Global bunker fuel costs could rise by up to USD 60 billion annually from 2020, in a full compliance scenario, when the International Maritime Organization’s (IMO) 0.5% sulphur cap for bunker fuels kicks in, Wood Mackenzie said.
With the implementation of the IMO regulation in 2020, the shipping industry will have to consider a switch from fuel oil, which is high in sulphur content, to alternative fuels, such as marine gas oil (MGO), or install scrubbers, a system that removes sulphur from exhaust gas emitted by bunkers.
A combination of higher crude prices and tight availability of MGO could take the price of MGO up to almost four times that of fuel oil in 2016, and eventually cost the entire industry additional USD 60 billion annually.
“Installing scrubbers may be an economically attractive option. Although there is an initial investment, shippers can expect a high rate of return of between 20% and 50% depending on investment cost, MGO-fuel oil spread and ships’ fuel consumption,” Sushant Gupta, research director for Asia refining at Wood Mackenzie, said.
“Despite attractive returns, penetration rate for scrubbers could be limited by access to finance, scrubber manufacturing capacity, dry-dock space and technological uncertainties. The shipping industry is traditionally slow to move, but in this case, early adopters may hugely benefit,” Gupta added.
Furthermore, switching to MGO is a more costly solution, according to Gupta. In full compliance, shippers are expected to try to pass the cost to consumers and freight rates from the Middle East to Singapore could increase by up to USD 1 a barrel.
Wood Mackenzie said that it also expects a shift in bunkering locations based on compliant fuels availability. Singapore could potentially lose some of its market share for bunker fuels to China as shippers look for alternative locations with a surplus of compliant fuels.
China, with ample MGO supply, is well positioned to attract shippers looking for MGO. Singapore will also need to repurpose some storage tanks and other infrastructure to prepare for a shift from fuel oil to gasoil bunkering, according to Wood Mackenzie.
“The options for refiners and shippers will depend on the course of action decided by each of them. At the end of the day, the shipping industry and refineries need to communicate and find middle ground, and time, unfortunately, is running out,” Gupta concluded.