As the implementation of the 0.1% marine fuel sulphur limit in Emissions Control Areas (ECA) approaches, January 2015 is only 22 months away. It is interesting to ponder the potential risks of inaction on the part of the ship owning and operating community. A “wait and see” approach has technical, operational and cost risks associated with it. Probably the most significant is the cost of compliant Marine Gas Oil (MGO) which at current rates is trading at a premium of in excess of US$300 per tonne in Rotterdam over fuel oil. It is hard to imagine that MGO demand will do anything other than rise in 2015 thus ship operators will be facing a cost increase in the 40-50% region, by their own admission (two major European Ferry operators were quoted in the UK press last year). The operational risk also stems from increases in MGO demand. MGO comes from the same middle distillate refinery stream as road transport fuels and significant increases in demand for marine use could potentially stretch supply chains to such an extent that supply could get short and deliveries missed. Technical problems associated with vessels consuming low sulphur fuels are increasingly common, as reported in Sustainable Shipping this week, mostly associated with reduced lubricity and its impact upon engine wear and performance.
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Set against these risks, what are the issues associated with taking a proactive position and planning for compliance via the use of sea water scrubbing equipment. Broadly the risks fall into the same three categories; technical, operational and cost (although in this case it is more about capital) Technical risk is down to whether or not the scrubbing equipment works to its contracted performance and so achieves compliance. We at Oceanox have discussed this in depth with our ship owning partners and have decided that a positive stance from us can remove this risk from the ship owners concerns. To achieve this we have been working with customers to structure agreements which mitigate or remove technical risks. Having listened intently to the shipping community and its representatives, we see the operational risk as being breakdowns in the scrubbing system which make the vessel temporarily non-compliant. At a recent Ministerial Stakeholder meeting chaired by the UK Department for Transport, it was made clear that vessels which have invested in scrubbing equipment, which then suffer a failure, will not be censured by the regulatory authorities as long as a rectification plan is in place in a reasonable timescale. Whilst a “reasonable timescale” must be properly defined, we do think it clear that the enforcement approach will be pragmatic given that the vessels owners have invested in a proactive technical solution. In terms of cost risk, the requirement for capital expenditure can be mitigated by the commercial structures mentioned above. However unlikely it may be, owners could say “what if the price of MGO falls relative to fuel oil?” Should this happen there are mechanism by which the fuel oil to MGO spread can be hedged to remove any risk. These mechanisms were muted by the oil industry representatives at the recent Ministerial Stakeholder meeting. We believe that the concerns of ship are addressable and would cite the potential pitfalls of inactivity as being far greater.