Industrial Perspective Başer/ JEMS, 2020; 8(1): 2-8

DOI ID: 10.5505/jems.2020.06025

Journal of ETA Maritime Science J EMS

OURNAL

Understanding IMO 2020

Ada Ezgi Başer

Dan-Bunkering
[email protected]

In 2020, the International Maritime Organization (IMO) required bunker fuel used by
the global shipping industry to lower sulfur content from 3.5% to 0.5%. As a result, fuels
will require blending with low sulfur products like diesel. Followed by radical changes and
significant costs to all players. We experienced the IMO 2020 sulfur regulations significantly
increased pricing for global transportation fuels broadly. This stands to benefit those
who can most efficiently produce low sulfur refined products (complex refiners) while
potentially creating inflationary costs for global transportation and consumers.

Figure 1. IMO Marpol Annex VI sulphur limits timeline

Emission standards rules were first discussed in 1973 during the International
Convention for the Prevention of Pollution from Ships (MARPOL), and since 1997, these
standards have become progressively more stringent, on a country-by-country basis,
focusing on reducing greenhouse gas emissions (GHG).
Efforts have focused on regulating the sulfur levels in fuels used while ships are
operating in defined coastal areas defined as Emission Control Areas (ECAs). These are
generally located in high traffic coastal regions adjacent to Europe and North America (dark
blue areas in the map below) and sulfur thresholds in these areas have systematically been

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 © UCTEA The Chamber of Marine Engineers Journal of ETA Maritime Science

Figure 2.Current and future Emission Control Areas (ECA)

reduced until the latest update in 2015 (mostly vacuum tower bottoms and other
which reduced this limit to 0.1% sulfur. related streams). Bunker fuel is primarily
While the sulfur limits for bunker fuel produced by blending terminals which
usage in the ECA’s are tight (tight enough purchase fuel oil from refineries along
that they can only effectively be met by with distillates to produce a variety of
using marine diesel), their impacts have bunker grades. Industry consultants have
not been substantial because total usage in indicated that this market structure has
these areas is quite small. A much bigger the potential to constitute another source
impact is expected when the new standards of problem for the industry in the 2020
for “openwater” transit come into effect transition.
(“Global cap” in the chart below).In 2008 Global fuel oil production was
the International Maritime Organization ~8mmb/d in 2016, of which ~4mmb/d
(IMO) voted to reduce the global cap on (~38%) was used as bunker fuel, which
sulfur emissions for international shipping represents the main application. Fuel
to 0.5% (from the 3.5% which has been in oil is also used for electricity generation
effect since 2012)starting from 1 January (a key area of potential future demand
2020. In October 2016, the IMO reiterated growth), heating and a variety of industrial
the 2020 deadline, reducing the odds of purposes. The global oil product bunker
a last-minute deferral. The latest figures market is dominated by residual fuel oil,
provided by the IMO showed that the yearly accounting for ~80% of the market (with
average sulfur content of the residual the rest being
fuel oils tested in 2015 was 2.45%. As a marine gasoil).
comparison, the worldwide average sulfur
content for distillate fuel is 0.11%. Forecasted Product Portfolio Post 2020
The change will have dramatic This to provide a perspective on the
consequences on the refining industry bunker industry as it is today/currently,
and both crude oil and product prices. and a view of what the industry could look
Normally, refineries don’t make bunker like after 2020 is in full implementation
fuel but instead they produce fuel oil mode.

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Prior to 2020 Post 2020

Simple product selection – in reality There will be a very wide range on
ship owners have two considerations price differentials (spreads). Buyers
to make: Do I need fuel that complies must realize that poor bunker planning
with Emission Control Area (ECA) may result in having to buy the most
specifications (0.1%) or do I need a fuel expensive fuel option to comply with the
that is for international waters HSFO 3.5%. new regulations. ”Fuel Oil Not Available
Of course some ship owners also have the Report” (FONAR) can not help when MGO
option to go for higher viscosity fuels like is available at a port and the preferred fuel
RMK 500, 700, etc. or even less viscosity, choice for the ship owner is VLSFO and
e.g. RMG 180. However, there is not too VLSFO is not available at the port. Under
much complexity around the fuel choices. this situation, they will have to buy the
We also operate in a market where from compliant fuel that is available, pricing is
a supply perspective, the market is quite not one of the criteria to use a FONAR.
balanced. Having to deal or plan for multiple
Supplier / Customer relationship fuel options will be more relevant and
heavily relies on pricing – competitive as mentioned on the price differentials,
pricing or cheapest price will win the deal this will have a very serious impact to
10 out of 10 times! customers if they have to buy the most
Credit is very liquid - partly as there are expensive fuel due to poor planning.
too many suppliers in the market and each With the introduction of VLSFO 0.5%,
bring a portion of credit to the market! and the fact that the majority of the VLSFO
Connected to the credit point, is the fact fuels will be blended, understanding
that barriers to entry for new suppliers/ quality specifications will be critical
bunker traders are not very hard to in minimizing the potential challenges
overcome. Therefore, we have a very around compatibility and stability, among
crowded competitor landscape (too many others like a wide range of viscosity.
suppliers!). As we mentioned, the supply

Figure 3.Global Bunker Demand in Metric Tonnes.

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 © UCTEA The Chamber of Marine Engineers Journal of ETA Maritime Science

availability will be more complex. We are Post 2020

not predicting that there will be massive There will be a very wide range on
supply disruptions. However, buyers price differentials (spreads). Buyers
should anticipate that there could be times must realize that poor bunker planning
that their preferred fuel is not available may result in having to buy the most
and will end up having to wait for the next expensive fuel option to comply with the
avails or having to buy the most expensive new regulations. ”Fuel Oil Not Available
fuel. Report” (FONAR) can not help when MGO
We see the relationship moving from is available at a port and the preferred
pricing (transactional) to a relationship fuel choice for the ship owner is VLSFO
based more on trust and how reliable your and VLSFO is not available at the port.
supplier is (emotional). Under this situation, they will have to
Credit liquidity will be challenged, and in a buy the compliant fuel that is available,
way it could be very similar to what we are pricing is not one of the criteria to use a
projecting for fuel supply. FONAR.
Having to deal or plan for multiple
Pricing-Spread Analysis fuel options will be more relevant and as
mentioned on the price differentials, this
Prior to 2020 will have a very serious impact to buyers
Simple product selection – in reality if they have to buy the most expensive fuel
ship owners have two considerations due to poor planning.
to make: Do I need fuel that complies With the introduction of VLSFO 0.5%,
with Emission Control Area (ECA) and the fact that the majority of the VLSFO
specifications (0.1%) or do I need a fuel fuels will be blended, understanding
that is for international waters HSFO 3.5%. quality specifications will be critical
Of course some ship owners also have the in minimizing the potential challenges
option to go for higher viscosity fuels like around compatibility and stability, among
RMK 500, 700, etc. or even less viscosity, others like a wide range of viscosity.
e.g. RMG 180. However, there is not too As I mentioned, the supply availability
much complexity around the fuel choices. will be more complex. We are not
We also operate in a market where from predicting that there will be massive
a supply perspective, the market is quite supply disruptions. However, buyers
balanced. should anticipate that there could be times
Supplier / Customer relationship that their preferred fuel is not available
heavily relies on pricing – competitive and will end up having to wait for the next
pricing or cheapest price will win the deal avails or having to buy the most expensive
10 out of 10 times! fuel.
Credit is very liquid - partly as there are I see the relationship moving from
too many suppliers in the market and each pricing (transactional) to a relationship
bring a portion of credit to the market! based more on trust and how reliable your
Connected to the credit point, is the fact supplier is (emotional).
that barriers to entry for new suppliers/ Credit liquidity will be challenged, and
bunker traders are not very hard to in a way it could be very similar to what we
overcome. Therefore, we have a very are projecting for fuel supply.
crowded competitor landscape (too many
suppliers!)

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QUALITY IMPACT Non-compliance / cheating. The IMO

has no authority to monitor or enforce its
From the supply side: own regulations, but rather has relegated
Challenge of handling multiple grades: compliance to the member states.
MGO, VLSFO, HSFO but in addition the Currently, both direct and indirect methods
different specifications within the VLSFO are used to monitor compliance in ECAs.
blended fuels, different viscosity and other These include in-port verification of bunker
characteristics. fuel paperwork and the monitoring of
vessel smokestack emissions at sea using
From the demand side: aeroplanes and, more recently, drones
Very similar to the supplier, prepare There are also large differences between
and be ready for procuring and handling the penalties imposed on non-compliant
multiple grades: MGO, VLSO, HSFO and how vessels in ECAs. The penalties imposed
important it will be in the future to properly in North America are more severe than
for bunkers. Poor planning can lead to elsewhere. See Table 1 for this.
having to buy the most expensive compliant
fuel available and additional operations on Scrubbers. Shipping companies can
board the vessel to handle the fuel switch decide to equip vessels with exhaust gas
over. cleaning systems (ie. scrubbers) which
spray alkaline water into a vessel’s exhaust,
Advises to Shipowners and Academicians; causing the removal of sulfur dioxide.
The advantage of this approach is that it
Blending and feedstock strategies. allows burning high sulfur fuel oil (set to
The best short-run source of low-sulfur become increasingly cheaper from 2020).
fuel for shippers in marine gasoil (or a The disadvantages is the high upfront
combination of marine gasoil and fuel investment requirement ($2-10m) per
oil), and, in our view, this will be the vessel (including the lost income during
compliance strategy of choice for most the installation phase), it is less proven
of the shipping companies, at least in the on 2- stroke and 4-stroke engines (used
early years. From a technical perspective, in large shipping vessels), and increases
shipping companies are saying that opex by ~$400k per vessel per year (e.g.
technically it should be relatively easy requires specialized personnel). There are
to switch to a combination fuel (even also several uncertainties associated with
if switching to pure gasoil may present this solution: firstly, if MARPOL legislation
challenges in some cases), with only proceeds along the same lines as has
minimal operational changes and no legislation regulating the emissions from
significant capital expense or time out of terrestrial motor vehicles, then future
service. The two fuels combined could see legislation can be expected to impose limits
an incremental demand of 1.2-1.5 MBD. on pollutants such as nitrous oxide (NOx)
Gasoil blending is the option of choice for and particulate matter that are not filtered
Maersk. The largest benefit of this short- by scrubbers. It also raises the issue of waste
run option is flexibility, or capability to water disposal. Industry estimates suggest
adjust to market dynamics. The largest that only 300-400 KBD of the 2.5MBD high
negative could be lack of viscosity that sulfur bunker fuel consumption can be
impairs tanker engine performance with absorbed by scrubbers in 2020. Further,
long duration untested fuel options. while spreads may incentivise scrubbers as
an option, the available dry dock capacity

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Table 1.Penalties for non-compliance to sulfur regulations in selected countries

Country Maximum financial penalty
Belgium Eur 6 million
Canada CAD 25,000
Denmark No maximum
Finland Eur 800,000
France Eur 200,000
Germany Eur 22,000
Latvia Eur 2,900
Lithuania Eur 14,481
Netherlands Eur 81,000 + gains
Norway No maximum
Sweden SEK 10 million
UK GBP 3 million
USA USD 25,000/d
Source: Trident Alliance
to change over the fleet may be a limiting won’t see a widespread adoption of this
factor. In long term HSFO usage will increase technology in the shipping industry in the
due to newbuild vessels (see the graphic; very near term. However it can be research
Global Bunker Demand in Metric Tones) topic especially for academicians in long
term with source handicap.
LNG / Methanol. LNG- or methanol-
fuelled vessels should be cheaper than
0.5% sulfur bunker fuels, generate lower
emissions and protect vessel owners from
future changes in emission standards
(carbon dioxide, NOx, particulate matter).
The disadvantages of these technologies
are the high upfront capex requirements
(LNG is best suited for new builds), and
the lack of high capacity supply location.
From an environmental perspective, a key
risk is the emission of unburnt methane
in the combustion process (known as the
“methane slip”), which can substantially
limit the greenhouse gas reduction from
using LNG. Recent studies suggest that this
issue has been practically eliminated in the
most recent LNG engines. However, a recent
environmental impact study promoted by
the European Commission continues to
rank methane slip as a key issue “requiring
further investigation”. LNG is certainly
an important long-term driver, but we

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Ada Ezgi Başer

Born and raised in Istanbul with Turkish and French roots with a long term interest
in the maritime industry. This interest led her to persue and receive her Bachelor degree
from the Department of Maritime Transportation and Management Engineering at Istanbul
University.
After graduating, she worked on VLCC tankers on Swedish company where through
hard work, perseverance and diligence she rose to the rank of chief officer. This led her
to a career which was often challenging but always rewarding where she was fortunate
enough to travel and work globally and helped to foster an interest other culturest and
perspectives.
Her quest for a new challenge has led her to bunker industry which affords new
opportunities to work and learn globally. Currently she is working for Danish owned
company named as Dan-Bunkering at Dubai office since Feb/2019. Beside her native
languages Turkish and French she speak also English and Spanish fluently which she
feel are essential languages for the trading of bunkers, dealing with internal and eternal
stakeholders and developing new business. Friends and family are very important for her
and in her spare time she enjoy their company. She is also a professional rhythmic gymnast
since the age of four and also enjoy snowboarding, running, swimming and travelling.