What is IMO 2020 and how will this International Maritime Organization ruling affect the logistics industry?
The shipping industry is one of the largest sources of pollution and carbon dioxide emissions on the planet. Marine vessels and container ships consume up to 4.4 million barrels of oil per day, which is 10% of oil consumption in the entire transport sector.
IMO 2020 is one of the most significant changes in the maritime sector in recent years, with major cross-industry impact.
IMO Sulfur 2020 is a regulation adopted by the International Maritime Organization, which states that from January 1, 2020, the sulfur content in marine fuel should not exceed 0.5%, compared to the current 3.5%.
The main type of bunker fuel for ships is fuel oil obtained from the distillation of crude oil. Crude oil contains sulphur, which, when burned in an engine, results in harmful emissions from ships.
Bunker fuel is widely used in maritime shipping. This type of fuel is also known as heavy fuel oil (HFO).
IMO regulations to reduce emissions of sulfur oxides (SOx) from ships first came into force in 2005 under Annex VI of the International Convention for the Prevention of Marine Pollution by Discharges from Ships (known as the MARPOL Convention).
One of the main difficulties with regulation of marine pollution is the huge swaths of the ocean that are not regulated by any state.
This is where MARPOL plays its most important role. This international agreement was signed in 1973. To date, more than 155 countries have ratified the Convention.
Since then, various annexes have been added to the original convention. The most relevant of which is Annex VI. Annex VI was added in 2005 and deals specifically with air pollution from ships.
Since then, restrictions on the content of sulfur oxides have been gradually tightened.
2005: Annex VI came into force and the sulfur emission limit was set at 4.5%
2008: Annex VI requirements were tightened
2010: Revised rules come into force
2012: Sulfur emission limit reduced from 4.5% to 3.5%
2013: Energy efficiency requirements come into force
From January 1, 2020, the limit on the sulfur content of fuel oil used on ships operating outside the designated emission control zones will be reduced to 0.5%.
This means that all fuel used by marine engines (both main and auxiliary) and boilers must contain no more than 0.5% sulfur.
In addition, there are Emission Control Areas, also known as ECAs, which are areas where there are stricter regulations and requirements for emissions from the transportation of goods. The limit for sulfur content in fuel for ships in countries with ECA zones is 0.1%.Vessels operating in these areas must strictly comply with the established standards related to the reduction of emissions of nitrogen oxides and sulfur oxides.
ECAs now include the Baltic Sea, the North Sea, several areas off the coast of the US and Canada, and the US Caribbean Sea.
The rules come into force on January 1, 2020, and many carriers have already seriously thought about them. Shippers should start planning for increased cost recovery to be ready when carriers start changing their rates in response to the new rules.
How can the maritime sector meet the requirements of IMO 2020?
Every year ships use over 400 million tons of marine fuel. Of these, container ships with a capacity of 4,000 TEU and above account for a fifth of the total.
With heavy fuel oil no longer meeting IMO standards by 2020, shipowners must seek alternative fuels and refinements.
There are three generally accepted methods that shipowners can adopt to comply with the IMO 2020 rules.
Use of liquefied natural gas (LNG)
LNG, recognized as one of the most environmentally attractive alternatives to heavy fuel oil, will help reduce sulfur emissions by 90%. Over the past five years, many new ships and container ships have been designed specifically to use LNG as the main fuel.
The low sulfur content means that LNG-powered ships can operate in ECAs without having to change their fuel, as is common with oil-fueled ships.
However, not all transport vessels are equipped to carry LNG and the existing infrastructure to support LNG remains limited in scope and availability.
It is estimated that LNG-powered ships will cost $5 million more to build, a price nearly equivalent to the cost of installing scrubbers.
LNG proponents argue that LNG-powered ships do not require the same maintenance as oil-powered ships, increasing their longevity.
Despite all this, the desire of many shipowners to switch to LNG seems to be gaining momentum. The industry is seeing an increase in orders for LNG-powered ships compared to 2015.
Number of LNG vessels in 2015: 102
Number of LNG vessels in 2017: 117
Number of LNG vessels in 2019: 143 (with 135 more under construction)
Scrubbers
There is another way – to fight sulfur not in the fuel, but in the exhaust, where its concentration can be higher than in the fuel. To do this, shipowners install “scrubbers” that neutralize sulfur. “Scrubbers” refers to exhaust gas cleaning systems. Vessels equipped with “scrubbers” can continue to carry and use HFO.
Such cleaning systems work by cleaning exhaust gases before they are released into the atmosphere. This is done by adding alkaline water, which reduces the content of oxide elements by 98%. The use of “scrubbers” is permitted by the International Maritime Commission’s declaration to reduce the sulfur content of marine fuels along with switching to LNG, low sulfur fuel or methanol.
However, there are questions about their environmental friendliness. Even though the sulfur content is reduced during processing, the water used for processing is eventually released back into the sea.
Several countries, including Singapore and China, have banned the use of open circuit scrubbers, the most widely used method.
This should take into account the possibility that future environmental regulations may prohibit the use of “scrubbers”.
Energy consultancy Wood Mackenzie estimates more than 2,000 orders for “scrubbers” have been placed. But that’s just a fraction of the roughly 90,000 ships roaming the seas.
Already by 2020, a significant increase in the number of ships equipped with scrubbers is expected, most of them in the Asia-Pacific region.
As Seatrade-maritime reported in 2018, “scrubbers” have already been ordered or installed on about 1,000 vessels, including shipowners such as Spliethoff, Frontline, DHT and Star Bulk. The payback period is 12 months. The main share of shipowners who prefer “scrubbers” are Chinese companies – 60% for existing ships and 85% for new ones.
It is estimated that the cost of installing “scrubbers” is between US$2 million and US$6 million per ship, depending on its age, type and size.
Low Sulfur Fuel (LSF)
Low sulfur fuels such as marine gas oil (MGO) are among the highest quality marine fuels currently available on the market. It has a significantly lower sulfur concentration (approximately 0.1%), but is also significantly more expensive than installing “scrubbers”.
As of February 2019, the price per tonne of fuel oil was $420 compared to $647 per tonne of marine gas oil (MGO).
In addition to opting for marine gas oil, major oil producers and refiners have already begun work on developing new and cheaper types of low-sulfur blends to meet the new requirements.
But even with the progress made, testing so far has shown that these new blends are still not 100% stable and compatible. It is unlikely that many ships will switch to the new low sulfur blends at an early stage.
Of the options available, switching to low sulfur fuels is likely to be the most popular in the initial period due to the lack of “scrubbers”.
Industry experts say marine gas oil is the most efficient solution available and requires the fewest technical changes, as ships already have to use this type of fuel within ECAs.
Preparing for IMO 2020
While it is shipowners who must comply with the new rules, it is predicted that shippers and logistics companies around the world will feel their impact.
According to iContainers experts, fuel costs currently account for more than half of a vessel’s total operating costs. And with the entry into force of IMO 2020, these costs will increase exponentially.
The total cost of meeting the new requirements is expected to cost the shipping industry about US$15 billion a year, some of which all carriers, including CMA-CGM, ONE, OOCL and APL, have said will be passed on to customers. One of the longest-term impacts of IMO 2020 will be an increase in maritime freight rates. Shipping rates are expected to fluctuate, with shippers being impacted by at least two or three waves of financial costs during the first years.
Bunker surcharges are likely to vary across trade lines (eg, Pacific or Atlantic). Route analysis will help determine the most profitable of them, and optimize costs.
Shippers also need to be aware of any surcharge announcements (whether they go into effect in January 2020, later or earlier).
Perhaps the optimization of other logistics services will help partially offset the increase in the ship fueling (BAF) charge.
While IMO 2020 will result in negative economic impacts for both carriers and shippers, the environmental impact will be a positive one. IMO 2020 is predicted to reduce total sulfur oxide emissions by 85%, which will benefit nature and human health: reduce storms along trade routes, especially in the Indian Ocean and South China Sea, reduce acid rain, reduce respiratory and cardiac – vascular diseases in coastal areas.
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Based on materials from http://www.icontainers.com/ and data from open sources.