ENGINE Market Intelligence & Clean Marine AS
29 May 2023
How to keep emissions and costs in check towards IMO 2025 and beyond
In 2015, emission control areas (ECAs) were established to restrict sulphur oxide (SOx) emissions to an equivalent of 0.10% sulphur content by mass in fuel within heavily trafficked waters located near populated centres (see Figure 1). SOx from fuel emissions has been identified as a significant contributor to environmental damage and increased risk to human health.
In 2020, new emissions regulations were implemented to reduce all SOx emissions outside the already designated ECAs from 3.50% to below 0.50% globally (see Figure 2 overleaf). Now, the International Maritime Organisation (IMO) is turning its attention to the Mediterranean Sea, where a long-discussed ECA (Med ECA) is set to be implemented from 1 May 2025.
It is likely that other ECAs will follow in the coming years. Clean Marine believes that as the shipping industry grapples with these new regulations, scrubber technology remains the only proven and commercially available solution to meet these requirements without increasing operational expenditure. The use of scrubbers has become increasingly popular among shipowners, as they allow vessels to continue using much cheaper high sulphur fuel oil (HSFO) while still meeting emissions requirements. This paper will attempt to clarify the impact of this new Med ECA and identify a way for shipowners to comply with it cost-effectively.
The 2025 Med ECA
In December of last year, the Barcelona Convention, a transnational organisation focused on the protection of the Mediterranean Sea, made a significant announcement on ECAs. The Mediterranean Sea is home to some of the busiest shipping routes in the world. According to the UN Environment Programme, the Mediterranean sees approximately 20% of the world’s tonnage pass through on an annual basis, and this sea will become an ECA from 1 May 2025. This development represents a crucial step towards reducing sulphur emissions and improving the air quality in the region. However, it will come at a substantial operational cost for companies carrying out shipping services, potentially making it difficult for them to continue profitable operations.
In order to comply with the new regulations, ships will have to switch from burning very low sulphur fuel oil (VLSFO) with 0.50% sulphur content mass/mass to marine gasoil (MGO) with 0.10% sulphur content. This will result in higher costs as MGO is more expensive than VLSFO on average.
MGO has a higher calorific value and substantially lower viscosity than VLSFO, and is made from the valuable distillate stream in oil refineries, whereas VLSFO is typically a blend of a greater share of lower cost oil components.
This disparity in prices is likely to widen further if shipowners switch on mass to MGO in the Mediterranean. This mirrors what was previously seen after the implementation of IMO 2020, which limited ships to burning fuel with a maximum of 0.50% sulphur globally, down from the original 3.50%. As the industry moved to predominantly bunker VLSFO, prices jumped and left wide spreads between sulphureous and cheap HSFO, and the sweeter and pricier VLSFO. A similar increase in price spreads between MGO and VLSFO is therefore expected in 2025.
Figure 4 shows the price volatility induced in bunker markets as a result of IMO 2020 immediately before the implementation, as well as the entrenched spread between compliant and non-compliant fuel translating to sustained cost increases for shipowners.
As seen in Figure 5 below, not only are the outright prices of different bunker grades highly volatile, but so is the spread between them. With price spreads between MGO and HSFO in the Mediterranean peaking at +$840/mt in the last 12 months, it is easy to see the potential of a new set of restrictions to completely change the operational costs of vessels operating in the area.
To get an idea of this potential impact we can run a counterfactual with historic spread data. If 2020 had also ushered in the implementation of the described 0.10% sulphur cap in the Mediterranean, with an average MGO-VLSFO spread of $180/mt between Q1 2020 – Q1 2023, an Eco Aframax tanker trading solely in the Mediterranean would have spent an extra $1.5 million/year on bunkers.
Looking forward, with a $225/mt MGO-VLSFO forward spread for 2025 – as seen in Figure 6 – it would cost a shipowner an extra $1.9 million/year operating an Eco Aframax.
Incorporating the information derived from the ICE forward curves displayed in Figure 6, this study has modelled the potential cost savings achievable by various vessel types operating in the Mediterranean throughout the year through the installation of scrubbers. By consuming HSFO instead of MGO, vessels ranging from 200-metre cruise ships to Aframax tankers are set to make substantial savings (as shown in Figure 7). In some instances, initial investments in scrubber technology can be recouped in under a year. These findings have been calculated by assessing the average annual bunker consumption for the specified vessels and then factoring in the average prices of HSFO and MGO for the second, third, and fourth quarters’ forward prices in 2025. Assumptions regarding idle time and vessel consumptions are available upon request.
MGO crunch for non-scrubber vessels?
While it is difficult to obtain exact data on the volumes of refinery outputs throughout the Mediterranean, we can observe existing refineries and differentiate between those with coking units and those without (as shown in Figure 8 below).
Refineries with coking units have the ability to “upgrade” heavy residues like vacuum residue to higher value products like diesel and gasoil. However, not that many European refineries have coking units and cannot perform this more complex processing. Their final yields are therefore likely to include substantial amounts of heavier intermediary refinery streams and finished products like HSFO in the foreseeable future. It is far from certain that there will be enough gasoil available in the Mediterranean to support a widespread shift from VLSFO to MGO. This is in addition to the impact of a current EU embargo on direct Russian crude and oil product imports, which has cut off direct diesel/gasoil supply. As many EU countries have historically been deeply dependent on these inflows the region is expected to become less resilient to supply shocks, with diesel/gasoil perhaps especially vulnerable.
Impact on multiple shipping sectors
The Mediterranean Sea is a crucial market for the global cruise industry, accounting for nearly 20% of the world’s cruise capacity. However, cruise ships are also known to be some of the biggest consumers of fuel, which can have a significant environmental impact. This makes them some of the best candidates for installing scrubbers before the Med ECA comes into effect. By installing scrubbers, cruise ships can continue to use cheaper HSFO and comply with regulations while maintaining operating margins and remaining competitive in a global market.
In 2019, the Mediterranean Sea witnessed over 20,000 container ships, transporting around 204 million mt of goods, accounting for approximately 25% of global container trade. The region also hosts one of the largest transshipment areas. A container ship coming from a major eastern export hub like China’s Ningbo might offload and reload containers in Spain’s Valencia, before sailing on to destinations like New York on the US East Coast. Given the Mediterranean’s strategic location between the east and west of the world, its importance is undeniable. Consequently, if spreads between HSFO, VLSFO and MGO continue to be wide, Clean Marine thinks it is highly likely that container shipowners will opt to install scrubbers in order to achieve significant fuel savings.
The Mediterranean Sea covers several key shipping lanes for tanker ships, serving as a major conduit for the transportation of crude oil and refined petroleum products between Europe, Africa and the Middle East. The region is strategically positioned, providing access to major global oil producers such as Saudi Arabia and Iran, as well as key refining centres in Europe. The Mediterranean Sea is also home to several major oil terminals and ports, including those in Greece, Italy, and Spain, making it a vital hub for the global oil and gas industry. As indicated in Figure 9 below, which draws on global AIS data, over 50% of traded vessels transited through the Mediterranean last year. While many of these vessels also trade in other regions, a closer examination of the data reveals that 453 tankers spent 180 or more of their trading days in the Mediterranean in 2022, while 372 tankers spent between 120 –179 days. It is notable that only a small fraction of these tankers have been fitted with scrubbers, which leaves them vulnerable to fuel cost increases from the new sulphur caps.
The Mediterranean Sea’s strategic location between major trading hubs in Europe, Asia and Africa has long made it a vital trade route, with over 30% of the global dry bulk fleet passing through annually, according to the Suez Canal Authority. Dry bulk shipping, which transports commodities such as coal, iron ore and grains, plays a crucial role in supporting economic growth for countries reliant on these resources. Two important Baltic traded routes intersect this area connecting Europe to Asia, emphasizing the Mediterranean’s central position in this global trade. The resulting impact on freight rates and subsequent commodity prices as a result of tightening sulphur restrictions should not be underestimated.
How can this impact be mitigated?
The shipping industry has already faced increased costs in fuel consumption in recent times, with fuel expenses representing around 30% of their overall operating costs, according to Marine Insights and Navig8 Research. Regulatory changes and associated cost pressures from IMO 2020 prompted companies to develop and implement new technological solutions to meet the changing landscape after the 2020 deadline. One widely adopted strategy was to install exhaust gas cleaning systems (EGCS), also known as scrubbers. These systems are connected to a vessels’ exhaust system and are used to scrub down SOx, particulates, and other harmful emissions. Scrubbers were initially intended to reduce SOx emissions from HSFO combustion from 3.50% to 0.50%. However, technological gains in the development, installation and modification of scrubber systems have enabled some manufacturers to reduce SOx emissions to under 0.10%. This means that vessels can burn HSFO while emitting the same amounts of SOx as they would if they were burning MGO. Clean Marine is one such company that stands out in the industry for achieving such high levels of sulphur scrubbing from HSFO. Founded in 2004, the company has installed more than 300 scrubber systems on ships, ranging from newbuilds to retrofits. Clean Marine is the result of a merger between two major players in the scrubber design and manufacturing market that joined forces in 2020 to address the effects of IMO 2020 on the shipping industry. With a market share of more than 20% for these systems, Clean Marine has achieved the landmark of scrubbing SOx down to 0.10% during real world sea trials. It says its open-loop scrubbers have been proven to function effectively and reliably, having been thoroughly tested and certified by all members of the International Association of Classification Societies (IACS). As may be required, these units are also Marine Equipment Directive (MED) certified.
The upcoming Med ECA will present a significant challenge for every shipping segment operating in the Mediterranean, from intra-Med tanker trade, to cruises, to cross-continental container shipping trade. Clean Marine believes that the new regulations on reduced SOx emissions poses a considerable financial liability for the shipping industry, as the cost of alternative low sulphur compliant fuel is higher than that of currently bunkered non-compliant fuel. The potential deficit of MGO in the ECA raises the risk of fuel tightness and large, volatile spreads between compliant and non-compliant fuel. This could add further financial strain for the shipping industry, as fuel costs are a significant portion of operating expenses. One solution to this problem is installing scrubbers on ships to remove SOx emissions from the exhaust gases they produce by burning cheap and readily available HSFO. By installing scrubbers, ships can continue to use cheaper HSFO while complying with the new regulations. This offers a cost-positive solution to the issue, allowing regulatory compliance while also providing financial gains. It is essential that the shipping industry explores all viable solutions well in advance of IMO 2025 to avoid a financial and operational cliff edge.
About Clean Marine
For over 20 years, Clean Marine Singapore Pte Ltd has established itself as a leading provider of marine technology, specializing in Exhaust Gas Cleaning Systems (scrubbers) for the maritime industry. Our track record boasts over 300 active scrubber units operating worldwide, attesting to our unwavering commitment to excellence. We offer comprehensive business solutions, encompassing product design, engineering, manufacturing, and worldwide after-sales services. Our regional support teams are equipped with unparalleled expertise in ongoing maintenance and after-sales assistance, guaranteeing the highest service standards for our valued clients. Headquartered in Singapore with manufacturing in Batam Indonesia, we leverage economies of scale and manufacturing know-how to provide short production lead times and competitive pricing. email@example.com
ENGINE is the leading marine fuels intelligence platform that provides shipowners and bunker buyers with access to the world’s largest database of bunker fuel information. ENGINE’s goal is to bring transparency to an inherently complex and opaque marine fuels market, by providing access to live pricing at hundreds of ports, supplier fuel quality information, plus a dynamic news feed of breaking stories and industry reports. Behind ENGINE is our team of journalists, researchers and analysts who are connected to hundreds of suppliers, trade bodies and governments globally, bringing our users the best quality content and market intelligence. firstname.lastname@example.org