Even bigger fuel challenges ahead
Even with slow steaming and economies of scale of bigger containerships, fuel is still a significant cost for carriers, amounting to about 60-70 percent of a voyage across the Pacific, recently noted Brian Conrad, Transpacific Stabilization Agreement executive director.
Bunker fuels jumped from $450 per ton in September 2010 to $745 per ton in early 2012, and contributed to the poor financial results of carriers, Conrad said during a panel discussion at the TPM 2013 conference in Long Beach, Calif.
He predicted fuel prices will remain volatile, probably in the $600-to-$700 a ton range for the foreseeable future.
TSA publishes a bunker formula surcharge for carriers on a quarterly basis that’s based on the average bunker price in Hong Kong and Los Angeles for West Coast services, or Hong Kong and New York for East Coast services. It has been revised twice, once in mid-2011 to show the increased use of slow steaming by carriers (hence lower fuel use) and at the end of 2012 to reflect the requirement that carriers use low-sulfur fuel when they’re within the 200-mile Emissions Control Area (ECA) around most of the United States and Canada.
Speaking on the same panel, Brian Wood-Thomas, vice president of environmental policy at the World Shipping Council, said changing international standards for bunker fuel has the potential for huge commercial impacts on the liner shipping industry in the near future, as do ongoing climate discussions at the International Maritime Organization (IMO), an arm of the United Nations.
Annex VI for the Prevention of Air Pollution from Ships in the IMO’s International Convention for the Prevention of Pollution from Ships (MARPOL) entered force in May 2005. It sets limits on sulfur oxide (SOx) and nitrogen oxide (NOx) emissions from ship exhaust and prohibits deliberate emissions of ozone-depleting substances, as well as designating ECAs like the one off the U.S. and Canadian coasts.
Wood-Thomas said today the cost differential for high- and low-sulfur fuel is “relatively modest.”
Globally, ships can burn fuel with 3.5 percent sulfur content, but must use fuel with 1 percent sulfur content when they’re within 200 miles of the U.S. and Canadian coasts. (Parts of Alaska and Northern Canada are except.)
But come 2015, the amount of sulfur that’s allowed in fuel used in the ECA will fall by a factor of 10, to 0.1 percent.
That will require the use of distillate fuel, instead of residual fuel that’s used in ship engines today, and Wood-Thomas said the difference in cost is about $200 a ton. A ship may burn 100 tons daily.
While there’s a lot of concern about the change coming in 2015, he said a requirement in 2020 is even more significant, since it will change the global cap on sulfur fuel content from 3.5 percent to 0.5 percent, requiring the use of distillate fuel worldwide. “That change has tremendous implications,” Wood-Thomas said.
He said about 260 million tons of marine fuel is used by the world fleet annually. (To put this in perspective, a World Shipping Council position paper noted that in 2005 the entire European Union consumed about 170 million tons of diesel fuel.)
If ships must convert to diesel fuel, he said “you are looking at a total additional cost in the neighborhood of $75 to $100 billion per year.”
Carriers can’t “simply absorb and figure out a way to eat it,” Wood-Thomas said.
Climate change is another major issue before the IMO, and he said member states have been able to agree on energy-efficiency standards for new ships, in part, because saving fuel is in the interest of carriers. But he explained there has also been a long-standing and contentious debate about whether the shipping industry should adopt market-based measures to reduce carbon emissions from the existing fleet, be it through emissions trading or some sort of fuel levy.
No agreement is expected soon, because it’s such a political hot potato, and some governments are stepping into the breach, talking about efficiency standards for existing ships.
That could be welcome, if it drives further fuel efficiency, but he said it could be problematic if the approach is to use fuel consumption today to create a baseline and require carriers to reduce emissions by a particular percentage. “It’s going to be very important how that system is structured to prevent perverse outcomes,” he said.
For example, if a shipping company’s fleet is sailing very slowly and its emissions are relatively low, will they be unfairly punished when compared to a company with a less efficient fleet?
“Some of the people in government recognize these challenges, but it’s a fundamentally difficult problem and we may face the prospects of efficiency standards that are creating a de facto speed limit.... Not by someone declaring a speed limit on the ships, but by virtue of the government monitoring fuel consumption on an annual basis and a company being told it has to burn less,” Wood-Thomas said.
And a few years down the road, if economic conditions change, the option of speeding up a vessel in the supply chain could be effectively removed.
Wood-Thomas also noted emissions could be affected by technology.
Instead of using low-sulfur fuel, carriers could also meet emission standards by installing exhaust scrubbers. Norway’s Wilh. Wilhelmsen is in the process of installing scrubbers for both auxiliary and main engines on its pure car-truck carrier Tarago.
Wilhelmsen spokeswoman Benedicte Gude told American Shipper “depending on test results, we will determine which vessels the systems might be suitable for. Such evaluation will be limited to ships where the number of years of operating service left justifies the investment. Ships routinely sailing in ECAs will also be candidates for such an evaluation.”
LNG may have potential in certain regional markets, Wood-Thomas said, but added it’s not clear how relevant its use would be in the container trades, noting that an LNG system “takes up a lot of space, is a significant capital expenditure and sacrifices cargo space.”