After years of debate and a period when “IMO 2020” fuel-spec mandates dominated headlines, very low sulfur fuel oil has become a fact of life for the global bunker industry.
But the route to a commoditized VLSFO as an internationally accepted bunker grade may be a winding path that takes another two to three years to culminate, said Henrik Zederkof, chairman of the International Bunker Industry Association (IBIA).
Prior to the start of 2020, seagoing vessels had been burning fuel on the high seas with 35,000 parts per million sulfur levels.
Now, the pollution level has been brought down to 5,000 ppm, as mandated by the International Maritime Organization. Ships can only burn the 35,000 ppm if they have installed scrubbers on board to remove the pollution.
Get more IMO 2020 background here.
The revolution in shipping fuel was billed as the biggest event to shake up the global oil industry for decades – before the coronavirus pandemic struck. Since then, lockdowns across the world – crashing oil prices and world trade – have diverted attention away from IMO 2020 fuel-spec concerns.
Specification of VLSFO Still to Be Defined
Yet, there are still many grey areas to be resolved, such as policing the new rules.
And, important for hedging, specification of the new 5,000 ppm sulfur bunker fuel needs to be defined.
To date, the only required specification is the sulfur level, leaving huge disparities between the various grades of bunker fuel from distillates down to heavy fuel oils.
But this obfuscation was necessary at the outset because the bunkering world was not ready for the switch, explains Zederkof, who is also a Senior Director at Bunker Holding Group, one of the world’s largest bunker companies.
"When IMO 2020 was introduced, we knew only one parameter had to be changed in order to meet the challenge, that being the sulfur limit. And that means that there are so many roads to get to Rome,” he said in a recent interview.
“If we had put a lot of other limitations [from the start] we might have ended up with less available products that could have meet the sulfur limit, and by that a worse supply/demand balance.
“Now we are on the other side, we have used the product for six/seven months, because we started the transition way before 1st of January. So yes, one of the next steps in IMO is to put it down to the International Organization for Standardization (ISO) [to come up with either one or a range of specifications] that caters for the new products.”
The range of available bunker products has already started to narrow down since the start of the year, Zederkof said, based on is experience at Bunker Holding’s trading floor.
But, we might need to wait until 2023 before we see an updated specification from the ISO, as the coronavirus will delay things, he added.
Without a standard specification, the swaps market in VLSFO has struggled to burst to life. Many suppliers and buyers are now selling the various grades of 5,000 ppm sulfur fuel as a differential to other – easily hedged – products or futures.
In Europe, the market often sells VLSFO as a discount to low sulfur gasoil futures on the ICE exchange; in Singapore there is a move to price as a differential to 10ppm gasoil and in the United States to sell as a differential to Brent futures.
But the flat-price “one size fits all” VLSFO specification and swap remains elusive.
“If you are a purchaser and you go around the world, it is challenging,” Zerdekof explained.
“And you need individual guidelines for your business. Before, we used to work on plus/minus 10 indexes [to hedge], and now it is perhaps 40-50.”
Global Bunker Fuels Industry Looks to the Future
There are more challenges ahead for the global bunker industry that has an ambition of cutting carbon emissions by half by the middle of the century.
Zederkof has a three-point plan for the IBIA to bring the voice of the bunkering industry into a broader environmental discussion by getting the wider shipping community together.
First, the IBIA is looking to introduce five regional boards — in Europe, the Americas, Asia, the Middle East and Africa.
More challenging could prove to be his second task: to bring more transparency to bunkering operations across the world.
The plan is to mimic practices followed at the world’s largest bunkering hub of Singapore. IBIA is aiming for bunker licensing and the compulsory use of flow meters. Currently, the organization is working with the largest ports in Northwestern Europe, the Amsterdam-Rotterdam-Antwerp hub. Some goals might be met by January 2022, Zederkof said.
“If we can achieve a bunker license scheme in the 8-10 large areas [globally] in the next half-decade, that would be a success.”
Bringing a uniform legal framework to achieve the former would be the key obstacle.
“If you have rules like that but you cannot enforce them, then they are worthless,” he said.
IBIA, which is a voluntary membership organization, does not have executive powers, but can work with other industry associations.
Thirdly, Zederkof said the bunkering industry must collaborate with others to find future fuel solutions.
“Right now, all the [future fuel] opportunities are there on the table and you cannot say which ones are correct, Zederkof said. “Also, I think we will see more opportunities arise in the future. We are still talking a 30-year gap to go from where we are from today [to 2050 zero emission target].” He named widely talked candidates like ammonia, hydrogen, Liquified Natural Gas (LNG), wind or battery-operated ships.
By Paulina Lichwa-Garcia and Paddy Gourlay
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