Maritime Fuel Regulations

August 6, 2018

Maritime Fuel Regulations

On January 1, 2020, new, more stringent maritime emission

regulations are scheduled to take effect for all ocean-going

vessels. Implementing major industry regulatory reform can

cause uncertainty and market disruption. As a result,

investment plans and market supply and demand might be

affected, leading to rapid price changes.

The International Maritime Organization

The International Maritime Organization (IMO) is a 171member United Nations agency that, among other things,

sets maritime fuel standards. The U.S. Environmental

Protection Agency (EPA) participates on the U.S.

delegation to the IMO. The Maritime Environment

Protection Committee (MEPC) is a group of member

nations within the IMO that is responsible for the

prevention of maritime pollution. Maritime pollution

standards are promulgated in the International Convention

on the Prevention of Pollution from Ships, a treaty

designated “MARPOL.” Specifically, Annex VI of the

treaty defines air pollution requirements for engines and

vessels.

Air pollution standards under MARPOL were first adopted

in 1997 and became enforceable in 2005. Those standards

specified maximum allowable sulfur concentrations in

maritime fuels and maximum nitrogen oxide emissions

from engine exhaust. Annex VI of MARPOL was amended

in 2008 to set tighter international sulfur standards.

Additionally, at that time, the United States, Canada, and

France requested the IMO to designate a North American

Emission Control Area (ECA) of 200 nautical miles from

the coasts of the United States, including Alaska and

Hawaii, and large portions of Canadian coastal waters, as

well as the French Islands of Saint Pierre and Miquelon.

Later the United States petitioned the IMO for a similar

ECA for the U.S. territories in the Caribbean including

Puerto Rico and the U.S. Virgin Islands. The North

American ECA was designated in 2010, and became

enforceable in 2012. Designation as an ECA allows the

relevant countries to specify tighter emission specifications

on vessels operating in the ECA.

IMO international pollution standards apply to both U.S.

and foreign vessels. In addition, the North American ECA

maritime pollution standards apply to all vessels that enter

the ECA, including U.S. as well as foreign flag vessels. In

addition, U.S. vessels must also meet EPA fuel standards

and engine emission standards as specified in the Clean Air

Act.

Fuel Standards

International marine fuel sulfur standards, pre-2012, were

set at 4.5% (mass-on-mass). The 2008 revisions of Annex

VI of MARPOL, which became effective in 2012, lowered

the international sulfur standard to 3.5%. The 2008

amendments also specified that on January 1, 2020, the

international marine fuel sulfur standard would fall to 0.5%.

However, the 2020 implementation date was contingent on

an IMO review to ascertain whether sufficient supplies of

low sulfur fuel would likely be available by the

implementation date. The review determined that fuel

supplies could be expected to be available, and in October

2016 the IMO decided to proceed with the January 1, 2020,

implementation date. Other studies forecast significant fuel

shortages at the implementation date.

The sulfur fuel standards for U.S. ships, as well as all ships

operating in the North American and U.S. Caribbean ECAs,

have been, and are, stricter than the international standards.

Pre-2010, the standard was 1.5%, while from July 2010

through July 2015 the standard was 1.0%. In 2015, the

allowable sulfur standard was reduced to 0.1%. As a result

of the low sulfur content allowable for U.S. vessels, as well

as all those entering the ECA, none of the new international

standards, or their revisions, have affected those vessels

directly.

Adjusting to the 2020 Standards

Fuel for marine vessels is referred to as bunker fuel. Bunker

fuel is produced at oil refineries around the world. The

refining process at those refineries, in brief, consists of

heating a blend of crude oils. The lighter products, gasoline,

diesel, and jet fuels, are boiled off and recovered. The

remaining, heavier fractions, which also retain most of the

impurities, including sulfur, are called vacuum tower

bottoms (VTBs). These VTBs can be further processed into

bunker fuel which varies in sulfur content depending on the

sulfur content of the blend of crude oils entering the

refining process. Alternatively, the VTBs can be processed

in a coker unit to yield a blend of lighter products and

petcoke. Whether the VTBs are processed into bunker fuel

or are further processed in a coker unit depends on the

economic value of the resultant mix of products.

Vessel operators have three main alternatives available to

meet the 2020 international maritime sulfur limits.

Operators can choose to purchase low sulfur fuels, install

remedial devices like scrubbers, which remove pollutants

from the ship’s exhaust, or use non-oil based fuels, like

liquefied natural gas (LNG). Each alternative offers a

different set of potential costs to operators, although each

can reduce sulfur emissions to the same extent, providing

the same improvements in air quality.

Low sulfur bunker fuel can be provided to the shipping

industry either by investing in facilities at refineries that

further process VTBs to lower the sulfur content, or mixing

higher value distillates (diesel, gasoil, or home heating fuel)

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Maritime Fuel Regulations

to lower the mass-on-mass sulfur content. In either case, the

cost of bunker fuel is likely to rise. The Energy Information

Administration (EIA) provided an example to suggest the

possible magnitude of the cost increase associated with low

sulfur bunker fuels. The EIA examined the relative cost of

low-sulfur gasoil (a distillate with 0.1% sulfur content) and

high-sulfur residual fuel (3.5% maximum sulfur content) at

the Amsterdam-Rotterdam-Antwerp trading and refining

hub in 2016. The EIA found that low-sulfur gasoil was

persistently priced over $20 per barrel more than the highsulfur residual. If the two fuels were mixed to meet the

2020 international sulfur standards, the cost increase for the

resulting compliant fuel would reflect the proportions of the

two mixed fuels.

Meeting the 2020 sulfur standards through the use of

scrubbers is an alternative that offers the possibility of more

fuel choice flexibility to vessel operators. Four main types

of scrubbers are available. Seawater scrubbers (open loop)

use untreated seawater that possesses a natural alkalinity to

neutralize the sulfur in the vessel’s exhaust gas. Seawater is

drawn from, and replaced to, the ocean. Freshwater

scrubbers (closed loop) use caustic sodas mixed with water.

The circulating water is re-processed for further use. The

closed loop system uses about one-half the water, by flow

volume, of the open loop system. Hybrid scrubbers allow

for either open or closed loop operation. Open loop

operation is typically used when the vessel is in the open

ocean, while closed loop operation is typically used in

harbors or other areas where discharge is prohibited. Dry

scrubbers use no liquids, but clean exhaust gases by passing

them through hydrated lime-treated granulates. This system

produces no discharges from the vessel and the process

produces a residual which can be used in the production of

wallboard.

As a result of the small number of installed marine

scrubbers in operation, detailed cost studies are not

available. However, it is likely that retrofits will be more

expensive than new systems and closed systems are more

expensive than open systems.

Vessel operators, especially if their vessels are relatively

new, might convert them to use LNG. Also, newly

constructed vessels might utilize LNG or biodiesel

dedicated propulsion.

The results of a survey concerning ship owner’s intentions

for meeting the 2020 sulfur requirements indicated that

74% intend to purchase low-sulfur fuel, 19% intend to

purchase a scrubber, 5% intend to switch fuels to LNG,

while 2% had other, unspecified plans. These survey results

are likely to be provisional in that the precise relative costs

of meeting the sulfur standards are not known.

Affected Industries

While global marine fuel demand is only about 4% of total

world oil demand at 3.9 million barrels per day in 2018, it is

expected that important effects may exist for many sectors

of the oil and petroleum products industry, as well as other

industries.

Because of the expected shift in relative prices, with high

sulfur product prices falling and low sulfur products rising,

it is likely that simple refineries that specialize in producing

high-sulfur fuels will experience lower profitability, while

complex refineries that can produce larger product streams

of low-sulfur products may experience higher profits.

Capital investment in the refining sector is likely to increase

to allow refiners to maximize their returns to reflect the

evolving relative prices of high and low-sulfur petroleum

products.

Crude oil prices, which reflect sulfur content, are likely to

adjust in favor of low sulfur grades while penalizing highsulfur grades, making the heavy, high-sulfur crude oils

produced by Venezuela and Canada, for example, less

profitable in the face of declining demand. However, the

light, low-sulfur crude oil grades produced in the Bakken

fields of North Dakota and the Eagle Ford and Permian

fields in Texas may become more profitable as their

demand increases. Some pessimistic observers see the IMO

regulations, in conjunction with other factors, affecting the

oil market in 2020 resulting in a price of $200 per barrel for

crude oil and $6 to $10 per gallon for gasoline.

Costs to the shipping industry are likely to rise, but the

magnitude of the increases might vary widely. The cost

results depend on what the size of the price premium for

low-sulfur fuel over heavy-sulfur fuel settles at and whether

fuel access is unconstrained, or whether fuel shortages

develop. Published annual cost estimates range from $5.8

billion to $52.6 billion, depending on the chosen values for

cost variables. Neither of these estimates include the cost of

scrubbers; they only reflect the cost increases for those

vessel operators that choose to use low-sulfur fuels.

Increased shipping costs are likely to be passed through as

higher shipping rates that are likely to affect consumer

prices for all goods shipped by sea.

A wide variety of non-oil sector industries might also be

affected by the shifting product mixes of refiners that face

differing economic incentives for high and low-sulfur

petroleum products and alter their product slates in

response.

On-road transportation costs are likely to rise due to the

IMO regulations, with diesel fuel prices increasing. Again,

land shipping cost increases are likely to occur which will

be passed on to consumers. If refineries, at least initially,

respond to the IMO regulations by changing the gasoline

and diesel fuel mix in favor of more diesel, gasoline prices

may escalate sharply.

Issues for Congress

The IMO regulations for cleaner maritime fuels will go into

effect on January 1, 2020. Considerable uncertainty exists

as to the availability of the required clean fuels as well as

the price effects of the fuel conversion. If diesel, gasoline

and maritime fuel prices increase sharply, shipping costs

may rise, leading to price increases in many industries.

Robert Pirog, Specialist in Energy Economics

IF10945

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Maritime Fuel Regulations

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