Global Sulphur Cap - Preparing for 2020

The implementation of the global 0.5% sulphur in fuel cap will have profound implications for the economics of shipping 

In October 2016, the IMO Marine Environment Protection Committee (MEPC) made a critical decision that will have profound implications for the economics of shipping. 

As expected by ICS, IMO confirmed that it will implement the global cap on the sulphur content of marine fuel on 1 January 2020 setting aside an option to postpone until 2025. This is the requirement under Annex VI of the MARPOL Convention, adopted in 2008, for all ships trading outside sulphur Emission Control Areas (ECAs) to use fuel with a sulphur content not exceeding 0.5%. 

This decision is highly significant because the cost of compliant low sulphur fuel is currently about 50% more than the cost of residual fuel, and in response to the greatly increased demand that will now arise in 2020 this differential may increase considerably. Residual fuel is that most commonly used by ships today when operating outside of the ECAs which apply in North America and North West Europe (in which fuel with a sulphur content of 0.1% or less must be used). 

Even if fuel costs stay at the current lower levels which have applied since the significant fall in oil prices in 2015, this mandatory switch to low sulphur fuel in 2020 could mean that bunker costs will return to their 2014 peak. But if by 2020, oil prices increase to something approaching US$70 a barrel – still well short of the 2014 peak – it has been estimated that the differential between compliant low sulphur and residual fuels could spike by as much as US$400 a tonne. (The International Energy Agency now predicts a crude price of about US$80 in 2020, assuming there is no oil price shock due to unforeseeable political events.) 

Under the terms of the MARPOL Convention, IMO was obliged to conduct a study into the availability of compliant low sulphur fuel in order to allow Member States to decide whether the global cap should indeed be implemented in 2020. This fuel availability study was presented to the MEPC in advance of its meeting in October 2016 (with ICS having been represented on the steering committee for the IMO study). 

ICS was careful to avoid expressing a view on whether or not implementation should be postponed, although in a submission to IMO (made with Intertanko) ICS did request the MEPC not to delay making a decision, so that both the shipping and oil refining industries would have as long as possible to prepare for this major change. 

While the IMO study concluded that sufficient quantities of compliant fuel will probably be available in 2020, in reality the decision taken by IMO was largely a political one. The cap will apply in the middle of the ocean, where very few people live, but it was nevertheless adopted by IMO Member States in order to reduce risks to human health and to improve the marine environment (sulphur being considered generally as a cause of ocean acidification). Although the supply of compliant fuel was projected by the IMO study to be tight – with some sections of the oil industry, amongst others, questioning the conclusion that adequate supplies of fuel will be available – IMO Member States nevertheless decided that it would be politically unacceptable to postpone implementation. 

Now that the 2020 date has been decided, ship operators and oil refiners need to prepare for implementation. The oil refining industry in particular will need to take important decisions to ensure that sufficient quantities of compliant fuel will indeed be produced. But governments need to monitor this carefully, since it may be in the refiners’ commercial interest to keep the supply of compliant fuel as tight as possible. It is important to remember that the IMO decision focused completely on the likely availability of compliant fuel and took no account of the possible purchase price. 

It is anticipated that due to the massive scale and global nature of the switch, oil refiners may be very hard pressed to supply sufficient quantities of 0.5% sulphur fuel, produced specifically for marine use, to satisfy demand in all regions from day one (i.e. 1 January 2020). 

In some locations, it is possible that other more expensive fuels, such as 0.1% sulphur distillate, will more likely be available, and that refiners and bunker suppliers may focus on meeting increased demand for existing low sulphur products in the knowledge that shipping companies will have no choice but to pay for them regardless of the price. This is therefore what many ships may have to use in order to comply. But even if significant quantities of 0.5% sulphur fuel are widely available in 2020, it is possible that the price may not be substantially cheaper than 0.1% fuel due to the major investment required to produce it. 

As a consequence of these supply issues shipowners could take an alternative route deciding to invest in other compliance mechanisms (which are permitted by MARPOL) such as exhaust gas cleaning systems (‘scrubbers’) or the use of low sulphur fuels such as LNG. The decision to implement the 0.5% sulphur cap in 2020 may also affect decisions on whether or not older and less fuel efficient ships will be sent for early recycling. 

As the implementation date for the global cap approaches, it will be vital for IMO Member States to start addressing issues associated with compliance, in order to ensure fair competition and the maintenance of a level playing field. 

Immediately after the MEPC decision in 2016, BIMCO, ICS and other shipping associations submitted a joint paper to IMO highlighting those fuel availability and implementation issues that will need to be resolved before 2020. The industry paper was well received by governments at an IMO Sub-Committee meeting in January, and work will continue on these critical issues at the MEPC meeting in July 2017 with a view to being completed by 2019. 

Following the implementation of the 0.1% sulphur requirements within ECAs in 2015, there was little evidence of deliberate non-compliance, and the few non-conformities identified were due largely to technical problems during the fuel switchover. However, implementation of the global cap – including ensuring uniform compliance in trades away from the major shipping lanes – are likely to prove far more complicated, especially if compliant fuels are in short supply and there is a significant price spike in 2020. 

2020 Global Sulphur Cap 

Implementation issues being addressed by IMO at the request of the shipping industry 

  1. Preparatory and transitional issues that may arise with the shift from the 3.5% sulphur limit to the new 0.5% limit 
  2. Impact on fuel and machinery systems resulting from the use of fuel oils with a 0.5% sulphur limit 
  3. Verification issues and control mechanisms and actions that are necessary to ensure compliance and consistent implementation 
  4. Development of a standard format (a standardised system) for reporting fuel oil non-availability that may be used to provide evidence if a ship is unable to obtain complaint fuel oil 
  5. Development of guidance to assist Member States and stakeholders in assessing the sulphur content of fuel oil delivered for use on board ship, based on the means available for verification that fuels supplied to ships meet the specified sulphur limit as stated on the bunker delivery note 
  6. Requesting ISO to consider the framework of ISO 8217 to maintain consistency between the relevant ISO standards on marine fuels and the implementation of the sulphur cap 
  7. Any consequential regulatory amendments and/or guidelines necessary to address emerging issues

  • International Chamber of Shipping
  • 38 St Mary Axe, London
  • EC3A 8BH