Canadian Shipper

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Ahead of the curve


With new fuel regulation standards set to take effect, Canada’s marine industry is ready

When Gregg Ruhl joined Algoma Central Corporation as a senior vice president in 2015, management had already made a bold decision to be early adapters of scrubber technology by buying and installing closed-loop systems on the newest of the 19 dry bulk carriers in the company’s domestic fleet of Canadian-flagged vessels that travel the St. Lawrence Seaway, servicing customers on the Great Lakes and the Canadian East Coast.

So with the world now on the cusp of the new global sulphur cap of 0.5 per cent for marine fuels that comes into effect on January 1—a dramatic decrease from the current emissions cap of 3.5 per cent—Ruhl says he’s grateful for the prescient decision taken by his predecessors to make Algoma the first carrier in North America to adapt to scrubber technology.

“I really appreciate it,” said Ruhl, who took over as Algoma’s president and CEO in February 2019, in a recent phone interview with Canadian Shipper from the company’s headquarters in St. Catharines, Ontario. “Until this year we had more closed-loop scrubbers than anyone in the world, so we’ve enjoyed lower-sulphur emissions for years.

We’ve also had the advantage of practice,” added Ruhl. “We’ve now had years of experience operating these scrubbers, dealing with what breaks, how to contain it—those sorts of things. For those in the world who are installing scrubbers right now and need them to be working as of January 1 of 2020, it’s going to be a challenge to get 100-per cent reliability.”

To be sure, shipping companies everywhere have been and continue to plan and prepare to meet the new fuel regulation standards implemented by the International Maritime Organization (IMO) that are set to come into effect worldwide on New Year’s Day.

Dubbed IMO 2020, the new regulations are the latest in a series of actions by the United Nations-backed agency aimed at halving greenhouse gas emissions from the nearly 60,000 vessels that carry over 90 per cent of world trade by 2050 and eliminating them completely by the end of the century.

“The year 2020 will mark the beginning of a decade of action and delivery,” IMO Secretary-General Kitack Lim said in July at the UN agency’s 122nd session at IMO headquarters in London, where ‘Sustainable shipping for a sustainable planet’ was adopted as the World Maritime Theme for 2020. “It will be a decisive decade not only for the shipping industry, but for life on the planet.”

Canada’s Algoma Central was the first carrier in North America to adapt its fleet to scrubber technology in advance of international caps on sulphur fuels.

Reducing sulphur content from conventional bunker fuel however will come at a cost for the international marine industry, according to shipping industry stakeholders and analysts.

Depending on the kinds of cargo companies carry, the markets they serve and the types and ages of the vessels in their fleets, ship owners must ultimately decide on whether to retrofit older ships so they can burn lower-sulphur or other fuels or to add new technology like scrubbers, which can cost $3 million to buy and install on a large dry bulk vessel.

IMO 2020 regulations are also expected to the supply and demand of marine fuel, notably a spike in the need for low-sulfur diesel—a demand that could drive diesel prices up by as much as 30 per cent more than conventional bunker, resulting in bigger profits for refiners and higher operating costs for shippers—and concerns over the availability of low-sulfur fuel.

IMO 2020 is also expected to result in a drop in both the use and price of conventional marine fuel oil, which will continue to be used on ships that are equipped with expensive scrubbers.

The new regulations are also expected to influence freight rates, which are affected by everything from time and distance between ports to the weight and density of cargo.

A recent analysis by Goldman Sachs on the potential financial impacts of IMO 2020 on the world’s economy predicts the new regulations will result in substantially higher shipping costs that will be passed on through the international transportation and logistics ecosystem to be ultimately absorbed by consumers.

Shipping companies of all size and stripe are taking different paths to compliance, from converting existing ships to burn the higher-priced, lower-sulphur fuel, outfitting them with fuel-cleaning scrubber technology (a path that about six per cent of the world’s shipping fleet have reportedly taken) or buying new ships with propulsion systems that use fuels like LNG that meet the new sulphur content regulations.

 

Canadian solutions

For Michael Broad, president of the Montreal-based Shipping Federation of Canada, which represents the foreign flag fleet and whose members trade internationally, it will take time for the shipping industry as a whole to deal with and digest the challenges posed by the new emissions regime.

“Things will get worked out over the next year, but right now it’s anyone’s guess as to the availability of fuel and the price increase for lower-sulphur fuel,” said Broad. “Obviously it’s going to result in added expenses and ultimately cargo has to pay for everything.”

Broad figures that all international shipping companies already have strategies in place to both ensure their vessels meet the new fuel regulations and to brunt and/or recoup the associated capital and operational costs.

Those strategies range from putting on fuel surcharges (which is being done by some container companies) to adding extra fuel costs to freight charges.

In some international jurisdictions like Canada, the United States and Europe, where legislative efforts to decarbonize shipping have been going on as part of a coordinated international effort that began decades ago, the impacts of IMO 2020 are not expected to have as big an impact on shipping as in other parts of the world.

One of the most notable IMO actions was the creation of four Emission Control Areas (ECAs) in Canada, the U.S., the Caribbean territories of the U.S., and the Baltic/North Sea area.

In Canada, the ECA that was enacted in 2015 requires sulfur levels in marine fuel used in waters south of 60 degrees not to exceed 0.1 per cent (five times more stringent than IMO 2020 requirements) and a limit of 0.5 per cent in fuels used north of 60 degrees (the same as the new IMO requirements).

Because older ships tend to burn fuel less cleanly, the Canadian government has allowed fleet averaging in its ECA to help companies reach the 0.1 per cent sulfur emission target. That loophole will end however on Dec. 31, 2020, which gives Canadian companies an extra year to reach compliance.

“I see IMO 2020 as more of a continuing evolution,” said Darryl Anderson, managing director of Wave Point, a Victoria, BC-based transportation and logistics consultancy firm. “People have long been talking about decarbonizing shipping but we’ve had an international system that allows for higher sulphur content. Now there’ll be a level playing field.”

For Anderson, the experience of ECAs has provided shipowners and regulators with insights on how to deal with the need for low sulphur, which is essentially an alternative fuel that requires more refining than heavy fuel.

“Yes, it’s more expensive,” said Anderson. “But for most operators—unless you’re planning to build a new ship—the cost of that capital doesn’t really make the alternative fuel stream a choice that you’re going to implement for your existing fleet.

“The heart of the debate is what is the price of very low sulphur fuel or the marine gas oil versus conventional bunkers and is it cost effective or more cost effective for a ship owner to buy these enhanced blends that meet the emissions requirement or is it cheaper to continue to use the lower quality fuel and try and adapt with scrubbers,” added Anderson.

For his part, Robert Lewis-Manning, president of the Chamber of Shipping, which represents commercial carriers and their agents in Canada that trade internationally and domestically, thinks the implementation of IMO 2020 rules on Jan. 1 will prove anticlimactic for two reasons.

“One is that Canada isn’t seen as a major bunker port for most ocean carriers and second there’s been a good dialogue with fuel providers in Canada, so what bunker will be required I think the demand will be met,” said Lewis-Manning. “Because there’s been so much dialogue, I think there’s a good understanding of what the demand is, what it will be in the future, probably already a discussion about what the price point is, and for the quantities that ocean carriers are taking on in Canada.”

In terms of the added costs that IMO 2020 could have on the supply chain, Lewis-Manning doesn’t think they will have much impact in Canada.

All shipping companies are likely looking well past Jan. 1 on future GHG emission targets the IMO has set. “I lot of people are looking to LNG as maybe a transitionary fuel, but there’s probably going to be a shift in technology and fuel types in the next 20 to 30 years—we’re likely talking new ships and new systems,” said Lewis-Manning. “To me that’s the real place where owners and operators have their minds set at the moment. They’re already prepared for IMO 2020.”

Looking ahead

Peter Ellis agrees. A retired rear admiral and deputy-commander of the Canadian Forces’ joint operations command who is now executive director of the Clear Seas Centre for Responsible Marine Shipping, he says the shipping industry has been a leader in environmental regulation, including the introduction of voluntary measures to reduce acoustic impacts and ship strikes on whales.

But, he said, the time, money and challenges involved with changing fuel types and making technical modifications, together with evolving IMO-led efficiency design standards for newbuilds and stated future emission targets—notably IMO 2050, which calls for a reduction in GHG emissions of the global shipping fleet to 50 per cent 2008 emissions—adds to the cost of going green.

“The reality is that there is a lot of uncertainty as to how to reduce the environmental impact moving forward,” said Ellis, whose group is currently doing a research project to compare the different fuel options for marine fuels in regards to GHG emissions and other particles like sulphur and nitrous oxides and black carbon, and another study on the environmental impacts of closed- and open-loop scrubbers.

For Ruhl, the extension of the fleet averaging protocol on sulfur emission until the end of next year, together with the decision made years ago by his predecessors at Algoma to install scrubbers on the newest of its domestic fleet of 19 dry bulk carriers (11 self-unloaders and eight gearless bulkers) and to convert the nearly 50 smaller ocean vessels (mostly pneumatic cement carriers and mini-bulkers) in Algoma’s international fleet to low-sulphur fuel, have helped to relieve the pressure of IMO 2020.

“Because we don’t have that absolute stop on Jan. 1, we’ll be able to slowly convert our ships without scrubbers to diesel over the next year,” said Ruhl, adding that by 2021, IMO 2020 will have created a level playing field in terms of emissions—but Algoma’s scrubbers will give it a leg-up on the competition.

“In terms of the type and cost of the fuel we’re consuming for propulsion, we will have a competitive advantage, especially on the Lakes where we’ve invested well in advance.”


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