2020 SULPHUR REGULATION

To scrub or not to scrub… on Tankers

30 August, 2018
 NEW SULPHUR GLOBAL REGULATIONS COME INTO EFFECT ON JANUARY 1ST 2020

SOx: 0.1% Sulphur NOx Tier III for SOx: 0.5% global NOx Tier III for GHG* reduction
limit in ECAs newbuildings sulphur limit newbuildings EEDI** Phase 3
(North America and Northern (North America ECA) (Worldwide) (Northern Europe ECA) (Worldwide)
Europe)

2015 2016 2020 2021 2025

Sulphur Content NOx Emission
5%

4%

3%

2%

1%
Inside ECA’s:
0%
3.4 g/kWh (9.n-2)
2005 2010 2015 2020 2025

ECA CAP Global Cap

*Greenhouse Gas Emissions, **Energi Efficiency Design Index

Source(s): IMO 2
 FLAG STATES AND PORT STATES WILL PLAY A KEY ROLE IN ENSURING COMPLIANCE

ROLES, RESPONSIBILITIES AND ACTIONS

INTERNATIONAL MARITIME ORGANIZATION (IMO)
 IMO’s Sub-Committee on Polution Prevention and Response (PPR) submitted a proposal for banning the sale of HFO to vessels without
scrubbers to the Marine Environmental Protection Committes (MEPC) 72nd meeting for review. The draft amendment to the International
Convention for the Prevention of Pollution from Ships (MARPOL) Annex VI was approved and will be submitted to MEPC 73, October 2018, for
formal adoption. If adopted, the amendment will enter into force in March 2020.

COMPLIANCE
 In principle, a ship registered with a Flag State who is not party to Annex VI and trading to a port of another party nation, could avoid
compliance. However, the proposed ban on sale of non-compliant fuel effectively closes this gap. With the ban, any vessel calling a port of a
member nation, can be inspected by local Port State authorities irrespected of the status of the Flag State.

ENFORCEMENT
 Enforcement and compliance will be the responsibility of Flag States and Port States. In general, the primary responsibility for the standards
of a given vessel rests with the Flag State whereas the Port State functions as a safety net to catch substandard vessels at a given port

Source(s): IMO, ICS 3

 SCRUBBER UPTAKE SEEMS TO BE GATHERING MOMENTUM

www.shipandbunker.com, Apr 2017

Tradewinds, Mar 2018

Lloyd’s List, Feb 2018

Bunkerworld, Jun 2018

Shipping Watch, Apr 2018

Tradewinds, Apr 2017

Shipping Watch, Jun 2018

Tradewinds, Jun 2018

Shipping Watch, Jul 2018

Tradewinds, Jul 2017

Tradewinds, May 2018

30 August, 2018 4
 THERE ARE THREE DIFFERENT TYPES OF SCRUBBERS ON THE MARKET
OPEN LOOP SCRUBBER
 Open loop scrubbers utilize seawater to clean
the exhaust gas
 The SOx is dissolved in the water wherefore the
properties of the water are important
 Low pH value of the water used will negatively
impact the performance of the scrubber
 Wash water is discharged overboard
 Residuals removed from wash water must be
retained onboard until it can be disposed off on
shore.
Source(s): EGCSA, ABS
CLOSED LOOP SCRUBBER
 Closed loop scrubbers can utilize either fresh or
sea water from a closed system onboard
 SOx removal process is similar to open loop
 Once residuals are removed from wash water,
caustic soda is added to restore alkalinity before
water is reused
 Only limited amounts of cleaned wash water is
discharged overboard
5
HYBRID SCRUBBER
 Hybrid systems can function as both open and
closed loop systems
 Closed loop operation is used in ports, rivers
and coastal areas
 Open loop is used during deep sea passage
 CONCERNS REMAIN PARTICULARLY WITH REGARDS TO DISCHARGE OF WASH WATER

IMO HAS SET STANDARDS FOR DISHARGE WATER OPEN LOOP SCRUBBERS ARE VIABLE IN MOST AREAS
While wash water can contain a number of harmful components,  Only three (3) areas have restrictions on Exhaust Gas Cleaning
IMO guidelines include criteria for four (4) specific areas: System (EGCS or scrubber) discharge water:
 Turbidity – Germany (inland waterways and some ports prohibited)
Amount of particles in the water which cause cloudiness. Turbidity – Belgium (only in coastal and open seawaters)
can decrease the ability of light to penetrate a body of water, – California (low sulphur fuel only method of compliance allowed)
potentially affecting submerged plants
 Polycyclic Aromatic Hydrocarbons (PAH)  Impact has been studied by several Environmental Agencies and
Group of carcinogenic substances and sometimes used as an organizations:
indicator of total hydrocarbon emission
 pH
Ocean water generally has a pH between 7.5 and 8.5. Anything
highly alkaline or acidic will severely affect marine life. The pH value
of discharge water should not be less than 6.5 except during
maneuvering where a difference of 2 pH units between inlet and
outlet is acceptable
 Nitrates
Oxidized form of nitrogen which can cause algae bloom and
eutrophication (loss of oxygen)

All measures are relative to the inlet water quality

Source(s): IMO 6
 SCRUBBERS MAY ADD TO OPEX BUT COMPLIANT FUELS ARE NOT A TROUBLE FREE SOLUTION*

SCRUBBERS LOW SULPHUR FUELS

 Annual operating cost (18 MW Engine, Hybrid)
– Electrical consumption USD 140k (corresponding to a 1-3% increase in
consumption depending on scrubber type/manufacturer)
– NaOH, USD 130k (160 days of closed loop operation)
– Sludge disposal, USD 15k
– OPEX water treatment system, USD 30k
– Scrubber service, USD 20k
Open loop scrubber cost is limited to electrical, sludge and service expenses
 Equipment
– Open loop scrubber (hybrid ready), USD 1.5m
– New building installation, USD 750k
– Retrofit in Europe, USD 1.5m (installation in Asia may be 25-30% cheaper
than in Europe)
– Installation time is approx. 14 days including 3 days out of the water
 Stability and space
– Stability constraints only reported on smaller vessels but may be offset by
use of ballast
– As the scrubber can replace the silencer, space may not be an issue for
most vessels. Large container vessels may, however, lose space
equivalent to a few 40’ containers in case of a retrofit
 MGO
– Likely the most expense fuel choice for compliance but undoubtly the
safest solution due to existing ISO spec for distillate fuels
 Blended fuels
– No official ISO spec will be ready in time although an interim solution in
the form of a Publicly Available Specification (PAS) will be made available
– Given the uncertain composition of new blends, new testing methods will
likely need to be devised for fuel stability and compatibility
– Commingling not possible wherefore dedicated tanks are required for each
specific blend which may pose a challenge for tramp operators
 Viscosity
– Both MGO and blends have lower viscosity than HFO thereby requiring
different lube oils and may result in risk of leaks in the fuel system due to
mistification on some vessels
 Availability
– 0.5% fuels are expected to be more readily available than HFO
– Smaller ports with only one fuel type available are likely to have only
MGO or blended fuels

*Using LNG for propulsion is another way of complying with emission rules. For detailed information on this solution please contact Maersk Broker Research

Source(s): PureteQ, ThomsonReuters, IBIA, C.E. Delft 7

 WHAT ARE THE VIEWS ON 2020 AND FUEL AVAILABILITY?
IEA – EXEC. SUMMARY (2018)
 Currently 80% of sulphur in crude is
removed in the refining process but this
will need to be increased to 90% to meet
demand post 2020
 Projects for installation of hydrocrackers,
cokers, hydrotreaters etc to reduce heavy
yields will not be ready in time for 2020
 2020 supply to be met as follows:
– 0.6 mbpd straight run 0.5% fuel oil
– 0.3 mbpd hydrofined 0.5% fuel oil
– 0.6 to 1.1 mbpd supply from diesel pool
– ~0.3 mbpd blended products
– ~0.3 mbpd hfo used with scrubbers
– 0.6 mbpd short fall
 New diesel production to come from USA,
Middle East, China and Russia
Source(s): IEA, SEB, C.E. Delft
SEB – EXEC. SUMMARY (2018)
 2000 scrubbers installed by 2020 with
HFO demand of 0.3-0.5 mbpd
 HFO to gasoil spread will widen to more
than USD 450/mt
 Buying the 2020 gasoil to HFO spread can
act as a virtual scrubber for Owners (long
gasoil vs short HFO position for 2020 as a
plain bet for wider spread)
 Owners favor compliant fuels as cost is
believed to be passed to charterers
 Tankers, bulkers and container vessels
make up 76% of total DWT and would
require 18,000 scrubbers for unchanged
HFO demand
 0.5% fuel production capacity is uncertain
 Sulphur disposal problem will lead to
increased bitumen and asphalt production
 Power stations is the last option for
excess HFO with prices on par with coal
8
C.E. DELFT – EXEC. SUMMARY (2016)
 Foundation for IMO decision to go ahead
with 2020 rather then 2025 for global
sulphur cap
 Refineries will be able to meet demand for
0.5% fuels due to three factors
– Reduction in sulphur content of the
crude slate
– Increased refinery utilization rates
– Increased conversion capacity by
refineries
 Scrubber installations per year cannot
exceed 3000 units to due yard constraints
 3800 scrubbers installed by 2020 with an
HFO demand of 0.7 mbpd
 THE GASOIL-HFO SPREAD MAY CONTINUE TO WIDEN AS WE APPROACH 2020

SINGAPORE BUNKER PRICES

USD/MT

1,000

900

800

700

600
USD 180
500
USD 344
400

300

200

100

0
2014 2015 2016 2017 2018 2019 2020 2021 2022

380 CST Gasoil 10 ppm 380 CST (Forward) Gasoil 10 ppm (Forward)

Source(s): ThomasonReuters Eikon 9

EVEN ON AN MR, INVESTMENT CASHFLOW FROM A SCRUBBER INSTALL WILL BE POSITIVE IN 2021

MR RETRO-FIT, NON-ECO (PAYBACK 2.64 YEARS) LR2 RETRO-FIT, NON-ECO (PAYBACK 1.98 YEARS)

USD/Mill. USD/Day USD/Mill. USD/Day

1.9
2 5,600 6.0 9,600
5.1
8,400
4,800 4.5
1 7,200
0.5
4,000
3.0 2.7 6,000
0
3,200 4,800
1.5
2,400 3,600
-1 0.1
-1.0 0.0 2,400
1,600
-2 1,200
800 -1.5
0

-3 0 -3.0 -1,200
-2.9
-2.8
2019 2020 2021 2022
2019 2020 2021 2022
Cumulative Cashflow Fuel Saving (rhs) Cumulative Cashflow Fuel Saving (rhs)
*Installation Jan ’19 and savings calculated against MGO. See appendix for full set of assumptions. *Installation Jan ’19 and savings calculated against MGO. See appendix for full set of assumptions.

Source(s): PureTeq, Maersk Broker 10

 ON LARGER VESSELS, THE CASE IS EVEN MORE COMPELLING

SUEZMAX RETRO-FIT, NON-ECO (PAYBACK 1.91 YEARS) VLCC RETRO-FIT, NON-ECO (PAYBACK 2.03 YEARS)

USD m USD k/Day USD m USD k/Day

7 12.0 10.0 18
6.2 8.7
6 10.5 8.0 15
5
9.0
4 6.0
3.4 4.5 12
7.5
3 4.0
6.0 9
2
2.0
1 0.3 4.5 6
0 0.0
3.0 -0.1
-1 3
-2.0
1.5
-2
-4.0 0
-3 0.0

-4 -3.1 -1.5 -6.0 -5.3 -3

2019 2020 2021 2022 2019 2020 2021 2022

Cumulative Cashflow Fuel Saving (rhs) Cumulative Cashflow Fuel Saving (rhs)
*Installation Jan ’19 and savings calculated against MGO. See appendix for full set of assumptions. *Installation Jan ’19 and savings calculated against MGO. See appendix for full set of assumptions.

Source(s): DHT, PureTeq, Maersk Broker 11

 IMO 2020 WILL IMPACT THE COMPETITIVENESS OF NON-ECO VESSEL OVERNIGHT

MR DAILY FUEL COST PER STEAMING DAY* LR2 DAILY FUEL COST PER STEAMING DAY*

USD k/Day USD k/Day

14 13.7 24
13.0
12.5 20.9
12 19.9
10.9 20 19.1
10.4
10.0
10
16 15.0
8.3 14.3 13.7
8 7.1 7.1 12.6
6.6 6.8
12 10.4 10.8 10.9
6 5.4 5.6 5.7
9.1
7.5 7.8 7.8
8
4

2 4

0 0
2019 2020 2021 2022 2019 2020 2021 2022
MR MR ECO LR2 LR2 ECO
MR (Scrubber) MR ECO (Scrubber) LR2 (Scrubber) LR2 ECO (Scrubber)
*See appendix for assumptions – this calculation only illustrates fuel saving per day *See appendix for assumptions – this calculation only illustrates fuel saving per day

Source(s): Maersk Broker 12

 IMO 2020 WILL IMPACT THE COMPETITIVENESS OF NON-ECO VESSEL OVERNIGHT

SUEZMAX DAILY FUEL COST PER STEAMING DAY* VLCC DAILY FUEL COST PER STEAMING DAY*

USD k/Day USD k/Day

30 40 37.5
35.7
25.5 36 34.2
25 24.3
23.3 32
28
20 24.7
22.7 23.6 22.6
16.7 24
15.4 15.9 15.3
19.0 19.7 19.9
15 12.9 13.4 13.5 20
15.0 15.3
10.1 10.3 16
12.5 13.0
10 8.5 8.8
12
8
5
4
0 0
2019 2020 2021 2022 2019 2020 2021 2022
Suezmax Suezmax ECO VLCC VLCC ECO
Suezmax (Scrubber) Suezmax ECO (Scrubber) VLCC (Scrubber) VLCC ECO (Scrubber)
*See appendix for assumptions – this calculation only illustrates fuel saving per day *See appendix for assumptions – this calculation only illustrates fuel saving per day

Source(s): Maersk Broker 13

 APPENDIX – CALCULATION ASSUMPTIONS

MR (ECO) LR2 (ECO) Suezmax (ECO) VLCC( ECO)

Reference trade route TC2 TC1 TD20 TD3C

Laden speed 13.0 13.0 13.0 13.0

Laden consumption (ME) 23.0 (19.5) 36.7 (28.2) 43.9 (32.3) 70.0 (51.0)

Ballast speed 12.5 (16.0) 12.5 12.0 12.0

Ballast consumption (ME) 19.5 28.2 (19.6) 35.4 (19.7) 46.6 (26.0)

Trading days (year) 330 330 330 330

Scrubber cost USD 2.4 m USD 2.5 m USD 2.6 m USD 4.6 m

Consumption increase 2% 2% 2% 2%

Maintenance cost (year) USD 20 k USD 20 k USD 20 k USD 30 k

Off-hire (installation) 25 days 25 days 25 days 30 days

Off-hire cost (day) USD 13.5 k USD 16 k USD 20 k USD 25 k

All vessels are calculated as being in continuous trade on the reference route only with costs, timings etc as per Baltic Exchange baseline. All
savings calculated on steaming days only. Fuel prices as per slide 9.

30 August, 2018 14
 This report and/or presentation is based on our knowledge of relevant market conditions. Our estimates are made on the basis of this knowledge, but other circumstances, or new circumstances, as well as general
uncertainty could cause the market to develop differently. We take general reservation for misprints. © All rights reserved. No part of this publication may be reproduced in any material form (including
photocopying or storing it in any medium by electronic means) without the written permission of the copyright owner. Likewise, any quoting is prohibited without the written permission of the copyright owner.

30 August, 2018