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SHIPS AND ECAS: WHAT DO SCRUBBERS HAVE TO OFFER?

SHIPS AND ECAS: WHAT DO SCRUBBERS HAVE TO OFFER?. Lawrence Axelrod Axelrod Energy Projects LLC 2013 Energy Conference October 27-29, 2013 Miami Beach. Introduction. 1. The ECA Problem 2. A Scrubber Solution? 3. Scrubber Realties. The ECA Problem.

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SHIPS AND ECAS: WHAT DO SCRUBBERS HAVE TO OFFER?

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  1. SHIPS AND ECAS:WHAT DO SCRUBBERS HAVE TO OFFER? Lawrence Axelrod Axelrod Energy Projects LLC 2013 Energy Conference October 27-29, 2013 Miami Beach

  2. Introduction 1. The ECA Problem 2. A Scrubber Solution? 3. Scrubber Realties

  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).

  4. 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)

  5. 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)

  6. 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

  7. 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 )

  8. The ECA Problem

  9. 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

  10. 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

  11. 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

  12. A Scrubber Solution? • Scrubber Technology: • Open loop uses seawater to remove sulfur from exhaust gas. Filtered/treated wastewater from the ship is discharged into the sea. • Closed loop uses seawater to remove pollutants from exhaust gas. Ships store accumulated waste. Disposed at port. • Hybridsystem combines the two systems, allowing a vessel to operate in either closed or open loop mode.

  13. 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

  14. 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

  15. Scrubber Realities • Projected payback on scrubber purchase will vary with underlying assumptions: • Under 10% of operations in ECAs: 6-9years • 45-50% of operations in ECAs:4-6 years • 100% of operations in ECA: 2-3 years.

  16. Scrubber Realities Scrubber Examples: Non-Cruise Companies

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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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