Why scrubber installation makes sense for VLGC owners?
With less than a year to go before the cap on sulphur comes into force, VLGC shipowners are increasingly considering scrubbers as an attractive option to meet IMO’s low-sulphur regulation. In this piece, we discuss the economics behind scrubber installation.
The popularity of scrubbers in the large LPG sector is evident, given that 27 of the 30 VLGCs ordered over the last two years were either fitted with scrubbers (24 vessels) or were scrubber-ready* (3 vessels). However, in the existing VLGC fleet, the share of scrubber-fitted vessels remains small, with just 19 vessels having scrubbers.
An analysis of time charter fixtures indicates that charterers prefer scrubber-fitted ships for long-term contracts, in part as a mechanism for keeping fuel bills in check. But do scrubber-fitted ships attract a premium? If the recent fixing of the Dorian LPG-owned VLGC, Concorde (2015-built) is anything to go by – the answer is yes. This scrubber-fitted vessel was fixed at $29,000pd for three years, some $3,000pd higher than charter rates for non-scrubber-fitted ships. In simple numbers, the $3,000pd premium can be justified if the bunker price differential is greater than $130pd over the three years.
This raises the question of how much extra should a charterer be prepared to pay for a scrubber-fitted VLGC. In order to answer this question, we have made a simple model using Drewry’s bunker price forecast (see chart below) and the discounted fuel bill savings the charterer would be likely to achieve over a five-year period. Even when allowances are made for the expected narrowing bunker price differential over time, our figures indicate the potential saving in fuel costs could be upwards of $11 million over a five-year charter. Hence, scrubber-fitted VLGCs are likely to attract a rate premium for some time to come.
Drewry believes fitting vessels with scrubbers makes economic sense as it increases the probability of attracting long-term contracts. In addition, the investment of around $2-3 million for installing scrubbers can be recovered in two-to-three years (assuming a rate premium of $3,000-4,000pd).
While the attractiveness of installing scrubbers will be high in 2020 because of the wide gap between the two fuel prices, slots may not be available for retrofitting. Although more slots will be available in later years, there is a risk of significant narrowing of premium for low-sulphur fuel if its supply improves faster than expected.
*These ships have space and class approval to retrofit scrubbers in future.