Slow Steaming to 2020:  Innovation and Inertia in Marine Transport and Fuels

DOWNLOAD THE FULL REPORT [PDF]

Senior Research Scholar Antoine Halff explores the outlook for marine bunkers and the impact of new environmental restrictions to come into effect January 2020 that aim to reduce sulfur oxide (SOx) emissions from ships. The report, which builds on insights from a February 2017 CGEP Global Energy Dialogue on the Future of Marine Transportation, places the global sulfur cap against the backdrop of recent changes in shipping and challenges analyst projections that the new rules will wreak havoc in oil markets by dramatically raising demand for low sulfur fuels. Key takeaways include the following:

-  The global sulfur cap goes a long way to cut harmful emissions but will not be as transformative for the shipping industry nor as disruptive for oil markets as might be expected. 

-  Industry consolidation and shipping innovation have already unlocked substantial fuel savings that are poorly captured in statistics. With digitization set to further reduce the oil intensity of shipping, oil demand growth from the marine sector will likely remain below forecast, which will help blunt the effect of the global cap.

-  At the same time, although liquefied natural gas (LNG) bunkering is making some inroads into shipping, the new pollution standards may not visibly speed up the sector’s shift away from oil. In fact, by selecting performance standards over technical ones to desulfurize marine fuels, and by adopting a sequential approach to the sector’s main types of air emissions, regulators may have unwittingly entrenched the role of oil in shipping for decades to come. Given their high capital costs and the advanced planning required, neither scrubbers nor LNG engines seem destined to play a leading role in meeting the new specs, at least initially. That leaves low-sulfur bunker fuels as the default compliance option for most. A more integrated approach, combining restrictions on SOx, NOx and GHG, could have incentivized a faster switch to LNG.

-  Postponing the rules, as some have advised, would not necessarily give industry more time to prepare. The wait-and-see approach taken by many shipowners is a cautious and rational response to market risks, compounded by potential feedback effects and regulatory uncertainty. 

-  While some analysts have drawn parallels with the 2008 oil rally, when desulfurization of road diesel helped propel oil prices to record highs, this is an imperfect analogy. Unlike in the 2000s, diesel demand is far from booming. The new bunkers also will not be diesel look-alikes but rather hybrid fuels, produced as much through blending as through refining. Refineries with high yields of high sulfur fuel oil (HSFO) will suffer from reduced demand, however – as will producers of heavy, sour crude oil grades whose price is partially indexed to that of HSFO, such as Mexico.

-  Lack of enforcement capacity means a high risk of noncompliance, further easing market pressures.