Of all the scenarios that were imagined when the new sulphur emission control area (SECA) limits took effect on 1 January, few foresaw that the low-sulphur marine gas oil (MGO) that satisfies the regulations would be available at the same price as higher sulphur heavy fuel oil (HFO) was selling for just 6 months earlier. Yet that’s exactly what has come to pass. While the recent shift in global oil prices was not precipitated by the then forthcoming SECA limit change, it has prompted many involved in shipping to conclude that the cost of the sulphur regulations won’t be felt. Such conclusions betray a lack of understanding of how the industry deals with fuel price fluctuations.
Shipping is an industry that must operate with an eye to the far distant horizon. The vessels that are being designed and built today will be in operation till nearly 2050.
Since it is impossible to accurately predict how fuel prices will develop over such a long interval, the industry has developed mechanisms to cope with fuel price fluctuations.
To deal with such HFO price variability, contracts may include bunker clauses that modify the rate payable according to a recognised HFO price index. The clause may not provide full insulation against price volatility, but it should even out the extremes.
Making the switch from HFO to MGO, to be compliant with new 0.1 per cent sulphur limits, presents operational and technical challenges, but also commercial ones since MGO has for years been 50-75 per cent more expensive than HFO, meaning that it is simply to great for shipping lines to absorb. Even if the recent fall in price of both fuels has been significant, the differential has not changed. In short, it’s important to ‘mind the gap’ between the two. The fall in HFO price has simply camouflaged the impact of the regulation.
Another gap to be mindful of is the threat to fair competition represented by weak enforcement of sulphur regulations. When compliance is costly, the role of enforcement in maintaining a level playing field really comes to the fore. While most shipping lines and their customers are committed to compliance, when it reaches the unprecedented cost of sulphur regulation, and enforcement is poor, there can be temptations to cut corners.
Fortunately, enforcement is now a topic in the spotlight and perhaps that is partly the reason why officials have redoubled enforcement efforts of late. However, so far, the focus has been on compliance testing in ports, which, although welcome, represents only the ‘low-hanging fruit’ of the enforcement tree. What remains are, literally, the ‘hard to reach’ parts: open waters, especially international waters.
Who will test for compliance in international waters? How should compliance testing be done? Will those with the jurisdiction to sanction those in violation actually do so in a meaningful manner? Specific to the last point, there are limits on resources and potential conflicts of business interests that suggest the current policing may exist more in theory than in practice.
It is critically important to get an effective mechanism for high seas enforcement in place before the 0.5% sulphur global cap becomes a reality. Unless this issue is addressed now, the words of Benjamin Franklin may become uncomfortably familiar:
“By failing to prepare, you are preparing to fail.”