The new IMO 2020 fuel regulations have implications for the whole supply chain – with significant challenges remaining for second-tier bunkering ports, writes Stevie Knight
Don’t expect very low sulphur fuel oil (VLSFO) availability issues to evaporate any time soon, says Adrian Tolson of Blue Insight. “Both local infrastructure and supply chain must adjust and while you build those up, nobody really knows how it will actually work out in the end. It’s going to be at least a year before we see equilibrium return to the global bunker market.”
Frankly, it is not likely to be a real issue for the big hubs, which – despite record prices nearing US$800/t and an early hitch or two – will probably have a full set of offerings.
However, Tolson adds that “barring a refinery around the corner” smaller-to-mid sized ports may find their modest bunker demand will not necessarily interest a VLSFO supplier.
Likewise, though MGO has often been regarded as the alternative ‘go-to’ fuel in emergencies as it is often utilised by harbour fleets, he explains that “suddenly ramping that up to ship-sized quantities on short notice could be difficult”.
Moreover, even familiar high-sulphur fuel – utilised by scrubber-fitted ships – may not be universally available. It remains to be seen whether HSFO will be mopped up by refineries as feedstock or moved into power generation.
Neither are all the challenges down to market dynamics. One of the biggest concerns fuel quality – and this hits shipping’s Achilles Heel. Back in 2018, over a hundred vessels were involved in what became known as the ‘Houston incident’, with cases of fuel contamination arising around the world and reports that some players “simply resold the debunkered fuel,” says Paul Collier of Clyde & Co.
He believes if there are “significant quality issues” with VLSFO blends the market could be primed for a rerun. While far from new to the bunkering industry, these troubles are magnified by the nature of the low-sulphur blends.
According to Naeem Javaid of Lloyd’s Register’s FOBAS fuel testing service, “off-spec test results have doubled to 8%”, and while previously there were a number of reasonably minor reasons for failures, the main issues now are more consistently worrying, namely sulphur content that exceeds the IMO 0.50% limit and total sediment levels which flag up potential stability issues.
This latter problem is mostly down to what Javaid believes to be “an industry gap in upstream control of components”. Firstly, blending for this minimal sulphur content is demanding. Secondly, the components don’t always make stable blends, allowing sludge to precipitate out, clogging fuel line filters and treatment plants.
There is also a further potential complication for ports with limited bunker tank space. Mixing even stable chemistries can end in trouble. For example, blending a low sulphur fuel from residual stock with a more paraffinic VGO blend in a holding tank will likewise cause sludge precipitation.
There is some disagreement as to what is likely to give the most trouble. “Everyone is testing for sediment or instability in the supply chain and on ships ….so getting a catastrophic surprise is not likely,” says Tolson, adding, “Most problems will be resolved before the fuel gets onboard.”
However, both Tolson and Collier are concerned about the sulphur content. “There is a natural variation in bunker sample results… so it’s possible for one bunker test to pass, while others narrowly exceed the 0.50% sulphur limit,” says Collier. This discrepancy stands to create trouble. “While the documents may show that the fuel supplied is within spec, a Port State Control (PSC) test showing higher sulphur content of fuel onboard may result in the vessel being detained or forced to debunker,” the executive added.
There is a further devil in the detail, adds Tolson. He explains that, there is an “inbuilt conflict between suppliers and purchasers”. That is, for the recipient, a test showing sulphur content at 0.53% meets the 95% confidence limit set by ISO 8217, while suppliers to be certain of being on-spec must be 0.3% below the threshold. He points out this means that “the fuel limit can be set at 0.51% for one party, and at 0.48% for another”.
IS BIGGER BEST?
Put together, these pressures seem, at least at first glance, to favour the more prominent fuel hubs with higher throughput and more space to play around.
So, could the larger operations squeeze out the smaller facilities? Indeed John Ghio, deputy captain of Gibraltar Port, admits there’s “been speculation” that the overall effect could be to consolidate the market.
Others feel differently. “We’re not yet certain of the effect on the supply chain,” says Tolson. “Once quality is assured ships will start looking at price and overall logistics. So, we might see bunker ports in locations we have not considered before.” He adds this might include places like Brazil and Argentina clustered around a supply of low-sulphur crude.
Other contenders could come from regions around China – which is pumping up its capacity to produce low sulphur fuel – or Sri Lanka, which might possibly be in the right spot for the Middle-East VLSFO supply chain, outside the Gulf region.
It is also plausible lines will reshape calls around fuel cost and the new pressures could mean some authorities make a concerted attempt to draw in traffic. That much has happened before, says Tolson.
“For example, Vladivostok became a key containership calling point for many years during the last decade. It was not because Russia’s Far East suddenly saw huge container demand, but just that if you worked cargo, you were entitled to buy bunkers minus the export tax.” While that loophole has likely closed, there may be other price-cut offers to tempt in ship calls.
END OF COSY
The fact is, smaller bunkering operations have usually just been “ticking along” says Tolson, “without too much intervention from the port authority”. However, since that cosy situation may be at an end anyway, what could ports do to protect themselves and their callers? The answer, according to Ghio, is “work at it”.
It may take quite a bit of foresight and most importantly, cooperation with the various supply chain players to mitigate unforeseen market effects, but it is possible.
For example, while he stresses Gibraltar has avoided VLSFO availability issues, like a number of other ports “it has seen some pressure on bunker barges” admits Ghio. When at the end of 2019 the forecasted distillate dominance failed to materialise “the blip suddenly meant bunker operators were forced to alter their segregation plans, to take into account the unexpected rise in VLSFO demand”.
The port worked with all parties on the changed barge runs to smooth the way. He adds that “as a result, I think things are now settling down”. Yet there are limits to what a port can really do – after all, it is the matchmaker, not the bride.
As Ghio explains: “Even though we play a more active part than is the norm within the port industry, we would still be unable to provide analysis in advance for all the products supplied within our jurisdiction.” That, he says, “is an issue that does fall squarely on the purchasing party”.
Unfortunately, despite being a problem to be sorted out between buyer and supplier, if quality issues keep turning up, it stands to impact a port’s reputation – hence the efforts taken by Gibraltar to be pro-active in monitoring fuel quality.
Certainly, “if there’s a supplier repeatedly selling off-spec fuel, the authorities may well want to step in and take action”, says Collier. While this may simply prompt a search for an alternative provider, if a port wants to grow its bunker operation, there’s another possibility: “It depends on the desire but working with the state on legislation toward a licensing arrangement will give a further level of control,” he explains.
Despite industry pressure at IMO level not many have so far followed this pathway. Still, like Singapore, Gibraltar has found it yields a useful level of oversight – but, again, Gibraltar has paired this approach with effort: “We carry out unannounced inspections as well as tests on the bunker cargo,” he says, but adds there’s a pretty robust follow through – a product analysis which fails to meet the specifications set out in the bunker licence “leads to immediate action taken against the supplier, including the possibility of a stoppage of the bunker barge in question”.
In addition, these issues “are taken into account for our consideration of renewal of the licence”, says Ghio. Tolson concludes with a word of caution. “There is supposed to be a requirement for a bunker supplier registry,” he says, noting that it is not quite as demanding as a licensing agreement. “Currently, I believe, it is a possibility that is largely overlooked”.
Culled from Port Strategy