Shipping moves away from heavy fuels

The issue of bunker fuel for ships is hardly headline news, however the meeting of the UN’s International Maritime Organisation (IMO) in London, which is ongoing this week, is expected to move towards a banning of high sulphur fuels and possibly trigger a shift away from fuel oils altogether.

High-sulphur heavy fuel oil has traditionally been the cheapest type of fuel available. The desire for the lowest cost resulted in the shipping sector adopting the least refined oil product to power its vessels.

For the best part of a century the shipping industry has used high-sulphur heavy fuel oil to power its ships. Attractive as the cheapest fuel available, it was assumed that at since ships spent most of their time at sea the toxic nature of the engines exhaust that burnt it did not really matter. However, a string of authorities from the US, to the EU and China have already moved to outlaw various types of high-sulphur fuel having realised its ability to pollute the atmosphere whilst ships are in coastal waters.

The IMO is now proposing a global minimum standard in fuel quality. At present ships may use fuel with a 3.5% sulphur content. It is proposed that the new regulations impose a 0.5% ceiling for sulphur. This is quite a modest proposal as there is already a ban on fuel sulphur levels of 0.1% in the Baltic, the North Sea and much of the North American coast. Despite this, the shipping industry is concerned about an increase in cost, caused not least by a possible shortage of the right kind of oil refining capacity.

In the longer term, regulatory authorities are pressing for a movement towards the use of Liquefied Natural Gas (LNG) as a fuel for ships. With modest adjustments to engines and fuel tanks this cleaner energy source can provide an effective alternative to the heavy oil used as bunker fuel at present. There is a growing infrastructure providing LNG for vessels, but it is a long way from being universally present in the way heavy oil is. However, production of LNG is growing rapidly and, for the present at least, is likely to be reasonably competitive in price terms.

Whilst this is a technical issue that grips the shipping industry it also has implications for the customers of shipping lines. The price dynamics of fuel is a significant driver of prices for container services and other shipping transport. If the basis of the sector’s fuel provision changes it may have a longer impact on prices, possibly driving them upwards.

Source: Transport Intelligence, October 25, 2016

Author: Thomas Cullen