DOSSIER

 

IMO 2020 - why the upbeat sentiment?


Paul Bartlett looks at how positive first reactions to introduction of the new IMO 2020 sulphur limit may have deflected attention from some serious underlying concerns.

Despite the IMO secretary-general’s praise for everybody in enabling the January 1 sulphur-in-fuel regulations to be ‘implemented successfully without significant disruption to maritime transport and those that depend on it’, there was growing concern in the early weeks of the year that the far-reaching regulations had been introduced without enough time for preparation and due diligence. Some thought that Kitack Lim might have spoken too soon.

At the end of the third week of January, the International Maritime Organization reported ‘a relatively smooth transition’ with only 10 cases of compliant fuel reported as being unavailable. However, there has been a steady stream of warnings relating to new 0.5% sulphur fuel blends, as well as uncertainties over secure supplies of what has now become a multi-fuel mix for ship operators.

Virtually no-one had predicted the scale of the differential between IMO-compliant very low sulphur fuel oil (VLSFO) and traditional heavy fuel oil (HFO). At that time, VLSFO was selling at a premium of more than 80% over HFO in key bunkering hubs. Fuel experts put this down partly to initial market volatility but mainly to bunker barge bottlenecks, short-term VLSFO shortages and other logistics issues. These would be ironed out in the weeks ahead, they predicted.


Fuel concerns

Back in September, some of shipping’s top brass had voiced concern over fuel quality, availability, price, machinery risk and contractual obligations in charterpartys. Leading trade associations including Bimco, the International Chamber of Shipping, Intertanko and Intercargo issued a joint statement warning of fuel supply problems, as well as concern about the stability and compatibility of individual bunker blends.

In the early weeks of the year, it transpired that some very low sulphur fuel compositions had been found to contain more hydrocarbons known as aromatics which, on combustion, cause a higher volume of black carbon than is present in heavy fuel oil. This led to a joint submission to the IMO by Finland and Germany calling on such fuels to be banned in the Arctic and suggesting that the International Organization for Standardization should undertake a prompt review to qualify the environmental performance of marine fuels more accurately.

The issue was to be discussed at the IMO’s annual pollution prevention committee meeting in February. However, various non-governmental organisations, including WWF and San Francisco-based Pacific Environment said the findings were alarming and asked the IMO to ban fuels that give rise to high emissions of black carbon. They also called for a resolution seeking a voluntary moratorium on the use of such fuels until the regulations could be updated.

Meanwhile, in major bunkering hubs including Singapore and Houston, new 0.5% blends were found to contain high volumes of sediment which, together with viscosity and the other issues mentioned above, pose the risk of blocked fuel pumps and filters. This, warned some fuel experts, could yet result in main engine breakdowns and loss of power.


Insurance issues

Hull and machinery underwriters are nervous, only too well aware that off-spec fuels constitute a growing risk, as the 2018 ‘Houston Problem’ demonstrated. In a briefing note soon after those incidents, London law firm Clyde & Co revealed that although the issue had been linked to Houston, similar problems had also been evident in Panama, Singapore – the world’s largest bunkering hub – and other ship fuelling locations.

At the end of December, the day before the new sulphur regulations entered force, Reuters reported that low sulphur fuels procured in Antwerp, Houston and Singapore contained potentially harmful levels of sediment. The news agency quoted AmSpec Services, a fuel testing specialist and FOBAS, a Lloyd’s Register bunker testing subsidiary, both of which had expressed concern over levels of sediment in low sulphur blends.

Some fuel experts claim that undue haste in implementing the sulphur cap is partly to blame. They point out that there has been insufficient time for a new version of ISO 8217 to be drawn up and introduced. The latest version dates from 2017, although a Publicly Available Specification was issued in September, intended to demonstrate how the 2017 standard could be applied to new fuels. But many charterers still procure bunkers on the basis of ISO 8217:2012. This is eight years old and seriously out-of-date.

Experts warn that even if ships’ fuel is procured on the basis of the ISO 8217:2017 standard, new bunker blends may well have a range of characteristics which are not accurately assessed. This, they point out, was one of the likely causes of the Houston Problem when it transpired that the off-spec fuel had contained 4-cumyl-phenol, a binding agent used in the production of epoxy resins.


Questions on liabilities

Meanwhile, P&I Clubs were also squaring up for a series of possible fuel-related claims with uncertainties about where the liability for non-compliance might lie. P&I sources reveal several fuel-related risks which have caused consternation and led to a private briefing document shared by P&I Clubs and seen by Seatrade.

Of particular note, at least in the early months of the new regulations, is the issue of contamination. Fines can be imposed on ship operators by Port State Control (PSC) authorities if fuel is shown to be non-compliant. But questions arise over the source of the contamination. There are concerns that large tanks at refineries and storage depots, used for heavy fuel oil over long periods, could potentially contaminate compliant fuel along the bunker supply chain.

Early in the year, North P&I Club revealed that ship operators had sought guidance on this issue. They had bought supposedly compliant VLSFO in good faith, as confirmed by the bunker delivery note, but had subsequently found that the bunker stem failed to meet the IMO’s 0.5% sulphur limit.

The Club’s freight defence and demurrage deputy director, Tiejha Smyth, went on record as saying this was not an issue confined to one region, but was evident around the world. The challenge for ship operators is whether or not to notify port state authorities that the fuel is non-compliant and, presumably, risk a possible delay and/or a dispute over liability in the future.

PSC inspectors are entitled to take fuel samples whenever they like and if an operator has not revealed that he has non-compliant fuel on board upon sampling at the next port, he could be viewed with disfavour. A further problem is where the fuel sample is taken. The MARPOL Convention requires that samples are taken at the bunker manifold, ie. the exact point of supply. But a sample taken subsequently from a bunker tank could prove to be non-compliant.

In such an instance, it could be that ship operators have not undertaken thorough cleaning of bunker tanks and a fresh bunker stem could have been contaminated by the so-called ‘unpumpables’ and residuals which coat the bottom of HFO tanks. If tanks have not been meticulously cleaned, these deposits can be disturbed in heavy weather, thereby contaminating fuel. If non-compliant fuel can be shown to have resulted from dirty bunker tanks, ‘discretion might not be exercised in a member’s favour’, to use the P&I Club lingo.

A further P&I concern is where compliant fuel is unexpectedly not available in a certain location, an issue that has already affected some tramp operators without established bunker supply contracts in the ports where their ships were bound. The IMO regulations allow a standard Fuel Oil Non-Availability Report to be used to report these instances, but without more cleaning, this could potentially lead to more problems of potential contamination from bunker tanks used to store HFO.

P&I Club risk managers stress the importance of thorough vessel-specific Implementation Plans and diligent record-keeping on board. If a ship is targeted by PSC inspectors for a non-compliance issue, evidence of the crew’s accurate adherence to the Implementation Plan is likely to be viewed favourably, they say.


Trading restrictions

Then there is the impact of scrubbers. Towards the end of January, VLSFO was priced at a substantial premium over HFO, enabling owners of scrubber-fitted VLCCs to command much higher daily rates and shorten payback periods dramatically. However, this rosy picture could be relatively short-lived – the future supply of heavy fuel oil in some locations is far from certain and will depend on bunker suppliers’ analysis of levels of demand, supply and price.

For the owners of Capesize bulkers, many of which do not have scrubbers, earnings were falling fast. In the fourth week of January, the Baltic Dry Index had fallen close to 40% month-on-month and almost 30% compared with the same time last year. With significant exposure to VLSFO price volatility, Capesize owners were trying to take smaller bunker stems more frequently, brokers said, in the hope that the price delta would narrow.
Most scrubber installations so far have been open-loop systems where wash water is discharged directly into the sea, a more convenient arrangement for ship operators than more expensive closed-loop or hybrid systems. However, a growing number of ports and regions have banned or restricted the use of open-loop scrubbers, including Belgium, California, Connecticut, China, Egypt (Suez Canal), Germany, Gibraltar, India, Latvia, Lithuania, Malaysia, Panama, Portugal and Singapore.

This is a headache for owners of open- loop scrubber-fitted vessels. If their ships are to trade in these regions, they will need to have supplies of IMO-compliant fuel on board, requiring separate bunker tanks, or else shell out another few million dollars for a new scrubber installation.

 

Low sulphur fuel prices discount to MGO vanishes


The entry into force of IMO 2020 has seen prices of very low sulphur fuel oil (VLSFO) skyrocket since mid-December to the point of almost no discount to marine gas oil (MGO).

In Singapore, prices of both VLSFO and MGO climbed steadily over the last weeks of 2019, with VLSFO rising faster until the two types of fuels were trading at roughly equal levels.

Price indications for Singapore VLSFO touched a high of $741 per tonne on 6 January, before heading down to below $700 per tonne in mid -January, according to data from Ship & Bunker.

Looking back, Singapore VLSFO prices had remained relatively steady at around $520-550 per tonne between July and November 2019 before a sudden hike from mid-December as the IMO 2020 deadline loomed closer.

Singapore MGO prices, on the other hand, reached a high of $746 per tonne on 7 January, before declining to just below $700 by mid-month. MGO prices climbed swiftly past the $700-mark within a two-week period during second-half of December.

‘For the time being, the VLSFO to MGO discount has vanished in Singapore with both bunker fuels currently sold at around $700 per tonne. With such a price convergence, the apparent advantage of VLSFO goes out the window,’ observed Adrian Tolson, senior partner at consultancy firm 20|20 Marine Energy.

Tolson, however, pointed out that MGO will not remain cheaper than VLSFO, for logic maintains that VLSFO will get increasingly cheaper as more of the product becomes available and more companies and barges start delivering it.

Bimco stated: ‘Whatever the underlying cause, the price levels for VLSFO and MGO have risen respectively by 30% and 24% from start of December to the start of January. Such price increases are quite extraordinary for the low sulphur fuels, which have been trading at relatively stable levels throughout 2019, as opposed to the more volatile HSFO (high sulphur fuel oil).’


‘Currently, the VLSFO-HSFO spread in Singapore is at $340 per tonne, the third highest level since low-sulphur fuel became widely available. Similarly, the MGO­HSFO spread is at $346 per tonne, the highest level since 2014,’ Bimco stated.


By Lee Hong Liang

 

 

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