According to a Bloomberg report today, some ship owners may simply ignore impending International Maritime Organization (IMO) sulfur standards and pay the fines since that will be cheaper than compliance options such as scrubbers and cleaner fuels. By 2020, the IMO standards will reduce sulfur by 86% requiring ships to use fuel with 0.5 wt% sulfur (over the current 3.5 wt%).
As it turns out, the penalties for noncompliance are small, compared to millions of dollars for scrubbers and cleaner fuel. The biggest civil fine the U.S. Coast Guard can impose is $71,264 for IMO violations in U.S. ports, for example, although willful violations could be referred to the Justice Department for criminal prosecution. Bloomberg quoted experts that noted the “light fines may tempt some owners to ignore the regulations.” In fact, some ship owners at a closed-door meeting earlier this year openly discussed their plan to “blow off” the IMO standards.
The industry faces some tough choices. As I noted in an earlier post, ships carry 90% of the world’s trade and produce 3% of GHGs. However, by using heavy fuel oil, 15 ships alone emit more NOx and sulfur than all the world’s cars put together. The problem the industry has is in getting finance to improve vessels, and the industry can barely pay its existing debts. To make matters worse, freight rates have collapsed because world trade has slowed down since the financial crisis and in response to overcapacity. Earnings reached a 25-year low in 2016, according to The Economist.
Ship owners, who would normally borrow for such upgrades, do not benefit from lower fuel bills. It is the firms chartering the vessels that enjoy the savings. But their contracts are not long enough to make it worthwhile to invest in green upgrades. The average retrofit has a payback time of three years, whereas 80% of ship charters are for two years or less. Green-lending structures, such as a program called, “Save as you Sail”, comes from the Sustainable Shipping Initiative. The idea is to share the fuel savings between the ship owner and the charterer over a longer contract, giving both an incentive to make the upgrades.
So what are the options? Reducing sulfur in heavy fuel oil does not appear to be a great option since two-thirds of the refineries that supply these fuels are in developing countries that can’t afford the investment to add coker capacity to their refineries. Another option would be to switch to cleaner diesel, LNG, methanol or biofuels and that will be a possibility for some owners, especially those larger companies that do not want the reputational damage IMO non-compliance could bring. Installing scrubbers cost about $10 million for large container ships and $5 million for medium ships, according to a source cited in the Bloomberg article. But again, financing could be an issue.
Tammy Klein is a consultant and strategic advisor providing market and policy intelligence and analysis on transportation fuels to the auto and oil industries, governments, and NGOs. She writes and advises on petroleum fuels, biofuels, alternative fuels, automotive fuels, and fuels policy.