EU Forces Marine Fuel Dilemma for Ships, Refiners
A European crackdown on pollution from ships will require billions of dollars worth of investment by shipping firms on filter technology and by refineries on upgrades to produce cleaner fuels - burdens they can ill afford.
The shipping industry is already struggling due to poor global demand and overcapacity, which have pushed freight rates to unprofitable levels for many operators. European refineries are under pressure from high crude costs, cheap refined product imports and weak demand.
To comply with new European Union laws, shipping companies now face extra costs of 2.6 billion to €11 billion ($3.2-$13.6 billion) to switch fuels or to fit exhaust filters that would scrub out the sulphur in marine fuel oil.
The new rules require that the sulphur content in shipping fuels fall to 0.1% from 1% by 2015 in "sulphur emission control areas" in the Baltic, North Sea and English Channel. In other EU waters, they will be limited to 0.5% sulphur by 2020, in line with global International Maritime Organization rules.
EU rules have already forced ships to cut sulphur emissions in harbours.
Fuel oil dilemma
Burning cleaner marine diesel would be a quick fix that would meet the requirements, but it currently trades at a $350 per ton premium to fuel oil, which has 1 to 3.5% sulphur content and which most ships use.
What's more, Europe is structurally short of diesel, and its older, less complex refineries cannot retool to produce more diesel without significant investment and lengthy shutdowns.
Switching back and forth between fuels as ships enter the low-sulphur zones could damage a ship's engines, according to Sigurd Jenssen, director of Exhaust Gas Cleaning at engineering firm Wärtsila Environmental Solutions.
Another option is for ships to use exhaust filters or "scrubbers" to prevent the sulphur in fuel oil from entering the environment. It transforms the harmful gaseous oxides into neutral sulphates, which can be dumped in the sea.
Scrubbers resemble big car exhaust systems and range in price depending on the size of the engine. A scrubbing system for a 14 megawatt engine of a 150,000 ton suezmax oil tanker would weigh over 22 tons and for a 55 MW engine around 86 tons.
Lindsay Sword, a senior analyst at Wood Mackenzie, expects scrubbing to become fairly standard on ships.
"It's not a really proven and well used technology yet, but we cannot see how the refining industry globally would be able to cope otherwise," she said.
"What would they blend into their existing fuel oil pool to get the sulphur content down from 3.5%? It would need something very low sulphur. It just would not make any economic sense for them to do it."
The technology has passed regulatory hurdles and is starting to be used.
Scrubber-maker Hamworthy, a UK subsidiary of Finland's Wärtsila, sold its first systems for commercial use at the start of this year. Its main competitor, Sweden's Alfa Laval , has also recently sold its first systems.
One alternative
The most expensive option for refiners would be to upgrade plants to produce more diesel, which could cost at least $500 million.
Instead they are looking for cheaper alternatives to avoid being stuck with a lot of unsold heavy fuel oil, which is a blend of low-sulphur diesel with the high-sulphur tarry residue left after the distillation of crude.
One possibility is MSAR, a low-cost substitute developed by Quadrise Fuels International, which has a market capitalisation of about $54 million.
With this technology, refiners blend water and speciality chemicals into the tarry residue, instead of diesel, to produce a cheaper, cleaner fuel albeit with about the same sulphur content as fuel oil.
MSAR brings down the costs for refiners and enables them to sell the diesel that would otherwise have gone into blending, increasing profitability.
Quadrise says a refiner can install its technology for around $50 million, without the need for a prolonged shutdown, and that a 200,000 barrel-per-day refinery could boost profits by about $100 million per year.
Shipping companies could save money by buying MSAR fuel, which would help offset the expense of still having to install a scrubber to meet the EU requirements.
Quadrise has partnered with Denmark's Maersk to conduct sea trials of MSAR fuel for over a year. Commercial use of the new fuel is expected to start next year after the trials wrap up.
"Within 12 months, we would expect to have entered the commercial phase," Quadrise Executive Chairman Ian Williams said in an interview.
"The combination of our fuel and a scrubber would put a shipping company in a better position financially than fuel oil and a scrubber," Williams said. "There would be savings of approximately $1 million per annum per vessel."
