Refineries may struggle to produce enough fuel oil compliant with the 0.5% sulphur cap the International Maritime Organization will enforce from 1 January 2020.


Some studies have suggested refining capacity could be inadequate in 2020, with an estimated 60–70% additional sulphur plant capacity required by then. They also expect at least half of compliant-fuel demand to be met by marine gas oil, rather than consultancy CE Delft’s assumption of fuel blends.


Citing a study from EnSys Energy and Navigistics Consulting, Italian shipbroker Banchero Costa noted that worldwide refinery capacity is expected to grow from 97.7 million barrels per day (bpd) to 101.7 million bpd.


Refinery projects for 2016–19 are expected to add 5.6 million bpd of new distillation capacity, although potential refinery closures could take 2 million bpd out of the market.


With the sulphur cap in place by 2020, complex refineries able to produce compliant fuels may find themselves in a better position with improved margins. But simple refineries producing a larger portion of HSFO face hefty costs to adapt to the demand change.


To comply with the sulphur cap, shipowners can install approved scrubbers to continue using fuel types that exceed the 0.5% sulphur limit, or otherwise either use compliant fuels such as MGO or retrofit the vessel to handle alternative fuels such as LNG. However, each option presents its own challenges and costs.


Installing scrubbers on existing ships requires setting aside space, which may eat into cargo space and affect the stability of the vessel.


Smaller vessels may also have inadequate power-generation capacity to support scrubbers. Retrofitting vessels with smaller engines may not be cost-effective. A study by CE Delft, assuming a price difference of USD129/tonne between conventional fuels and low-sulphur fuels, found that for engines up to about 5 MW, retrofitted scrubbers are rarely cost-effective.


Cost-effectiveness improves for engines between 5 and 20 MW, while for most ships with over 20 MW of engine power, scrubbers are a cost-effective option to comply with the sulphur limit.


“For shipowners to arrive at a decision on how to address the new sulphur cap regulation, various factors may need to be considered, such as the operating life of their vessel, trading areas, and their view on the spread between HSFO and compliant-fuel options. There is also the issue of split incentives between the shipowner and charterer, which may discourage shipowners from making the necessary investment to comply with the sulphur cap,” said Banchero Costa.


“The shipping industry appears likely to take a wait-and-see attitude for now, with both the IEA and CE Delft expecting scrubber installations to pick up closer to 2020, when market signals relating to spread between compliant and non-compliant fuel options are clearer. Questions also remain as to whether the sulphur cap will be enforced effectively, as legal frameworks and detection methods remain inadequate, and fines and sanctions are currently up to individual parties to MARPOL to enforce.”