Koninklijke Vereniging - Société Royale



Slow Steaming To 2020: Innovation And Inertia In Marine Transport And Fuels

Discussions of “peak oil demand” tend to focus of passenger vehicles, often from a US and European perspective, and they ignore other markets, such as marine transport, which collectively would also need to show a reduction in demand if oil consumption as a whole were to reach an inflection point.

This report explores the outlook for marine bunkers, a niche market that accounts, depending on estimates, for up to 7 percent of the demand barrel. It focuses on the impact of new environmental restrictions that aim to drastically reduce sulfur oxide (SOx) emissions from ships as of January 2020, placing them against the background of past innovations that have been reshaping ships’ fuel consumption patterns and assessing their likely impact on future innovation in the sector. Of the three main compliance options available to ship owners ahead of the new “global sulfur cap,” two—installing “scrubbers” to capture SOx emissions from shippers’ current fuel of choice, high-sulfur fuel oil (HSFO), and switching from oil-based bunker fuels to liquefied natural gas (LNG)—are more capital intensive and require more advanced planning than the third, switching from HSFO to lower-sulfur products, such as low-sulfur fuel oil (LSFO) or marine gas oil (MGO). Analysts reckon that most shippers will opt to run low-sulfur fuels, but they fear that rising demand for these fuels will bump against refining capacity limits and cause price spikes that might spread to other markets, notably diesel and even crude oil. Some analysts have suggested that delays could help the industry better prepare for the new rules.

This report challenges these findings. Key takeaways include the following: – New restrictions on marine sulfur emissions are occurring against the background of sweeping changes in the shipping industry, the impact of which is poorly captured in statistics and underappreciated in most assessments of the rules’ impact. Whereas forecasters assume steady growth in shipping fuel demand, oil consumption from the sector actually contracted in recent years and looks set to keep doing so—or, at least, grow more slowly than expected. Oil price swings and weak freight margins have served as catalysts of change, reducing the oil intensity of shipping through innovations in vessel design and fleet management and relentless industry consolidation.

Digitalization holds the promise of further fuel savings, while LNG is making inroads in the sector. Industry participants have taken a cautious approach to capital-intensive measures to comply with the global cap. As the 2020 deadline looms, and given long lead times for scrubbers and LNG engines, low-sulfur bunkers will become the industry’s new de facto fuel of choice. This wait-and-see approach is no accident but, rather, a prudent response to the uncertain long-run costs and benefits of the various options. Potential feedback effects have exacerbated the inherent uncertainty of oil and gas markets, while regulatory uncertainty about future nitrate oxide (NOx) and greenhouse gas (GHG) restrictions further clouds the options’ economics. Delaying the rules’ implementation would not in and of itself change the industry’s incentives. Performance standards such as the global sulfur cap are normally seen as supportive of innovation, unlike technical standards that “pick a winner” among available technologies. By making low-sulfur fuel the default compliance option of industry, however, the global cap effectively entrenches oil’s role in shipping for decades to come. A more integrated approach to marine emissions, one that would have regulated SOx, NOx, and GHG, would have accelerated the switch to LNG, and it would have been a good way to curb all emissions at once. Shippers’ choice of lower-sulfur fuels as their default compliance option shifts the burden of innovation onto the refining industry, but it will likely prove a lesser challenge for refiners than is commonly understood. Although some analysts have drawn parallels with the 2008 oil rally, when the desulfurization of road diesel helped cause imbalances in distillate markets and propelled oil prices to record highs, that is not an apt analogy. Unlike in the 2000s, diesel demand is far from booming. Furthermore, due in part to viscosity and lubrication requirements, the new bunkers will not be diesel look-alikes but new fuel hybrids, the production of which will entail as much blending as actual refining.

Noncompliance will further alleviate product market pressures. Given the lack of environmental police on the high seas, enforcement is a daunting challenge for the global cap’s implementation. Efforts to beef up enforcement currently focus on tightening paperwork checks at ports, which is a cheaper but less effective approach than actual emission checks by flyover or satellite. While the global sulfur cap will be less disruptive than feared, the loss of one of the last remaining market outlets for HSFO might be the death knell for some of the less competitive refineries with high HSFO yields. Falling HSFO prices will also adversely affect producers of high-sulfur crude oil, whose price is often indexed to that of HSFO, such as Mexico. Source: Center On Global Energy Policy



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