Low-sulfur fuel still pricey, but supply challenges may ease by 2015

Jan 24, 2014 10:19 AM

When California decided in 2008 to require that all oceangoing vessels operating within 24 nm of the state’s coastline use low-sulfur fuel, the state’s Air Resources Board called it the most “stringent and comprehensive requirement for marine fuel use in the world.”

Not surprisingly, the rule has created some challenges for ship operators because not enough of the fuel is available to meet demand at some of the locations where it’s needed in California, according to London-based consultant Robin Meech. That situation is expected to continue through 2014, but end in 2015 when fuel with the 0.1 percent sulfur requirement will be needed in Emission Control Areas (ECAs) in North America, which extend 200 miles from the U.S. and Canadian coasts, and around the world.
“There is always a problem when you are trying to find a difficult fuel,” Meech said.

The challenges created by the regulations are minor, at least so far, in terms of pricing and supply. As John Kingston, director of news at fuel price intelligence provider Platts noted: “So if the ECA changes are going to cause turmoil, it isn’t happening yet.”

Low-sulfur fuel reduces emissions of harmful pollutants such as small bits of soot known as particulate matter, which among other things can aggravate asthma. It reduces carbon dioxide and nitrogen oxide, which are greenhouse gases linked to global warming. The World Shipping Council (WSC) estimates that the worldwide industry is responsible for about 2.7 percent of the world’s CO2 emissions.

The rule creates additional work for crews when they switch the ship’s engines to run on low-sulfur fuel and back again, a process that can take several hours. “It’s not as simple as flipping a switch or turning a valve,” said Capt. J. Kipling “Kip” Louttit, executive director of the Marine Exchange of Southern California.

A 2012 study by the UK Protection & Indemnity Club found low-sulfur fuel was likely creating an increase in engine failures and electrical blackouts.

The estimated cost increase per ship visit to California is $30,000, the Air Resources Board said. That would boost the cost of a trans-Pacific voyage by 1 percent, or $6 per container. Operators can opt to pay a non-compliance fee of $45,000 per vessel.

Environmental Protection Agency data cited last year by the WSC in testimony before the U.S. Congress estimated the cost of complying with the ECAs at $3 billion annually starting in 2020 and that most of those costs would be associated with using low-sulfur fuels. The WSC at the time wasn’t sure if increased fuel prices would add to compliance costs. Ship lines spend roughly $50 billion on fuel annually.

In California, at least three ship operators have been fined for failing to switch to low-sulfur fuel, the Air Resources Board said in a statement. In one case, a car carrier made 17 visits to California waters without switching, resulting in a $299,500 fine. A bulk carrier calling at Los Angeles was fined $53,000 for a single violation. Another bulk carrier failed to switch while en route to Stockton and Long Beach and was hit with a $87,750 fine.

The state of Alaska filed suit last year arguing that the rule would “jack up fuel prices” and harm the state’s cruise industry.

“To our knowledge, fuel has been generally available, but in some ports within the North American ECA it is only available at very substantial premiums in comparison to similar fuels used in other locations,” said David Peikin, a spokesman for the Cruise Lines International Association.
 

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