recorded in all regions around the world, so any of these projections should not be regarded as absolute numbers. A summary of some of the various demand numbers is shown in Figure 1.

Global demand for bunkers is expected to grow at a rate consistent with estimates for near-term deliveries of new-build ships. Global tonnage in use for shipping has already increased from around 1085 thousand dwt in 2007 to 1310 thousand dwt in 2010. The order book in many shipyards remains at a high level, indicating a strong outlook for continued growth in marine shipping.

The US and Canada have applied for designation of an IMO Sulphur Emission Control Area (SECA) covering the Pacific Coast, the Atlantic/Gulf Coast and the eight main Hawaiian Islands, out to 200 nautical miles. It is certain that the US will have Emission Control status in 2012. Any shipping transit in this area will be required to comply with the IMO Emissions Controlled Area (ECA) regulation rules. During the first stages of the regulations, we expect to have an increase in incremental demand for low-sulphur fuel oil (LSFO), shifting from what is now primarily high-sulphur fuel oil (HSFO). After 2015, however, we anticipate the incremental demand from bunkers to move from residual fuel-based product to distillate-based product in order to comply with the 0.1% sulphur fuel IMO specification within a SECA.

The uncertainty surrounding the implementation of the final stages of the IMO’s MARPOL Annex VI paints a rather risky business environment. Any early investment is at risk, as it could lead to stranded capacity or idled units. Refiners have to have a clear horizon about the actual time frame when the specifications will be implemented, as well as a definite size of the bunker market.

Regulatory framework: MARPOL Annex VI
The Marine Environment Protection Committee (MEPC) of the IMO has long sought the reduction of emissions from ships. The main body of the MARPOL Annex VI sees a progressive reduction in sulphur oxides (SOx) and nitrogen oxides (NOx), as well as particulate emissions from ships as a core part of their agency mandate (see Table 1).

1.5% to 1% sulphur content in SECAs in 2010
Today, the IMO’s MARPOL Annex VI regulation applies to a relatively small amount of global trade, specifically the Northern European markets. This represents less than 10% of global bunker demand. The switch from 1.5% to 1.0% sulphur, which was put in place in July 2010, is generally easy to achieve, either blending HSFO with LSFO or lower-sulphur cutter stocks such as distillate.