The great scrubber conundrum

It's been six months since my last 2020 dispatch. Since then, I’ve spent time at major industry gatherings in London (IP week) and Athens (Posidonia) and yet I’m just as uncertain about 2020 as I was then. My only comfort is that judging by my numerous conversations at Posidonia, I’m far from alone.

By now, anyone remotely involved in shipping should know about the importance of January 1, 2020 -- the date environmental restrictions on sulfur content in bunker fuel come into effect. Some still hold out hope for an extension, but that just won’t happen. Much like most of the world, shipping has to become a more environmentally conscious industry.

For me, the biggest surprise at Posidonia was the intense interest in Exhaust Gas Cleaning Systems, or scrubbers, as a fuel compliance solution. Scrubbers -- which allow ship operators to burn high-sulfur fuels -- come in three forms: open loop, closed loop and hybrid. The first releases the excess sulfur dioxide into the sea, the second requires discharge at shore, while the latter can be operated as either of the other two.

Some owners have vocally opposed scrubbers, citing energy inefficiency and high maintenance costs. At Posidonia, a prominent Greek owner described them as "an experimental drug" forced onto the industry -- a view likely shared by other industry luminaries.

Global Oil Markets podcast:
Younger generation of shipping executives reconsider scrubbers ahead of IMO 2020

On the other hand, some charterers are all for them, perhaps an early charterhire negotiating move to counter higher freight rates due to the increased bunker prices expected in 2020.

Discussion and announcements on scrubbers proliferated during the Posidonia week, leaving small, cash-strapped owners scratching their heads. Some affluent shipowners are hedging their bets, opting for scrubbers on half their fleet and confident of yard space availability. Moreover, one scrubber manufacturer was boasting about the flurry of orders he received during Posidonia week.

I’m more skeptical about scrubbers; assuming a Panamax vessel with a top-tier quality engine allowing for a quick retrofit could cost the owner some $2.5 million on a two-week drydock trip, as well as the loss of income during the installation. For affluent owners, cash prepayment might be an option, while cash-strapped owners will have to obtain additional financing, adding some 7%-10% to the cost. And that’s assuming financing is available.

Or take a 5-year-old 82,000 dwt Panamax dry bulk owner who requires additional scrubber financing. We assume a 24-month facility on 60% financing for the scrubber, with monthly capital repayments.

Say the ship is on a 12-month timecharter at $14,500 per day. The scrubber financing will add $2,000 to the daily expenses, taking the daily total to about $8,000 per day, excluding any interest or finance costs on the vessel herself. Assuming debt repayment on the vessel also, the vessel could be forced into negative cash-flow. Are small owners willing to sacrifice returns, just as the market seemingly begins to recover?

And what of fuel availability? Scrubber technology was seemingly out of fashion for months, only to become relevant again during recent weeks. Refiners and suppliers have been gearing up for compliant low sulfur fuel availability, leaving some operators asking whether high sulfur fuel will be available post-2020.

While being in the dark is disorienting, it can also be fascinating and exciting, though for owners it must be nerve-wracking. Time runs short and decisions must to be taken soon.

And we haven’t even touched on the equally onerous Water Ballast Treatment bill coming up...