US, petrostates band together for IMO showdown over green bunker rules

The US and a group of eight petrostates have made renewed attempts to thwart the International Maritime Organization's new decarbonization rules, creating uncertainties in future bunker markets while readying themselves for a showdown in October.

During the UN agency's Marine Environment Protection Committee meeting in April, member states held a vote to approve two sets of lifecycle greenhouse gas emission intensity thresholds for marine energy, requiring ships of 5,000 gross tons or larger using conventional, oil-based marine fuels to pay fines from 2028.

The regulation is set for adoption at the IMO's next MEPC meeting in October, which needs two-thirds of qualified member states present and voting. Seasoned observers suggest another vote is highly likely, given that opposition remains strong.

"What the US is trying to do is to prevent an international climate agreement," Tristan Smith, professor of energy and transportation at UCL Energy Institute, told Platts, part of S&P Global Energy.

Having withdrawn from the April talks, Washington has reiterated its rejection of the new regulation while threatening to retaliate against countries that do not support its position.

"The Trump Administration unequivocally rejects this proposal before the IMO," the US State, Commerce, Energy and Transportation Departments said in a joint statement on Aug. 12. "Our fellow IMO members should be on notice that we will look for their support against this action and not hesitate to retaliate or explore remedies for our citizens should this endeavor fail."

The warning came after Bahrain, Iran, Iraq, Kuwait, Saudi Arabia, the UAE, Venezuela and Yemen in July asked other member states to "reconsider" the regulation's adoption because the shipping industry could face "undue financial burdens."

"In light of the significant ambiguities and gaps surrounding the approved measures ... it is evident that proceeding with their adoption at this juncture is premature," the countries, which voted against the regulation in April, said in their submission to the IMO.

Cost issues

The central argument of the US and the oil producers has been that new IMO rules would lead to higher fuel costs for shipping companies, which could be passed on to end-consumers, and that decarbonization would not be achieved with low-carbon fuel availability expected to remain low in the foreseeable future.

July's average bunker price for very low sulfur fuel oil, the most common bunker type, was $517.83/mt in Singapore, compared with $623.20/mtVLSFOe for LNG and $1,878.37/mtVLSFOe for 100% sustainable methanol, according to the Platts bunker cost calculator.

Supporters believe the new IMO regulation could make it cheaper for shipping companies to burn transition fuels like LNG and biobunker fuels in the near term while providing investment signals to green methanol and ammonia producers to ramp up output, and the sustainable fuels would become much cheaper next decade due to increased availability.

But Saudi Arabia and other oil producers said the most likely outcome would be that ship operators pay fines to comply, arguing that the current regulatory design provides limited incentives for a switch to transition and sustainable fuels.

Based on the approved rules, ship operators would need to reduce the GHG intensity of their bunker use by at least 4% from 2008 levels to avoid a hefty fine in 2028. The threshold is to increase to 30% in 2035 in phases. When achieving higher reduction targets, set at 17% in 2028 and 43% in 2035, they could generate carbon credits for sales.

The oil producers expect VLSFO prices to be $418-$498/mt of fuel oil equivalent cheaper than zero-emission fuel prices in 2030, even when the fines are taken into consideration, and that large subsidies would be needed to trigger a low-carbon switch.

Assuming a subsidy of $500/mtFOe, the IMO could accumulate up to $28.1 billion in 2030 with the large number of ship operators to "pay to pollute" by staying with conventional, oil-based fuels, according to the oil producers. The IMO fund could balloon further to $138 billion in 2040, assuming a subsidy of $300/mtFOe.

"This divergence between ambition and practical feasibility risks generating a significant accumulation of revenue in the IMO Net-Zero Fund ... Such a dynamic introduces inefficiencies and inflationary pressures across the sector," the submission said.

Future negotiations

The IMO has set goals of reducing GHG from international shipping by 20%-30% by 2030 and by 70%-80% by 2040 compared to 2008 levels, before a net-zero close toward 2050.

Some analysts expect the approved regulation could prompt more use of alternative fuels, even though the pace of decarbonization might not match the stated ambition.

Felix Klann, policy analyst at nonprofit Transport & Environment, said shipping companies would likely rely on LNG, biofuels and heavy fuel oil for initial compliance, while the main concerns are the limited incentives for zero-emission fuels.

"Our analysis does not align with theirs," Klann said, adding that the oil producers did not present concrete counterproposals and might not be willing to "engage productively."

Opinions are mixed over whether the US and petrostates could successfully derail the regulatory progress at the IMO, which relies on its member states to enforce its rules as flag states and via port state control.

Rico Luman, a senior economist at ING Research, said the IMO regulation's final adoption could be "in danger," as other countries could fear US retaliation if they support it.

Even if adopted, the regulation "will apply globally and also apply to journeys to and from the US," Luman added. "If the US doesn't accept the effectuation this will complicate the whole system."

Since Donald Trump's return to the White House in January, the US has often threatened tariffs on other countries in various types of negotiations to gain leverage. While the US-flagged fleet is small, Washington could impose fees on ships linked to foreign countries supporting new IMO rules.

In April, 63 countries -- including China, Japan and EU member states -- voted for the regulation during the MEPC meeting, and there have been no signs of them changing their position for now.

"There is a significant majority of countries that do support the IMO," Klann said, while adding that a failure to adopt the global rules could lead to more regional regulations and throw shipping companies back into the uncertainty they experienced during earlier negotiations.