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Lloyd's List Business Briefing: London


Topic video - Global sulphur cap 2020: risks and challenges


A panel of industry leaders offer perspectives from the energy, finance and legal standpoints on the IMO global sulphur cap 2020 regulation, with a focus on the risks and challenges the shipping industry faces in the run up to a multi-fuel future. The panel raised the issues of fuel availability, contaminants, new building vs retro-fitting, and regional attitudes to the regulation.


Don't have time to watch? See the full video transcript below.



Also of interest


Video transcript


Could I also add my welcome to this London Shipping Week Business Briefing. Have you noticed the arms’ race going on in shipping? If you look at the event calendar for London International Shipping Week, there are half a dozen events around low Sulphur fuels; there are half a dozen events around ballast water treatment and so many of these other issues that shipping thinks is ‘the issue’ that we really need to tackle.


The problem with the low Sulphur issue is that it’s got the date 2020 attached to it, which Mr Google has reliably informed me is 842 days away, loads of time to sort this one out. As I hope you’ll very quickly realise, it’s only going to be a year or so before this becomes a crisis and then a little while after that, it’s almost going to become an issue that is going to change our industry for good.


We’ve got two panels for you this afternoon. The first one we’re going to look at the problem itself. What is the problem? Not just from a European perspective but also from an African perspective and an American perspective.


And we’ve got a whole series of experts, not only here but also in the audience, to tackle these questions.


I’m going to begin with Iain White, global marketing manager, Fuels and Lubricants for ExxonMobil, to set the scene. Iain, you’ve told us this is a crisis, unpack that word for us please.


The rules are changing in 2020 and Richard has posed the question: ‘Are the industry-sleeping walking into this?’ I think from, certainly from ExxonMobil’s perspective, we’re not; we’re working hard to prepare. However, don’t underestimate the challenge, this is an unprecedented shift for the supply-side of the industry, to move from the Sulphur level that we have today in heavy fuels, to the 0.5%. And if you’re operating a shipping company, our suggestion would be, you would be well advised to be starting the planning now.


Part of the challenge is that, as a supplier, we’re are preparing. However, the other refiners and the other suppliers in the industry are no doubt doing something similar but we are not effectively coordinating the approach because we can’t, because we compete. So, that’s part of the challenge for the shipowners to try and understand what will be on offer because there isn’t a coordinated answer for that.


We believe we’re heading for a multi-fuel future and a lot of people we talk to think that means there’ll be a predominance of distillate. Whilst we think that will be one of the solutions, it will by no means be the only solution. Some people we talk to think that the rules might not happen. Well we think it will; there’s no question now that the rules are changing. And the IMO certainly had a sub-committee today looking at what measures they’re going to have to support consistent compliance. So, we haven’t really got, yet, a clear picture as to how the management and compliance is going to happen.


So, we are heading towards a multi-fuel future, that means distillates are relevant. There’ll be blended fuels; they’ll be heavy distillates; they’ll continue to be some, a variety of blends of heavy oil available. They’ll be the new fuels: LNG, LPG possibly, methane, we’ve already seen happening; and of course, you could install a scrubber and legitimately keep burning the high Sulphur fuel. But what will availability be like? Now there’s a question. That’s unclear right now and with all these new fuels will come new challenges. Will the fuels be stable; will they be compatible; and what sort of contaminant levels will they bring? What sort of other new challenges will come with them? So that’s a question.


And really, if you’re a shipowner, you will have a series of questions you need to ask yourself to make the right decisions because there’s no magic bullet solution for this challenge. What’s right for one ship, will not necessarily be relevant for the next. So, it really depends on vessel age, sailing pattern, how much time do you spend in the EQA areas; how big is the ship; how much space do you have for installing a scrubber; do you have enough spare electrical capacity; enough spare seawater capacity to operate a scrubber; how much will the scrubber cost and what do the economics look like? And I’m not sure that we’ve got the answer to all of those questions today but that’s kind of thing that you need to be asking yourselves.


So, I’m not sure Richard. Do you count that as a crisis?


It’s more than availability, that’s the point, isn’t it?




Henrietta from DVB Bank. Can you put into context where we are in our industry at the moment and you’ve talked about a ‘new normal’ position, what is that ‘new normal’?


I think perhaps my role here and what I can contribute is twofold. First of all, how do we look at it when we look at our customers; but also from a market perspective, how do we supply adjustments that are needed in the industry? So, this is of course, one way to adjust on the supply-side. When we look at the overall market, we’re looking at, we’ve for several years been arguing that we are temporarily out of traditional shipping cyclicality. Now because of too much shipyard capacity. Now we are arguing that we are coming back to a more traditional shipping cyclicality; some sectors more prominent than others but on a shorter cycle. Moving from the traditional seven-year cycle towards, a more, four-year cycle. And perhaps being the driver of market, where we see this traditional shipping cyclicality kicking in first.


But no doubt we need to supply adjustments. We’ve been talking about ballast water treatment heavily for the last couple of years now. We are talking about 2020 as the next possible supply adjustment mechanism to achieving a more balanced market and an improvement in the shipping market. As a bank when we… This is, of course, we have been asking the ballast water treatment question to all our customers, non-stop for the last one to two years. What’s your strategy? What’s your plan for the current fleet? This is what we are already asking our customers again. What is your plan? How does it fit into our also cash flow forecast for the cases we are looking at? So, this is of utmost importance that we see that change and regulations including SOX 2020 is incorporated in the strategy of our customers.


So, it’s not just the transition to low Sulphur fuel, it’s happening at the same time as the transition for bulk of bunker treatment; and you’ve got shorter market cycles to deal with?




So, there’s lots going on, all at the same time.


Yes. And so, that’s a way to… That’s a very exact way of putting it because it also exactly arguing why you can’t just use history to write forward the future. That you need to model in the massive structural changes, first of all, we see in the market but also the increasing pace with which we see regulatory changes impacting on our customers’ performance in world where they are struggling already.


When I travel to Scandinavia, you understand why some of those countries are very keen to push the shipping industry towards a cleaner and greener future. But of course, the whole world isn’t like a Norwegian Fjord. Dele Adewale is in London at the moment but his footprint of Zenith Bank is West Africa, which has a different attitude towards this. Just explain to us, what is the thinking in West Africa about this push toward a cleaner and a greener future?


Actually, when you consider West Africa as a whole, the issue of awareness is one thing I will talk about because everybody’s aware that the IMO has fixed 2020 and there’s no going back about it. But I discovered that a lot of the shipping line, and the rest of them over there, has seen not preparing at the moment, or maybe they have but not at the pace that you actually want it to be. Everybody’s trying to believe, ‘Oh, when we get there; we don’t want to start it now; who will pay for the cost if we start preparing now?’


Well for me, I think, it’s good to start now because by the time you start now, the challenges you face will be resolved before 2020. Because the point is, when you start at the starting point, like 2020, January and you say, ‘Oh, I want to start because I want to maximise profit’, at the end of the day, you find yourselves stuck. And that’s the challenge that a lot of people are facing now.


For example, here in the bank, most of the clients, bank clients, at the moment, like she is saying, they are already planning for some of their customers and the truth is that this customer, the operator, the suppliers, they are needing to carry the bank along. Because now when it starts there will be high costs; there will also be the running costs, everything will have to increase.


So, where’s the financing coming from? The banks are there, they are part of the cycle. So, you youhave to approach the bank on time. Let the bank be aware, because some banks, they don’t deal more with shipping, they just deal with the customers and they don’t really have a concrete view of what is happening. It is left for the customer, the shipowner, the bunkerers and the suppliers to involve the bank in this thing now, so that they can consider the risk involved. They consider their risk appetite. This is something that we can do because there is uncertainty. There’s no sure. So, getting them involved now, would give them a lot of time to prepare for it and that would also be for the suppliers and shipowners.


So, if the decision has been taken to impose a 2025 deadline, in your view, nothing would have happened until 2024.


That’s what I’m trying to tell you that nothing would have happened. Maybe we have a few set of people that care for it; that are ready for it; they are preparing hard for it. But maybe, as I say, the majority of the people there are taking this lightly and slowly to see what will become of it.


Okay, thank you for that. Really, really interesting. Philip Roche from Norton Rose Fulbright, talk to what Dele has just been saying from his shipowner perspective, there’s no going back and the timeline is now really narrowing. How do you advise your clients?


It is a tough one because the problem we have, when you are looking at risk, if you do a risk assessment, you can work out what the risk is and what the mitigating factors are. The problem we have here is that we are kind of leaping into the dark. We don’t know so much. If you look at some of the estimates, the cost of this to the industry, it could be between twenty-four billion or sixty billion, or some other figure that comes out of some economic model and we don’t know what the answer is. We don’t know what the price of this fuel is going to be in 2020 and 2022. And so, to be making big capital investment and planning for that and I can understand, shipowners being in a panic when the bank turns up and says, ‘what is your strategy?’ Because, quite often, they go, ‘Well we don’t know what the strategy is.’


I mean we talk about the shipping industry but of course, the problem is different depending on where you look; a cruise is different; a cruiser ferry is different; if you are in EQA the whole time. In a way, it’s not a hard decision at all. Container lines have a different problem; bulk shipping, another problem and it also depends where you are in the cycle.


So, if you are an owner that buys new ships, well then you have a lot more options. You might think methanol; you might think LNG. We’ve seen huge uptake in certain sectors of LNG and we’ve seen the energy companies starting to gear up and build infrastructure, to allow LNG ships to engage in worldwide trading. We’re seeing a lot of new buildings, suggesting that LNG will be used.


If you’re an operator of ships where you buy your ships second hand, then the problem is completely different. What do you do? Retrofitting is expensive. There is the issue with finance, where’s that money going to come from. If you can spend four to six million dollars on a treatment system and you’re going to pay that back over five years, then the daily rate addition is quite astonishing – $2,000 or $3,000. And of course, in this market, money is tight; fleet rates are tight. These are decisions that are very hard to take. So, if you are somebody who owns and runs older ships, then your problem is a very serious one. If you are in the happy position of buying new ships, well then, there are different ways you can deal with that risk.


Thank you for that. Why is it a shipowner problem and why is it not a refineries problem? Why can’t they just develop low Sulphur fuels and sell that onto the market, Iain?


Well I think the supply-side of the industry will develop but refineries… Well every refinery is different; not sure if the rest of the market realises that but every refinery has evolved with different units. And it is very typical for fuel oil to be a bi-product of the refinery process and that fuel oil has found a very welcome home in the marine industry for many years now. But clearly that arrangement has to change. So, I think the refiners will all now be looking very carefully at what options they have to adjust either the fuel stocks coming in, or make adjustments to the machinery they have for the units they have to bring new products to market. So, there will be new products coming to the market, part of the challenge is our customers are now asking us for the details and we’re working on it but we’re not quite there yet with the absolute details. And the challenge will then become availability in all the various different ports; that will become the question.


In the meantime, you will have the whole issue of blending.


Well, a lot of the fuel that’s supplied into the industry today doesn’t come directly from the refiners, it comes through the intermediate resellers, the people who have tank storage and indeed, blending. And so, they will continue to play a role, an important role in the business but they will be blending 0.5% in future.


Is that a danger?


There ends up being a lot of questions. Clearly, there is a lot of fuel around today that has got much higher Sulphur. The average Sulphur today is somewhere around 2.5%. So, if you want to blend that fuel down, you probably need 85% distillate. So, that’s the kind of ratio of blend you need to have. So, how stable will the product be? We’re not quite sure. And of course, any product, any of the fuel streams that have a very low Sulphur level in future, will have a premium. It will be more attractive to be used in the blending process. So, that will bring all sorts of new challenges with contaminants, like Cat Fines and the issue of, whilst the fuel maybe stable by itself, as soon as you start mixing different fuels from different sources, you will run into compatibility issues. That will become a new challenge.


Henriette, what is the feeling about ships going for scrap? Because this will change how you see your ship and whether you are going to invest significantly in an old ship.


Also, because new building prices are low and they will remain low for several years and that comes back to, again, one of the routes of the course, that we have too much shipyard capacity and not enough is closed. So, we expect new building prices to continue to be low and the gap… It doesn’t take much improvement in the market before the second-hand prices are more or less equal to the new building prices. Thereby, triggering more focus on ordering new vessels, especially with regulatory changes in the near-term future. So, that will change the perception of scrapping age and attractiveness of older vessels.


So, that again, supports more adjustments on the supply-side and more ordering of new vessels. Which again, of course, for us a bank, means that when we look at the age profile of the assets, we see going forward, we don’t necessarily expect the assets to trade for the same amount of years as we see in today’s markets. And that is, again, relatively different across the sectors. Some sectors are, and that is again, not only driven by regulatory changes like ballast water treatment and SOX but it’s also driven by some tanker sectors have had much more focus on young assets. So, that whole age perspective in shipping is changing and that also translates down to the classes with which we see the transaction, from a financing perspective.


But in a region like West Africa, where many of the ships are of an advanced age, that must be quite a concern for Dele?


It is quite a serious concern, not only for the shipowner, not only for the change of the fuel, but even for the banks. Because from what you are saying from the financing perspective, what she is saying, are they going to put in a scrubber? Are they going to do something else? What are they going to be able to do to comply? Those are the questions we begin to ask. And when you come to the bank and the bank is asking these, these questions will be posed to you. And when the question is posed to you, okay these are the concerns that we have about it. Because we are looking at the risk, which is very uncertain at the moment. We should be able to measure it. You understanding what I am saying? We should be able to measure it. We should be certain as a bank, we should be able to measure it.


So, at the end of the day, it is huge concern, not only for the people in the industry but also for the party financing them. So that’s the way…


Phillip, it’s going to change the structure of our industry is this, isn’t it? In as far as, we’ve got these… The new buildings are cheaper; the older ships… Old will now be what, twelve years or fifteen years? That’s where it will be.


In the tanker market, an oil tanker is old when its fifteen. And right now, in a low market, we see that young assets of five years are still very attractive in the market because everyone, or the good strategy is in a low market, to sell the old assets and buy young tonnage, so you prepare for the next upturn in the market. But everyone is trying to do the same, so, it is relatively easy to get rid of the old tonnage but it’s much more difficult to get access to the younger tonnage. If you look at the dry bulk market, it’s a different… Because the oil majors are very much focusing on the age of the assets and dry bulk, you can easily sell a fifteen-year-old dry bulk asset in the Chinese market. It’s much more difficult with a tanker.


Phillip, you mentioned the cruise sector before. Is this such a problem for the cruise sector, the whole issue of low Sulphur fuel, because they have to go into environmentally sensitive regions anyway. So, they are currently burning 0.1% in certain regions. For them, this is an issue that has to happen anyway, isn’t it? For the tanker, you can imagine them saying, ‘Well I’ll wait until I absolutely have to.’


I think that’s right and if you look at the pattern of new buildings for cruise liners, you are seeing, I mean the demand for cruise seems to be continually, exponentially rising, in the Far East particularly. The Chinese middle class is very interested in that. So, there’s huge opportunities for building new ships. Quite interesting with cruise, because of the demand, there’s a requirement for older ships and older ships can save a company a lot of money. So, we have seen various cruise companies investing because it is worth them doing so because the ship is run on, it doesn’t have a drop-dead date like tankers. So long as the passengers are happy and it’s amazing how a particular passenger has an affinity with a particular ship. If people keep coming, the cruise company can still make money. So, for them, it is much easier to make the financial decision, ‘Shall we fit a scrubber into the ship; or shall we dispose of it?’


Tankers and dry bulk – harder and harder – because in one way and we heard somebody talking at Norton Rose the other day and they said, ‘This might be manna from heaven in the way a whole generation of ships are going to have to be scrapped, because nobody’s going to give a shipowner money to retrofit them and the shipowners don’t have the money themselves.’ So, everybody talks about, ‘We need to scrap more ships.’ Well this might be, from his perspective, a good thing and as you say, there is plenty of shipbuilding capacity, new ships might be the answer, greener ships. So, for the environmentalist that sounds like a good thing as well, doesn’t it? Get rid of the old dirty ships and run these new ships.


And I think, I see what Dele says about how, if we waited until 2025, we’d be having this debate in 2024 but given that it takes so long to build a ship, to develop a new fuel, to change the refineries, we are trying to do this very quickly and I think there are huge risks involved in that. And a lot of people, I think, are going to make the wrong decision because of the uncertainty and I think that wrong decision could come and bite us later on in the mid-2020s. Because, of course, we suddenly go from burning residual fuel oil, because pretty much nobody wants and big diesel engines run very efficiently and makes shipping very efficient. But suddenly now, we are going to be burning fuel which rarely compete for the distillate part of that fuel with roads and agriculture and heating oil. So, we have a cold winter in North America and everybody burns twice as much heating oil as they want. Suddenly, I think, as we’re getting used to this, we can suddenly find oil becomes… Compliant fuel becomes very expensive indeed.


So, Iain, it really could be an availability issue.


I think that could be a possibility but Iain would say more about that.


ExxonMobil publishes the energy outlook, which looks out as far as 2040 and the large and growing demand is for diesel oil. Not so much for this industry but for the emerging economies and for the trucks, buses and delivery vehicles. Whereas, you see, a lot of the automotive industry is now heading towards electric cars and batteries. For trucks that’s not viable. So, diesel will be the growing demand and that, as you say, that sector of the market will be competing with the marine business for these lower Sulphur molecules by 2020. So that will become a challenge.


So just to wrap up this session, Henriette, the 2020 deadline, is that a good news or not a good news?


From a market perspective it's a good news; from cost perspective it's challenging news.


Challenging but could still be good news. We've got to think long-term here haven’t we? From the West African perspective, Dele, is it good news?


Yes, it's actually good news for me, I would say it's good news because if you look at the... You was talking about the banking sector, it's good for the banks, it's good for the people, it's good for the shipowners, it's good for the suppliers. There'll be challenge in the beginning but I can tell you that it will get there. It's always like that when new regulations, when things come up, we always find a way of trying to resolve it. But the point where we are resolving becomes a normal trend. So, I believe it's a good news for West Africa as a whole.


Thank you, and I guess you agree Philip?


I do, I think if you are an environmentalist and are interested in the health of people then it's a good thing. My worry is that we're trying to do it a bit quickly. I think the we're doing it before we've got enough scrubbers in the fleets. That we don’t have the fuels and the refineries are coming online. I think it will all work out well in the end but I think we might have a few challenges.


There will be challenges ahead and I think Iain, you would agree with that.


Environmentally it makes sense but from a refinery perspective there's some unprecedented challenges.


Thank you very much to our first panel. I think what we've done is we've come to a point where we understand there are challenges ahead and in our second panel, what I'd like to do is to try and explore what happens when these challenges hit us. So, to Henriette, to Dele, to Philip, thank you very much indeed for your contribution here.


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