(Article originally published in Nov/Dec 2014 edition.)
***From Nov-Dec 2014 Edition of The Maritime Executive magazine***
On January 1st a new IMO mandate for North America and northern Europe will take effect, reducing the amount of sulfur in fuel by 90 percent. But how will it be enforced?
The shipping industry is bracing to feel “the pointy end of the stick,” as one executive calls it, when new sulfur emission regulations take effect on January 1, 2015 in northern Europe, North America and the Caribbean Sea. “What’s coming just two months from now is unprecedented,” says Roger Strevens, Chairman of the Trident Alliance, a coalition of 24 international shipowners and operators formed last July out of alarm that authorities are not ready to enforce the new pollution standard.
Beginning New Year’s Day, vessels ranging from tankers and ferries to container ships and ocean liners must cut sulfur emissions from the current permitted level of 1.0 percent to 0.1 percent. That will mean dramatically higher costs, a shift in cargo movements from sea to land, and unfair competition if enforcement is not robust.
The Enforcement Issue
“The reason some of us are screaming that the sky is falling is because we realize the enforcement end of this is woefully not ready,” says Strevens, who is also VP of Environment at Wallenius Wilhelmsen Logistics.
In Europe, the Sulfur Emission Control Area (SECA) will aim at shipping in the Baltic Sea, North Sea and English Channel. In North America, the Emission Control Area (ECA) will regulate not only sulfur oxide (SOx) discharges but also nitrogen oxide and particulate matter for ships in U.S. and Canadian waters and U.S. territories in the Caribbean, including Puerto Rico and the Virgin Islands.
The impetus behind the new mandate is public health. The European Commission estimates 50,000 premature deaths occur annually in Europe as a result of maritime sulfur emissions. In North America, the U.S. Environmental Protection Agency calculates reduced sulfur levels from shipping will save as many as 14,000 lives and $110 billion in health expenditures per year by 2020.
On the North American side, protocols will be enforced by the EPA and the U.S. and Canadian Coast Guards. Even though territorial waters extend 200 miles from shore, most ships will be inspected at anchorage or dockside. Violators can be fined up to $25,000 per infraction and be prohibited from sailing until deficiencies are corrected. Shipping executives in the North American ECA do not seem overly concerned about the equity of enforcement. However, their counterparts in Europe are approaching 2015 with trepidation.
In the EU, where jurisdiction will be fractured into many different states, the Trident Alliance asserts enforcement of maritime laws is already lax. Only about one-in-1,000 vessels is inspected, and half of those are found to be in violation of sulfur limits. With the SECA deadline only weeks away, 12 European Union nations have yet to pass laws to administer the new rules. Strevens says Trident members fear slack enforcement will lead to cheating by other shipowners and operators looking to save money.
“There are multiple reasons why companies comply,” he notes, “but with weak enforcement and high cost there is a temptation not to. You can realize a very great commercial advantage through non-compliance. That distorts the competitive landscape, and for the companies that are complying that’s simply an unacceptable business threat.”
Some European states appear ready to enforce the regulations. Denmark recently announced it will spend €940,000 to, among other steps, employ aerial “sniffer drones” to fly over vessels to smell engine exhaust for sulfur content and to install detection devices beneath the Great Belt Bridge leading to and from the Baltic Sea.
The bottom line for the shipping industry is that the cost of complying will be substantial – more than $6 billion a year, according to estimates by the EPA and EU.
The crux of the problem is heavy fuel oil (HFO), which currently powers an estimated 85 percent of international shipping. HFO is drawn from the bottom of the oil barrel, the dirtiest of dirty petroleum, containing 2,700 times more sulfur than most road fuel.
Its attraction is cost. HFO is cheap compared to alternatives. Shipowners will be forced to choose from a handful of more expensive options. They can switch to low-sulfur marine gas oil (LSMGO or just MGO), liquid natural gas (LNG), methanol or biofuels. Or vessels can be equipped with exhaust-gas cleaning systems, commonly known as scrubbers, to reduce sulfur oxide levels in emissions.
The front-runner to replace HFO is LSMGO. Of the 5,000 or so ships that ply their trade in SECA waters, 70 percent of owners say they plan to switch to LSMGO in 2015, according to a survey by the European Shortsea Network (ESN). As a result, demand for maritime LSMGO in northern Europe is expected to soar from seven million tons in 2014 to almost 20 million tons next year. The fly in the ointment is the price differential. Low-sulfur fuel costs approximately $350 per ton more than HFO – a roughly 60 percent increase at today’s prices.
To illustrate the dilemma facing shipowners, an ESN case study found that a typical container vessel carrying 400 FEUs (40-foot containers) will incur a €24,000 cost increase on a roundtrip between Rotterdam and Oslofjord. ESN estimates waterborne freight costs in emission control areas will surge between 30 and 50 percent.
The question becomes: Who gets stuck with the tab? Joe Cox, President of the Chamber of Shipping of America, says it likely will not be shipowners: “At the end of the day it’s going to be paid by somebody. You don’t stay in business if you are not making a profit. Eventually the cost gets passed on.”
The UK Chamber of Shipping predicts a modal shift in cargo transport in Europe. It expects sea routes to become shorter and more freight to be moved by trucks, thereby negating the stated intention of the SECA legislation, which is to reduce airborne emissions.
One promising development is LNG, although LNG-powered shipping is in its infancy. The worldwide fleet numbered only 42 vessels as of October 2013, and that number has at best doubled in the interim. Most LNG vessels – ferries, offshore workboats and LNG carriers – sail under the flag of Norway, where shipowners enjoy capital support from the Norwegian NOx Fund. But the U.S. and others are catching up with companies announcing construction of LNG-fueled newbuilds or conversion projects almost every week.
Det Norske Veritas predicts LNG use will mushroom to 400 ships by 2020 when economies of scale are expected to whittle prices to a level where it is an inviting option to HFO and the fuel becomes more widely available. But the number could be even higher.
Compared to LNG, methanol-fueled shipping is in the fetal stage. Stena Line has a pilot project to test methanol on one of its ships, and it has high hopes for the fuel (see “Case Study” and “Executive Interview” articles elsewhere in this issue). And biofuels may someday also be an option.
Scrubbers are a simpler and less expensive alternative for some ships, particularly retrofits and cruise liners. They seem to be the most popular choice after LSMGO. Rather than converting their engines to accommodate more expensive fuels, operators can continue burning HFO and let scrubbers remove the sulfur from emissions.
Wärtsilä, the Finnish manufacturer of marine propulsion systems, is seeing a decided uptick in orders for new scrubbers as the January 1 deadline approaches. Wärtsilä’s Marit Holmlund-Sund says they are low-maintenance, don’t require additional crew to operate, and the payback on investment is relatively short: “Usually you can say that if you spend more than 50 percent of your time in an ECA area, the payback period is between two and five years.”
The cruise industry is investing heavily in scrubbers. Bud Darr of the Cruise Lines International Association says approximately 100 of the 300 ocean-going cruise ships in the world today have installed or are installing scrubbers: “The three largest lines in the world – Carnival, Royal Caribbean and Norwegian – all have made substantial commitments to scrubber technology in their existing ships and are even more inclined to go to scrubbers with newbuilds.”
Crucial unanswered questions, however, surround scrubbers. Open-loop scrubbers use seawater to wash sulfur from exhaust before discharging the wastewater into the sea. In Europe, where many ports are located beside delicate shorelines, bays and rivers, regulation of the effluent is by no means uniform. Scrubber-discharge standards vary from country to country, and some states prohibit dumping washwater altogether.
That uncertainty is impeding scrubber use: “Many shipowners are awaiting an installation since they expect changes in the rules for discharge water,” says Holmlund-Sund. To circumvent the ambiguity, Wärtsilä is manufacturing three different scrubber systems. In addition to the open-loop, it offers a closed-loop scrubber that can hold contaminated sludge until it can be disposed of shoreside, and a hybrid of the open- and closed-loop systems.
Testing the Waters
What happens in the SECA and ECA regions will in some ways be a laboratory experiment aimed at 2020 when the IMO will require shipping worldwide to adhere to a new global sulfur emissions standard of 0.5 percent.
“We’re going to be a kind of test bed for the rest of the world,” says U.S. Coast Guard Commercial Vessel Safety Specialist Michael P. Rand. “The rest of the world will be looking to see what has been done in northern Europe and North America. We want to achieve compliance but also be realistic and are dealing with shippers and shipowners and fuel suppliers to make this work. The bottom line is we want to remove sulfur from the sky.” – MarEx
Joseph Collum is a former investigative reporter and Emmy Award-winning journalist. He is also the author of the Max Brady mysteries. This is his first appearance in the magazine.
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The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.