Ship emission reduction and marine fuel developments are recent major power exercise by the IMO which led to the loss of predictability of technical progress and shifted the marine fuel choice into another competition platform with a great load of uncertainties.
Maritime industry is well optimized and standardized in the last century, so that, Shipping cost for most raw materials and finished goods has been reduced significantly. The ship-port interaction, shipping services and many other aspects of the industry are designed accordingly to achieve certain standards. On the other hand, current changes on fuel management have led to a new level of uncertainty which redeals cards, and it twists the order of a century-old system.
To reduce costs and achieve higher capacity in services and goods, industries focus on standards, optimizations, repeated procedures, comparability and visibility of operations in the long run. Most management theories would preach how standard and optimized operations gain productivity and quality. Maritime industry is one of seminal examples of this concept. Commercial and industrial history of maritime services shed light on how to improve equipment, system and operations to reduce costs and improve the capacity of services. Comparing to the mid-19th century or early 20th century, the shipping margin in finished goods is almost negligible today (while that reverses gradually). That is the great success of generations in the shipping industry and well-established global governance which shaped the industry. Shipping service is a non-storable, non-transferable and capital-intensive business which requires (at least) technical visibility (predictability) to value commercial risks.
The International Maritime Organization (IMO) played a leading role in this process of massive optimization and standardization journey. The power of the IMO is enormous in today’s global governance equation. Among many other global organizations, the IMO may be the strongest in terms of practical and direct impact. With the port state control and flag state control mechanisms, it has an unavoidable direct power exercise on over 90,000 ships around the world. In fact, the role of IMO is more than technical regulatory body as mandating a technical standard may have side-effects on commercial and financial aspects of the business. The phase-out program on single hull tankers is a good example of such impact. However, the program was laid down on a decade to reduce financial side effects.
The Fact That There is No Standard for Marine Fuels will Break the Balance
Ship emission reduction and marine fuel developments are recent major power exercise by the IMO which led to the loss of predictability of technical progress and shifted the marine fuel choice into another competition platform with a great load of uncertainties. In contrast to its half a century of practice, the IMO did not make a clear turning point identifying a standard fuel. Maritime industry is addicted to receive clear directions with detail such technical specifications of a life raft. In case of emission control, the choice of fuel and equipment is completely left to carriers, and a space of uncertainty has been created due to the number of potential solutions available in the market. In addition, the long-term prospect of any choice is another dimension of this uncertainty space.
A cargo ship is ordered few years earlier, then it is operated for minimum 20 years (mostly over 25 years). So, the horizon of a ship investment covers roughly three decades. Knowing that a cargo ship built today may be phased out in the next decade, or it may need a major renovation/retrofit in 10 years, how a ship investor would exercise a feasibility study.
Timing of such drastic change, type of change, and more importantly, the cost of such change are completely unknown. By a brief search on maritime information resources, you may encounter ten different scenarios or potential changes. For example, reducing carbon dioxide emission is not an easy step. For a significant reduction, extraordinary measures are needed; among them, some measures are not invented and practically tested yet.
IMO Has Changed Its Strategy to Implement a Compulsory Power
Instead of developing a solution first, IMO has shifted its strategy to implement a coercive power on experimenting extraordinary measures to move entire shipping industry to find its own solution. That is a historical move! Such an uncertainty and ‘liberalization’ of the choice of solution will eventually create fractions (already started) throughout the industry. Every major carrier or groups of shipping firms offer their unique choice of dealing with this emission mandate.
In other words, we are approaching an era ironically lifting some standards and reducing technical visibility of ship operations. Placing a standard of emission target collapses standards (regulated or defacto) on the fuel, propulsion power and bunkering operations. In addition, such a major change leads to significant changes on the well-to-tank supply chain for fuels, and the impact spills over oil and petrochemical industries.
The Sanction will Complex the Environmental Concerns
It took decades laying down a level playing field over the propulsion and fuel aspects of the industry: A standard choice of fuel, a standard method of bunkering, almost a standard engineering on propulsion power, a standard ship port interaction and so on. Underlying industries including the oil industry are well optimized and interlocked with this mechanism of powering ships. Lifting this mechanism and pushing the industry to seek another equilibrium on another powering solution without a standard transition will eventually cause a domino effect and even complicate the entire environmental concern. For example, choice of methanol or ammonia for such a massive volume will lead concerns on the LNG (liquified natural gas) processing as the only major source of such fuels is from the conversion of LNG today.
The cost of sustainably produced methanol or ammonia is not easy to swallow by carriers. LNG is questioned due to the extra volume needed to store while methanol or ammonia needs even much bigger space as their energy content is very low (engine will consume much higher volume of fuel). Yet, petrochemical industry needs to feed 90,000 cargo ships around world. With just a single proposal, we have so many things to consider, optimize and mathematically test its feasibility. IMO does not take responsibility on ensuring the availability of a certain fuel, but a mandate needs to be practical and resolution instead of chaos.
Fuel and Power Transition must be Managed Correctly
The fuel and power transition must be managed to reduce such chaos. A stepwise transition from heavy fuel oil (HFO) to low Sulphur fuel oil (LSFO) without a scrubber (exhaust gas cleaning method) option would have made it easier to grasp by the industry. After achieving a level playing field, another practical option may have been injected at some point. For an industry addicted to receive detailed orders from IMO, studying a complex problem and solving a multi-variate equation are not something that every carrier can handle. Since there is no clear direction, every carrier is now responsible to do their own homework in theory. Yet, whatever solution is developed, it must be coherent with competitors to achieve the economy of scale and widescale availability in targeted solution. Competitors need to collaborate while not breaching the competition rules.
The Popularity of the Scrubber Option has Increased
Considering the uncertainty around the fuel and power problem, most carriers preferred ‘no action’ choice and left the problem to be solved by whoever can handle it. Therefore, low Sulphur fuel oil (LSFO) is the major fuel choice in the current market. Due to raising price gap between LSFO and HFO in recent period (highest in the last two years), the popularity of scrubber option has risen while a reverse may be observed if such gap diminishes.
Who is responsible for funding and finding the ultimate solution for the entire industry? The current debate on the emission control lies on this underlying question of responsibility and authority.