Khalid Hashim, the managing director of Precious Shipping, is not opening his wallet anytime soon to buy a scrubber for any of his bulkers. He explains why below.
I read with interest the article carried on Splash earlier this week that looked into Wood Mackenzie research claiming that another $60bn will be lumped onto shipping’s annual bunker bill once the sulphur cap comes into effect in 2020. I’m sure many a scrubber manufacturer read the same report too, rubbing their hands in anticipation of the phone ringing off the hook. The fact is, though, here at Precious Shipping, Thaliand’s largest dry bulk owner, we are not willing to invest in this emission cutting technology anytime soon – the case for scrubbers has yet to be firmly made. They are not the solution, just yet another mechanical add-on.
The other day, I’ll confide with you, we got a quote for 14 ships for scrubbers from a European supplier at $91.5m or $6.54m per vessel. I almost fell off my chair when I read the quote.
How can shipowners with no available cash in their pockets and ships that are older than 15 years of age valued at scrap spend a multiple of the value of their ship on some untried and untested equipment which may, or may not, work in real life? And this comes on top of the $1m which you will end up spending on ballast water management systems that come into force after September 8 this year. The world fleet in dry bulk over 15 years of age as of the start of this year was almost 14% or about 115m dwt.
So let’s crunch some numbers to look at the pros and cons of scrubbers.
The differential between clean oil and dirty oil is expected to increase to more than $400 per metric ton. Ships burn 25 tons of fuel a day so that’s a potential extra cost of $10,000 a day – or $2m a year, assuming 200 days at sea. So then, a $6.54m scrubber would pay back in just over three years.
Pros and cons
Here are my problems with scrubbers today. Essentially most of them are are only ‘lab tested’. Lab tests can be cheated/tweaked to show the desired results. (Volkswagen comes to mind!)
If actual results don’t meet the emission standards then you will be fined. You will have to remove/not use the expensive scrubber system.
Even if the system works perfectly, what if the scrubber manufacturer closes down or goes bust? Where will you get your spare parts or consumables from? And how will you fund the initial capital expense?
At this point, as an aside, it’s worth noting that we owners will face an additional expense from 2020 thanks to the fact that our engines were not made for this different type of fuel. Ship’s engines have been designed to burn dirty oil. Clean oil being burnt in such engines will create their own problems. Items that immediately come to mind are the difference in viscosity, difference in thermal outputs, and difference in lubricating properties. The viscosity can be dealt with by using chillers to thicken the clean oil; extra/more advanced coolants could possibly cope with the different thermal outputs; and additional advanced lubricants might be the solution. All of which will require even more investments.
2020 vision
Here’s what we’re thinking of doing come 2020’s sulphur cap implementation. Ours is a wait-and-see attitude.
We plan to burn clean oil to begin with for the first year. This will allow us time to see if the scrubbers actually work, whether the scrubber manufacturers are financially solvent, and prices should, hopefully, come down over time, something we have seen with ballast water systems of late.
After a year we would be able to buy the latest, most efficient, tried and tested scrubber system from a financially solid manufacturer, at a reasonable price.
The problem is that shipowners simply do not have that much cash lying around to spend on expensive, untried and untested, equipment.
In the meantime, after January 1, 2020 owners can try and reduce the additional daily cost by burning less clean oil per day. This can be done by slowing the speed of the ship.
Daily consumption would drop by between three to four tons per day per knot of lower speed. Most owners would reduce speed by about 2 knots.
Assuming normal speed of say 12 knots the ship would steam 12 knots for 200 days, which works out at 57,600 nautical miles.
Reducing normal speed to say 10 knots the ship would steam for just 48,000 nautical miles. This results in a 16.7% reduction in available ship capacity.
Older ships will be scrapped in 2018/2019 due to the ballast water regulations. Post January 1 2020, I reckon owners will scrap all older ships, which combined with the expected slow steaming, will curtail the dry bulk supply side. Regulatory pressure will ultimately trump the irresponsible behaviour and attitude of shipowners.
Khalid,
thanks for sharing your thoughts on this, as it gives a nice insight in the clash between environmental policy makers, technology as an enabler and the hard reality of business.
2020 is still far away when looked at from a technology point of view, the world can look completely different in three years. From a business planning point of view 2020 is the day after tomorrow and with most shipping companies not having a bank account that looks like Apple’s, investing 100 million requires serious planning.
On top of all your concerns I would like to add two elements:
1. In Industry asset modifications that involve new technology (i.e. commercially unproven) are increase the risk profile of a dry docking (or similar kind of events).
2. Dockings, or similar kind of events, with a large capital expenditure work scope are on average up to 40% overrunning their planned Cost and Schedule. See more details at an article I wrote some time ago on this topic, available on my LinkedIn profile (or send me your email address and I forward it to you).
Once again, thanks for sharing the insight in your business decision making approach.
Interesting comments, but not sure about “unproven” aspect of marine scrubbers – The Cruise liner industry have been quick to adopt – Carnival as an example has an ongoing scrubber fit programme that will see the vast majority ofi ts fleet fitted with same – Would they e doing this tech was not doing the job & making the savings required? – The bulker/boxship certainly seems reluctant to adopt scrubber solutions – especially on the biggest ships – If the likes of Maersk suddenly place an order or two then things may just change pretty quickly….
Jim,
The cruise business is so different to the world of cargo shipping that what works for the one may not work for the other.
Khalid Hashim has taken the time to contribute this article and set out his reasoning and I recognise his approach as that of many serious and thoughtful owners.
The cruise shipping industry has far more invested in each ship and each ship has a much larger crew and far more technical resources available to them.
One of Khalid Hashim’s main points is – “Why spend more than your ship is worth?” There are few cruise ships which are worth less than the cost of fitting scrubbers…
It seems obvious to me that the oil producers have the most to lose by decreased use of heavy bunker oil, because that supports profits from lighter oil. The oil industry can support manufacture of scrubbers at cost or even subsidize installation and thereby recover the actual cost through the sale of heavy oil over a longer period of time to preserve the value of their reserves in the ground.
There is a myopic view here. What incentivizes a scrubber, kills a refiner. Cheap fuel price is substantial margin loss to a producer to the point of shutting down. EU is already at low margin, now add a carbon tax of 1.50$/bbl or more and a loss of HS that takes up to $3.00/bbl the net margin is negative. How long can a refiner of low complexity run at negative margin?
as long as scrubbers are not a mandatory requirement they will never be taken up seriously at least in the operations of commercial ships ; even incinerators and garbage compactors get short shrift on board ( leave out cruise vessels )
Leon –thanks your post —would really like to have your article on variances in dry docking costs –my email is “arvindjsharma@hotmail.com ” –thanks a lot and in advance for mailing it to this address