Mind the sulphur cap

The shipowners of the world, with a handful of specific exceptions, are not going to be scrubbing their funnel flue gases to remove sulphur dioxide.

The exceptions are, firstly, people who have ordered ships for delivery in 2020, and secondly cruiseship owners. For these people, installing a scrubber and rolling it into the newbuild pricing makes sense. They will be able to operate on HSFO which will be rather cheap for as long as it takes for Big Oil to offer a readily obtainable LSFO, which is at least reasonably compatible, and the bulker, tanker and containership owners amongst them will benefit from the freight rate rises that will be the consequence of the supply side tightening that Khalid Hashim of Precious wisely predicted in these columns, as the new legislation “bites”. The cruiseship business is on another planet, economically, and so long as they can find space on board to fit a scrubber system they will do so, because they won’t be seeing the supply side constriction that the rest of us expect.

The sorts of numbers that we all hear suggest that the price differential between HSFP and MGO is around $200 a tonne, but we can assume that once stable and compatible LSFO is commonplace, we can assume that it will cost a fair bit less than MGO, even if we ignore the probable rise in the cost of MGO as the shipowners of the world queue up to buy it.

If I am honest, the variables that dog any forecast of what the effects of the sulphur cap may be are so numerous that only a complete mug would attempt a forecast.

The only forecast that I will venture is that the date of implementation will stand. Ballast water treatment this is not. Technically and politically this is a simpler issue.

I also think it is highly likely that ships will, if they can, slow down until rates rise to the point where we all stop worrying about the fuel price.

We don’t really know how long it will take for refiners to move that part of their output which is currently HSFO – I am told that this is around 3% of world refinery output through new and doubtless very expensive treatment plants (good business for the heavylift sector, here?) to turn it all into LSFO. But any organisation staring at a price differential of up to $200 per ton of its cheapest product is going to be tremendously motivated.

I will just chuck out a few of the ‘known unknowns’, starting with the suggestion, which I have heard from serious seagoing engineers amongst my friends, that some main engines intended for HSFO are not, as some of us had supposed, going to be happy to operate for long periods on MGO. The non-technical amongst us, including me, remember the days when engines originally designed to run on MGO were being fed ‘Bunker C’, which they, and more particularly their human custodians in engine rooms, very much disliked. Modern engines are just the other way around, and whilst we won’t be troubled by sludging purifiers, there is I am told a big problem with leaks, especially in a certain make as built under licence in a certain country, which I don’t propose to name for fear of being sued by makers and owners of these engines. I’ll just predict a lot more engine room fires.

Then there is the question, which will also cheer up the greybeards amongst us, that there is likely to be a big problem with the stability and more particularly the compatibility of the new generation de-sulphured heavy fuels. (There are just a handful of oilfields which yield crudes that are low enough in sulphur for their residuals to be below 0.5%, and their owners are correspondingly happy). We have more or less forgotten stability and compatibility… My next prediction is that there is going to be a big increase in the demand for bunker fuel advisory services.

Next, we have the question of what will happen between owners and charterers of ships under time charter whose charter parties are either very specific about fuel quality or are quite vague about it, because a lawyer friend who makes a very good living from time charter disputes tells me that the answer may not be the same, and it may not be the one that you are expecting. I’ll also predict that he and his colleagues will not be short of work on the question of exactly what the charterer has contracted to supply the ship with.

The brokers will be in a different position, and it is quite likely that there will be a trial of strength between owners and time charterers, with the charterers holding out for supplying HSFO, and the non-scrubber-equipped owners refusing to play and – depending on a great may factors, only some of which are listed here, accepting a much lower rate.

And along comes the next unknown – what will shipowners do at sea, if they have fitted scrubbers – will they just bypass them, and if so, will public spirited folks like the US Coastguard offer the sort of remuneration and re-location packages for whistle blowers that have let to their spectacular successes in their campaign against ‘magic pipes’, or will they feel that, with Mr Trump in command, the high seas are now none of their business? Undoubtedly a part of the reluctance to order scrubbers on the part of many shipowners is the unspoken thought that, firstly, some of their competitors will cheat, and secondly, that proving that you have not cheated will be difficult, and could be horribly expensive.

It’s time to meet the elephant in the room.

There is a suggestion, more whispered than voiced, that, confronted with ships without scrubbers, with Port State Control people wondering how they will deal with the prospect of issuing non-compliance notices to almost every ship in their nation’s ports, and a severe shortage of both MGO and LSFO, world trade may be affected, and to prevent this the IMO may – I only say may – be compelled to issue dispensations on a voyage by voyage basis to shipowners who can prove that neither MGO nor LSFO were available when and where they needed some.

Should this come to pass, tremendous fun will be had. Let’s suppose that, at a given bunker port, there is a supply of LSFO, and a supply of MGO, but not enough for everyone. Would not the astute operator of a handy bulker go to some lengths to be at the back of the queue, and allow the time-poor owner of a containership to go first and buy the expensive stuff, so that he could be ‘forced’ to buy HSFO and collect a dispensation for doing so? Bunker brokers’ staff are going to be getting and making some exceptionally interesting calls on their mobile phones, or perhaps on mobile phones of the ‘burner’ variety. In fact, a whole new area of ship operations will open up, one that will be very remunerative for those who get it right, and the nation most likely to do that is.

Happy Posidonia, everyone!