The world's leading maritime nations are leaning toward setting rules next week to cut the sulfur in oceangoing vessels' fuel by more than 85% in 2020, people familiar with the matter say.
The rules are aimed at reducing the air pollution from burning high-sulfur fuel oil-a viscous refining byproduct-that health officials blame for respiratory and heart diseases. Shipping executives say it would cost around $40 billion for the industry to meet the new rules, with some of the outlays starting soon, during one of the sector's worst-ever downturns.
The regulation also could catapult the price of cleaner-burning marine diesel fuel sharply higher if the deadline isn't extended to 2025, giving fuel producers time to adjust, some shipping and energy executives say. Even at the later date, some ship operators say they doubt there would be enough of the fuel to supply the industry.
The International Maritime Organization, the United Nations' shipping regulator, is scheduled to begin meetings in London on Monday where member countries will decide whether to require the change in 2020 or push out the deadline by five years.
"The IMO will seek a consensus decision and many major shipping nations have expressed their intention to adopt the 2020 deadline," says one person involved in the matter. "But it's one country-one vote and if objections are raised it will go to a vote. In that case, it will be close and can go either way."
The regulator might choose to allow the rules to take effect gradually between 2020 and 2025 for certain ship types or geographical areas, or postpone a decision altogether.
"Effective enforcement measures are necessary in order to ensure real environmental progress as well as a level playing field for all shipping lines internationally," said a spokesman for Maersk Line, the world's biggest container carrier. "An IMO decision should reflect this."
Ships contribute about 13% of the world's total sulfur-dioxide emissions according to the IMO-much less than other industries like electricity production. The pollution from burning high-sulfur fuel causes respiratory ailments, and can aggravate existing heart disease, according to the World Health Organization.Implementing the rules in 2020 instead of 2025 would prevent thousands of premature deaths world-wide, health officials say.
But the change would be a blow to some refiners and the shipping industry. The rules would quash demand for fuel oil and increase consumption of cleaner-burning diesel.
If enacted in 2020, marine-diesel prices could surge as high as $1,000 a metric ton, said Gregg Schwartz, director of strategic development at fuel supplier Aegean Marine Petroleum Network Inc., at a September event in New York. "This shock will really crush an already beleaguered [shipping] industry."
Marine gas oil, which is nearly identical to marine diesel and has a lower sulfur content than fuel oil, on Thursday cost $464.50 a metric ton in Singapore, according to pricing service S&P Global Platts. Fuel oil sold for $283.97 a ton.
Many of the IMO's 171 member countries, 87 of which handle 96% of the world's cargo, already are moving toward cutting sulfur emissions. These including some of the world's biggest ship-owning nations such as Greece, China, Germany and the U.S. In much of the world, however, ships can use fuel with a sulfur content of up to 3.5%, more than 2,000 times the level allowed for cars on U.S. highways.
Earlier this year, China, which moves a third of the world's containers, began requiring vessels calling at its largest two ports of Shanghai and Shenzhen to use low-sulfur fuel. European Union nations will limit by 2020 the sulfur content in marine fuel regardless of the IMO decision. Tighter sulfur limits have been imposed for ships sailing the English Channel, North Sea and Baltic Sea and those docking along the U.S. and Canadian coasts.
Asian shipping powerhouses like Japan and China haven't raised any objections to the prospect of changes. But the change would affect about 70,000 ships and burden operators already reeling from one of the industry's worst downturns.
Shipping operators have three options for complying with the new rules: Switch from sulfur-heavy fuel oil to more expensive diesel or a diesel-based blend, use ships that run on liquefied natural gas, or install scrubbers to existing ships to filter out sulfur.
All three promise to be expensive.
Sweden's Stena Line, the EU's largest ferry operator, serving Northern Europe's low sulfur zone, in 2014 said it had to shed about 800 jobs, or 30% of its workforce to pay for required scrubbers that cost $5 million to $6 million a vessel.
Oil prices have fallen sharply in recent years, meaning a switch to pricier fuels could be less painful than before for operators. Many analysts reckon some shipping companies will meet the requirements by using new fuel blends that are untested in ships, rather than use straight marine diesel or gas oil.
The low-sulfur fuel blends "are basically not fit for purpose," said Lars Robert Pedersen, deputy secretary-general for BIMCO, an industry group, representing ship operators. "We think that is a very, very serious problem."
A study commissioned by the IMO this year found there would be a sufficient supply of cleaner fuels for a 2020 implementation. Royal Dutch Shell PLC and BP PLC also have said they can meet a shift in demand.
Source: Wall Street Journal
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