Many variables in play as deadline for maritime fuel sulfur reduction approaches

By Michael Brenneis
Maritime shipping remains the most efficient way to transport goods, considering its weight to fuel-economy ratio. Still, an average container ship running on typical high-sulfur fuel emits nearly the same amount of sulfur oxides (SOx) as 10 million diesel passenger cars. By some counts shipping contributes over 5 percent of global sulfur emissions.
Beginning in January 2020, the United Nations International Maritime Organization (IMO) is requiring the maritime industry to reduce the sulfur content of its fuels from 3.5 percent to 0.5 percent, in an effort to reduce SOx, particulates, and other pollution. The limit of 0.1 percent in Emission Control Areas will remain in effect. Finnish researchers calculate that the effect of a five-year delay in implementing the IMO restrictions, as requested by some in the industry, could contribute to nearly 570,000 premature deaths due to lung cancer or cardiovascular disease. The 2020 start date was announced in October of 2016 to give the 174 IMO member states, and the oil supply industry, sufficient time to ensure the availability of compliant middle-distillates fuel (diesel). It also allows time for shippers to either accommodate the lower-sulfur fuels, switch to other compliant fuels such as liquefied natural gas (LNG), or implement emission-reducing scrubber technology.
An analysis by Antoine Halff indicates that the inclusion of allowances for scrubber technology, or the use of LNG, may have been intended to foster innovation, but could favor the switch to diesel, which is the least-costly alternative. Market uncertainty (the question of which solution will be the most cost-effective over the long haul) and regulatory uncertainty (the question of whether future regulations will target other pollutants for reduction) may delay compliance with IMO requirements until the last minute. The costs involved in adopting LNG or scrubber technology, or the increased cost of lower-sulfur fuel, may put early adopters at a competitive disadvantage.
The regulatory change and the choices made by carriers portend a near collapse in the market for high-sulfur fuels and a dramatic increase in demand for diesel. Some refineries that cannot afford to transition toward low-sulfur fuels may not survive. A diesel supply shortage—which some anticipate to be about 1 million barrels per day—could drive shippers to alternative fuels such as LNG or spur alternative fuel innovation. The precise formulation of low-sulfur fuel is not fully known at this point; a new blended fuel may alleviate some lack of supply. There are indications that the gasoline supply may suffer should vacuum gas oil, which is used in the formulation of European gasoline, be used in a low-sulfur blend.
However, according to Halff, the coming demand for diesel may not be as high as some analysts anticipate. Increased efficiency—e.g., larger ships carrying more cargo, energy-efficient designs, slow steaming—digitization and optimization of logistics and maintenance, shorter trade routes, and consolidation of the shipping industry have all contributed to a reduced fuel demand of late, even while the amount of shipping has been increasing. The expected electrification and improved efficiency of truck and bus fleets could reduce demand considerably. Diesel is losing ground to natural gas and renewable sources for power generation in developing countries. Enforcement shortcomings paired with high diesel costs may result in noncompliance, which may, in turn, reduce demand.
The wait-and-see approach to IMO sulfur-reduction regulations adopted by the shipping and refining industries, while pragmatic, has led to uncertainty as the deadline approaches. The results-driven approach to these regulations by the IMO has had the consequence, perhaps unintended, of keeping many variables in play up to the last minute.
Michael Brenneis is an Associate Researcher at SSTI.