The new year fast approaches, ushering in increased limits on sulphur oxide and particulate matter emissions within the IMO’s designated Emissions Control Areas (ECAs). Considerable concern has been expressed on this issue, not least by those faced with the prospect of complying with the tighter limits. This article seeks to outline key changes in the rules that will take effect from 1 January 2015, and provides an overview of the anticipated impact on the industry.
Pursuant to Annex VI to the IMO’s MARPOL 73/78 Convention (MARPOL Annex VI), as of 2010, global shipping has been subject to regulations as to emissions of nitrogen oxides (NOx), sulphur oxides (SOx) and particulate matter. These have been acknowledged to have a negative effect on health and the environment.
Fuel oil-based bunkers have been identified as contributing to global SOx levels. MARPOL Annex VI therefore imposes limits on bunker sulphur content, measured as a percentage of sulphur content of overall mass (% m/m), in order to curtail SOx emissions1. MARPOL Annex VI also set the framework for more stringent limits to be implemented in ECAs, currently designated in the North Sea, Baltic Sea, North American coastline and US Caribbean.
Changes on the horizon
The implementation of MARPOL Annex VI has been graduated to afford time for operators to adapt. Sulphur content limits are currently at 3.50% m/m globally (as from 1 January 2012) and 1.00% m/m in ECAs (as from 1 July 2010). On 1 January 2015, the content limit within ECAs will be reduced further to 0.1% m/m. Operators of vessels that do not comply are likely to face significant financial penalties.
Three broad solutions for compliance are open to operators:
- Supply vessels with bunkers with compliant sulphur content (e.g. LSMGO or LSIFO).
- Fit vessels with exhaust gas cleaning systems, commonly known as scrubbers.
- Fit vessels for burning alternative bunkers (e.g. LNG).
None of these options are free from costs and risk in some form or another. We considered the relative advantages and disadvantages of each solution in our previous Bulletin (see “Emissions regulations: a brave new world for the bunkering industry”, March 2014 - http://www.hfw.com/Green-Shipping-Bulletin-March-2014).
Questions have been raised on how SOx emissions regulations will be enforced. Within the European ECAs in particular, where many states’ coastal zones overlap, effective cross-border policing will be particularly challenging. This has been recognised by some North Sea maritime authorities, who have expressed the desire to co-ordinate their enforcement efforts. In particular, Denmark plans to launch “sniffer” drone technology, and install SOx detectors on the Great Belt Bridge, to identify non-compliant vessels. The extent to which other governments within ECAs will expend similar efforts remains to be seen.
The impact: direct and indirect costs
Direct fuel cost increases have been the focus of much industry attention. Prices for low-sulphur bunkers are significantly greater than higher sulphur equivalents. Absent any agreement to the contrary, under voyage charters, owners will face the impact of increased bunker prices. For time charters or bareboat charters, charterers will shoulder this burden. Several container lines have already announced new low sulphur fuel surcharges for shippers due to be implemented in January 2015.
This price differential is not expected to improve if refineries do not increase output of low-sulphur distillates in the near term. In any event, if refineries do prioritise low-sulphur distillates, the opportunity cost would be lower supply (and consequent rise in price) of other fuels, such as diesel. This would impact upon other stakeholders, such as road transport and end consumers. Finally, low sulphur bunkers have also been cited by some to increase engine wear, and the risk of power loss, a further hidden cost of the fuel shift which must be borne by owners.
Rising fuel costs have been identified (for example, by the European Community Shipowners’ Association) as undermining the economic viability of low-volume and/or long distance routes within ECAs, especially for ferries and LoLo services. Increased costs may not easily translate into increased short-sea freight rates, where shipping faces strong competition from rail and road hauliers.
Operators seeking to avoid exposure to fuel costs risk must contemplate making capital investments, by either retrofitting scrubbers or alternative fuel burning technology (most notably, LNG), or incorporating these solutions into newbuilds. Some eco-technologies, such as turbocharger cut-outs and hydrodynamic paints, readily justify capital expenditure through fuel efficiency savings. Nevertheless, evidence suggests that emissions abatement technologies such as scrubbers could result in energy efficiency losses, harming their cost effectiveness and therefore their attractiveness to operators.
What does the future hold?
A practical case which will be of interest to both operators and governments is that of California, where tighter 0.1% m/m limits have been in place since 1 January 2014. A sunset review of the effect of this legislation is due to be published next year, when the state regulations will fall in step with the rest of the North American ECA. Indications have been that whilst fuel supply has not been a critical issue, power losses on vessels are reportedly higher owing to the use of low-sulphur distillates.
Industry opinion indicates that 2015 could prove to be a crucial year for operators seeking to adapt to tightening regulations in the face of less than ideal market conditions. We will continue to monitor the impact of MARPOL Annex VI and provide updates on new developments.