ON Jan 1, 2020, the International Maritime Organisation (IMO) is set to impose new emission regulations designed to curb pollution produced by the world’s ships.
The new IMO rule is poised to ban shipping vessels using fuel with a sulphur content higher than 0.5 per cent. At present, the upper limit on sulphur oxides is 3.5pc, unless the ships are equipped with exhaust-cleaning systems known as scrubbers, down from 3.5pc.
The change is drastic. This meant ships would require a fuel product to meet the more stringent rules. It also means; ships found in violation of the new law risk being impounded as ports are expected to police visiting vessels.
When the rule was announced, most in the industry felt, it could be disruptive to the global economy, and specially to the shipping industry. After all, maritime transport is critical to the global economy. As per the United Nations, more than 90pc of the world’s trade is carried by sea.
By far, it is also the most cost-effective way to move goods and raw materials, across the globe.
The most dire consequences of the change in rules were predicted by Phillip K. Verleger, in his July 1, 2018 article ‘$200 Crude, the Economic Crisis of 2020, and Policies to Prevent Catastrophe,’ underlining the global economy was faced with an economic crash of horrible proportions in 2020, for want of low-sulphur diesel fuel.
In order to examine the implications of the new rules, the US Senate held an Oversight Hearing on Dec 10. “There is still some disagreement over what those exact impacts will be,” said Sen. Lisa Murkowski, the chairman of the US Senate Committee on Energy and Natural Resources.
“But I’m glad to see a consensus — or at least something resembling a consensus – among many analysts that the impacts of IMO 2020 will be less than what was projected just a year ago.
Derrick Morgan, senior vice president at American Fuel and Petrochemical Manufacturers testified, that “it is becoming increasingly clear that refining and shipping industries are prepared for IMO 2020. Major bunker fuel refiners and suppliers have been testing fuels for much of the year, and very-low-sulfur fuel oil (VLSFO) is already being supplied at major ports around the world.”
He also said the International Energy Agency has reported that “ports, shipowners and refiners have stepped up preparations, and major bunkering hubs such as Fujairah, Rotterdam, and Singapore are said to have large volumes of compliant fuel available.”
Linda Capuano, the head of the US Energy Information Agency testified, “We anticipate that the IMO 2020 regulations will put upward pressure of about $2 per barrel on light, sweet crude oil prices in 2020, which will moderate in the following years.”
The markets are calm. There is no panic, as was anticipated about a year ago. Major oil companies and shipowners have spent billions of dollars preparing for the changes. Matthew Smith, director of commodity research at ClipperData, told CNBC that he believed there is going to be “very strong compliance” with the new rules — at a rate of around 90pc.
In order to meet targets, buyers appear preferring crude with higher yields of IMO-compliant fuel. Abu Dhabi’s highly sought after crude, ‘Murban’ appears falling out of favour, as the world’s top refiners seek out types of crude that produces more low-sulfur, high-viscosity marine fuels.
Demand is rising for grades such as Russia’s ESPO, trading this month at a premium of $8 to $8.40 a barrel over its benchmark price.
How the rules would be implemented is yet to be sorted out. The protocol is still to be established. One candid example is the UAE, with Fujairah port acting as a hub for regional shipping. Reports are now saying that though, the UAE has ratified the IMO 2020 rules, it may not rush to punish non-compliant ships when new rules will be effective from Jan 1.
Some others also need to play catch up. Almost 100 haven’t signed up the IMO agreement yet. These include Argentina, Colombia, Ecuador, Israel, Iraq, Mexico, Pakistan, and Egypt.
The Suez Canal, a trade artery between Europe and Asia passes through Egypt. How these countries would police the non-compliant vessels using their waters are still to be ascertained.
However, as per IMO, those countries that have ratified the bill, represent 97pc of the global fleet. This means, the laggards, including Pakistan, will need to join the club, sooner rather than later.