So, we are getting even closer to the implementation of IMO 2020’s Sulphur cap, I bet you’re all prepared and excited to see what happens next, I certainly am! I think ship owners have made their minds up about both the short-term switches they have to make, as well as fueling decisions for future new buildings, especially VLGCs. The big question though is what will sit in the middle for those who have basically said they will “suck it and see”. The buzz is certainly dual fuel, and maybe it will also be part of the reality.
There is something of a dichotomy facing the future development of LPG as an engine fuel. It might be the buzz in LPG shipping circles, but it’s yet to catch-on in the marine industry as a whole, with compliant fuel engines more likely to run on LNG or CNG. There’s been more attention focused on it in light of the IMO 2020 mandate, but it needs to break free of any image that tends to focus on its use within the relatively narrow LPG vessel segment. It is a viable solution, especially when compared to LNG, which it beats on implementation costs, has less operational problems, potentially a better and more readily accessible supply network, and it’s not too far away on price.
In addition, it’s hard to ignore the forecasts of more and more shale gas production having to find a home, together with other new LPG production supplies outside of the U.S., including Australia and Canada. Throw in the overall environmental concerns and LPG has the merits for being considered throughout the marine sector as a viable clean fuel alternative. LPG even gives LNG a run on the climate front, with LNG deemed a greenhouse gas, since unburned methane originates from the incomplete combustion on cold cylinder walls, and combustion chamber surfaces, and from the combustion chamber crevices. This issue is going to grow more as controls to limit carbon dioxide emissions come into play, and decisions to ignore methane release could prove to be the wrong choice.
On the other side of the coin LPG still has a number of technical issues to get over, including the wide range of LPG mixtures and purities found on the market, with contaminants present that could cause engine damage. It’s typical to find sand and dust, among other debris, that would impair an engine’s performance and put greater demands on fuel line systems, but companies are introducing more advanced filtration methods to clean the LPG, as well as the next-generation injectors to reduce unburnt fuel, whether LPG or LNG.
But that’s somewhere in the future, for now LPG ship owners are committed to the decisions they have made for the start of 2020. The debate has gone along the lines of don’t do anything at all, in other words run Marine Gas Oil (MGO) as the compliant fuel, on the assumption that the delta between MGO and High Sulphur Fuel Oil (HSFO) will not jump as wide as others, who are fitting scrubbers, are thinking. As the date arrives, it’s interesting to see that HSFO stocks are at historical lows at many ports as refiners have already started to reduce production as they adjust their running slate, and storage companies are freeing up tankage and cleaning tanks in preparation for 1st January. So HSFO has become more expensive, making those VLGC owners who have invested in scrubbers sweat a little. But it should all change as we cross the 2020 start-line, shouldn’t it?
I still have my money on Very Low Sulphur Fuel Oil (VLSFO), which will be a blend produced by the refiners to meet the restrictions, but they are late on the scene, and it will take time to iron out any running issues at the refineries, or in the ship’s engine room. But there will be decisions made on how much HSFO to produce and store, as there will be with for VLSFO. If the pendulum swings too far one way or the other, we could easily see shipowners with scrubbers happy or extremely concerned. But the equilibrium will be reached, and it suggests to me that all these huge variances might start trending more to the middle ground, which probably at the end of the day won’t please anyone.
I’ve heard players suggest $300-350/ Mt spreads between HSFO and compliant fuels will be likely at the start of 2020, but these spreads could easily narrow over the year. Although ship owners will be fearful of running a relatively untested bunker fuel to start-off with, homing in more on MGO, but this will start to ease. At the same time, refiners will be eager to increase sales of VLSFO as they will continue to have a disposal problem for their heavier residues, and most players are expecting scrubbers to be a short-lived solution, if ultimately a solution at all. This has led a number of players, including BW, to hedge the spreads between MGO and HSFO for at least 2020.
I think ship owners in the LPG space are saying they are now unlikely to make the decision to fit scrubbers to their VLGCs, as the waiting time involved in getting delivery of the scrubber units, plus the price itself, have gone up recently, increasing the likely payback period on the investment. Ship owners are also unsure about what future controls might be brought in on open-loop scrubbers, and what costs could be involved in disposing of unwanted Sulphur deposits associated with the closed-loops. This is really why the momentum has swung to the dual fuel engine. Similarly, advances being made on type ‘C’ deck tank design and the potential to sit separate tanks inside the main LPG tanks, to then be used by the owner for LPG fuel purpose, has only furthered the momentum swing. It is believed that this could well eliminate the potential bill of lading issues.
BW have announced the retrofitting of 4 older ships to run on dual fuel, but the exercise is expensive, albeit BW should be commended for the environmental pluses of the exercise. But I can’t see a rush to retrofit unless the financial rewards start to look as if they will outweigh the initial cost.
Of the roughly 320 VLGCs we’ll have in the market by 2022, less than 20% will be scrubber fitted. At the moment, only a handful of new buildings are committed to the dual fuel approach, although the number is growing. This means that a very high proportion of ships plying their trade will resort to using compliant fuels. If the price of MGO hasn’t sky-rocketed, or the price of VLSFO settles at reasonable levels, then we probably won’t see extra costs pushed through to the charterers, but it’s going to be interesting to find out.
The future is as much in the hands of the refiners as it is in the grasp of the ship owners and engine-makers. At the end of the day the decisions that will be made to retrofit or include as part of a new-build specification, will be based on sound financial calculations, and a hell of a lot of guess work. If I was a ship owner, I would be pressing for the slow steam option to control emissions – always worth a try and will get the support of the Greek ship owners, of course.