environmental regulations and future fleet development• marine bunkers 0.5% closes in on marine...

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

Environmental regulations

and future fleet developmentIMSF / April 2018

Dalibor Gogic

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

What do we now so far?

2


“For anyone out there thinking this is not going to happen [in 2020], please put that idea to bed - it will enter into force.”

– Jeff Lantz, Director, Commercial Regulations & Standards, USCG, speaking at CMA 13 March 2018

3

No delay in 1 January 2020 enforcement date

HFO carriage ban


The shipping industry has four main options, and likelihood is that a combination will be

implemented

• Installation of Exhaust Gas Cleaning Systems (EGCS or

‘scrubbers’) to remove sulphur oxides from the exhaust on

board.

• Switching away from high sulphur fuel oil grades to low-

sulphur fuels, based on gasoil, low sulphur residuals, or

hybrids.

• Switch to alternative fuel sources, notably liquefied

natural gas, which requires vessel modifications.

• Non-compliance, either sanctioned due to acknowledged

supply-side difficulties (transitional, category-based

exemptions, local non-availability etc.), or grey area non-

compliance (i.e. malicious intent).

Environmental regulations and future fleet development

4

Install scrubbers

1Switch to LNG

(or other alternative fuel)

2

Switch to compliant fuel

3

Non-compliance

4

IMSF / April 2018


IHS Markit currently identifies 419 vessels with scrubbers installed or on order; LNG

adoption as a compliance solution is limited with ~ 267 vessels currently identified with

LNG capability

• A minority of vessels fits scrubbers on new vessels today

(only 1.5% of the 2017 order book).

• Number of orders for new container vessels did choose to fit scrubbers. This

could be a precursor for future appetite from the container sector.

• Concerns remain on the carrying of caustic in the case of closed loop scrubbers

and water effluent quality in the case of open loop

• Cruise ships and RoRo/Car carriers are the 2 main categories of ships which are

installing scrubbers

• This is mainly being driven by operation in ECAs but also from “green”

credentials in the case of the cruise ships

• As with scrubbers, the LNG fuelled vessels are mainly operating in ECAs

• Majority of the types of vessels are offshore ships (i.e. FPSO/FLNG) and ferries

• These are vessels that traditionally traveling short distances rather than

intercontinental, but more longer-haul services are slowly becoming available

• CMA CGM’s annoucement on LNG-fueled mega-containers may be an important

milestone that LNG could be viable for vessels operating globally in the near future

• It as yet to be seen, but they claim that they operated along the Asia-Europe

service with a single LNG fill. The ships will be in operations in late 2019

IMSF / April 2018

5

26 %

24 %

18 %

5 %

12 %

6 %

4 %5 %

Offshore

Ferry

Tanker

LPG

Containership

Cruise

Ro-ro/car carriers

Dry cargo

LNG fueled vessels - ship type breakdown

Source: IHS Markit © 2018 IHS Markit



The bunker fuel sector may be small, but has the potential to have significant impact on

global crude oil and refined products markets

Other12 %

Gasoline30 %

Diesel (ex-bunker)

32 %

Jet/Kero9%

Naphtha8 %

Fuel oil(ex-bunker)

5%

Marine Diesel1 %

Cutter stock1%

Residue2%

Bunker4%

Global Refined Product Demand: 2016


• Residual bunker fuel represents a small share of global demand

for refined products, total consumption is ~200 million tonnes (~4

million b/d)

• The marine industry is the most significant demand center for

high sulphur residue

• High sulphur residue is the most difficult stream to

process/upgrade in refineries, due to complex molecules, high

carbon content and high levels of contaminants such as nitrogen,

nickel, and vanadium.

• Therefore we expect the challenge of a strong reduction in

bunker fuel sulphur content to be twofold for the refining industry

1. Producing sufficient quantities of 0.50%S bunker fuels, regardless of their

composition (gasoil, residual, hybrid)

2. Finding ways to dispose of the high sulphur residue excess that previously found

a home in bunker fuel within the refining system or in new markets

IMSF / April 2018

6



What do we expect to see

7


Post 2020 IMO sulphur switch presumptions and key differentials; Switch to Marine Gasoil

and large differential between LSFO and HSFO

26%

53%11%

27%60%

15%

1% 1%

2%3%

0%

20%

40%

60%

80%

100%

120%

Current 2020

Gas/Diesel oil HSFO 0.5-2%S LSFO 0.5%S HSFO >2%S ULSFO 0.1%S LNG

Global Bunker balances post IMO specifications


IHS Price Forecast Comparison 2017 US dollars

2019 2020

Dated Brent FOB $/bbl 57.31 62.50

Dated Brent FOB $/T 433.09 472.31

Gasoil 0.1% CIF NWE $/T 539.7 627.2

Marine Gasoil 0.1% CIF NWE $/T 516.5 600.3

Marine Bunkers 0.5% CIF NWE $/T 408.7 544.3

Marine Bunkers 3.5% (MFO 380) CIF NWE $/T 268.6 175.1

Differentials

Marine Gasoil 0.1% minus Marine Bunkers 3.5% $/T 247.9 425.1

Marine Bunkers 0.5% minus Marine Bunkers 3.5% $/T 140.1 369.2

Marine Bunkers 0.1% minus Marine Bunkers 0.5% $/T 107.8 56

Source: IHS Markit

© 2018 IHS

Markit

IMSF / April 2018

8

• Crude, Gasoil and 0.5% bunkers price all rise; 3.5 % sulfur Marine Bunkers Price falls

substantially

• Marine Bunkers 0.5% closes in on Marine Gasoil price owing to high production cost

• Produced by blending large quantity of “gasoil” material with higher sulfur residues

• Or from ultra-low sulfur residues that have high alternative value in refineries as upgrader

feedstock

• As expected, the new sulfur compliance will have a strong shift towards gasoil/diesel

quality components (26% to 53%) while reducing the call for residue-based components.

• IHS Markit has compared the total fuel oil (FO) bunker demand, which include gasoil

bunker (MGO), today versus year 2020 (IMO compliance year)

• 0.10 % S bunkers are largely gasoil-based, while fuel oil bunkers (1.0 % S or 3.5 % S)

are majority residue-based with some gasoil cutter-stock blending to meet the finished

bunker fuel specifications



Some rough calculations based on some rough presumptions – Larger the vessel faster

ROI is expected giving a hint to possible scrubber adoption

ROI for scrubbers based on following presumptions

Vessel type Vessel size Consumption

Tonns/day

Yearly LSFO/HSFO

differential in million

USD at (250$/T)

Yearly LSFO/HSFO

differential in million

USD at (369$/T)

Scrubber cost

installation million

USD

Estimated ROI

differential 250$/T

Years

Estimated ROI

differential 369$/T

Years

Bulkers Large Handy 25 1.9 2.7 5-10 3.0-7.0 2.3-4.5

Supra 33 2.5 3.6 5-10 2.5-5.0 1.6-3.2

Panamax 35 2.6 3.8 5-10 2.4-4.7 1.6-3.1

Capesize 60 4.5 6.6 10-12 2.5-3.0 1.3-2.5

Tankers MR 37 2.6 3.8 5-10 2.4-4.8 1.5-3.0

Panamax 40 3 4.4 5-10 2.0-4.0 1.3-2.6

Aframax 50 3.8 5.5 7.5-10 2.3-3.0 1.5-2.0

Suezmax 65 4.9 7.1 10-12 2.3-2.7 1.5-1.8

VLCC 80 6 8.8 10-12 1.8-2.2 1.2-1.5

Container 3,000 teu 75 5.6 8.3 5-10 1.0-2.0 0.6-1.3

5,400 teu 96 7.2 10.6 10-12 1.5-1.8 1.0-1.2

10,000 teu 170 12.8 18.8 10-12 0.8-1.0 0.5-0.7

15,000 teu 218 16.4 24.1 10-12 0.6-0.8 0.4-0.5

Notes: Yearly steaming at 300 days per year; Consumption numbers presumed at full operating speed/slow steaming not taken into account; Yearly scrubbers operating cost presumed at 0.5 million USD; cost of immobilization/time of charter not taken into

account


IMSF / April 2018

9



What is potential for fleet removals?

10


Fleets are expected to have some potential for removals facing combination of SOx and BWT

regulations – Big chunk of merchant fleet estimated due for Special Surveys adding to cost

6,9%10,6%

17,5% 14,5%

3,6% 4,7% 5,4%5,8%

1,3% 1,4% 0,8%3,1%

0%

20%

40%

60%

80%

100%

120%

Bulk Carriers Container Ships(fully cellular)

Crude Oil Tankers Product Tankers

0-5 6-10 11-15 16-20 21-25 25+

Major fleet expected age profile 2020


ship type

IMSF / April 2018Environmental regulations and future fleet development

11

3,02%

5,21%

6,44%

6,92%

7,45%

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

7,00%

8,00%

0

500

1 000

1 500

2 000

2 500

2018 2019 2020 2021 2022

Product Tankers Crude Oil Tankers

Container Ships Bulk Carriers

% of currently active fleet capacity (GT)

Estimated fleet due for 3rd special survey and later

Notes: Calculated vessel age between 15 and 30 years of age take into account; Estimated

yearly fleet growth between 2-3%


Nu

mb

er

of

vessels


Dry bulk fleet - Fleet structure is expected to remain relatively young thanks to recent

demolition activity, still major capacity reduction expected to be coming from larger ships

1,9%

4,8%

5,5%

6,2%5,9%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

0

100

200

300

400

500

600

700

800

2018 2019 2020 2021 2022

100,000 dwt> 65,000-99,999 dwt

40,000-64,999 dwt 10,000-39,999 dwt

% of currently active fleet capacity (dwt)


No

of

sh

ips

Estimated Dry bulk fleet due for 3rd special survey and later

IMSF / April 2018

12

2,8%

1,3%1,5%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

0

5 000 000

10 000 000

15 000 000

20 000 000

25 000 000

15 20 25+

100,000 dwt 65,000-99,999 dwt 40,000-64,999 dwt 10,000-39,999 dwt % of projected active fleet

Estimated Dry bulk ships special surveys in 2020 based on currently active fleet capacity


dw

t

0% 20% 40% 60% 80% 100%

100,000 dwt >

65,000-99,999 dwt

40,000-65,000 dwt

10,000-39,999 dwt

0-5 6-10 11-15 16-20 21-25 25+

Dry Bulk expected fleet age capacity profile - 2020


Sh

ip s

ize

17%

14%

14%

7.6%



Container fleet age structure is very young particularly among larger fleets; Fuel

inefficient mid and small sizes expected to be targeted mostly by demolition

IMSF / April 2018

13

4,1%

1,8%

0,8%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

4,0%

4,5%

0

100 000

200 000

300 000

400 000

500 000

600 000

700 000

800 000

900 000

1 000 000

15 20 25 +

10,000 teu > 5,400-10,000 3,000-5,400 teu 0-3,000 teu % of projected active fleet

Estimated Container ships special surveys in 2020 based on currently active fleet capacity


teu

s

0% 20% 40% 60% 80% 100%

10,000 teu>

5,400-10,000 teu

3,000-5,400 teu

0-3,000 teu

Total fleet

0-5 6-10 11-15 16-20 21-25 25+

Containerships expected fleet age capacity profile - 2020


Sh

ip s

ize

17%

38%

22%

21%


2,9%

4,1%

6,6%

8,8% 8,9%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

9,0%

10,0%

0

100

200

300

400

500

600

700

800

900

2018 2019 2020 2021 2022

10,000 teu > 5,400-10,000 3,000-5,400 teu 0-3,000 teu % of currently active fleet capacity (teu)

Estimated Container ships fleet due for 3rd special survey and later


No

of

sh

ips


Crude oil tankers fleets are expected to see significant capacity of ships 15 years and

older, which are potential candidates for removal; potential development of two tier market

IMSF / April 2018

14

4,8%

6,5%

7,8%

6,2%

8,2%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

9,0%

0

50

100

150

200

250

2018 2019 2020 2021 2022

Aframax/LR2 Suezmax VLCC % of currently active fleet capacity (dwt)

Estimated Crude oil tankers fleet due for 3rd special survey and later


No

of

sh

ips

4,3%

3,2%

0,2%0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

4,0%

4,5%

5,0%

0

5 000 000

10 000 000

15 000 000

20 000 000

25 000 000

15 20 25 +

Aframax Suezmax VLCC % of projected active fleet

Estimated Crude oil tankers special surveys 2020 based on currently active fleet capacity


dw

t

0% 20% 40% 60% 80% 100%

Aframax

Suezmax

VLCC

0-5 6-10 11-15 16-20 21-25 25+

Crude oil tankers expected fleet age capacity profile - 2020


Sh

ip s

ize

23%

24%

25%



Product tanker ages structure very similar to Crude oil Tankers structure, with demolition

candidates more likely coming from ships 20 years and older

IMSF / April 2018

15

4,4%

8,3% 8,5% 8,8%

10,5%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

0

100

200

300

400

500

600

2018 2019 2020 2021 2022

Handytankers MR Panamax/LR1 % of currently active fleet capacity (dwt)

Estimated Product tankers fleet due for 3rd special survey and later


No

of

sh

ips

5,7%

1,9%

0,8%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

0

2 000 000

4 000 000

6 000 000

8 000 000

10 000 000

12 000 000

15 20 25+

Handy MR Panamax % of projected active fleet

Estimated Product tankers special surveys in 2020 based on currently active fleet capacity


dw

t

0% 20% 40% 60% 80% 100%

Panamax/LR1

MR tankers

Handy tanker

0-5 6-10 11-15 16-20 21-25 25+


Sh

ip s

ize

Product tankers expected fleet age capacity profile - 2020

25%

24%

20%


Older inefficient fleets are expected to find themselves under pressure, although some

resilience may come from repaid CAPEX and finding market niches

• Switch to Marine Gasoil/LHSFO is expected post 2020 with HSFO and LSFO differential is expected to be

relatively high 250$ +, IHSMarkit estimates differential at 369$ for 2020.

• Excess residual fuel is expected to be redirected to energy markets competing with other energy sources

such as coal which is expected to negatively influence the price of HSFO.

• Based on our presumptions ROI on scrubbers varies, although it seems that it is faster for bigger fleets. If

judging by that, larger fleets are expected to have scrubber technology installed.

• Shipowners face hard decisions post 2020. Although scrubber installation and retrofit in case of high

differential can be repaid relatively quickly in case of big differential spread, shipowners face other costs of

compliance such as BWTS and maintenance cost. On top of that with IMO expecting to further curb CO2

shipping emissions, additional requirements can be expected.

• Although there is an argument for ultimate environmental cost/cost of burning LSFO/Marine Gasoil to be

passed to shippers, it seems that two markets are likely to develop. Older/less efficient tonnage is expected

to find itself under pressure.

• Older fleets (15+ years) are generally expected to be phased out in the first few years of implementation.

Fleets expected to find themselves under pressure are Medium and Small sized Container fleets, Large and

Medium sized Dry bulk fleets, Large Crude oil tankers.

IMSF / April 2018

16


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