ARTICLE SHIPPING & MARINE / JULY 2011
By Søren Christian Meyer
Global Sales Director
OW Bunker & Trading A/S

Following the economic downturn, shipping continues to be transformed by a multitude of factors; environmental pressures, technological innovation and tighter regulations. The first order of business for many tanker companies is managing this change. Those thatdo it effectively will realise significant opportunities.

Marine fuel lies at the heart of these challenges. It accounts for over 50% of a vessel’s operating costs, is the subject of game-changing environmental regulation and has a major bearing on the performance of every vessel and every operator.

As such, it is hard to overstate the importance of understanding the coming changes in the marine fuel market and planning for the future in a positive and proactive fashion. So, what are the big fuel issues? How do they impact the tanker industry? How can the risks be minimised? And how can the opportunities be exploited?

The most immediate drivers of change are the forthcoming Emission Control Area (ECA) regulations. A new North American ECA takes effect from July 2012, from which point all vessels must comply with a mandatory limit of 1.0% sulphur content. Furthermore, a Caribbean ECA covering the waters around Puerto Rico and the US Virgin Islands was approved at the IMO’s MEPC meeting in July 2011 and will take effect in 2013.

Based on experience in the Nordic and Baltic ECAs, the 1.0% limit in American and Caribbean ECA waters prior to 2015 should be manageable from a supply perspective, with ample stocks of product available from global bunker suppliers.

However, the challenges will be far greater when the ECA sulphur limit falls to 0.1% in 2015. Concerns from the shipping industry over supply and cost are understandable. However, OW Bunker has warned against the risk of complacency that may result if certain parties continue to call for a postponement of the 2015 regulations. Tanker companies will be better served by taking active steps to prepare for 2015, which means working with their fuel supply partners to formulate the right fuel procurement strategy.

In terms of the post-2015 options, three key solutions have been proposed: LNG, scrubbing technology and distillates.

LNG has a lot of potential, but it is too soon to declare it as the fuel of the future. There are many unanswered questions about the supply network, infrastructure, cost and return-on-investment period, as well as health and safety.

Scrubbing technology appears viable, but it still awaits formal validation at IMO level. And, even if vessel owners wanted to invest heavily in abatement technology, it is unclear whether scrubber manufacturers or shipyards offering retrofit services could meet the demand.

This leaves distillates. If distillates are to be the preferred choice, it is estimated that a further 400 million - 600 million tonnes by 2025 would be required to meet demand. Clearly this would be a significant challenge. They are also costly, with distillate prices currently exceeding heavy fuel oil prices by over 40%.

In addition, there are significant technical complexities in switching from heavy fuel oil to low sulphur fuel and distillates that can cause major problems if handled incorrectly. This is borne out by experience in California, which, following the introduction of a 0.5% sulphur limit in 2009, saw ‘loss of propulsion’ incidents rise dramatically from an average of 23.6 incidents per year to 67 incidents in 2009.

The lesson here is that operators will expose themselves to major operational risks, including engine damage, unplanned downtime and extra costs if they fail to prepare for the technical challenges of fuel switching on their vessels; this means properly equipped fuel systems, rigorous operating procedures and thoroughly trained crews.

Nor should it be overlooked that, in the case of the North American ECA, whilst ECA waters extend 200 nautical miles (NMs) from the coast, the reality is that vessels will need to switch fuels a further 100 NMs prior to this to ensure operational safety. Effectively this makes the North American ECA a 300 NM zone.

So, whilst there is no simple post-2015 solution, it is clear that vessel owners and operators must be proactive in planning for the new regulations. They should also take advantage of the expertise that lies within the bunker industry, which in turn should explore all the options on behalf of its customers. This includes procurement strategies, risk management tools and technical innovations, such as blending methods that can reduce the cost differential between low and high sulphur products.

There have also been some important developments in terms of fuel quality and quantity. As the lifeblood of any vessel, fuel quality is of paramount importance. The bunker industry has invested heavily in technical innovation to ensure that its products can be relied upon to meet its customers’ exact specifications.

The 2010 version of the ISO8217 standard for marine fuel incorporated a number of changes. Despite reports that availability and demand for the ISO8217: 2010 standard was initially limited, 2010-compliant stocks are now relatively widely available, certainly in key bunkering locations and from larger marine fuel suppliers.

Whilst ISO8217 is nonmandatory, it is important for tanker owners and operators to be aware of the role that it serves as a quality benchmark.

When it comes to quality, fuel handling is just as important as fuel specification. The most professional suppliers in the bunker industry have invested heavily in highly trained, professional crews that know how to handle and deliver marine fuel to the highest standard. Vessels are also equipped with online blending technology, which ensures that air is not injected into the product and that viscosity and density is within the appropriate specifications.

Ensuring the quantity of fuel delivered has historically also been a challenge. Manual tank gauging and sounding has been the dominant practice and is still used by many bunker suppliers, but the growing popularity of mass flow meters is having a tremendous impact in ensuring far greater accuracy. OW Bunker pioneered the use of mass flow meters when they were installed on vessels five years ago. Maersk has also confirmed its support for mass flow meters, with its data showing a discrepancy of just 0.15% between the invoiced fuel quantity and the flow meter reading.

The use of mass flow meters is part of a wider trend within the bunker industry towardsgreater professionalism and higher performance standards. Forward-thinking fuel suppliers now realise that they have a significant role to play in helping ship owners and operators improve business and operational performance, increasing efficiencies, eliminating risk and reducing costs.

A good example of this is the growing trend of outsourcing fuel procurement, where customers hand over their fuel purchasing function to an external, expert partner. This allows the customer to concentrate on their core business. There are significant benefits to be obtained from an outsourced arrangement, given the complexities of the fuel supply chain, and we expect this trend to grow.

A consequence of all these trends has been an evolution in the relationship between the customer and fuel supplier. The modern bunker supplier must have the capabilities to be a source of valued counsel for their customers, a trusted adviser on the myriad of commercial and operational issues surrounding marine fuels and an essential partner in the design and delivery of the right fuel procurement strategy.

While the industry is in a state of flux, tanker companies that wish to succeed will calibrate their business in anticipation of change, not in response to it. This means setting out a roadmap for responding to regulatory and technical transformation in a strategic, proactive and agile way.

A partnership approach between the tanker industry and the bunker industry is required; one based on transparency, trust and professionalism. The changes within the industry are all manageable, but there is no room for complacency. The spoils will go to the tanker owners and operators that plan ahead.