The biggest change in the oil and shipping industry in decades is set to come into force in less than a month. From January 1st, 2020, the new IMO (International Maritime Organisation) 2020 Low Sulphur Regulation will be in effect, banning all sea-going vessels worldwide using fuel with a sulfur content higher than 0.5%, compared to the present upper limit level of 3.5% which was established in 2012.
The most commonly used marine fuel is thought to have a sulfur content of around 2.7%.
The regulations will concern every kind of ship – no matter the dimensions and/or the routes.
A small portion of the approximately 51,000 ships composing the world fleet already burn compliant fuel, but the remainder will have only four viable options, including one temporary “hall pass” to comply with the law:
- Convert to low-sulfur (e.g., very low sulphur fuel oil (VLSFO), marine gasoil (MGO), diesel) or a blend of HFO and low-sulfur that meets the emission standards;
- Install equipment known as “scrubbers” to ensure they pump out less sulphur oxide pollutants and continue to burn HFO, the cheapest grade of fuel;
- Retrofit existing ships or purchase new builds to use liquefied natural gas (LNG).
- Obtain waivers/non-compliance.
The IMO, a specialised agency of the United Nations says the aim is to protect the environment. Reducing the amount of sulphur oxide emissions should have major health and environmental benefits, including improving air quality and reducing risks of acidification of the oceans.
The new regulation sent shockwaves up the little-known world of refinery feedstocks.
The market for VLSFO, is already heating up as demand for IMO-compliant products is driving unprecedented shifts in physical crude market dynamics.
(Graph Data Source: IMO)
“As of January 2020 as much as 4 million barrels of oil a day will be affected by the changes in the IMO standard. The transition from HSFO (High Sulfur Fuel Oils), such as No. 6 Oil or Bunker C, to VLSFO (Very Low Sulfur Fuel Oil) will affect every corner of the petroleum market” Global Fuel Recovery said in a post on Twitter earlier this year.
Analysts estimate the container industry is likely to be among those hit the hardest, with additional costs of approximately $10 billion, according to a Reuters report.
“While it sounds like a noble goal, it will come at a cost. The new fuels will tighten supply and drive up costs. The rules will put maritime fuel buyers in direct competition with trucking, planes, trains, and other forms of transportation. That will lead to a squeeze on supply, raising the cost of goods to consumers” Phil Flynn, senior market analyst at Price Futures Group told Marketwatch.
Goldman Sachs estimates that the overall impact on consumers in 2020 could be as much as $240 billion.
Between the threat of an oncoming economic slowdown, trade wars, Brexit uncertainty the IMO 2020 just adds to the challenge of being in business today.