S P E C I A L R E P O R T

SHIPPING

Cleaning Up Bunker Fuels.

But at What Cost?
January 2010
By
William Bathurst
Managing Editor, Platts Marine Alert
and
Ellie Weir
Editor, Platts Bunkers
S PEC I AL RE PO R T: S H I P P I N G
introduction
As Environmental pressure grows on the oil industry due
to their role in carbon emissions, so the shipping industry,
which was exempt from the Kyoto protocol on cutting carbon
emissions, has come under increasing scrutiny to catch up
with other more strictly regulated industries.
Airlines have responded to this pressure and promised to
cut annual carbon dioxide emissions of 650 million tonnes by
50% by 2050. That amount of emitted greenhouse gas is half
that produced by the global shipping industry so the need for
emissions and sulfur limiting legislation is evident within the
marine industry.
What is still unclear is how an industry, that has been
massively hit by the global economic slowdown, will cope with
the costs associated with cleaner and thus more expensive
fuels. This report will focus on the new legislation coming
into force in the shipping industry throughout 2010, and then
analyse the implications of this legislation.
MARPOL legislation
The legislation that comes into force in 2010 was drafted
in October 2008 to revise Annex VI of 1978 International
Convention for the Prevention of Pollution from Ships.
The main changes to MARPOL Annex VI will see a progressive
reduction in sulfur oxide (SOx) emissions from ships, with the
global sulfur cap reduced initially to 3.5% from the current 4.5%
from 1 January 2012 and then progressively lowered further
to 0.5 %, from 1 January 2020. This is however subject to a
feasibility review to be completed no later than 2018 and many
in the shipping industry already believe the target to be too
ambitious.
This reduction however pales into insignificance in comparison
to the sulfur limits applicable in Sulfur Emission Control Areas
(SECAs) which will be reduced to 1% from July 1 2010 (from
the current 1.5 %) and then further reduced to 0.1 %, effective
January 1, 2015.
Progressive reductions in nitrogen oxide (NOx) emissions from
marine engines have also been agreed, with the most stringent
controls on so-called “Tier III” engines or those installed on
ships constructed on or after 1 January 2016 and operating in
Emission Control Areas.
The revised Annex VI will allow for an Emission Control Area
to be designated for SOx and particulate matter, or NOx, or all
three types of emissions from ships, subject to a proposal from
a party or parties to the Annex, which would be considered for
adoption by MARPOL, if supported by a demonstrated need to
prevent, reduce and control one or all three of those emissions
from ships.
Alongside the MARPOL legislation, the EU has also been
taking steps to limit sulfur in its member states’ seas, before
the MARPOL legislation comes into force. The first test of this
tightening environmental legislation has been the recent entry
2 | Cleaning Up Bunker Fuels. But at What Cost?
in force of European legalisation governing the use of 0.1%
sulfur fuels in ports and on inland waterways.
After January 1 2010, all ships berthed in EU ports for more
than two hours are required to burn fuel of less than 0.1%
sulfur and the sale of MGO with a sulfur content of more than
0.1% was banned in EU member states.
Those vessels connected to shore power whilst alongside
(known as cold-ironing) are exempted. When cold ironing ships
in berth switch to shore-side electricity in ports, and cut the
need for burning MGO in port. This swap both cuts fuel costs
for ships and also brings the promise of tax breaks from the EU
as it would cut emissions significantly.
Implications of the legislation
Firstly, the most pressing implication for those in the industry is
the higher price associated with the switch to cleaner fuels as
they are of course more expensive to produce.
The largest cost for an operator is their bunker costs. When
bunkers are $200/mt, ships will move at higher speeds but
when prices double and ship values are halved or worse, ships
will steam at economical speeds to burn less bunkers saving
out of pocket expenses.
If a ship that can do 18 knots on 33 mt of intermediate bunker
fuel per day slows to 15 knots, they will burn only 25 mt/day and
will also take 20% longer to get to where the ship is going.
Consequently if the ship saves 8 mt a day with bunkers at $400/
mt they save $3,200/day so with a time-charter value of a ship
at $20,000/day, 20% of that is $4,000/day meaning it would not
pay to slow-steam.
However, if the time-charter value of the ship was $10,000/
day, then the extra time would cost $2,000/day and the bunker
costs they saved would still be $3,200/day, meaning $1,200/day
savings. Then it does pay to slow-steam.
The practice has been in use for over a year on several tanker
routes already but the global economic slowdown combined
with over-ordering particularly in the tanker markets has
caused a tonnage demand/supply imbalance. When tankers
take longer to complete their journeys they are out of the spot
market for longer, which can help lend some support to the
market.
In the tanker spot market however, it is the charterers’ decision
to allow slow-steaming and owners must seek their approval
for this to take place. Nevertheless, slow-steaming had been
cited by tanker sources as providing an ongoing relief from the
overcapacity in the market.
With ever cleaner fuels increasingly costing high amounts,
the practice of slow steaming will become more and more
prevalent, sources in the tanker market believe particularly if
the low sulphur premiums seen in the past re-emerge once the
global economies pick up.
The below graph shows the premium for low sulphur 1.5% 380
CST bunker over High sulphur 380 in the port of Rotterdam over
the last two years. This peaked at $100/mt in 2008 although was
typically around $35-40/mt that year. A slow down in demand in
2009 brought that back down to $15-20/mt.
The greater expense is not of course restricted to marine fuel
oil with lower sulphur distillates also being stronger. Platts
began assessments of marine gasoil in the same port at the
beginning of this year and the current premium over marine
diesel oil shows that the cost to shippers of the switch to the
former was fuel was a premium of $20-40/mt. This of course
varies according to market conditions and in spite of tankers
storing huge quantities of gasoil off the coasts of Europe.
Admittedly however, this gasoil needs to be blended to marine
specifications.
Another implication, with particular regard to the January
legislation is enforcement. The legislation itself states that fuel
changeovers must be recorded in ships’ logbooks a process
which many sources have questioned and only time will tell
how this method of self regulation is successful.
As EU ports have realized that ships distillate use will move
entirely from marine diesel oil to marine gasoil due to the sulfur
cap, they saw demand for diesel fall away from the middle of
2009.
Although some traders feel that the better supplied gasoil
market may actually lead to prices for gasoil coming down.
“More demand will gain influence of the price, but I do not
think the prices will go massively up, because on the MGO side
we have a lot more [supply] competition,” one trader said.
Low Sulfur 380 CST Premium in the Port of Rotterdam (USD/MT)
Source: Platts
“As vessels have to use gasoil 0.1% in port from the new year
and many vessels are starting to run on gasoil [so there’s] not
a lot of demand, one has to stop buying and the sellers are
stopping to put it on the market and so we have had to get rid
of our dmb barges,” one trading source in Rotterdam said.
However while many traders and suppliers saw the buying
patterns for distillates shift well in advance of the EU
legislation, changes to storage had not been so successfully
migrated.
“We have enough barges for MGO but tank storage is tight for
the moment in all parts of Hamburg, so we will see what comes
up in the next few weeks and months. We need storage tanks
and this will be a problem, because for now we have a lot of
tanks for fuel or MDO but not for MGO. So we have to clean
tanks etc, [and to] clean a tank etc. costs a lot of money,” a
source in Hamburg commented.
As the new legislation comes into force and sulfur levels
are cut further and further, the bunker industry and ship
owners are already looking at their options to meet the new
requirements. However the biggest concern is what the
increased pricing will do to the balance sheets of an industry
already suffering from the global economic downturn and in
many sectors a heavy order-book.
The price of ship fuel is going to become and an ever more
important consideration.
Cleaning Up Bunker Fuels. But at What Cost? | 3
 About Platts
Platts, a division of The McGraw-Hill Companies (NYSE: MHP), is the market leader for independent
real-time news, pricing, and data for the energy and metals markets. From our 17 worldwide offices,
we create market transparency and drive better decision-making for traders and investors in more
than 150 countries. More information is available at www.platts.com.

For more information, please contact the Platts sales office nearest you.

North America EMEA Latin America Asia-Pacific Russia www.platts.com

+1-800-PLATTS8 (toll-free) +44-(0)20-7176-6111 +54-11-4804-1890 +65-6530-6430 +7-495-783-4141 support@platts.com
+1-212-904-3070 (direct)

© 2010 Platts, a Division of The McGraw-Hill Companies, Inc.

Reproduction of this publication in any form is prohibited except with the written permission of Platts. Because of the possibility of human or mechanical error
by Platts’ sources, Platts does not guarantee the accuracy, adequacy, completeness, or availability of any Platts information and is not responsible for any
errors or omissions or for the use of such Platts information. Platts gives no express or implied warranties, including, but not limited to, any implied warranties of
merchantability or fitness for a particular purpose or use. In no event shall Platts be liable for any direct, indirect, special, or consequential damages in connection
with subscribers’ or others’ use of this publication.