How COVID-19 Helped To Simplify The Transition To Low-Sulphur Diesel In The Shipping Business
Any crisis, whether in energy or any other sector, inevitably creates unanticipated costs and benefits. The crisis created by the COVID-19 pandemic has produced all manner of unforeseen consequences in the energy and environment space, both in the U.S. and globally. This has certainly been true in the maritime transport sector as well.
One of the major energy and environment-related events that took place at the first of this year was the required reduction in Sulphur emissions in the shipping business as a result of the IMO 2020 rule implemented by the International Maritime Organization. Shippers across the globe were given a set of options in order to meet the new emissions standards:
o Upgrade their engines to allow for a change over to low-sulphur diesel fuels;
o Install scrubber equipment to remove suplphur from the cheaper, high-sulphur fuel; or
o Completely convert to an alternative fuel such as Liquefied Natural Gas (LNG).
With the third option currently being cost-prohibitive in most situations, the decision point for most shippers was expected to be between low-sulphur fuels and scrubbers. That all started to change early in 2020 as China began to shut vast parts of its economy down in response to the initial outbreak of COVID-19 in Wuhan province, and demand for diesel began to collapse.
As Jenny Vander Zanden, Chief Operating Officer at Breakthrough, told me, “In December and January, there was a pretty significant differential between the high-sulphur fuel and the low-sulphur fuel. It was almost $300 a metric ton. Since then, that differential dropped to as low as $37 per metric ton as the price of fuel declined significantly, and as of late it is hovering more around the mid-$50s.
“So, the option for being compliant with IMO 2020 was to either switch to the higher-cost low-sulphur fuel or to adopt scrubbers, and those scrubbers came at a pretty high price premium,” Vander Zanden said. “What has happened is that the dramatic decline in fuel costs has changed the ROI and as a result more than 700 scrubber projects have been cancelled.”
Thus, the anticipated close competition between adopting the higher-cost fuel or cleaning up the lower-cost fuel became a rush secure supplies of the low-sulphur alternative. Fortunately, efforts by refiners and the industry to pre-place large inventories of the new fuel at strategic ports around the globe that Vander Zanden detailed for me last May helped to avoid any shortages as the user demand shifted at the first of the year.
“There was a question in January of whether there would be enough of the low-sulphur fuel available to ensure compliance,” she said. “But the availability of ample supplies at more than 450 ports around the world has led to a really high level of the use of that fuel. The refiners did quite a bit of planning in advance. So, while they were able to increase their supply of that low-sulphur fuel, they had already built a good inventory of supply in advance of the changeover. It was a logistical shuffle to get the right quantities to the right place at the right time, but the market environment we have been operating in helped create the conditions to meet that demand.”
Based in Green Bay, Wisconsin, Breakthrough is a consultant to the shipping industry, advising land and maritime shippers on strategies to minimize their fuel and transportation costs. Obviously, the uncertain market conditions created by COVID-19 have made her job even more of a challenge than before.
“We have seen the number of questions from shippers increase, because they need to know ‘what are my costs?’ and ‘how do I plan?’” she told me. “Every organization is revisiting their budget and the influence of COVID to determine what they’re going to sell and in what quantities. They also need to know how to anticipate these costs in a 2020 model. We are getting many more questions from a vice president level and above.”
Vander Zanden said that work-from-home requirements imposed by state government responding to the COVID crisis have also created challenges for her organization. While some company leaders I’ve spoken with this year anticipate having significant percentages of their workforce continuing to work from home after the crisis has passed, Vander Zanden notes that her team is still in an evaluation mode on that question.
“It’s a great question. I will say that we adapted to working from home quite well. As an organization, we have a lot of people who travel frequently and already worked from home at times, so we were already pretty agile. Plus, we have a team that is pretty close and has great work relationships and so were able to create ways to make it work.”
She also notes that the question is more complex than many understand, especially for a client-facing business unit. “We have asked ourselves, ‘what is the purpose of the office?’ What we came down to is that, with an organization that is innovative, there is a need to collaborate. And collaborating and having that free flow of ideas over video can be challenging. So, while I do think we’ve been able to adapt and adjust to working from home, there’s still certain types of work that work well in very focused, sit-down meetings.
“There are groups of work that really require collaboration, engagement, relationships, especially when you are creating something new. Understanding all of that will help us determine the types of ways we will work in the future. We don’t have answers to all of those questions yet, but it all comes down to what works best to serve our clients.”
So, the impacts of COVID-19 have actually eased the changeover required by IMO 2020 in unexpected ways. But for consultants to the shippers who actually buy and use the fuels, the ultimate nature of and fallout from the crisis remain a work in progress.
One thing’s for sure: None of this was predictable.