11/17/2015

The Motorship - Choice of sulphur emissions abatement technology depends on payback time

Choiceofsulphuremissionsabatementtechnologydepends
onpaybacktime
11Jul2014
Indecidingthebestoptionfordealingwiththe
upcomingECAsulphuremissionslimits,and,inthe
longerterm,theglobalsulphurcap,thelikely
paybackperiodisacriticalfactor:GarrettBillemeyer
andMelanieDavidson,BelcoTechnologies
Corporation,lookattheeconomicsofthescrubber
option
MARPOLAnnexVIstipulatestheuseoflowsulphurfuel
Fuelpricedifferential,MGOv.HFO
oranemissionabatementtechnologyonshipstraveling
inEmissionControlAreas(ECAs).Thisisnotnews,as
theregulationhasbeenonthehorizonwitha1January
2015enforcementdateforseveralyears.Despitetheloomingdeadline,muchoftheshippingindustryhas
beenreluctanttocomeupwithanECAcompliancestrategy,preferringinsteadthewaitandseeapproach.
Recently,however,ithasbecomeclearthisapproachisnolongervalidorwise.
Governments,supportedbyindustrycoalitionssuchastheTridentAlliance,aredeclaringtheirintentionsfor
strict,timelyenforcementandclearlyunderstoodconsequencesfornoncompliancetoguaranteeafairplaying
fieldfortheentireindustry.Shippersarenowfeelingthepressure,andinincreasingnumbershavebegunto
evaluatecomplianceoptionsthatmakethemostfinancialsense.Thegoodnewsistherearecompliance
optionsthatcanalsoleadtoahealthybottomlinegiventherightstrategyandtiming,especiallyforships
travelingmorethan30%ofthetimeinanECA.Withapaybackperiodofonetothreeyears,increasingly,for
thiskindofshipthepreferredstrategyistheadoptionofemissionabatementtechnology,i.e.scrubbers.
Whenthesulphurregulationswerefirstannounced,themostobviousoptionforcomplianceseemedtobea
switchtolowsulphurfuels.Forlonghaulshipswhichspendlessthan30%oftheirtimeinECAs,dualfuel
switchingcapabilityisthepopularoption,sinceingeneralitisrelativelylowinbothcapitalandoperational
expenditure.However,dualfuelswitchingmayrequiresomeenginemodificationssincelowsulphurfuelssuch
asmarinegasoil(MGO),marinedieseloil(MDO),andlowsulphurfueloil(LSFO)lackthelubricityofheavy
fueloil.
Forshipsspendingmorethan30%ofthetimeinanECA,adualfuelstrategyorastrategytoburnlowsulphur
fuelexclusivelycouldbelowcapital,buttheoperatingexpensesareprojectedtobequitehigh.Withtheprice
differentialalreadybetweenUS$250andUS$350/tonnedependingonthebunkeringlocation,alowsulphur
fuelstrategycangetquiteexpensive.Additionally,refinersarenotmodifyingtheiroperationstomeetthe
increasedLSFOdemandfortheupcoming2015ECAdeadline.Thuswithstaticsupplyanddrastically
increaseddemand,pricesareforecasttorise,withhighestimatesputtingthedifferentialtoasmuchas
US$500in2020.Forashipburning50tonne/dayoffuelinanECA,evenwithaconservativeUS$300price
differential,thataddsuptoanadditionaloperatingexpenseofUS$15,000/dayorUS$5.475million/year.
AswelooktotheglobalECAregulations,refinersarestartingtotakemorenoticeandmakeplanstocreate
0.5%sulphurblends,butitwontbequick,cheaporeasy.Thecreationofnewrefineryblendstockswillrequire
yearsofplanningandbillionsofdollarsofinvestment.Hence,thismightexplainwhysomeintheindustry
expecttheglobalsulphurlimittobepostponedto2025.However,the0.5%sulphurlimitinallEuropeanwaters
by2020willnotchange,regardlessoftheIMOdecision,andatthatpointevenmoreshipswillbeaffected,
includingshipsintheMediterranean.
Forshipstravelingmorethan30%ofthetimeinanECA,emissionabatementtechnologyadoptionis
increasing.AstheJanuary1deadlinefastapproaches,itseemseveryweekannouncementsarecomingout
namingnewcontractsbetweenscrubbercompaniesandferries,cruiseshipsandcargovessels.Itishardly
surprisingtoseethemarineindustryreverseitsinitiallyscepticalpositiononscrubbertechnology.This
technologyhasbeenusedfordecadestosuccessfullyandreliablyremoveSOxandparticulatesondifficult
landbasedapplicationssuchasfluidisedcatalyticcrackersinrefineries,andtodosowithfewmaintenance
requirementsandlongperiods(fiveyearsormore)withoutturnarounds.Notonlyhaswetscrubbingbeen
successfullyutilisedonhundredsofrefiningapplications,ithasbeeneffectivelymeetingIMOsulphuremission
standardsonanumberofclasscertifiedmarineapplications.
Themarketforemissionabatementtechnologyisrampingup,butitisracingagainstthe1January2015
deadline.Installationiseasiestonnewbuilds,butcanbeperformedasaretrofit.Bothjobtypeswillrequire
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The Motorship - Choice of sulphur emissions abatement technology depends on payback time

customengineeringanddesign.Forretrofits,mostfirmsrequireinstallationtobeperformedwhiletheshipisin
drydockformanyreasons,includingsafety.Theinstallationcanbetimedtofitwiththeshipsroutinedrydock
schedule.Additionally,designsandtestingneedtobereviewedbyclassificationsocieties.Leadtimescantake
6monthstooneyearbeforeasystemisfullyinstalled,tested,andaccredited.Allthewhile,MDOcostswillbe
ontherise.Thus,earlytechnologyadopterswillbeabletoreapthebenefitsofscrubbersandrealisetheir
paybacksooner.
Whicheverstrategyshipownersundertake,currentlyitseemsthatthehighestcostoptionisnowwaitand
see.Withoutaplan,shipswillbeatthemercyofthemarket.Higherfuelpriceswillbepassedontocustomers
whetherforincreasedcargoorpassengerfare.InNorthernEuropeconcernaboutashiftawayfromship
transportisgrowing,asthecostadvantagedisappearswithincreasedfuelprices,andtruckingbecomesmore
financiallyattractive.Additionally,chartersareinavulnerableposition.Asthefuelpurchaserstheywanttobe
abletobuythelowestpricedfuel,buttheyarenotinthepositiontodictatewhichtechnologiesthechartered
shipsinstall.Forcharters,agoodstrategywouldbeopendialoguewiththeshipowners,becauseinthefuture
theywillprefertogivetheirbusinesstoshipswhichcanburncheapheavyfueloil(HFO)whilemaintaining
compliance.Thus,chartercompaniesshouldbeworkingwithshipownersnowsoasnottogetstuckpaying
veryhighfuelcharges.
Weareunlikelytoseesignificantinvestmentinrefiningprocessesneededtomeettheultralowsulphurmarine
fueldemandsimposedbyMARPOLAnnexVIregulationsforthe2015deadline.Forshipstotakeadvantageof
lowpricedHFOandstillmeettheregulations,anexhaustgascleaningsystem,orscrubber,isanincreasingly
popularoption.BasedontheamountoftimeashipspendsinanECA,currentfuelpricedifferentials,amount
offuelconsumed,scrubbercosts,andothervariables,ashipoutfittedwithascrubbercanhaveapayback
periodofonetothreeyears.Withfuelpricedifferentialsincreasing,thepaybackperiodcanevenbeshorter.
Scrubbersofferareliable,economicalalternativethatcanhelpshieldshippersfromrisingmarinedieseloilfuel
priceswhilekeepingtheirvesselsincompliance.

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