Ships and ECAs: What do Scrubbers Have to Offer?

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SHIPS AND ECAS:
WHAT DO SCRUBBERS HAVE TO OFFER?
Lawrence Axelrod
Axelrod Energy Projects LLC
2013 Energy Conference
October 27-29, 2013
Miami Beach
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Introduction
1.
2.
3.
The ECA Problem
A Scrubber Solution?
Scrubber Realties
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3
The ECA Problem
• Ship engines are a source of air pollution
• The International Maritime Organization is charged with regulating
international shipping matters (including safety, security, and
pollution)
• The IMO first addressed air pollution from ships in MARPOL Annex VI,
effective May 19, 2005
• Marpol Annex VI sets an evolving cap on sulfur content of bunker fuel
used on the high seas (which now stands at 3.5%S)
• Annex VI permits the creation of shipping zones that are deemed to
require special fuel-related regulations
• Originally, these zones were known as SOx Emissions Control Areas
(SECAs).
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The ECA Problem
• SECAs were restricted to 1.5%S max bunker fuel
• SECAs established in:
– Baltic Sea (effective May 2006)
– North Sea/English Channel (effective November 2007)
• SECAs become ECAs (Emissions Control Areas)
– 1%S max bunker fuel, effective July 2010
• Two new ECAs
• North America (effective August 2012)—two hundred nautical
miles
• US (including Hawaii)
• Canada
• Puerto Rico/US Virgin Islands (effective January 2014)
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The ECA Problem
•
•
•
•
ECA sulfur cap falls to 0.1%S max effective January 1, 2015
Shipowners face a large financial burden
Ships have traditionally burned high sulfur IFO on high seas
The shift to low sulfur bunker fuel in ECAs has added an expense
to shipowners
• Rotterdam IFO-380 LS/HS Differential
– $44.73 mt (Jan-Dec 2012)
– $27.13 mt (Jan-Sept 2013)
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The ECA Problem
• While 1.5%S max and 1%S max IFO have been available
from bunker suppliers at an increased cost, the shift to
0.1%S bunker fuel raises the economic stakes to
another level
• By moving the bar to 0.1%S max the IMO is essentially
eliminating (or at the very least enormously reducing)
the ability to burn fuel oil in ECAs
• To meet the 0.1%S cap bunker suppliers will need to
make use primarily of middle distillate
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The ECA Problem
• Middle distillate trades at a significant premium
to fuel oil
• Rotterdam Barges
– 1%S Fuel Oil premium to 3.5%S Fuel Oil
• Jan-Dec 2012: $40.92 mt ($3.89 million btu’s)
• Jan-Sep 2013 $20.82 mt ($3.55 million btu’s )
– 0.1%S Gasoil premium to 1%S Fuel Oil
• Jan-Dec 2012: $282.48 mt ($6.39 million btu’s)
• Jan-Sep 2013 $298.94 mt ($6.88 million btu’s )
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The ECA Problem
Rotterdam Barges Differentials
(Dollars per Metric Ton)
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.1%S/1%S
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Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
0.00
1%S/3.5%S
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The ECA Problem
• To give an idea of the financial burden that ECAs
impose on shipowners, it is necessary to employ
rough estimates of the amount of 1%S bunker
fuel being consumed in ECAs
• Baltic/North Sea/English Channel: 9.6 million mt/year
• North America: 2.2 million mt/year
• Total: 11.8 million mt/year
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The ECA Problem
• Notional incremental costs (basis 2012
Rotterdam prices)
―1%S/3.5%S
• NW Europe: $393 million
• N America: $90 million
• Total: $483 million
—0.1%S/1.0%S
• NW Europe: $2.71 billion
• N America: $621 million
• Total: $3.33 billion
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A Scrubber Solution?
• IMO regulations permit shipowners to meet sulfur caps
through technological means
• Shipborne scrubbers are capable of handling IFO with
sulfur as high as 4.5%S
– Emissions on par with use of 0.1%S bunker fuel
• Scrubbers can be retrofitted on existing vessels or
installed on newbuilds
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A Scrubber Solution?
• Scrubber Technology:
o Open loop uses seawater to remove sulfur from
exhaust gas. Filtered/treated wastewater from the
ship is discharged into the sea.
o Closed loop uses seawater to remove pollutants
from exhaust gas. Ships store accumulated waste.
Disposed at port.
o Hybrid system combines the two systems, allowing a
vessel to operate in either closed or open loop
mode.
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A Scrubber Solution?
• Classification societies play a role in certifying that
scrubbers can meet standards set by the IMO
– American Bureau of Shipping: Belco
– Bureau Veritas: Belco
– Det Norske Veritas (DNV): Green Tech and Wartsila
– Germanisher Lloyd: Couple
– Lloyd’s: Alfa Laval and Ecospec
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Scrubber Realities
• Cost of a scrubber varies with type and size of ship-– low end: $500,000
– high end: $5 million
• Payback varies with:
– Cost of scrubber
– Time vessel spends in ECAs
– Cost of MGO versus IFO
– Fuel consumption
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Scrubber Realities
• Projected payback on scrubber purchase will
vary with underlying assumptions:
– Under 10% of operations in ECAs: 6-9 years
– 45-50% of operations in ECAs: 4-6 years
– 100% of operations in ECA: 2-3 years.
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Scrubber Realities
Scrubber Examples: Non-Cruise Companies
Shipowner
Algoma Central
Corporation (Canada)
Canada Steamship Lines
(Canada)
DFDS (Denmark)
Ignazio Messina & Co.
(Italy)
Oceanex (Canada)
Spliethoff (Germany)
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Scrubber Company
Wartsila
Ecospec
Alfa Laval (and
possibly other
scrubber companies)
Wartsila
Couple
Alfa Laval
Scrubber Delivery
Ordered 2011, first
delivery in 4Q 2013
Ordered 2012,
delivered 2013
Deliveries in 2013 and
2014
Ordered in 2010 and
delivered in 2011
Ordered in 2012 and
delivered in 2013
Delivered in 2012
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Scrubber Realities
• For most part, ships operating in ECAs post-2015 will
not be equipped with scrubbers:
– Not worth spending the money on older ships
– Prefer gradual, newbuilds to retrofits, which take
ships out of service
– Scrubbers seen as too costly, especially for ships
only in ECAs for limited periods of time
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Scrubber Realities
• Compared to other types of shipping companies, cruise
lines show greater interest in purchasing scrubbers,
since —
– Some of their cruise vessels spend a significant
portion of their time in ECAs
– Cruise ships, unlike other vessels, cannot generally
slow steam
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Scrubber Realities
• These cruise lines are investing in scrubbers:
– Royal Caribbean announced in July 2013 that it
would have scrubbers installed in two newbuilds
– Norwegian Cruise Lines announced July 2013 that
two newbuilds will have scrubbers based on Green
Tech technology
– Carnival announced Sept. 2013 that 32 of its cruise
vessels will be outfitted with scrubbers (both
retrofits and newbuilds) at a cost of $180 million
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Conclusion -- Near Term
• ECAs will move to 0.1%S max bunker fuel in January 2015
• Bunker companies will need to expand their MGO lines
• 0.1%S Gasoil/1.0%S (3.5%S)Fuel Oil diff can be expected
to expand
• Shipowners will face higher fuel costs for those ships that
sail in ECAs
• Positive development for those that burn 1%S in on-land
applications
• Scrubbers will be more the exception than the rule,
though seem to be gaining traction in cruise industry
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Conclusion -- Longer Term
• IMO will cap bunker fuel at 0.5%S max
– To be reviewed in 2018
– To be implemented earliest 2020, latest 2025
• Given anticipated incremental costs associated with
burning 0.5%S bunker fuel on high seas, at least some
shipowners will likely be willing to consider (if not
embrace):
– Scrubbers
– LNG (pending availability of infrastructure)
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