In 2008 the International Maritime Organization approved amendments to Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL). These set out two main requirements on sulphur emissions.Firstly, in 2015 the establishment of Emission Control Areas (ECAs) in the Channel, Baltic and North Sea and around the coast of North America, within which ships will be required to burn fuel with a sulphur content of less than 0.1%.
Secondly, a global standard for all shipping will be introduced in 2020, requiring a world-wide limit of 0.5% – if there is enough fuel available.
The UK Chamber of Shipping fully acknowledges the need to reduce emissions of SOX from shipping. Nevertheless, these regulations will create considerable financial, logistical, societal and even environmental impacts that will impose considerable hardship, particularly on smaller companies – both shipping and otherwise – with limited cash flow.
A number of impact assessments have been made that broadly agree the regulations may result in up to a 50% modal shift from sea to land due to the significant projected increase in fuel prices. Some routes are less susceptible to modal shift than others, but based on these studies we expect a significant decline in short sea shipping in Northern and Eastern UK ports as shippers shift to either the shortest possible sea routes or to Western UK ports that lie outside the ECAs.
Whereas road freight haulage companies might, at first glance, welcome the modal shift from sea to land, they will be less likely to welcome the impact the greater congestion has on roads and nor will they welcome the likely rise in road diesel prices as shipping starts to compete for this slice of the fuel market. A very recent Swedish study predicts diesel prices will rise by about 50p per litre as a result.
Job losses in UK ports and associated infrastructures could be significant, especially in those ports lying within the ECAs on the East and South coasts of the UK as they see trade declining.
Options
The options for ship owners in meeting the requirements of MARPOL Annex VI are essentially threefold.
Firstly, switch to low sulphur fuels. There are, however, major draw backs in following this option. It is not possible to be precise about future fuel prices but the differential between heavy fuel oil and low sulphur distillate will be high. At today’s market prices, the differential is 52%, a figure likely to rise substantially once competition is factored into the equation. For many, these costs will be difficult to pass on and we expect to see many freight operators shift from sea to road where possible.
Switching to low sulphur fuel will also place far greater demand on middle distillates, a fraction that is already short in many parts of the world including Europe. Shipping will require an estimated additional 32m tonnes from 1 January 2015. As road, rail, fisheries and agri-diesel all compete for the same slice of the refining process we expect to see a significant rise in diesel costs for those sectors as well.
Secondly, ship owners could continue to burn heavy fuel oil and use scrubbers to remove the sulphur, a mechanism that is widely used in land power stations. With very few exceptions, shipping companies globally have not invested in scrubbers as, whilst they work well in shore installations, manufacturers have yet to be able to ‘marinise’ their equipments sufficiently to be reliable enough to meet the sulphur limits.
The cost is also considerable – as much as £6.5m for an average sized vessel. Studies have also shown that scrubbers are unsuitable for up to 60% of ferries for reasons of stability, size or age of the vessel. There are also considerations of the time lost to a company whilst a vessel is taken out of operations for retro-fitting scrubbers. We believe this could add a further cost of between £6.3m and £8.4m per ship in lost revenue alone.
Thirdly, alternative fuels such as LNG provide an attractive option but there are a number of issues associated with LNG that are hindering a wider take-up. Whilst not an exhaustive list, these include lack of LNG bunkering facilities in the UK, lack of port LNG infrastructure, serious regulatory issues associated with re-fuelling passenger ships, methane slippage and loss of freight stowage areas on board due to size of LNG tanks.
Add to this possibly the greatest hurdle that converting a ship to LNG is complex and very expensive and, at present, is only suitable for new build vessels and not a viable option for existing vessels.
Route exemptions
Given the major drawbacks associated with all the available options, the UK shipping industry supports implementation of tightly controlled route and time specific exemptions. This would not be for all or even most vessels operating in the ECAs, but for those for which scrubbers and LNG are not an option, and for which route closures and resultant modal shift can be demonstrated to be a real threat.
We believe that exemptions are acceptable in both regulatory and political terms and precedents are already in place. Such exemptions offer the most realistic option to protect important UK trade routes, UK jobs, UK companies and the environment whilst preventing a predictable modal back shift from sea to land.
The shipping minister chaired a meeting with key stakeholders in late October 2012 where he outlined four major strands of work to be undertaken.
Firstly, a fuel availability study, secondly to look at any unhelpful regulatory issues that might hinder a greater uptake of scrubbers, thirdly to see what more could be done to encourage ship owners to invest in scrubbers and finally a impact study on job and services using data to be provided by shipping, freight and the ports.
The UK chamber intends to be fully involved in all these strands and particularly in the impact study that we believe will clearly support the case for route exemptions.
Source: UK Chamber of Shipping