Shipping regulation and the EU Emission Trading Scheme

With the premium for very low sulfur fuel oil (VLSFO) over high sulfur fuel oil (HSFO), known as the Hi-5 spread, looking set to remain above $100/mt, the demand for exhaust gas cleaning systems, or scrubbers, has a bright outlook. This will boost HSFO’s share of the oil-based bunker demand through 2030, S&P Global Platts Analytics forecasts.

The prediction of increased HSFO demand is ironic as the International Maritime Organization only last year banned 3.5% HSFO without the use of scrubbers. The oil-based bunkers market will reach 6.094 million b/d by 2030, with distillates accounting for 1.837 million b/d, LSFO at 2.427 million b/d and HSFO at 1.83 million b/d, according to Platts Analytics.

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S&P Global Platts in partnership with the Singapore Logistics Association, hosted a webinar in discussing the outlook for container and rail freight.

On July 29, the oil product tanker Mercer Street was victim of a deadly drone attack, while a few days later another tanker, the Asphalt Princess, was reportedly hijacked. Both incidents are adding to heightened tensions in the Middle East, which remains a critical region for global oil supply.

What impact are these incidents having on freight and oil markets at the time when COVID-19 is still weighing on global oil demand?

In this episode of the Oil Markets Podcast, S&P Global Platts Senior Editor Eklavya Gupte and Associate Editorial Director of EMEA Clean Refined Products Francesco Di Salvo discuss the latest drama unfolding in the Middle East.

With just over four months of 2021 to go, global bunker fuel demand is on track to post a near 5% year-on-year rise as major bunkering hubs perform well, but still drastically lags 2019 levels as COVID-19 outbreaks continue to wreak havoc, global research and consulting company BLUE Insight’s director Adrian Tolson has told S&P Global Platts in an interview.

“Big ports continue to do well and we might even get a record in Singapore… that’s really all about container demand,” he said.

In addition to strong container activity, Singapore can provide competitive prices for all marine fuel grades, which most small and medium sized ports cannot, Tolson said.

The city-port is also starting to receive some recognition for its work with mass flow meters as the shipping and marine fuel supply community increasingly tire of practices at some other supply ports, he said.

High sulfur fuel oil sales have also been strong in Singapore despite the shift to cleaner fuels.

Singapore’s HSFO bunker sales, which include 180 CST, 380 CST and 500 CST grades, rose almost 7% year on year to 1.06 million mt in July, and comprised about 26% of total marine fuel sales in the month, data from the Maritime and Port Authority of Singapore showed. Singapore’s HSFO sales over January-July jumped 33.7% on year, the data showed.

“Well, it’s [HSFO sales] driven by scrubber demand… this has slowed down, but even a spread of around $100/mt between HSFO and VLSFO makes sense for most scrubber investments on the larger ships,” Tolson said.

“However, as wash water discharge and environmental pressures build, we will in the next 2-3 years reach the peak of post-2020 HSFO demand and see a slow slide from then,” he said.

Scrubbers are only really an option for those vessels that are on the larger side and call at ports with good HSFO availability, capping overall HSFO consumption, he added.

Carbon tax, offsets aiding decarbonization

The International Maritime Organization in April 2018 laid out its strategy on greenhouse gas emissions, aiming to cut the shipping industry’s total emissions by at least 50% from 2008 levels by 2050, and to reduce CO2 emissions from transport work by at least 40% by 2030.

As for alternative fuels, LNG has obviously made an impact and, so far, is the only real volumetric success, due mostly to global container shipping company CMA CGM, Tolson said. LNG bunkers could well account for 10% of the total marine fuel mix well before 2030, he added.

In June, CMA CGM said that “between now and the end of 2024, 44 of the group’s vessels will be powered by LNG.”

As for other options, there is a lot of focus on biofuels, which would be very easy to adopt, Tolson said.

Ammonia and methanol are other promising options, “but for these to be green, we have a very long way to go,” he added.

Pilot projects will be seen for other fuels, too, but most of these will not achieve scale until well into the next decade, he said.

Meanwhile, Tolson believes market-based measures will also be needed to incentivize the use of zero-carbon fuels. “They [fuel buyers/ship owners] will seek out the cheapest energy source and to make sure that is low or no carbon, we need to tax carbon in some way,” Tolson said.

“Once the incentive is there, we will see new fuels and, of course, the price will come down as well,” he said, adding that he was convinced that everyone in the supply chain would be “happy” to pay the extra cost, from shipper to end-consumer.

In the short term, carbon offsets will also help meet carbon neutral targets to some extent. However, this is not a real solution to decarbonization, and this mechanism is not likely achieve the goals that a carbon tax would, Tolson said.

“I am concerned about project oversight even though efforts are being made to address this by suppliers in our industry,” he added.

As these options grow in price and popularity, they will also likely be abused. A natural disaster like a forest fire will make some carbon offsets worthless, so perhaps offset projects will need to be more carefully chosen, Tolson noted.

So, before making predictions of lower carbon fuels making 20%-30% or more of the market by 2040, “we had better focus on efficiency, abatement and carbon capture,” Tolson said.

S&P Global Platts is proposing to launch daily methanol bunker fuel price assessments, reflecting the value of methanol used as a marine fuel at the port of Rotterdam, effective Sept. 27, 2021.

The proposed launch recognizes growing market demand on the back of an increased build-out in vessels utilizing methanol as a marine fuel and related activities at this major bunkering hub.

Platts is proposing to publish these assessments in $/mt delivered Rotterdam. In determining the assessment, Platts may consider the prevailing tradable value of methanol bunker fuel on a barge-to-ship (delivered) or truck-to-ship (ex-wharf) basis and may take into consideration other local methanol bunkering hubs.

Platts is proposing to assess the differential from its daily methanol FOB Rotterdam spot assessment calculated in $/mt (HPACQ10), publishing the final assessment on a flat-price basis. The methanol bunker fuel assessment flat price would include the logistics costs from the terminal to the barge or truck, and charges for delivery direct to the receiving vessel.

Platts is additionally proposing to publish methanol bunker fuel calculations converted to LNG and oil energy content equivalents, enabling comparison with other marine fuels, using the following factors to convert the methanol price from metric tons:

– Methanol bunker fuel value as LNG equivalent: 52 GJ/mt for LNG, 21.5 GJ/mt for methanol;

– Methanol bunker fuel value as marine fuel oil equivalent: 41 GJ/mt for marine fuel oil, 21.5 GJ/mt for methanol.

Alongside the proposed launch of methanol bunker fuel assessments, Platts is further proposing to publish daily cost comparisons for alternative marine fuels, reflecting the calorific value comparison of methanol bunker fuel, LNG bunker fuel, marine fuel oil and marine gasoil, also from Sept. 27, 2021. The proposed comparisons would use the following conversion factors:

– Methanol: 17.03 GJ/m³ and 0.792 mt/m³;

– LNG: 23.40 GJ/m³ and 0.45 mt/m³;

– Marine fuel oil: 40.63 GJ/m³ and 0.991 mt/m³;

– Marine gasoil: 42 GJ/m³ and 0.94 mt/m³.

The proposed European methanol bunker fuel assessments would be published in Platts Petrochemical Alert with the cost comparisons featuring in Platts bunker fuel publications.

Platts invites feedback on this proposal by September 10, 2021. Specifically, Platts seeks comments on its proposed conversion factors and on the calculation method for logistics costs from the terminal to the barge or truck, including charges for delivery direct to the receiving vessel.

Beyond the immediate scope of this proposal, Platts is considering introducing methanol bunker fuel assessments in Asia and the Americas and invites feedback on specifications and hubs in those regions.

Please send feedback and questions to petchems@spglobal.com and pricegroup@spglobal.com.

For written comments, please provide a clear indication if comments are not intended for publication by Platts for public viewing. Platts will consider all comments received and will make comments not marked as confidential available upon request.