Pending environmental regulations in the shipping industry will drive up diesel prices and ocean freight rates, says an analyst and a shipping industry official.
The United Nations’ International Maritime Organization is instituting a cap that will limit marine fuel sulfur emissions to 0.5 percent starting in 2020, down from 3.5 percent currently.
To meet the new standard, ship owners will either have to install expensive scrubbing equipment, use liquefied natural gas or switch from using heavy, thick bunker fuel to a form of diesel.
Tom Kloza, global head of energy analysis with the Oil Price Information Service, said it is a seismic change that is shaking up the oil sector.
“It is getting as much attention as Y2K got,” he said.
“The question is, is this a Y2K-like event on the horizon or is it more like an apocalyptic event on the horizon?”
Kloza expects the vast majority of ship owners will choose to switch to diesel rather than install scrubbers or use liquefied natural gas.
That has already led to higher diesel prices. Diesel is selling for $25 to $30 a barrel over the price of sweet crude, which is twice the usual spread, and many think the price will continue to rise.
“It’s possible there could be shortages of diesel and jet fuel or that the price will be spectacularly higher than it is now,” he said.
“It’s not going to be helpful for farmers, that’s for sure.”
However, he said that if the price gap between low sulfur diesel fuel and existing bunker fuel widens to something like $40 a barrel, ship owners will install scrubbers and use the cheaper fuel.
Diesel is one of the main input costs for prairie farmers. In Saskatchewan’s dark brown soil zone, a wheat grower spends $19.35 per acre on diesel while a canola grower spends $18.39, according to Saskatchewan Agriculture’s crop planning guide.
Michael Broad, president of the Shipping Federation of Canada, a trade association that represents all ocean-going ships that carry Canada’s imports and exports, said the new environmental regulation is going to be costly.
He said 3,800 of the 55,000 cargo vessels sailing the world’s oceans have indicated they will be installing scrubbers. The vast majority of the remainder will switch to diesel because of the storage and other problems involved in using liquefied natural gas.
Diesel fuel that is compliant with the new regulation costs $150 to $200 per tonne more than the high-sulfur bunker fuel that is currently in use.
“Who knows what the price is going to be when 2020 comes around,” said Broad.
He estimates three million barrels of heavy bunker fuel will be replaced with diesel every day around the world starting in 2020.
That is about 450,000 tonnes of more expensive fuel being used every day, and fuel accounts for about 60 percent of a ship’s operating expenses.
At a difference of $150 per tonne, that’s about $25 billion in additional annual costs for the shipping sector. However, some believe the spread will rise to $450 by 2020, resulting in $75 billion in extra expenses.
“The ship has to get the money from somewhere, and it’s going to have to be the cargo that pays for the additional cost,” said Broad.
He is not sure how much freight rates will rise because they are influenced by a wide variety of factors. Right now they are low because there are too many ships on the seas, but that could change by 2020.
New ballast water management regulations are going to cost ship owners another $70 billion per year, so that’s another reason freight rates could be climbing in the near future.
Goldman Sachs, in an equity research report released in May, said shipping bunker fuel accounts for seven percent of global transport oil demand but 90 percent of transport sulfur dioxide emissions.
Kloza said one large container ship emits as much sulfur in a year as one million cars.
Even after the new regulations come into effect, the bunker fuel will contain 5,000 parts per million of sulfur compared with on-road diesel at 15 parts per million.
However, Broad said ships are more environmentally friendly than trucks when measured on a per ton mile basis because it would take about 2,000 trucks to haul the cargo that a ship transports.