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Interview: A third of total bunkers in 2025 may be high sulfur fuel oil being scrubbed -- MECL MD

Highlights

Differential of 0.5% sulfur bunker versus HSFO price likely to rationalize in future

Scrubbers uptake to rise on favorable pricing economics

Singapore — A third of the total bunkers in 2025 could be high sulfur fuel oil being scrubbed, compared to an estimate of about 8% in 2020, as the uptake of exhaust gas cleaning systems, also known as scrubbers, accelerates after the implementation of the International Maritime Organization's 2020 rule, Robin Meech, managing director at Marine and Energy Consulting Limited said Thursday.

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The IMO rule will cap the sulfur limit in marine fuels to 0.5% worldwide from January 1, 2020, from 3.5% currently. This applies outside designated emission control areas where the limit is already 0.1%.

Shipowners will have to either switch to using cleaner, more expensive fuels or install scrubbers.

"The uptake of EGCS has really taken off -- even Maersk who was totally against EGCS is looking at a small number of systems," Meech, who is an industry veteran, told S&P Global Platts in an interview.

A lot of other shipping companies are also mulling over scrubbers.

In August, Hong Kong's Pacific Basin Shipping, for example, said it was assessing two main methods -- low sulfur compliant fuel oil versus scrubbers -- as it geared up for the IMO 2020 rule.

The shipping company had said earlier that it did not think that scrubbers were an effective solution either technically or environmentally.

"The consensus has been that the 0.5% bunkers/HSFO price differential could be well over $300/mt in 2020, but once through the initial chaos, the differential will be rationalized by increased use of EGCS, growing inland demand, and refiners continuing to respond to the price differential," Meech said.

Longer term, the MGO/HSFO price differential could be expected to settle at around or probably slightly higher than today's level of $210/mt to $260/mt, he said.

The MGO/0.5% sulfur fuel oil differential could be as low as $50/mt with unsophisticated blending of HSFO and MGO, but it is expected to be around $100/mt certainly until a game changing, new worldscale desulphurization technique emerges, he said.

Post 2025, the differential between 0.5% bunkers and HSFO is expected to be around $140/mt, he said.

It costs about $30/mt to operate an open-loop EGCS, leaving a cost saving of $110/mt.

A VLCC consuming 17,000 mt bunker fuel annually would have cost savings of about $1.8 million mt/year, he said.

Assuming a retrofit for a VLCC costs $4.3 million, the owner would breakeven in under 30 months, he said.

The economics of installing an EGCS on a newbuild is even more attractive, as the capital costs are lower, suggesting the uptake of EGCS will continue well into the late 2020s, if not beyond.

Initially, EGCS were favored by cruise liners and ferries operating in the ECAs, but there are now over 1,000 vessels committed to EGCS, with every indication that this number will increase rapidly, he said.

Also, installing EGCS on older vessels may be the only way they can remain viable, he added.

A 10-year old tanker with EGCS will be some 25% more economic than a new eco-friendly similar sized vessel consuming highly priced 0.5% bunkers.

There are new ways of financing EGCS, predominately through leasing, and the use of hedging tools to mitigate risks is another factor that has accelerated the take-up of EGCS, Meech said.

Some of the larger suppliers are offering to become involved in the financing of the EGCS installation, in return for a long- term HSFO supply contract, Meech said.

REFINERS WILL ADAPT

HSFO will not be available at all ports post 2019, and for tramp operators -- those who operate ships that do not have a fixed schedule or published ports of call -- a long-term contract would be even more beneficial if one can be secured, he said.

Meech remained confident that refiners would be able to adjust to the changing industry dynamics.

Refiners can always make HSFO available by decreasing the level of utilization of secondary processes, and if the longer term future starts to reflect the current market then the 0.50% bunkers/HSFO price differential will remain sufficient to see EGCS on most larger new builds, Meech said.

--Surabhi Sahu, surabhi.sahu@spglobal.com

--Edited by Geetha Narayanasamy, geetha.narayanasamy@spglobal.com