FEBRUARY 25, 2017—Over the next five years, international environmental regulations will have a major impact on the tanker market, according to a recent report by marine transport advisors McQuilling Services, LLC.
In its latest Tankers Industry Note, McQuilling Services points to the implementation of the Ballast Water Convention this year and the global 0.5% sulfur emissions cap in 2020 as two defining regulatory events for the marine transportation market.
Beginning in 2020, the International Maritime Organization (IMO) will establish a global 0.5% sulfur cap in order to reduce the carbon footprint of maritime transportation. McQuilling Services says the result of the sulfur cap will alter trade flows of fuel oil and middle distillates in 2020 and beyond. A new bunker fuel blend containing fuel oil components and gasoil is expected to enter the market. Considering the current global refining complex, East of the Suez markets are likely to be self-sufficient and meet regional demand while Western markets with less complex refining systems (Europe, Latin America and FSU/Russia) will likely switch and become net importers of the new bunker fuel.
McQuilling projects that the Middle East will produce 2.81 million bbl/day of gasoil by 2020/21, which is 34% more than regional demand. It foresees the Middle East as being a large export center for gasoil, boosting tanker demand. “In fact, we are likely to see Middle East exports rise substantially to Europe, as well as potentially to more distant markets in the Americas. Assuming this new fuel will be classified as a clean product, we anticipate a material rise in ton-mile demand for product tankers, with a bias towards larger tankers (LR2) for expected long-haul transportation requirements.”
McQuilling Services says that “while the implementation date of 2020 appears to be set in stone, we cannot completely rule out the possibility of an extension given the concern over the likelihood that global gasoil supply will not be enough to meet demand. As of now, the view taken by owners seems to be a ‘wait and see’ approach considering many uncertain factors remain, such as the availability and quality of scrubber technology, the composition of the new bunker fuel and what the supply/demand scenario for this fuel looks like.”
McQuilling also points to the increased use of scrubbers by shipowners to comply with the stricter emissions regulations of Emission Control Areas (ECAs), which would “likely lead to higher demand for HSFO, as opposed to gasoil and relieve pricing pressure on HSFO, decreasing the spread between these two options. With a narrower spread there is less of an incentive to install the system, particularly for vessels with a shorter trading life on the horizon.”
Continues McQuilling, “As such, we expect the minority of these owners to actually follow through on scrubbers. From our supply outlook, an accelerated level of deletions/scrapping may occur beginning 2018, likely supporting rates; however, we must observe how events play out to lead to this outcome.”
Ballast Water Management Convention
Meanwhile, the long-awaited implementation of the Ballast Water Convention is set for this September 8. It will require the installation of an IMO type approved Ballast Water Management System (BWMS) during the vessel’s next special survey after September 8.
McQuilling Services expects shipowners of older ships to carefully weigh whether it makes financial sense to install an expensive BWMS or scrap the vessel. “The cost related to one of these systems ranges from $500,000 to $3 million depending on the size of the vessel. A vessel approaching its 4th or 5th special survey may not have enough trading life left to offset the cost of installing the treatment system, therefore providing some incentive to scrap the ship.”
Says McQuilling, “As a majority of the vessels with surveys due after September 2017 are on their 1st- 3rd round, we do not see a significant amount of cost aversion-driven scrapping in 2018.”
There’s also the possibility that an extension of the implementation date to September 8, 2019 will be discussed at the Marine Environment Protection Committee’s (MEPC) 71st session in July 2017, allowing owners more opportunity to get their dry docks or International Oil Pollution Prevention (IOPP) certifications completed before the implementation date in order to obtain a waiver and delay the installation of the equipment. This will allow owners to see if systems that are both IMO revised G8 and USCG Type Approved enter the market.
According to McQuilling Services, of the global tanker fleet, 22.1% is due for special survey beyond September 2017 through 2018, which could potentially contribute to temporary contractions in supply as vessels enter dry dock. Short-term supply contractions could provide some support to rates throughout 2018.