Troubled waters for shipping bunkers

Soaring fuel costs and the pressure to use cleaner fuels are making waves for the shipping industry. This article navigates through the troubled waters.

Part of the growing pressure on the industry as a whole comes from the recent announcement that CO₂ emissions from shipping are almost three times higher than previously thought. The UN report, which was leaked to the UK’s Guardian newspaper, indicated that the world’s merchant fleet is already generating 1.12bnt of CO₂ a year, equivalent to almost 4.5 per cent of the world’s CO₂ emissions. In addition, the report predicts that this figure, as well as the sulphur and soot emissions associated with shipping, are likely to increase by 30 per cent by 2020.

Moreover, the industry produces seven per cent of the world’s SO_x emissions and 11-12 per cent of all NO_x,according to Lloyd’s Register Quality Assurance and the German government’s scientific advisory body – WGBU 2002. Furthermore, bunker fuel, also know as heavy fuel oil (HFO) contains polycyclic aromatic compounds, which are carcinogenic in nature. Indeed, HFO is itself classified as a carcinogen and a peer-reviewed study, published in November 2007, indicated that particulate matter emissions from shipping were linked to the premature deaths of 60,000 people each year, primarily in coastal and port areas and that this figure is likely to increase by 40 per cent by 2012.

It is worth bearing in mind, however, that in comparison to all other forms of transport, shipping and freight are by far the most efficient, particularly in comparison to aviation. In addition, great strides have been made over the past 20 years. One litre of fuel on a modern VLCC (very large crude carrier), now moves one tonne of cargo more than twice the distance it once did.

A recent members’ meeting at the UK’s Chamber of Shipping has drawn attention to the possible use of market-based mechanisms in reducing CO₂ emissions from shipping. Robert Ashdown, the Chamber’s technical head, explained that the industry is becoming increasingly aware that the future expectations of regulators cannot be met by technical and operational improvements alone. A real concern is that if the International Monitoring Organisation (IMO) fails to move quickly enough then individual countries might start introducing legislation unilaterally, creating significant headaches for the industry as a whole.

In fact, this is already happening. California’s Air Resources Board (ARB) now requires ocean-going vessels within 24 nautical miles of its coast to use to low-sulphur diesel. The move carries with it heavy penalties for non-compliance and unlike an earlier attempt, does not require approval from the federal Environmental Protection Agency. Both Denmark and Japan are independently developing a CO₂ index for new ship build which will allow owners to compare their ship’s fuel efficiency against other vessels. The major difference between the two approaches is that Denmark favours a course which will reflect performance under calm conditions, while Japan prefers an index which covers actual trading conditions. Denmark has also proposed a US$30/t levy to be adopted internationally. If accepted, it could raise around US$33bn annually, allowing the industry to offset around one-third of its emissions.

The IMO is already preparing for the implementation of a CO₂-indexing scheme, which will allow more efficient vessels to pay less in terms of emission dependent charges.

Fuel efficiency

The recent surge in the price of fuel, although having fallen back in recent months, is still having an effect on the shipping industry. It is worth considering that bunker fuel represents between 50 and 60 per cent of the freight market’s operating costs and the price has risen by 100 per cent YoY according to Aseambankers Research. The hike has triggered a rush towards fuel efficiency strategies such as investing more in hull, propeller and engine maintenance.

“So far, the initial results have been encouraging, showing real fuel savings of one to four per cent,” it noted (The Edge). In addition, the rising cost of bunker fuel has sparked competition among Asian ship-builders, who are now fighting to offer the best possible fuel performance.

Hyundai Heavy Industries has recently announced that it is now looking to fit “thrust fins” onto the rudders of its ships. These recover rotational flow from behind a ship’s propeller, thereby generating additional thrust. The company claims that this can reduce fuel consumption by four to six per cent.

Meanwhile, Daewoo Shipping and Marine Engineering have released their own propeller-based systems, which promise similar gains in performance. Finn Englese of the Oslo-based broker Lorentzen and Stemoco has suggested that the high cost of fuel could lead to the development of super efficient ships, which might use advanced slow speed engines with electronic injection for deep-sea routes. Anti-fouling coatings are another way of improving efficiency and already save the industry around US$60bn a year in reduced fuel bills. They are currently seeing strong growth in the Asia-Pacific region, due to new buildings in China and South Korea, particularly. Several companies have recently released new brands, all of which have fuel efficiency as a selling point.

Another strategy which is gaining momentum is in many ways a return to the industry’s roots. Skysail, a German company, is currently developing a towing kite wind propulsion system. It offers kites for cargo vessels with effective loads of between 8-32t. The system is being tested on two ships at present. One of the vessels has reported that the skysail could temporarily substitute over 50 per cent of the main engine power under optimal conditions. The company expects the system to result in a 10-35 per cent reduction in annual fuel costs.

The Skysail is one of many innovative new technologies
being developed in order to reduce the impact of escalating
bunker fuel costs on the shipping industry. If a switch to
diesel goes ahead, they will be sorely needed.

Other operators are responding to higher bunker prices simply by slowing down. The Hapag-Lloyd shipping company in the second half of 2007, reduced the standard speed of its speeds down to 20 knots from 23-23.5 knots and is reportedly making handsome savings, despite having to add an extra ship to its route.

The high-price environment has already claimed one victim in the form of The Gold Star Line, which had been operating an Australia-New Zealand container shipping service, but was forced to suspend operations in July.

Scrubbers versus diesel

In conjunction with the pressure on vessel owners to reduce SO_x emissions, the high price of fuel is making the introduction of onboard sulphur scrubbers more appealing than to using low-sulphur distillate fuels. However, this approach will do nothing to reduce the industry’s CO₂ emissions and such scrubbers are still an expensive investment. In comparison, switching to middle distillates means that CO₂ emissions could be reduced by over five per cent, due to its higher specific energy content and the fact that such fuel does not require pre-treatment or heating prior to use.

The IMO has set a target of switching the industry to a 0.5 per cent sulphur-content fuel by 2020. In addition, the current cap of 4.5 per cent will be reduced to 3.5 per cent by 2012. Furthermore, some special sulphur emission control areas will only allow ships using 0.1 per cent sulphur fuel to operate from 2015. Questions remain as to how practical these targets are though, especially given the increasing demand for low-sulphur diesel in the European private transportation market.

Any shift towards greater diesel usage by shipping could have a dramatic impact on refiners. Bunker fuel is effectively a residue from refining, primarily from the distillation and cracking processes. If demand runs dry, then the thick black sludge cannot simply be converted into another, more desirable fuel. Current estimates indicate that around 290Mta of bunker fuel is consumed each year. To replace that with low-sulphur diesel would require colossal investment in new refineries and specialised units needed to increase the yield of diesel. In addition to the cost, the lead-time between concept and a new refinery is considerable. It should be noted that the cost of new refining capacity is still less than installing onboard SO_x scrubbers on every large vessel.

A move to low-sulphur diesel could well be the cheaper option for the shipping industry. That’s the conclusion of Intertanko, the International Association of Independent Tanker Owners. Although the organisation expects such an approach to roughly double the cost for the industry, it still argues that this would be less costly than a series of lower impact measures that would likely be less effective and eventually lead to dieselisation in any case. In addition, it would eliminate the need for shipboard HFO treatment and onboard scrubbers, reducing CO₂ emissions in the process. It has also been argued that such a move would remove the quality control problems often associated with using a residual fuel and improve the working environment for ships’ crews. Intertanko is also opposed to scrubbers on the grounds that the shipping industry should not have to be involved with waste management. In addition, onboard scrubbers are currently large, difficult-to-install, leave hazardous waste and are still being tested.

Shipping fuel to markets

As far as the oil tanker industry is concerned, it is making significant progress in terms of its own unique challenges. For example, thanks to over US$500bn of investment, the industry expects to see 95 per cent of all tankers in operation by 2010 being equipped with double hulls. This has come about in part due to increasing pressure for higher safety standards and a lower risk of spillages. The options for single-hulled vessels include refitting to double hulls or conversion to bulk carriers. Interestingly, the bulk of the single-hulled vessels in operation seem to be moving to Asia, which in 2007 had 66 per cent of the single-hulled fleet.

This programme has already resulted in dividends. Despite the global tanker fleet’s expansion to approximately 107bn tonne-miles, this decade has so far seen a 78 per cent reduction in reported oil spillages (ITOPF/Fearnleys). At the same time, the average age of oil tankers has also fallen to 11 years, down from the peak of 15 seen at the end of the last decade.

One of the challenges faced by the industry is declining oil demand in the US, triggered by US$4/gal gasoline and the economic downturn. In a presentation at Intertanko’s AGM, Henry Curra, ACM Shipping’s head of research, indicated that in his opinion, transatlantic arbitrage is likely to continue. He highlighted the lingering questions surrounding the new export-driven refineries expected to soon come online, and in particular whether or not they will supply as far afield as the US. Mr Curra later dismissed this possibility, along with the potential for new Middle Eastern refining capacity to increase long-haul capacity within the next six years, as wishful thinking.

Conclusions

It is clear that the shipping industry faces significant challenges in the coming years. Fortunately, the nature of the business means that compared to the rest of the transport sector, it is on a firmer footing, given lower price sensitivity and a stronger ability to pass on costs to customers. If a switch to diesel occurs it will have substantial consequences for the oil sector, as well as the global economy, if the necessary refining capacity fails to materialise. Fuel efficiency gains are clearly there for the taking, but it is difficult to see at this point how the sector could be completely decarbonised.

For more information, visit:
www.skysails.info
www.imo.org/
www.intertanko.com