A common argument with respect to scrubbers and the criticism that they receive as far as retrofit is concerned is that since ship operators are not bearing the costs for fuel themselves the cost will inevitably be left to the charterers; others claim that there will be an availability issue for 2020 because the market will be shrinked, another valid argument is that large part of the shipping industry will stay with compliant fuels LSFO/MDO minimizing thus any competitive advantage or competition distortion by the use of scrubbers.
Talking about what can happen in 2020 and where are we now, BP diagram below shows the marine fuels market and specifically the potential industry route to meet demand. It is of essence to focus on the light purple zone which raises the question about scrubbers, what will be the eventual market share of scrubbers after 2020?
Today 45% of fuel oil in the world goes to shipping and at the shame time 5% of Global Middle Distillates market is channeled to the shipping industry as well. 300 million tons annually consist of 80% HFO and 20% distillates. After 2020 we will see a 35% deficit in fuel oil demand globally and approximately a 15% increase in the demand of Middle distillates.
Fuel oil market will probably be more difficult to adopt than the distillates market and of course, we will need to wait and see the strategy of certain refineries globally meaning that we will see regional imbalances and this is why perhaps some shipowners are already considering their buying strategy on a geographical basis.
Scrubber Market Anatomy - Who has fit scrubbers?
According to a Clarksons Research (2017), the scrubber equipped vessels are around 300; we can expect that there is a number of recent installations along with the fact that these numbers refer to perhaps larger vessels but generally there is a wide spread out of the use of installations of scrubbers among different types of ship segments. The vast majority comes from the cruise and passenger scale and then come the Ro-Ros, tankers, gas carriers and even bulk carriers. Subsequently, today every type of ship has adopted a test dissolution.
LR has exceeded quite a lot the 60 cases of installation of scrubbers and there is nothing to imply that there is a lack of experience and expertise in these installations.
“We have seen problems, we have seen solutions and with the ECA zones adoption, we have the time to test our ability in the scrubbers.”
There are 60.000-90.000 ships that are potential candidates for scrubbers until 2020. However, in the assumptions made by several analysts it is expected that no more than 2.000 ships will be fitted with scrubbers by 2020 (1.200 projections by CE Delft and 2.000 by IEA) and by 2025 the number of ships may increase to 7.000-10.000 installations (projections by FGE and the Bank of America respectively). Thus, scrubbers may constitute the preferable alternate solution to the status quo, but they seem to have no dynamics to dominate the market. As things stand, scrubbers would be considered outliers to the vast majority of vessels using LSFO and blends. The vast pool of shipowners will continue competing in the field of compliant fuels while other regulatory requirements, like decarbonization, will challenge the scrubber uptake by the end of the next decade. So, right now most probable scenario is that scrubbers could gain a share of the market around 10% of the fleet in numbers.
Four types of scrubber risks
1. Operational Risks
Crews will have to deal with at least three types of fuel. Segregation, operation and demonstration of compliance will be quite demanding.
2. Availability Risks
A separate HFO supply chain will need to be maintained, it will be quite difficult for local suppliers to depend on HFO consumers.
3. Financial Risks
The oil and refinery industry transition and adjustment with the new reality may drive any differential to lower levels while costs for maintaining the HFO storage and supply chain may vanish any remaining gains.
4. Compliance Risks
Washwater control of discharges, enforcement issues that may rise, Crew Health issues in dealing with rich in Sulphur fuels.
Scrubbers compliance is governed by IMO MEPC Resolution 286.59. LR has developed two schemes of approval to meet compliance for scrubbers installations : the first one is based on the Type Approval basis according to which the Classification Society tests the scrubbers with a set of parameters and certifies with an emissions compliance certificate;the second approval scheme is about continuous monitoring of SOx emissions. Furthermore, today LR has Washwater discharge requirements for acidity(Ph), polycyclic aromatic hydrocarbons (PAH), Turbidity and Nitrates.
There is already an arsenal of local regulations about discharges and we are going to see that increasing in the years to come and perhaps becoming even more stringent. So, it is difficult to project what would be the requirements in the future. At the same time, however, there is a great opportunity forward; forward price curves for the price premium of compliance fuel operation already show a cap increase to more than 250$. Forecasts imply a projected initial cap of 400$ per ton, while the most bearish projections make reference to 600$per ton. We also have analysis implying that the gap will start widening even before 2020.
Therefore, the scenario about what to happen is the following; there is a cap widening much more due to the drop of the fuel oil price as we expect on supply-demand basis rather than the increase on the demand of distillates. Making a simple projection of what is going on and taking into account the scenario for the maximum cap and the lowest cap as well as what we call the stabilized cap, we can see today that in contrast to long term time charter for several types of vessels, net returns from the installation of the scrubber are comparable to the overall returns of the vessel itself; in some cases we can have the same return with the 1/10 of the investment. Even at the stabilized cap we can still see the net returns that would justify any investment.
Looking at the average between the highest 400$ initial cap and the lowest-the current projection of forwards of 250$ cap we will see that it is important making decisions at the right time. So, the Return on Investment (ROI) for 2020 in comparison with 2021 and 2022 is significantly high and since we are talking about high return on investment if we focus on the payback period for a RoPax Aegean, a Capesize, a VLCC, an Aframax or a Containership feeder, the longer we wait the longer the payback period will be and the more probable for this to fall into the change and the increased pressure legislation for scrubbers or other alternative fuels prevail.
How can we help – LR Advisory services
LR has already set up the right framework for Rules and Notations, as well as a Scrubber-Ready Notation, with a preliminary assessment state, structural reinforcement, review and tanks install review of Scrubber-Ready stages. There is a set of Rules specifically applying on the engineering aspects of scrubber installations. Moreover, LR offers a wide range of Class and Advisory support to assist shipowners in their decision of scrubber installation & retrofit:
- Assessment of proposed solutions by makers, shortlisting;
- Compliance decision making, and compliance risks vs technology adopted;
- Materials operation and lifecycle assessment;
- Financials, Feasibility assessment, sensitivity scenarios;
- JIP approach, makers undertaking exercises with owners on real life data;
- Commercial banks ‘pay as you save’ schemes, 3r funding solutions, this could entail EIB, EBRD packages, 3rd party validation;
Concluding, with respect to the rumors and concerns around the use of scrubbers first of all “acting now” may be the most profitable action: start the discussion today and not at the later stage is a very important aspect. Last but not least, as far as availability is concerned,this it may be a problem in the future it is not yet happening. It seems like there will be HFO at least for the few years right after 2020 and large part of shipping will stay with compliant fuels, so there is no reason for risk as there would be no high competition about it but there is an opportunity to be an outlier and to differentiate.
Overall, we expect that in 2020 we will have a cap widening and this will be based on fuel oils and less to the distillates demand. Scrubbers are not risk free; their availability and the compliance challenges are among the greatest risks. The best “medicine” to scrubber risk is one; swift payback and this may come with the early adoption. If fears do not come true and we do not see something extravagant with the frame of scrubbers, they will continue offering adequate net returns over a long period of time. Finally, there is also a hedging against weak freight rates in the years to come.
Above text is an edited article of Panayiotis Mitrou presentation during the 2018 GREEN4SEA Conference
You may view his video presentation herebelow
The views expressed in this article are solely those of the author and do not necessarily represent those of SAFETY4SEA and are for information sharing and discussion purposes only.
Panos Mitrou is a Naval Architect and Marine Engineer NTUA, holding an MBA in Shipping from ALBA Business School. He is currently employed as a Technology & Innovation Manager for Lloyd’s Register Marine & Offshore, South Europe. He focuses on uptake of technology, forthcoming legislation, innovation and compliance challenges. During his seven year service with Lloyd’s Register Piraeus Technical Support Office, he had been dealing with series of statutory and other reviews. He has supported and lead the implementation of several pieces of new legislation ranging from Ballast Water management to the latest Energy management related requirements. He has also been deeply involved in MARPOL and the Chemical codes matters. He has represented Lloyd’s Register in a number of international forums, research and other projects developed within the TEN-T and other EU frameworks. He is currently involved in the roll out and materialisation of special projects like Poseidon Med and elemed.