Next year, new global limits mean ships will have to use fuel oil with a sulphur content of no more than 0.50% compared to the current limit of 3.50%. The move is intended to reduce sulphur oxide emissions and have a significant impact on the environment and human health, particularly for people living in port cities and coastal communities. But how will the change impact shippers? We speak to Anders Kobbernagel to find out.

In your experience, have you ever seen such sweeping regulatory change as Sulphur 2020 before?

No. This is a really big deal. Some compare it to shipping switching from coal to oil power, and for the oil market, it’s one of the biggest single shifts in demand for a product that we’ve ever seen. According to International Maritime Organization data, up to 290 million tonnes of shipping fuel with a sulphur content of 0.10% to 0.50% could be required next year.

What’s the current status of the oil price?

The oil price has recovered from a low of about $50 per barrel at Christmas, and is now holding steady at above $60 per barrel. Turbulence in the financial markets sparked fears of a potential slowdown in the economy and therefore lower demand for oil. OPEC – even with its partners outside the organisation – didn’t manage to stabilise oil prices with projected production cuts, but oil prices have since recovered along with the wider financial markets. It was a classic January re-bounce.

Learn more about Sulphur 2020.

What do you expect to happen to the oil price over the next year?

We’ve got an interesting year ahead in the oil market. Prices will be influenced by various factors, including compliance with OPEC production cuts. Last time we saw oil production cuts, the compliance rate was significantly above what was projected. Saudi Arabia is the main driver – and has the most to gain. During the second half of 2019, we’re likely to see a shift in demand for oil from the shipping industry as shipping companies across the world prepare for Sulphur 2020. This shift has the potential to change the dynamics in oil markets – overall, more crude oil will need to be processed to meet demand from shipping. We’re also likely to see higher Gas Oil prices.

What impact will the oil price have on the price and availability of fuels for shipping?

We don’t foresee a direct impact on the availability of fuel compared to the oil price. Pricing of fuels available will fluctuate along with the general oil price, of course. Since Very Low Sulphur Fuel Oil (VLSFO) will consist of different blending components, it’s hard to predict pricing. We’re witnessing the birth of a new market – we’ll have to wait and see how that market develops and matures once the supply and demand picture is clear.

What will the cost of Sulphur 2020 be for the shipping industry?

The move to a lower sulphur bunker fuel doesn’t come cheap. If we look conservatively on the global bunker market, there is an estimated 250 million-plus tonnes of bunkers being used by the global shipping fleet annually. About 65-70% of this is currently a 3.50% residual fuel, or at least a higher sulphur fuel. This means that roughly 165-175 million tonnes of fuel will have to be changed to a more expensive version. Very early indications in the futures markets put the premium at about USD $180-200 per tonne. That’s roughly $35 billion in added costs across the sector. It’s safe to say that protecting the environment comes at a cost.

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What should shipping companies be doing now to prepare for January and Sulphur 2020?

There’s no fixed plan for handling the changeover and shipping companies will face challenges. It’s important to follow industry guidelines and keep in contact with those involved in the procurement phase of bunkers. At the same time, it’s crucial to evaluate exactly what needs to be done to be compliant before the deadline and have a detailed evaluation plan. Some vessels will require longer changeover procedures than others to clear out higher Sulphur fuels from their systems.

Do you anticipate shortages of Very Low Sulphur Fuel Oil (VLSFO) next year?

The impression we have is that there will be enough VLSFO to go around – at least in the larger bunkering hubs.

What are the different compliance options?

Right now, if you haven’t already invested in a scrubber system or made a conversion to LNG, the only choice is to burn a compliant fuel (max 0.5% sulphur) or Gas Oil. The increased use of scrubbers will be partly dependent on the oil market and how it changes. Companies will need to consider the cost of the investment versus the cost of VLSFO. We’re also seeing improvements in scrubber technology.

What will the knock-on effect ship operator costs be?

Initially, ship operators will absorb costs related to the changeover. The fuel cost will then be covered by higher freight rates and, eventually, end users. But there will be an impact on ship operators’ profit margins, too.