Infographic: Mediterranean shifts to cleaner bunker fuels amid IMO's regulatory drive

The International Maritime Organization's new sulfur regulation is driving shipping companies to use cleaner yet costlier energy, but industry participants suggest significant disruptions are unlikely due to the high availability of compliant fuels.

From May 1, the UN agency will lower the sulfur limits for bunker fuels in the Mediterranean Emissions Control Area to 0.1% from 0.5% for ships not equipped with scrubbers, in efforts to protect marine environments and coastal populations.

While alternative fuels like LNG and methanol can also be compliance options for vessels with bespoke propulsion technologies, analysts expect most conventional ships will need to burn 0.1%S marine gasoil or ultra low sulfur fuel oil rather than 0.5%S very low sulfur fuel oil when sailing through protected waters.

"As shipowners look to comply with the new sulfur limits ... we can anticipate a shift in the market dynamics," said Fotios Katsoulas, a research director at S&P Global Commodity Insights.

The Mediterranean ECA will be the fifth of its kind based on IMO rules, and market participants suggest the bunker and shipping industries are well prepared to adapt to such a regulatory change.

At least 16 bunker ports in the Mediterranean will be able to supply MGO, and 10 refueling hubs can provide ULSFO when sufficient demand arises once the rules come into force, according to a survey of over 20 industry participants by Platts, part of Commodity Insights.

Nearly all Mediterranean bunker ports in the survey are capable of gasoil supplies, while some across a wide range of geographical areas -- from Gibraltar/Algeciras to Malta, then all the way to Istanbul -- are ramping up their ULSFO availability.

Consultancy 2050 Marine Energy has forecast MGO's share in the 22 million mt/year Mediterranean bunker market will jump to 33%-34% in 2026 from 17% in 2024, while ULSFO's share is expected to rise to 10%-11% from 1%. VLSFO's proportion is anticipated to collapse to 21% from 55%.

Supply dynamics

The 0.5%S fuel is expected to be well supplied in Mediterranean ports, according to the Platts survey, as it remains the most common bunker for ships in deepsea trades sailing to and from the region.

But market participants have noted several bunker suppliers displacing their VLSFO storage tanks with ULSFO or MGO as they anticipate a drop-off in VLSFO demand in May.

"VLSFO shall also remain short term, but mid to long term, we expect some areas not to have it available, mainly Italy and Malta," a spokesperson for bunker supplier Monjasa said. "We are seeing some oil majors already stopping their production now."

Anton Shamray, head of product at bunker intelligence platform ENGINE, said fuel suppliers are expected to use fewer barges and onshore storage tanks for VLSFO. "As a result, we may start seeing longer lead times, more planning and contracted supply volumes required," Shamray said.

Demand patterns

Platts assessed the delivered bunker price for MGO at $677/mt in Gibraltar on April 29, a premium of $181/mt to VLSFO. In March, the price spread averaged $193/mt.

In Rotterdam, Europe's largest bunker port, MGO was assessed at $607/mt and ULSFO at $587/mt on April 29.

ULSFO is not as standardized as MGO, supplied at fewer ports, and could require dedicated tank space. Therefore, shipping companies would often only use it when its discount to MGO reaches at least $30-$50/mt, according to many industry participants.

"It is considered a tricky product, with varying specifications from different suppliers and limited availability at ports," a Denmark-based trader said.

2050 Marine Energy's founder Adrian Tolson added: "Many transit vessels do not have enough tanks or regular ports of call and will take MGO because it is simpler and less problematic."

European refiners are expected to supply MGO sufficiently amid falling regional diesel demand, while arbitrage barrels from the Middle East and the US Gulf could also fill any gap, according to some analysts.

Meanwhile, ULSFO production requires an adjustment to crude plate or blending operations. Currently, Spanish refineries are producing the fuel for the West Mediterranean markets, and Tolson suggests Turkish, Greek and Italian refiners could also provide small quantities.

Alternative fuels

The ECA is taking effect amid tightening EU and IMO regulations on greenhouse gas emissions. Alternative fuels to oil-based bunkers with lower carbon intensity are also emerging as compliance options, as they can meet the requirements of both sulfur and GHG regulations.

With methanol and biodiesel supplies forecast to be limited in the region, some industry participants expect the regulatory drive to aid LNG bunker demand as more ships capable of running on the fuel will be delivered in the coming years.

LNG sales as marine fuel in Mediterranean countries could jump from 24,100 b/d in 2024 to 53,000 b/d in 2030, according to Commodity Insights' Annual Strategic Workbook.

Based on classification society DNV's order book data, the LNG-capable fleet is expected to grow from 646 ships at the end of 2024 to at least 1,277 at the end of 2028.

The Mediterranean ECA will likely boost LNG bunker demand in the region, bunker trader Integr8 said in a report earlier this year, adding that the fuel "remains a viable transitional fuel."

LNG has negligible SOX emissions, while industry estimates suggest it can reduce GHG emissions by 20% to 30% compared with oil-based fuels. Low-carbon fuels such as biomethanol can achieve at least a 65% reduction, but are much more expensive currently due to scarcity.

"Especially for vessels operating in Europe, [LNG is] enabling them to meet increasingly stringent environmental regulations while laying the groundwork for the switch to a more sustainable maritime future," Integr8 said.