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2019 July 5

Under the double 20 sign

Bunkering and shipping industry in Russia and worldwide anticipates the approach of 2020 with the 0.5% sulphur cap for bunker fuel. Experts say the market is not generally ready for new standards running the risk of facing large-scale violations of IMO requirements. Meanwhile, Russia is looking into building container carriers powered by nuclear fuel. These are some of issues discussed at the 12th Russian Forum “Current State and Prospects for Development of Russian Bunker Services Market”.

Introduction of global sulfur content requirement coming into effect on 1 January 2020, is a reality to face. However, bunker market experts believe that global shipping and energy industries are not ready for that in many respects.

Key alternatives to conventional heavy fuel oil is low-sulfur fuel with qualities close to VLSFO, low-sulfur diesel fuel – MGO LS, alternative fuels including LNG and scrubbers – gas cleaning systems that let use a conventional heavy fuel oil.

Heavy fuel oil or diesel fuel?

When speaking at the forum, Sergey Ivanov, Director of Marine Bunker Exchange (MABUX) AB, emphasized that there is a high risk of VLSFO deficit, at least during the first months after the restrictions come into effect. He expects this product to be available in certain ports, not all over the world. According to forecasts, the demand for HSFO will decrease from 1 January 2020, from 3.5 million barrels for day to 1.4 barrels per day while the demand for MGO LS is to surge from 900,000 barrels to 2 million barrels per day. The latter is to see the price increase with the HSFO and MGO LS price difference expected to grow from $250/MT to $380/MT.

According to Intertanko & Veritas Petroleum Services, daily demand for low-sulfur fuel (0.5% and 0.1%) to replace heavy fuel oil from 2020 will make some 3 million barrels or 480,000 tonnes.

Besides, the surge of demand for low-sulfur fuel oil can trigger bunker market changes in global hubs. For example, suppliers of VLSFO 0.5% anticipate traders to mix different grades of fuel (there are at lease ten of them) that will result in lower product quality. Therefore, they plan direct supplies without involving traders. Sergey Ivanov does not rule out the possibility of the situation to expand to other large bunkering centers worldwide.

According to the forecast, provided at the forum by Argus Media expert Pavel Sheglov, in the first quarter of 2020, HSFO 380 price at the port of Singapore will be $303 lower than that of VLSFO 0.5% (today, the difference is $155-160 pmt), at the port of Rotterdam - $329 pmt. In the second quarter of 2020, the agency forecasts, VLSFO 0.5% in Singapore will decrease to $565 pmt, in Rotterdam - MGO 0.1% will climb as high as $717 pmt, which is $473 higher than HSFO-380.

Thus, in terms of fuel price, VLSFO 0.5% is to be the most viable solution to meet IMO restrictions. However, it is far from certain that it will be available everywhere in required amount. According to Sergey Ivanov, Director of Marine Bunker Exchange (MABUX) AB, up to 40% of refineries in Europe and Middle East can stop producing bunker fuel because they are not ready to produce fuel complying with the IMO’s 0.5% sulphur cap. Besides, an imbalance is possible in the oil market amid the surge of the demand for ‘light’ oil.

As for Russia, VLSFO 0.5% will hold a strong position with sales as high as 42% and stable demand in the bunkering market of the Russian Federation,  Alersandra Skoryna, representative of Gazpromneft Marine Bunker LLC,  said at the Forum.

Scrubber – not a silver bullet?

Apart from disadvantages of scrubbers covered earlier (weight, price and challenging installation) this equipment is not a guaranteed ticket to the era of sustainable shipping since it does not fully meet all the requirements. According to Sergey Ivanov, only 5.4% of the global commercial fleet is equipped with them today. 81% of that number are equipped with из open-loop scrubbers discharging wash water back into the ocean after treatment. 

Andrey Zhmurko, leading specialist of Sovcomflot’s Engineering Center, said in his turn, that the most optimistic scenario forecasts about 10% of vessels to be equipped with scrubbers in the nearest years.

Meanwhile, the number of ports prohibiting the use of open-loop scrubbers is increasing. It is quite possible that they will be globally banned in the future by IMO which is already discussing the issue. 

By the end of 2018, using open-loop scrubbers was banned at the ports of Belgium, Latvia and Lithuania, internal waters of Germany, ports of California and Connecticut (USA), ports of Abu Dhabi and Singapore.

Installation of hybrid scrubbers is much more expensive and requires additional space. Moreover, additional energy is needed for cleaning equipment and chemicals (NaOH). By-products collected in a special tank should anyway be disposed which requires approvals, time and financial resources.

According to calculations shared by Andrey Zhmurko, the price of a hybrid scrubber is 1.3-1.6 times higher as compared with that of open-loop scrubber.

Taking into consideration the limited number of vessels equipped with scrubbers and supposed to be equipped with them, no large-scale production of this equipment is expected. Thus, the reduction of prices is not expected either.

Besides, scrubbers, even hybrid ones, are not likely to ensure compliance with the new requirements on CO2 emissions from ships.

When speaking earlier at the Transport Week in Moscow, Sergey Frank said that “in five-six years we will face restrictions on GHG emissions (CO2) that will overthrow substandard solutions like scrubbers”.

LNG requires infrastructure

Liquefied natural gas is being considered as one of the most viable alternative to oil products. 

As Sergey Ivanov said at the forum, the number of vessels running on LNG is glowing slowly. According to the forecast, in 2019 there share will only reach 0.5% of the total number of commercial ships. Slow growth rates bring into question investments into development of the related infrastructure.

Also, as Anton Lutskevich, Chief Process Engineer, Standardization Department, Gazprom, said at the forum, despite of a number of evident advantaged, development of gas-powered shipping is hindered by some aspects including insufficient LNG bunkering infrastructure and regulatory framework.  Today, Gazprom is developing gas fuel standards for ships. The head organization is CNIIMF, the developer is Krylov State research Center. That work is to be completed in 2022. Anton Lutskevich invited the interested organizations to submit their proposals on standards since it is a good opportunity to influence both international standards, ISO, and national ones, thus establishing the rules of playing in the young market of LNG.

When speaking at the XXIII St. Petersburg International Economic Forum (SPIEF 2019), Igor Tonkovidov, Sovcomflot Executive Vice President and Chief Operating / Chief Technical Officer, said that “the Ministry of Energy and the Ministry of Transport should express how their promotion and readiness to stimulate the development of this market and probably should develop a number of fundamental technical documents, including the gas fuel quality standard, that will set forth clear criteria it should comply with”.

In the part of infrastructure, it should be noted that LNG bunkering terminal has been put into operation in Russia under the Cryogas-Vysotsk project while Gazpromneft Marine Bunker is building its own LNG bunkering ship.

As Cryogas-Vysotsk representative told at the forum, the LNG terminal has already bunkered about 40 ships. In particular, the terminal provide fuel to the Kairos, the largest bunkering ship operating in the North-Western Europe. The terminal can accommodate vessels with length of up to 185 m, width of up to 28 m, draft of up to 7.82 m and capacity of up to 30,000 cbm.

According to the estimated shared at the forum by Vasily Zinin, Executive Director, National Gas Vehicle Association, global consumption of LNG as marine fuel can reach 6 to 40 million tonnes by 2030 excluding volumes consumed by large gas carriers.

In Russia, the pioneer in using LNG as marine fuel is Sovcomflot as well as we told earlier >>>> 

Besides, NOVATEK and Atomflot are considering a joint project on construction of four gas-powered icebreakers. United Shipbuilding Corporation (USC) is going to launch the first LNG-powered ferry for Ust-Luga-Baltijsk line in late July 2019. It is also developing a wide range of vessels running on LNG including bunkering tankers. Arctic gas projects are already using gas carriers using LNG as fuel. 

According to Stanislav Chuy, Advisor, Capital Construction Center, Rosatom, the work is underway to launch a project on construction of 30 container carriers with capacity of 5,000 TEUs. Their operation on LNG or nuclear fuel is under consideration. Stanislav Chuy says nuclear fuel would let escape the problems coming from using other types of fuel complying with IMO standards and would ensure stable financial model.

When speaking about LNG, it should be taken into account that construction of LNG-powered ships normally implies the creation of dual-fuel ships. However, in the opinion of USC President Aleksey Rakhmanov, construction and operation of dual-fuel ships results in increased financial expenses.

What is the destination?

Amid unpreparedness of many refineries worldwide to production of low-sulfur fuel complying with new IMO standards, the global shipping industry is likely to face local deficit of it. Installation of scrubbers is costly and there is risk of ban for them in the future. LNG is the most realistic among the alternatives but few vessels use it as fuel so far for large-scale development of required infrastructure which implies high capital investments in construction and operation of such vessels as compared with conventional ones. All those factors can either lead to en masse violation of IMO regulations or to the use of low-sulfur diesel fuel in regions featuring deficit of cheaper low-sulfur fuel oil.

In Russia, vertically integrated oil companies predict no problems with supply of low-sulfur fuel oil, although limited number of producers are provided with government grants for production of such fuel.

Russia is active in the development of LNG with its LNG terminal on the Baltic Sea already operational in Vysotsk. Besides, Rosatom, is looking into using nuclear fuel in commercial fleet.

Vitaly Chernov