Shipping has been drifting towards a fuel crisis for some time, pessimists argue. When sulphur emission limits from ships' fuels are cut next year, owners will suddenly switch to marine gas oil (MGO) in the restricted areas - and a demand surge will cause prices to rise swiftly.
When sulphur emission limits from ships' fuels are cut next year, owners will suddenly switch to marine gas oil (MGO) in the restricted areas - and a demand surge will cause prices to rise swiftly.
Worse still, they warn, MGO is essentially the same petroleum product as the diesel used in cars and trucks. Oil refiners will not be able to cope with the rush, shortages will follow and the price of both fuels will soar. In this scenario, politicians will quickly take notice and act to help motorists, adding to fears that freight will move back onto the roads.
The issue is most acute in Europe, where sulphur limits will drop to 0.1%, from 1% in the emission control areas (ECAs) of the Baltic Sea, North Sea and English Channel, from 1 January 2015. The lower limit will also apply up to 200 nautical miles from the US and Canadian coasts.
Shipowners are, as yet, unwilling to opt for untried, expensive and possibly unavailable responses such as burning LNG or using exhaust scrubbers. And why should they, when most diesel engines can burn the lower-sulphur MGO?
A guide to ECAs, published by Fathom Shipping with Lloyd's Register in 2012, warned that they "will result in a sharply increased demand for low-sulphur distillates", and: "Although it is envisaged that there will be some degree of increased output from the refineries, this will be gradual and is unlikely to match the expected increase in demand."
Many shipping organisations have warned about shortages of low-sulphur distillates, the report said, adding that the situation would get a lot worse when the limit outside the ECAs is cut from 3.5% to 0.5%, either in 2020 or possibly 2025, depending on an IMO review.
A 2010 study commissioned by the European Community Shipowners' Associations was even more alarming, predicting that low-sulphur fuels would cost 80-90% more than residual heavy fuel oils, with the ECA switch responsible for about half the rise in prices.
Refining capacity in Europe does appear precarious. Fifteen refineries representing 1.7 million barrels per day (bpd), or 8% of capacity, have closed in the past five years, according to the International Energy Agency, and the continent's middle-distillate facilities have always been geared more to production of gasoline (petrol) than diesel.
But downstream senior analyst Jonathan Leitch at Wood Mackenzie tells TW+ that the oil industry consultant does not believe there will be a refining capacity crisis.
"Our estimate is that in Europe about 200,000bpd, or 11 million tonnes per year, will switch from one grade [of fuel] to the other. It sounds like a lot, but there is plenty of spare refining capacity in Europe due to the weak economy and demand falling for many products."
He also points to growing diesel refining capacity elsewhere, which wasn't the case when the ECA plans were unveiled. New and expanded refineries in the Middle East, with a total capacity of one million bpd, will be capable of exporting 400,000bpd of diesel by late 2015, which is good news for shipowners who have ordered product tankers.
Leitch reckons that the American ECA will involve a 130,000bpd switchover.
Lloyd's Register's fuel oil bunkering analysis and advisory service general manager, Douglas Raitt, agrees there should not now be a supply problem, but says pricing is still an issue. "There seems to be some industry consensus that an increase of 15-20%, a rise from around $950 per ton up to $1,100, is reasonably likely."
But longer-term, he argues that nobody knows the significance of shipping competing directly with land-based demand for distillate fuel, and deepsea owners should be concerned about the impending global 0.5% limit. "This is the big fuel paradigm shift for shipping. Could enough distillate be available to meet potential global shipping demand?"
Unless there is widespread adoption of alternatives, including LNG and methanol, or means of compliance such as scrubbers, Raitt argues it is "highly likely that prices for distillates are only going to go one way - up".
