ILMA Compoundings - July 2020 - 25

Rolling Right Along
IMO 2020 regulations cause little disruption to the industry
By Mindy Long

B

eginning on Jan. 1, regulations
put forth under the International Maritime Organization
(IMO 2020) required all ships to burn
very-low-sulfur fuel oil (VLSFO),
but a decrease in demand brought
on by the COVID-19 pandemic and
a drastic reduction in oil prices have
combined to create little disruption
from the shift. Supply issues, costs
and compatibility have proved to be
nonissues, despite earlier concerns.
"IMO 2020 came into effect on Jan.
1 successfully, and all the fears of these
new VLSFOs being incompatible have
proven to be not a problem," said Stephen Ames, managing director of SBA
Consulting. "What has surprised a lot
of people is that the cost implications
have not originated."
Instead, the pressures caused by IMO
2020 have been replaced with pressures
caused by the collapse in demand, said
Blake Eskew, vice president with IHS
Markit. "Looking back to last fall and
then coming into the first part of this
year, the concern was there would be a
surplus of high-sulfur components, and
that would drive refined product price
differentials to some very disrupted levels, particularly in the second quarter of
this year," he said. "The price of crude
has collapsed and refined product prices
with that. This is a great instance when
nothing that you thought was going to
happen happened."
Initially, the industry expected
there were going to be cost differences

between low-sulfur options and
high-sulfur options, but that price
differential narrowed considerably
even before the COVID-19 outbreak.
"Today, low-sulfur fuel is ridiculously
cheap because the price of oil went
so low," Ames said. "The low-sulfur is
selling for less than what the high-sulfur was selling for last year."
Adrian Tolson, director and lead,
BLUE Insight, said the market was
quite soft to start with when looking
at late 2019 and early 2020. "The
prices didn't come up very high," he
said. "In December, things peaked,
markets were tight, prices were high
and delivery seemed to be delayed."
Then, with the pandemic, the
industry ran into a situation where the
market and prices started to collapse,
Tolson said. "In North America,
we have seen negative spreads on
VLSFO," he said. "That means the
wholesale price is higher than the retail
price. That doesn't happen very often."
Decreases in sailings have also
affected bunker demand. Jan Christensen, senior director, purchasing
and supply, for Hapag-Lloyd, said
the company has prioritized meeting
its contractual obligations. "We have
committed to certain volumes to
suppliers, and we don't want to pass
the problem on to them," he said.

SCRUBBER INSTALLATION
Under the IMO 2020 rule, all ships
that do not have exhaust-gas scrubbers

"In North America, we have seen negative
spreads on VLSFO. That means the wholesale price is higher than the retail price.
That doesn't happen very often."
Adrian Tolson, director and lead, BLUE Insight
must burn either 0.5% VLSFO or
0.1% sulfur marine gasoil (MGO).
Ships with scrubbers can continue to
burn 3.5% sulfur-heavy fuel oil (HFO).
As part of the regulation, carriers
couldn't even have high-sulfur fuel
onboard unless they had a scrubber,
Eskew said.
However, Ames said, the installation
of scrubbers had been impacted by
IMO 2020. "The number of ships that
were or are installing it has decreased,"
he said, adding that there wasn't
enough shipyard space to accommodate
all ships that wanted scrubbers. "You
had to get in line to get one installed."
Most installations are performed
in China. "Then the outbreak of
coronavirus slowed everything down,"
Ames said.
During a call with investors and journalists, Maersk CEO Soren Skou said
that currently, only a limited number of
Maersk vessels have scrubbers installed
because of delays at the yards and the
situation in China. He said those delays
are probably going to become even
longer. Skou said 10% of Maersk's fleet
currently consumes high-sulfur fuel oil

25
ILMA Compoundings - July 2020

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