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[Sustainable Future] The global race to throw sulfur overboard

Emissions rules are about to change but adapting isn’t easy

Oct 24,2019
The clock is ticking for the global shipping industry as tighter guidelines on sulfur emissions are due to take effect just two months from now.

Ships are often overlooked when we talk about pollution. As most people don’t cross paths with ships in their day to day lives, it’s easy to forget quite how much damage they can do to the environment. In fact, according to data from consulting firm Samjong KPMG, 90 percent of sulfur oxide emitted by vehicles comes from ships, not cars or trains.

Sulfur emissions are a known source of respiratory disease and acid rain.

To minimize the environmental damage caused by ships, the global shipping community has come to agree upon a tighter sulfur emissions guideline.

Under rules created by the International Maritime Organization (IMO), a United Nations body responsible for regulating international shipping, ships have to use marine fuel with a sulfur content of no more than 0.5 percent from January 2020, a major change from the current limit of 3.5 percent. This applies outside the designated emission control areas (ECAs) where the limit is already 0.1 percent.

There are three different ways that shipping lines can meet the new emissions regulations, though all three incur huge costs.

The simplest solution could be changing from high-sulfur fuel oil to more expensive, but greener, marine fuel with lower sulfur content. This solution involves costly fuel, but doesn’t require any physical changes to existing ships.

Another option is to add a device called a scrubber, which reduces sulfur oxide emitted by ships even while using high-sulfur fuel oil. The final option, the long-term strategy, is to completely switch over to liquefied natural gas (LNG)-powered ships. LNG generates almost no sulfur oxide emissions and cuts down on other pollutant emissions, including fine dust and carbon dioxide.

Korea’s largest shipping line Hyundai Merchant Marine (HMM) announced earlier this year that it plans to add scrubbers to its ships. But that doesn’t mean all its worries are over. The solutions chosen by different shipping lines, the price and supply of low-sulfur fuel oil, and the effectiveness of scrubbers could all be variables that affect the decision.

With just a few months to go before the new emissions regulations come into effect, shipping lines around the world are still struggling to decide which solution, or combination of solutions, works best in the long run.



Shifting to low-sulfur fuel oil

Changing from high-sulfur fuel to greener fuel is the simplest and most common way to adapt to the new emissions standards, as shipowners only need to change oil. This means no additional investment into revamping or completely replacing existing ships.

Mega shipping lines like the world’s largest container shipping line Maersk and France-based CMA CGM have announced that their main solution would be using compliant fuels with 0.5 percent or 0.1 percent sulfur while also adopting other options. In Korea, SM Line, a small container shipping company formed from the remaining assets of now defunct Hanjin Shipping, said it will mainly respond by shifting to low-sulfur fuel oil.

“It’s early to make a bold move and we are still monitoring the global shipping market,” a spokesperson from SM Line said.

Another local shipping line and logistics service provider, Hyundai Glovis, said it is starting to install scrubbers on newly ordered ships, but mostly responding to the regulation by changing to low-sulfur fuel oil.

A major drawback for this simple solution, however, is that low-sulfur fuel oil is at least 40 percent more expensive than high-sulfur fuel oil. According to data from market tracker Ship & Bunker on Sunday, high-sulfur fuel oil is currently being traded at around $368 per metric ton, based on the average price at 20 global ports. Alternative fuels with less sulfur content, including low-sulfur fuel oil and marine gas oil, similar to diesel fuel, cost between $550 and $650 per metric ton.

Considering an 8,000 twenty-foot equivalent unit (TEU) container ship consumes about 225 metric tons of bunker fuel per day, the difference in fuel price could be daunting for shipping lines. Maersk estimated a $2 billion rise in its annual fuel cost due to the IMO 2020 low-sulfur fuel cap. A spokesperson from HMM said shifting to low-sulfur fuel oil would incur some 300 billion won ($255.8 million) to 400 billion won in additional fuel costs from its 700 billion won annual spending on fuel last year.

“An increased cost of some 300 billion won is not a small sum of money, especially when freight charges remain pretty low,” the spokesperson from HMM said.

Whether there will be sufficient supplies of low-sulfur fuel oil is another concern. As shipping lines have not many options to choose from, demand for compliant fuel oil is likely to rise dramatically at the beginning of 2020, further pushing prices up.



Hyundai Merchant Marine’s 11,000 twenty-foot equivalent unit (TEU) container ship “Hyundai Blessing” (1) has been fitted with a scrubber, which cleans exhaust gas. First, gas moves through the exhaust pipe (2) connected to the engine room, before it enters the scrubber (3) where it is cleaned with water (4). The water removes sulfur oxide from the exhaust fumes, ensuring the ship meets the new emissions standards. [HYUNDAI MERCHANT MARINE]
The scrubber debate

HMM has been pushing for scrubbers for years.

According to the company, it will add scrubbers to some 70 to 80 percent of its ships by 2020. It started installing scrubbers in two 11,000 TEU container ships in 2018 and is continuing to add the exhaust gas cleaner to its existing fleet.

Twenty newly ordered ships to be delivered from 2020 will also come with scrubbers. Even its chartered ships will use scrubbers. The shipping line said shipowners are installing scrubbers on chartered ships and the process will likely be completed by the early half of 2020.

A big merit of adding scrubbers is that it allows shipping lines to continue using 3.5 percent heavy sulfur fuel. This also frees up companies from the price fluctuations of low-sulfur fuel oil.

Among global shipping companies, Mediterranean Shipping Company (MSC), the world’s second-largest container shipping line, announced in January that it secured $439 million in financing to add 86 scrubbers to its fleet.

However, other shipping lines have not been as bold in investing in scrubbers due to the cost burden as well as ongoing debate on the sustainability of the devices.

The cost of adding a scrubber to a ship could range from around $3 million to $8 million, which is a big investment. It also takes a month or two to be installed, which means ships need to be docked and out of operation during that time.

For large shipping lines with big fleets of ships, adding scrubbers to every ship could come as a huge burden in terms of cost and business operations.

Maersk, known to operate over 700 ships, for instance, has been a major skeptic, though in February, it announced that it has invested $263 million in scrubbers, without specifying how many ships it was actually adding them to. While shifting to low-sulfur fuel oil is its main strategy, it showed that it is not ruling out other options.

Adding scrubbers may not be economical for some shipping lines with a large number of older ships, like SM Line, according to analyst Kang Min-young from Samjong KPMG Economic Research Institute. Compared to the investment the shipping line needs to make to fit scrubbers, the age of the ships might mean they don’t actually benefit from the expensive technology for very long.

A bigger problem is the ongoing debate on the sustainability of open-loop scrubbers, which discharge wash water into the sea. Some argue that this type of scrubber takes sulfur out of the air and puts it into the ocean. Others argue that there is not yet proven scientific research concluding that discharged wash water from open-loop scrubbers causes environmental damage.

“Open-loop” is the most common type of scrubber installed in the market, as the “closed-loop” variety, which stores most of the wash water on board and is therefore thought to be more sustainable, costs twice as much. According to Norway-based certification agency DNV GL, 79 percent of scrubbers installed on ships were open-loop as of July, followed by the hybrid variety — which can be used in both open-loop and closed-loop modes — at 18 percent and closed-loop at 2 percent.

Despite the widespread use, a handful of countries and ports have created additional regulations to ban ships using open-loop scrubbers from passing through their waters or ports, due to concerns of sea pollution.

In January, the Port of Fujairah, a key bunkering hub in the United Arab Emirates, issued a notice banning the use of open-loop scrubbers in its waters. Singapore is set to implement a similar ban from January 2020, while China’s maritime authority has already banned the use of open-loop scrubbers in parts of its inland waters from January this year.

As debates continue regarding the use of open-loop scrubbers, there is still a lot of uncertainty for shipowners that have attached or were planning to use the devices. For companies looking for a long-term solution, LNG-powered ships still may be the most viable option.



LNG-powered ships

LNG is being highlighted as a sustainable fuel as it emits significantly lower levels of pollutants.

LNG ships emit almost zero sulfur oxide and cut down on nitrogen oxide and fine dust by 90 percent compared to existing ships. Carbon dioxide emissions can also be reduced by up to 15 percent on LNG ships.

Purchasing an LNG ship, however, requires hefty investment.

According to industry insiders, building a container ship with a dual fuel system, capable of running both on fuel oil and LNG, would require shipping lines to pay a premium of 15 to 25 percent of the original price.

“LNG-powered ships mostly adopt dual fuel systems for emergency situations where you need to burn oil instead,” said Hwang See-cheul, a senior officer and head of the LNG carrier sales department at Hyundai Heavy Industries. “There are still many shipping lines feeling burdened because of the high cost of LNG-powered ships, so shipbuilders are focusing on lowering the price to [an affordable level.]”

A lack of infrastructure is also holding shipowners back.

Unlike fuel oil, LNG needs to be stored and supplied at extremely low temperatures and dedicated infrastructure and bunkering technology needs to be in place for LNG-powered ships to operate.

Korea’s Ministry of Oceans and Fisheries announced in 2018 that it will start a project to develop the core technologies for LNG bunkering and building LNG infrastructure; however, local ports like Busan Port still lack the infrastructure for LNG ships.

“Like charging stations need to be built for electric cars to be widely commercialized, some time is needed for LNG infrastructure to be well established for shipowners to more aggressively increase the number of LNG-powered ships in their fleets,” a spokesperson from HMM said.

While local shipping lines are still slow in adopting LNG-powered ships, HMM’s 20 very large crude carriers to be delivered from 2020 will come with an LNG-ready option. The option enables the shipping company to retrofit the ships for LNG in the future.

“There could be a difference in how ready ships are, but basically LNG-ready ships are designed and built with extra space and stability so that they can be retrofitted in the future,” Hwang from Hyundai Heavy Industries said.

As the IMO is pressing ahead with tougher environmental targets for the future, industry insiders say future regulations may motivate shipping lines to switch their fleets to non-petroleum fuels including LNG and biofuel in the long run.



How will shipping lines handle the cost?

Everybody, including shipping lines, agrees that green is good. But if shipping lines are the ones to cover all the additional costs incurred to cut sulfur emissions, how can they handle the burden?

Global shipping lines have already begun making changes to cover their costs.

Maersk in September last year announced its bunker adjustment factor surcharge ahead of the IMO 2020 sulfur cap. The new surcharge, according to the company, will allow it to recover the costs of compliance with the global sulfur cap, which brings increases and uncertainty to fuel costs for shipping.

Last month, the company announced an update on its surcharge policy, saying it will introduce an environmental fuel fee effective from December for all spot business and contracts with validity of up to three months.

MSC, CMA CGM and other global shipping lines have introduced surcharges for using low-sulfur fuel oil to mitigate their exposure to higher costs. HMM has started charging surcharges on limited routes where tighter emissions guidelines are already in place, but the company spokesperson said a surcharge formula for all of its customers will likely be released around December, before the sulfur cap actually takes effect, to allow for a period of adjustment.

Government institutions like the Korea Ocean Business Corporation are also offering a helping hand to local shipping lines.
In March, the corporation inked a memorandum of understanding with HMM as well as trading companies and scrubber makers to financially aid the shipping line to install scrubbers on 19 of its ships.

While a total of 153.3 billion won in investment was necessary to fit scrubbers on 19 ships, HMM spent 46 billion won and the state-run body lent it the other 62.3 billion won. The rest of the money is to be delivered by a fund operated by five private companies under the condition that they will have priority in negotiations with HMM for future fuel supply and scrubber installation deals.

“It’s true there is an abrupt change, but that crisis could be an unexpected opportunity for local shipping lines that have been struggling in the business,” Kang from Samjong KPMG said in a report. “As large global shipping lines have a large fleet of ships, a higher cost burden is incurred for them to respond to the changing environmental regulations. Local shipping lines face a relatively low cost burden.”

Kang added that the government should also help Korean shipping lines so that they can quickly adopt greener ships and craft policies to actively nurture LNG-related businesses.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]


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