Switching to marine gas oil could cost shipping companies 30 percent more in raw material costs.

New IMO regulations that call for a much lower sulphur content in bunker fuel will significantly increase fuel prices for the shipping industry, according to two oil market experts Venture spoke with. The regulations will require switching to fuel that is more expensive and much more in demand.

Between now and 2015, the allowed level of sulphur in bunker fuel in the North America emission control area will drop from 4.5 percent to 0.1 percent. On a global scale, by 2020 sulphur levels will drop from 4.5 percent to 0.5 percent. These new regulations will require shipping companies to switch from the relatively low-cost heavy fuel oil (HFO) to the more expensive marine gas oil (MGO).

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“We are forecasting an oil price explosion between 2012 and 2015”

“The bunker fuel that shipping comp­anies currently use comes from the bottom of the barrel and cannot drive oil prices up or down,” says Torbjørn Kjus, an oil market analyst at DnB NOR, Norway’s largest financial services group.

“Residual fuel is basically a waste product, and the only fuel product that costs less than crude oil. So switching to a leading product like marine gas oil is financially not a good development for the shipping industry.”

According to Kjus, switching to marine gas oil could cost shipping companies 30 percent more in raw material costs, which could ultimately mean a 60 percent cost increase after blending processes are included. In addition, switching to marine gas oil will also make shipping companies much more vulnerable to increases in oil prices.

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“We are forecasting an oil price explosion between 2012 and 2015,” says Kjus. “Demand in non-OECD countries is growing faster than the non-OPEC supply. Within five years we will need 14 million barrels of oil more per day if current trends continue. When we reach the point when spare capacity in OPEC is exhausted, then the price explosion will come.”

A completely different ballgame

The upcoming regulations will have an immediate and major effect on shipping companies operating in the North Atlantic, according to Øivind Munthe-Kaas, an analyst and broker at Wilhelmsen Premier Marine Fuels, one of the leading independent bunker fuel brokers in Europe.

“Heavy fuel oil currently costs around US$600 per tonne, and is expected to increase to US$1000 by 2020,” Munthe-Kaas says.

“Marine gas oil, on the other hand, currently costs about US$960 per tonne, but is expected to increase to US$1,800 by 2020, and to US$2,300 by 2035. These numbers are astronomical and quite an eye opener for shipping companies used to running on cheap fuel oil.”

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Shipping companies that have regular schedules to the US will be most at risk in the near future, says Munthe-Kaas. “They will now have to fight for fuel with traders of jet fuel, heating oil and diesel oil,” he says. “This is a completely different ballgame.”