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Tuesday, September 12, 2000

Clean air: Expensive for shipowners
Poten & Partners is warning that MARPOL limits on sulfur in fuel will prove costly for shipowners.

In 1997, IMO adopted Annex VI to the International Convention for the Prevention of Pollution from ships (MARPOL73/78) that set a global cap of 4.5% sulfur content for bunker fuels with an on-going review for possibly lowering the cap. On March 20, 2000, an amendment to Annex VI was adopted by IMO'S Marine Environmental Protection Committee (MEPC) that designates the North Sea, in addition to the Baltic Sea, as a special zone where the maximum sulfur content in bunkers is limited to 1.5%. Implementation of Annex VI depends on a nations registered vessel tonnage. The annex comes into force 12 months after acceptance by at least 15 nations with a combined tonnage of at least 50% of the worlds fleet. So far, Norway and Sweden, representing slightly less than 5% of the worlds tonnage, have ratified Annex VI. The North Sea amendment comes into effect one year after Annex VI.

"Based on todays market, low sulfur bunkers do not exist," warns Poten. The nearest proxy is residual fuel of 1% sulfur content that is burned by electricity generating and industrial plants to fulfill local environmental regulations on sulfur emissions. Demand for low sulfur resid will rise considerably as a consequence of European Council Directive 1999/32/EC that reduces the maximum specification for the sulfur content of industrial fuel to 1% by 2003. Thus shipowners will have to compete with every industrial plant for low sulfur resids for bunkers. The price for high sulfur resids and bunkers in Europe should fall as the price for low sulfur resids rises, thus widening the spread between the prices of the wo fuels. One estimate is a long-term price premium of $20-30 per ton for low sulfur resids.

Poten says shipowners have four choices.

  • They can reduce emissions by slow steaming. However market economics dictate otherwise.
  • They can install scrubbers to remove sulfur, but this would be very expensive.
  • The third option is to have a double set of bunker tanks; one for normal bunkers and the other for low sulfur resids to be burned in designated special zones. Vessel operators would have to bear the expense of modifying their ship bunker system to load and fuel the propulsion engines with two different types of bunkers plus paying a premium for low sulfur resid.
  • Fourthly, they can burn only low sulfur bunkers, the so-called greener option.

The attempt of international organizations to reduce pollution greatly complicates ship operations and increases operating costs. Market rates are set by the relationship between the supply and demand for tonnage. The increased costs of cleaner bunkers means reduced profits for owners operating in the spot market where owners pay for bunkers. If the market is poor, a fairly common historical condition in the spot market, increased bunker costs may result in owners being forced to cut costs in other areas, with potentially disastrous results.

 

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