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Double Bubble (Macro Macchiato 18/11/19)

The IMO 2020 deadline is coming ever closer. Prices for 0.5% sulphur content fuel are becoming more readily available. Data from Refinitiv shows that the average price of 0.5% sulphur fuel oil at the four main bunkering ports is USD 536, some USD 255 more than the average price for old-time 3.5% sulphur fuel oil - or a premium of 91%, if you prefer.

At these sorts of prices, fitting a scrubber makes economic sense. For instance, assume a ship burns an average of 30 tonnes of fuel oil a day. Let’s pretend the engine is always burning that at all times. That isn’t the case of course as consumption varies with operation, port days, non-operating days, etc. But the biggest tankers and bulkers, basis their Baltic Exchange descriptions, easily burn over 60 tonnes per day when sailing at observed average speeds, so let’s halve it for argument’s sake. Similarly, the biggest container ships sailing at full speed could burn over 200 tonnes per day, but at slower speeds, with more port days, let’s go with 60 tonnes per day.

At a net 30 tonnes per day consumption, and if bunker prices stayed at today’s level for a year, fuel costs for a year would be just over USD 3 Mn for a ship burning old-time 3.5% Su fuel oil, but nearly USD 5.9 Mn for a ship burning new-and-improved 0.5% Su fuel oil. Double the net fuel consumption to 60 T per day, and annual fuel costs vary from about USD 6.2 Mn for 3.5% Su fuel oil to nearly 11.8 Mn for 0.5% fuel oil.

If therefore the projected annual capital+opex of a scrubber came out at below the difference between the annual 3.5% and 0.5% fuel oil – that’s USD 2.8 Mn for a ship burning 30 T per day, then the scrubber begins to look like a viable option. There are of course some caveats. A non-exhaustive list includes the compatibility and reliability of the scrubber system one chooses, how long the scrubber lasts, whether open or closed loop scrubbers will remain an acceptable route to compliance, whether the fuel price differential remains constant (it won’t), whether refineries continue to offer sufficient supplies of 3.5% Su fuel oil and, if fuel oil over 0.5% Su content remains available, why not shove in the surplus sulphur and let non-compliant fuel be 7% Su or more? What would that do to scrubber opex and expected life?

The situation remains as clear as mud as you can tell. No wonder then that more ship owners are investigating the alternatives: LNG, methanol, ammonia, batteries…. The latest to try LNG is Chinese megacorporation China COSCO Shipping Group. Its tanker operating arm, COSCO Shipping Energy Transportation has decided to convert one VLCC it has on order from fuel oil to dual-fuel LNG / fuel oil specification. The ship was ordered in 2017 at Dalian Shipbuilding Industry –part of the state owned China Shipbuilding Industry Group. COSCO will reportedly pay an extra USD 12 Mn on the engine upgrade. It is one of a series of four on order; what will happen to the other three remains unknown.

The benefits of LNG fuel were reported last month by AET, the Malay tanker owner, which had just launched two Aframax sized dynamic positioning dual-fuel shuttle tankers, Eagle Blane and Eagle Balder, to be chartered to Norway’s Equinor. In a press release, AET noted: “The DPST vessels will emit 40% to 48% less carbon compared to similar vessels built in 2008, positioning them as the most environmentally clean DPST. The tankers meet the International Maritime Organisation’s (IMO) 2030 target of reducing CO2 emissions by 40% compared to 2008 and its 2050 goal of reducing CO2 emissions by half. Eagle Blane and Eagle Balder are also designed to emit 98% less NOx, 85% less SOx, 93% less black carbon particulates and 98% less particulate matter compared to DPSTs that burn conventional fuel. The vessels use LNG as primary fuel and can also use 100% of the harmful Volatile Organic Compounds (VOC) as supplementary fuel. By combining LNG dual-fuelling and VOC recovery systems with a dynamic positioning system, the vessels can save approximately 3,000t of fuel annually.”

The Take Away

LNG bunkers are now available at major ports in the six leading nations that deliver two-thirds of global marine fuels – China, South Korea, Singapore, the UAE, the Netherlands and the US. It’s too expensive to re-engine a ship to use LNG, so its use will be confined to newbuildings. The orders are growing. Crude oil tanker orders with LNG as primary fuel totalled 6 out of 26 in 2017, 4 out of 58 2018 and 10 out of 74 in the first nine months of 201. COSCO seems to be in good company. About 15% of all orders are now specified with LNG as the primary fuel. With such lasting uncertainty around fuel oil, that percentage is going to grow.

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