Managing the Transition from Heavy Fuel to Cleaner Fuel
Managing the transition from heavy fuel oil to cleaner fuels in an efficient and cost-effective way
Götz Lehsten, Vice President, OW Bunker
One positive catalyst of the seismic economic and regulatory change that the shipping industry has experienced over the past few years is the transformation in the relationship between fuel suppliers and their customers. While we continue to work in a commodity-based industry, the value that customers want and need goes way beyond the basic sourcing and delivery of product.
While price and quality remain critical purchasing factors, customers need counsel and advice on the myriad of issues and challenges that now surround the process of fuel procurement. From better managing and controlling costs through effective hedging and risk management to identifying an appropriate strategy to tackle regulatory changes, as well understanding the technical challenges of switching to low sulphur-based fuels and distillates. With the implementation of a roadmap for regulation over the next 10 years that sees the transition from heavy fuel oil to cleaner fuels that will serve to radically recalibrate the nature of procurement, the importance of a strong and close relationship between ship owners, operators and their fuel suppliers has become even more paramount.
It is an opportunity for fuel suppliers to show customers their true value, based on demonstrating a complete understanding of the industry, both globally as well as from a more localized market perspective; and most importantly highlighting to customers how the challenges they face within the industry can be overcome. It is a principle that OW Bunker passionately believes in, and drives our business and all customer relationships.
The environmental and regulatory challenge is a good example of this. While the revision in July 2010 of MARPOL Annex VI - that saw the mandatory use of fuel oil in Emission Control Areas (ECAs) with a sulphur content of 1.0% - caused consternation from certain elements within the industry, the reality is that it is wholly manageable change is a gradual introduction to future modes of operation. The reality is that this current change is manageable, where suppliers that have the global scale and purchasing strength have plenty of quality product to meet the increase in demand.
However by 2015, when the sulphur content in ECAs moves to 0.1%, ship owners and operators are faced with a number of potential challenges. Firstly from a technical perspective, managing the switch from heavy fuel oil to low sulphur fuel oil and distillates, if not handled properly, can cause engine damage and subsequent downtime, as witnessed in California since the regulatory change (to 0.5% sulphur content) in 2009.
Secondly, it is not an industry secret that the cost of distillates exceeds the current price of heavy fuel oil – currently by as much as 70%. And while there has been much talk within the industry - particularly amongst classification societies - about using LNG, the reality is that there are still many questions that need to be answered about the potential of supply and associated costs, as well as the issue with regards to the location of storage facilities in relation to bunkering ports and global oil hubs.
The pressure on developing effective risk management strategies for fuel procurement, both from a financial and operational perspective is therefore significantly increased.
The onus must be on the fuel supplier to help alleviate these issues for ship owners and operators. It requires a partnership-based relationship that is founded on a fundamental understanding of the customer’s business, their trading routes and the nature and mode of supply that is required to operate. Any risk management strategy must be multi-faceted incorporating a range of hedging instruments that accounts for the volatility of oil prices and the differing costs of heavy fuel oil, LSFO and distillates based on when and where the customer requires specific products. And from a technical perspective, suppliers must be wholly engrained within their customers’ operations to ensure that the quality of products are maintained and that the technicalities of switching between different fuel types does not impact vessel performance.
To achieve this kind of relationship and ensure a positive and tangible impact on customers’ operations, suppliers must proactively calibrate their business accordingly in anticipation of change, rather than as a result of it. Not only must their operations be structured so that they have the scale to provide a range of products and services when and where customers need them, but they must have the right people that can work consultatively and take responsibility for providing the best solution to the challenges that customers face.
The reality is that despite the significance of the changing dynamic of the industry, it is a transition that is wholly manageable where success is based on taking a strategic approach to fuel procurement, and embracing a relationship between ship owner and supplier that is founded on values of transparency, trust and professionalism.
You can gain more technical knowledge in our Knowledge Centre - Just click here
Götz Lehsten, Vice President, OW Bunker
One positive catalyst of the seismic economic and regulatory change that the shipping industry has experienced over the past few years is the transformation in the relationship between fuel suppliers and their customers. While we continue to work in a commodity-based industry, the value that customers want and need goes way beyond the basic sourcing and delivery of product.
While price and quality remain critical purchasing factors, customers need counsel and advice on the myriad of issues and challenges that now surround the process of fuel procurement. From better managing and controlling costs through effective hedging and risk management to identifying an appropriate strategy to tackle regulatory changes, as well understanding the technical challenges of switching to low sulphur-based fuels and distillates. With the implementation of a roadmap for regulation over the next 10 years that sees the transition from heavy fuel oil to cleaner fuels that will serve to radically recalibrate the nature of procurement, the importance of a strong and close relationship between ship owners, operators and their fuel suppliers has become even more paramount.
It is an opportunity for fuel suppliers to show customers their true value, based on demonstrating a complete understanding of the industry, both globally as well as from a more localized market perspective; and most importantly highlighting to customers how the challenges they face within the industry can be overcome. It is a principle that OW Bunker passionately believes in, and drives our business and all customer relationships.
The environmental and regulatory challenge is a good example of this. While the revision in July 2010 of MARPOL Annex VI - that saw the mandatory use of fuel oil in Emission Control Areas (ECAs) with a sulphur content of 1.0% - caused consternation from certain elements within the industry, the reality is that it is wholly manageable change is a gradual introduction to future modes of operation. The reality is that this current change is manageable, where suppliers that have the global scale and purchasing strength have plenty of quality product to meet the increase in demand.
However by 2015, when the sulphur content in ECAs moves to 0.1%, ship owners and operators are faced with a number of potential challenges. Firstly from a technical perspective, managing the switch from heavy fuel oil to low sulphur fuel oil and distillates, if not handled properly, can cause engine damage and subsequent downtime, as witnessed in California since the regulatory change (to 0.5% sulphur content) in 2009.
Secondly, it is not an industry secret that the cost of distillates exceeds the current price of heavy fuel oil – currently by as much as 70%. And while there has been much talk within the industry - particularly amongst classification societies - about using LNG, the reality is that there are still many questions that need to be answered about the potential of supply and associated costs, as well as the issue with regards to the location of storage facilities in relation to bunkering ports and global oil hubs.
The pressure on developing effective risk management strategies for fuel procurement, both from a financial and operational perspective is therefore significantly increased.
The onus must be on the fuel supplier to help alleviate these issues for ship owners and operators. It requires a partnership-based relationship that is founded on a fundamental understanding of the customer’s business, their trading routes and the nature and mode of supply that is required to operate. Any risk management strategy must be multi-faceted incorporating a range of hedging instruments that accounts for the volatility of oil prices and the differing costs of heavy fuel oil, LSFO and distillates based on when and where the customer requires specific products. And from a technical perspective, suppliers must be wholly engrained within their customers’ operations to ensure that the quality of products are maintained and that the technicalities of switching between different fuel types does not impact vessel performance.
To achieve this kind of relationship and ensure a positive and tangible impact on customers’ operations, suppliers must proactively calibrate their business accordingly in anticipation of change, rather than as a result of it. Not only must their operations be structured so that they have the scale to provide a range of products and services when and where customers need them, but they must have the right people that can work consultatively and take responsibility for providing the best solution to the challenges that customers face.
The reality is that despite the significance of the changing dynamic of the industry, it is a transition that is wholly manageable where success is based on taking a strategic approach to fuel procurement, and embracing a relationship between ship owner and supplier that is founded on values of transparency, trust and professionalism.
You can gain more technical knowledge in our Knowledge Centre - Just click here