faq - cap 2020
TRANSCRIPT
May 2019 1
Energy Transition Ambition
FAQ - CAP 2020
May 2019 3
In 2008, the IMO (International Maritime Organization) set a maximum sulfur content of0.5% for marine fuels from 1 January 2020 throughout the world (except in specific ECAzones: 0.1%).
For reference, this global limit had already been reduced from 4.5% to 3.5% on 1 January2012.
1. Global Sulphur Cap 2020, what is it?
FAQ - CAP 2020
Yes. With an annual consumption of approximately 170 million tonnes of high-Sulphur fueloil, the shipping industry is currently emitting around 8 million tonnes of Sulphur oxides(SOx) per year into the atmosphere. The new emission limit set at 0.5% by the IMO willpermit a reduction of over 80% of these emissions.
The benefit to the environment and public health, particularly for populations living nearports and coasts, will be considerable.
2. Will this 2020 regulation on Sulphur content in marine fuels have an environmental impact?
Source : IMO* International Convention for the Prevention of Pollution from Ships
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On 1 January 2015, the IMO had already set a limit of 0.1% Sulphur content in marine fuelsconsumed in the areas specified in Annex VI of the MARPOL Convention.
These areas today are the North Sea and the Baltic Sea, and the coastal areas around theUnited States (including Puerto Rico and the Hawaiian Islands) and Canada.
3. What happens in the ECAs (Emission Control Areas)?
Yes. With regard to Sulphur oxide (SOx) emissions, new 0.1% ECAs are expected to beadopted between 2020 and 2025 (China, Caribbean, Mediterranean Sea?). Moreover, theissue of a new phase in global threshold reduction from 0.5% to 0.1% will arise (towards2030?).
The NOx Tier III (- 75% nitrogen oxide emissions) regulation currently applies in NorthAmerica to vessels built after 01/01/2016. It will be followed by Northern Europe in 2021for vessels built from 01/01/2021. It is reasonable to envisage that other areas will developaround 2025-2030.
“Climate Plan”: On 13 April 2018 the IMO adopted a roadmap on CO2 emissions, requestinga reduction in these emissions of at least 50% in absolute value between now and 2050(compared to 2008 levels). This plan also predicts a reduction in CO2 emissions per“transport unit” (per TEU and per kilometer travelled) of at least 40% by 2030, with thiseffort continuing up to 70% between now and 2050.
4. Are there predications for changes to the environmental regulation after 2020?
These areas remain unchanged to date, and the 2020 regulation does not change theirlimit.
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Yes. This regulation applies to all navigation zones, except for the ECAs referred to in AnnexVI of the MARPOL Convention, in which the sulphur content limit in consumable marinefuels is set at 0.1%.
5. Is this new regulation applicable throughout the world?
Yes. Vessels will have to modify her IAPP (International Air Pollution Prevention) certificate from the administration of the country of registration (flag state). This certificate contains a section stating that the vessel uses a fuel whose sulphur content does not exceed the applicable limit, or that it is equipped with an EGCS with approved operation.The port authorities, and also the administrations of the different countries, may at any time:
• Check the validity of these certificates;• Check the delivery note for the fuels that are on board the vessels (which must
state the sulphur content); samples may be taken and analysed for verification;• Use aerial surveillance methods (aircraft or drones) to identify potential
violations.
6. Will there be checks once the regulation comes into force?
No. Except in case of emergency situations involving the safety at sea, the vessel may be notcompliant in order to preserve life and vessel.
7. Are exemptions possible?
Yes. The IMO does not have authority with regard to penalties or fines and so has not itself established a suppression framework, but has delegated this responsibility to the port authorities, governments and countries of registration of the vessels.Non-compliance with the regulation, once ascertained, will lead to legal processes and criminal proceedings against the captain and the company operating the incriminated vessel.
8. Are there penalties if the regulation is not observed?
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9. Does this new regulation apply to all shipping companies?
Yes. The whole of the shipping industry is affected by this regulation on sulphur content in marine fuels: passenger transport, cruises, transport of goods in bulk or in containers, etc.
10. Is there a significant financial impact for shipping companies? For CMA CGM?
Yes. Whatever the chosen compliance solution, the financial impact will be considerable.• Even if we still haven’t a clear view of what will be the “compliant fuels” market in
2020 (Very Low Sulphur Fuel Oil 0.5% otherwise Gasoil), shipping industry expects a significant spike of fuel prices (with price levels close to those of Gasoil)
• If the Exhaust Gas Cleaning System solution is chosen, the fuel will continue to be the current 3.5% Sulphur residual fuel oil. However, the investment is high, and the operating and maintenance costs of this equipment are substantial. Moreover, this solution is not immediate, and entry into service takes about 12 months (from manufacture to installation on board the vessel).
• Recourse to Liquefied Natural Gas involves (LNG) a heavy investment and is currently only viable on newbuild vessels, or in retrofit for some few existing "LNG Ready" vessels. Also, although natural gas is a cheap energy, its liquefaction and logistics are very expensive (LNG is stored and transported at -160°C).
11. Do we have a precise idea of the impact per TEU transported?
For the moment it is difficult to anticipate a precise impact by slot cost and by trade, because of the limited visibility on marine fuel markets after 1st January 2020.In 2018, an estimation has been done, and has shown a potential impact of 160 USD per TEU transported, for all services together.
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12. What solutions permit compliance with the 2020 regulation on sulphur content in marine fuels?
Several solutions are contemplated by the shipping industry to comply with the future regulation:
• Use low-sulphur fuels (max. content 0.5%);
• Install Exhaust Gas Cleaning Systems (also called scrubbers) on the vessels. This equipment allows high sulphur fuels (i.e. HSFO 3,5%) to continue to be used, and it “scrubs” the exhaust gases so as to reduce the sulphur oxide emissions to levels equivalent to those generated by low-sulphur fuel oil (i.e. VLSFO 0.5%, or even ULSFO 0.1% in ECAs depending on the type of installation);
• Use alternative fuels, such as Liquefied Natural Gas, or possibly methanol already used on some “short sea” services.
• Bio-fuels could also become a compliant and green solution. CMA CGM in its constant research and development of realistic options to curb greenhouse gas and sulphur oxide emissions from shipping, has tested on a container vessel mid March 2019, such a product in cooperation with IKEA Transport & Logistics Services, the GoodShipping Program and the Port of Rotterdam.
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13. What is CMA CGM's strategy to be compliant with the 2020 regulation?
CMA CGM will comply strictly with the future regulation from 1st
January 2020.• Either by using 0.5% sulphur content marine fuels (and 0.1% in ECAs), which
will constitute at least 85-90% of our procurement in 2020;• Or by opting for alternative solutions which comply with the regulation,
namely:• Consumption of High Sulphur Fuel Oil for the few vessels of the Group
equipped with Exhaust Gas Cleaning System,• Consumption of LNG for future new building vessels.
In fact, CMA CGM is examining all the possibilities of adaptation that will permit compliance with the 2020 regulation. Installing Exhaust Gas Cleaning Systems is one of these options. To validate the use of this technology, CMA CGM has decided to equip three new ice-class 2500 TEU (CC PREGOLIA class), deployed in 2018 on the Baltic services, two 16000 TEUs, CC Jules Verne and CC Alexander Von Humboldt, and also a 17000 TEUs APL Lion City, with Hybrid EGCS that can operate in either “open loop” or “closed loop”.
CMA CGM has also chosen innovation in the world of container transport, by deciding on LNG as the marine fuel for its future 9 x 22000 TEUs (delivery to start from second half of 2020), and 5 x 15000 TEUs (delivery to start from first half of 2021).CMA CGM, through its subsidiary Containerships has also invested in 6 x 1400 TEUs. The two firsts, CS Nord and CS Polar, are already delivered. Two others will be delivered from shipyard on the second half of 2019, and the two lasts are planned for a delivery in 2021.This choice of LNG must be considered as part of the long-term strategy of the CMA CGM Group to comply with future regulations, and to demonstrate the importance the Group gives to environmental protection.
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14. What will the oil companies and marine fuel suppliers do?
The marine fuel currently consumed is a residual fuel oil with a sulphur content of 3.5%.Removing sulphur from these residues to a level of 0.5% requires very heavy investment on the part of refiners, who in most cases do not obtain an economic return.Consequently, refiners and suppliers tend towards mixes of refinery intermediate products which provide a marine fuel that complies with the future standard. The main bases of these future fuels will be light products of the gasoil family, with a low sulphur content after the various refining processes.
15. Will oil companies not adapt and enable shipping companies to procure marine fuels without an increase in costs?
Refiners’ investments are directed towards the production of products with a high added value (gasolines, naphtha’s, jet fuels, etc.). No targeted adaptation is envisaged to specifically meet the demand of the shipping industry.The solutions proposed by the oil industry will be mixes of refinery intermediate products, whose main components will be products of the gasoil family.In theory, a mixture of 0.1% gasoil and residual fuel oil with a sulphur content of 3.5% should contain 88% gasoil, so the final mixture only contains 0.5% sulphur and complies with the future standard. In practice the mixtures are even more complicated for reasons of compatibility between products.Consequently, the prices of future marine fuels will be close to gasoil prices, and the shipping industry will see its fuel costs multiply by 1.5 to 2.
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16. What exactly is a scrubber? How does it work?
The principle of the Exhaust Gas Cleaning System (EGCS, also called Scrubber) involves passing the exhaust gas flow of an engine (main engine and/or auxiliary engines) through a sea water “shower”. The water droplets sprayed capture the Sulphur molecules and a large proportion of the Fine Particulate Matter present in the exhaust gases.There are three types of EGCS :• EGCS which only operate in “open loop”,• EGCS which only operate in “closed loop”,• Hybrid EGCS which can operate either in open loop or in closed loop CMA CGM has chosen the hybrid technology for all the scrubbers to be
installed on owned vessels.
When the system is operating in open loop, the chemical properties of the seawater convert the Sulphur oxides from the exhaust gases into sulphates. Thanks to this chemical reaction, the Sulphur oxides in excess are cleared from the exhaust gases, which thus meet the emission limit of 0.5%, or 0.1% in ECA zones by increasing the flow rate of the wash waters.
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The wash water flow, containing sulphates, is removed into the sea. The quality of these wash waters meets the environmental standards set by the IMO in its resolution of May 15, 2015 (MEPC 259).
It is important to note that sulphates are naturally present in water.
On some installations, the system can operate in closed loop mode. In this case the seawater is no longer constantly renewed, and it is necessary to add a chemical (caustic soda or magnesium hydroxide or sodium carbonate) to maintain the reaction between water and sulfur oxides. The wash water in the closed loop circuit is then filtrated, to separate water and residues which are discharged and retreated onshore.
Salt Sea water
Calcium1,2% (0,42 g)
Magnesium3,7% (1,3 g)
Potassium1,1% (0,39 g)
Other components0,7% (0,25 g)
Salt3,5% (35 g)
Quantities for 1 Kg of sea water
Sulfate7,7% (2,7 g)
Chlorine55% (19,25 g)
Sodium30,6% (10,7 g)
Water96,5% (965 g)
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17. Used in “open loop” mode, is the scrubber solution not a polluting solution?
No. Even though in “open loop” mode the wash waters are discharged into the sea, the physical and chemical properties of the seawater convert the Sulphur oxides in the exhaust gases into sulphates. These sulphates are naturally present in seawater (see Q16).For information, the American cruise ship company Carnival has already installed EGCS on around 80 ships in its fleet. The management of Carnival, sensitive to the image that could be conveyed by the “open loop” technology, in 2017 voluntarily participated in a program of analyses of the wash waters conducted by the Norwegian classification society Det Norske Veritas (DNV GL). The results of this program are entirely satisfactory.The results of this 3 years study have also been exploited by the Japanese Ministry of Land, Infrastructure, Transport and Tourism (MLIT) to conclude that either any short- or long-term effects on marine organisms cannot be caused by the use of open-loop EGCS.
For the EGCS already in the fleet or to be installed shortly on some owned vessels, CMA CGM has chosen the hybrid technology, that can operate in “open loop” and in “closed loop”.
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18. Will changing to LNG give a significant competitive advantage to CMA CGM?
Yes and no!Although the price of LNG is, and should remain, lower than the price of conventional marine fuels (0.5% or 0.1% low-sulphur fuel oil and gasoil), the building cost of LNG vessels is much higher than for conventional vessels.In terms of slot cost, the oil and gas market assumptions considered at the time of making the investment decision in October 2017 for the 22000 TEUS and in February 2019 for the 15000 TEUS give a slight advantage to LNG vessels.However, it is important to note that the consumption of the future 9x 22000 TEUS and 5x 15000 TEUS will only represent 5 to 6% of the Group's total consumption.As the proportion of LNG is still marginal for the moment, there is no real competitive advantage in this choice.
19. Will CMA CGM receive grants to bring itself into compliance with the 2020 regulation?
In the context of the choice of LNG for its future 22,000 TEUS, CMA CGM, its supplier TOTAL and the port of Dunkirk have jointly filed a request for a grant to the European Union.However, as the vessels will not be operated 100% of the time in European waters, the EU has decided to not allow any subsidies to CMA CGM.
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20. Is there a risk of explosion on LNG vessels?
No. LNG carriers have been transporting and consuming LNG for several decades with no major accident arising.However, as LNG is a novelty in containerized maritime transport, this means conducting risk studies and introducing specific safety procedures, both by the vessel and by the port authorities.These studies, called HAZID and HAZOP, are currently in progress with our supplier TOTAL, in all ports that are likely to accommodate our LNG fueledvessels.
21. Can the extra cost brought about by this regulation be absorbed by CMA CGM without being passed on to the customer?
No. With fuel prices 1.5 to 2 times higher, or with large investments to be financed (Exhaust Gas Cleaning System and LNG), it will be impossible for CMA CGM to absorb the extra cost brought about by the entry into force of this regulation.It will be the same for the whole of the shipping industry.
22. Will customers pay more for maritime transport services?
Yes. After 1st January 2020, the freight market will find a new balance incorporating a fuels cost which will be considerably higher than the current cost.This increase in freight cost will be necessary, also for the shipping companies which will be able to obtain the cheapest fuels (high-sulphur fuel oil with EGCS or LNG) but will have large investments to finance.
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23. Will there be a particular impact on reefer containers?
Yes. The electricity power used on board vessels to maintain the operation of reefer containers is generated by the auxiliary engines.Like the main engine, the auxiliary engines consume fuel or gasoil or LNG, depending on the vessel.Consequently, reefers surcharges will have to be increased.
24. How much more will customers pay? What is today's evaluation of this extra cost?
The extra cost cannot be known for time being, as the composition and price of future Very Low Sulphur Fuel Oil 0.5% do not exist yet.
An estimate could be made as soon as the first significant transactions on these new fuels start, probably not prior the 3rd quarter of 2019. And even then, the market is likely to be very volatile and the new markers like the 0.5% indices published by Platts, will probably be tricky to use.
Platts publishes since the 1st of Jan 2019 some few VLSFO 0.5% daily indices. These indices are currently purely indicatives as the underlying product is not sold nor traded and the Sulphur component is not yet valued; the liquidity and relevance of such indices will remain poor until end of 2019 / beginning of 2020.
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25. How will shipping industry and CMA CGM pass on the extra cost brought about by this regulation to its customers?
Each shipping company will determine its method: • Either a higher all-in freight rate,• Or a specific bunker surcharge,• Or the current Bunker Adjustment Factor (BAF) with a substantial upwards
revision.
26. Does CMA CGM envisage proposing alternative solutions to enable its customers to avoid all or part of these cost increases, for example: reduction in speeds = reduction in consumption = increase in transit times?
Speed reduction / Super Slow Steaming is already used since 2008/2010 ; for sake of memory, a FAL round trip voyage was performed in 63 days before 2008, in 84 days nowadays!The subject is still studied, but the industry has already gone very far in the exercise during the past years and increasing once again the recourse to "slow steaming" seems unlikely.
27. If CMA CGM opts for installing Scrubbers on its vessels, can it not avoid passing on to its customers increases in BAF or freight rates?
No. Because of the size of the investments to be financed and the fact that it is impossible to install EGCS on all the vessels, for technical or economic reasons (60% of the vessels operated by the Group are chartered), it will be necessary to pass on the extra cost under this regulation to customers, by increasing or changing the structure of the Bunker Adjustment Factor (BAF) or freight rates.
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28. How can a CMA CGM customer convert their freight surcharge into a “green” marketing value?
As the whole shipping industry has to come into line with a regulation which has a significant impact on public health, shipping companies’ customers in turn can present a message on this positive point.
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GLOSSARY
(1) International Maritime Organization (IMO): United Nationsinstitution specialising in maritime issues. Its headquarters are in London. Its main missions are:Collaboration between the Member States in the field of maritime regulations.The adoption of safety standards: SOLAS convention for the protection of human life at sea, ISPS (International Ship and Port Facility) code, etc.Preventing pollution of the marine environment (MEPC) by vessels and port installations: MARPOL convention.
(2) Annex VI to the MARPOL convention: (MARine POLlution) concerns the prevention of air pollution by merchant vessels. Adopted in 1997, it came into force on 19 May 2005. Among other things, this new annex contains obligations concerning emission levels of sulphur oxides SOx, nitrogen oxides NOx and Volatile Organic Compounds VOC at sea and/or in ports, the sulphur content of marine fuels, and restrictions concerning incineration on board vessels.
(3) Emission Control Area (ECA = Emission Control Area or SECA = Sulphur Emission Control Area) these are maritime zones in which strict controls on merchant vessels have been established by the IMO to minimise emissions of sulphur oxides (SOx) and nitrogen oxides (NOx) and to prohibit all deliberate emission of substances that deplete the ozone layer. Since 2011 there have been four ECAs around the world:Baltic Sea and North Sea for sulphur emissions;North America and the maritime Caribbean zone of the United States for sulphur oxide and nitrogen oxide emissions and particulates.Since 1 January 2015, the sulphur content of fuels authorised for use on merchant vessels in the ECAs has been reduced to 0.1% from the previous level of 1%.
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(4) SOx, sulphur oxides: Sulphur oxides are different types of components containing sulphur and oxygen, the most stable being sulphur dioxide SO2 and sulphur trioxide SO3. SO2 is a colourless toxic gas. An atmospheric concentration of over 5 ppm becomes dangerous to humans, but for certain plant species it is harmful from 1 or 2 ppm (ppm = parts per million, i.e. in mass 1 milligram per kilogram). SO2 is an undesirable by-product of the combustion of oil or coal, for example. This element easily combines with water (H20) to form sulphuric acid.
(5) NOx, nitrogen oxides: Nitrogen oxides are different types of compounds containing nitrogen and oxygen. Among the nitrogen oxides, the main atmospheric pollutants are nitrogen monoxide NO and nitrogen dioxide NO2; these are the ones which are analysed by air quality monitoring networksand which, combined with volatile organic compounds, are the cause of “summer smog”.Nitrogen oxides have direct toxic effects on public health (respiratory disorders), and indirect environmental effects by contributing to the increase in the greenhouse effect.
(6) GHG, greenhouse gases: are gaseous components which absorb the infrared radiation emitted by the earth's surface and contribute to the greenhouse effect. The increase in their concentration in the earth's atmosphere is one of the factors causing global warming.Water vapour (clouds), methane CH4, carbon dioxide CO2 and nitrogen protoxide are the main greenhouse gases, which contribute to trapping the solar energy that is normally reflected, increasing the average temperature of the earth.
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(7) Refining: Oil refining means all the treatments and processing aimed at extracting from crude oils the different fractions that are directly marketable or usable as intermediate products in refineries. Basically, there are:• So-called “light” products (or fractions): gas (liquefied petroleum gas GPL),
light gasolines and naphtha’s, heavy gasolines and gasoil, jet fuels, domestic heating oils,
• So-called “heavy” products (or fractions): Residual fuel oils and bitumen.
(8) Heavy fuel oils (refinery residual fuel oils): Heavy fuel oils obtained from heavy refining fractions are used as fuels by the large engines installed on vessels or to power thermal power plants.These residual products contain impurities which, to a greater or lesser extent, are detrimental to correct engine operation; moreover their high viscosity makes injection at ambient temperature impossible and requires a succession of treatments before use (reheating, decanting, centrifugation, filtration, etc.).The main advantage of this type of fuel is its price; nearly half the price of gasoil (light product) for virtually the same amount of energy yield.
(9) Scrubber (or EGCS Exhaust Gas Cleaning System): A scrubber is a piece of equipment for industrial application. This term embraces several air pollution control systems, used to eliminate certain particulates from industrial exhaust gases, most often with the help of a liquid. It is the contact between the gas and the liquid which allows the polluted gas to be washed. It may also comprise systems which inject a dry reagent or reagent in suspension in a dirty exhaust flow to purify acid gases, or instruments for recovering heat by condensing combustion gases, etc. This decontamination equipment can take the form of a hollow scrubbing tower.
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(10) Liquefied Natural Gas: (LNG) is natural gas condensed to the liquid state. It basically consists of methane CH4, but can also contain up to 10% ethane C2H6 and small quantities of other compounds.
Natural gas becomes liquid at a temperature of -163/-161°C at atmospheric pressure, and its density of 0.45 makes LNG about twice as bulky as fuel oil or gasoil for the equivalent quantity of energy.It is mainly used as a means of transporting natural gas from producing countries to consuming countries, by sea. It is also used as a fuel for vessels or land vehicles, and as a solution for conveying natural gas to sites not connected to the network. LNG should not be confused with Liquefied Petroleum Gas LPG, which consists mainly of propane and butane, which are the lightest fractions obtained after refining crude oil.
(11) “HAZID” and “HAZOP” studies: HAZard IDentification HAZID and HAZard and OPerability HAZOP, are measures for identifying all types of standard risks (fire, collision, falling object, collapse of structure, etc.) and verification of risk control. This method mainly aims to identify the consequences of fault scenarios and the resources implemented to control the risks incurred.
(12) PLATTS indices: These are price indices for reference oil products (crude and derivatives) calculated and published by PLATTS on the basis of public data and figures which key buyers and sellers of these oil products supply via secure internet networks.These indices exist for all types of oil products, crudes, intermediate products and finished products, and for all geographical areas in which a wholesale and/or retail market exists and is sufficiently active to be representative.
(13) Bunker Adjustment Factor (BAF): In the field of maritime transport pricing, the BAF is an economic adjustment factor which influences the transport price. The BAF modifies the transport cost in accordance with the rate per barrel of oil (main energy source for transport). It may be expressed as a percentage or as an amount to be paid per container.