The International Maritime Organization (IMO) has mandated the use of low-sulphur fuel oil (LSFO; 0.5% sulphur) by ships replacing high-sulphur fuel oil (HSFO; 3.5% sulphur), with effect from January 1, 2020.

To be compliant, ship owners have two options: use LSFO, or continue to burn HSFO by equipping ships with exhaust gas cleaning systems called scrubbers.

So far, only 5-10% of the global fleet (by number of vessels) is estimated to have installed scrubbers, and by the end of 2020, this is expected to improve to only 10-15%. In other words, shippers are preferring a switch to LSFO.

The low preference for scrubbers is because of two factors: a ban on open-loop scrubbers, which transfer pollution from air to water, at ports; and, two, the ease of transition to LSFO for refiners, which could lead to concerns about availability of HSFO, especially at small ports.

Also, the cost of installing a scrubber is very high at $2.5-4.5 million (Rs 18-32 crore, which is 5-10% of the typical capital cost for a Suezmax or Aframax vessel).

Factoring this, a cost analysis of vessels with and without scrubbers over a 15-year lifecycle indicates that it is beneficial for a ship to run on LSFO even if the price differential between LSFO and HSFO remains at the current level of $300 per mt. And as the price differential narrows, the economic benefit for players operating on LSFO increases, compared with players using HSFO with scrubbers.

Source: CRISIL