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Per Funch Nielsen*: Seizing the real opportunities at the edge of the 2020 chaos

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There are a few notable similarities between Brexit and the impending global 0.5% sulphur cap in marine fuels, which will be enforced from 1st January 2020.

Firstly, the majority of people don’t want either to happen; a recent BMG poll showed that a significant number of Brexiteers were suffering from Brexit hangover guilt and cold feet, with a 10-point lead for the Remoaners. And ship owners are hardly chomping at the bit to increase their operating costs overnight. Secondly, no-one really knows what on earth is going to happen when either 2020 does come around, or when the UK finally hauls up its political drawbridge. Chaos? At least the IMO did actually conduct an impact assessment, which is more than can be said for the UK government. The only problem is that BIMCO also conducted a study, which completely contradicted the IMO’s more positive spin.  

What to do? Panic? Put our heads in the proverbial sand and hope that it all goes away? Absolutely not! Wasn’t it historian Niall Ferguson that said complex western civilizations are at constant risk ‘because they operate, most of the time, on the edge of chaos’ anyway? And isn’t the edge of chaos where the ‘truly creative changes and big shifts occur’? What is required is pragmatic, and bold thinking; planning based on using the best information and technology available; and collaborating with those that have the knowledge and experience to peer into the future; to mitigate risk, and reap the opportunities of change.

Within the shipping and bunkering sectors, we are continually hearing about what the options for compliance are. Distillates and distillate-based fuels (0.5% LSFO) are the clear choice with some ship owners and operators definitively pinning their colours to the MGO mast due to the quality concerns over the formulation of the hybrid products, and the potential impact on engine performance. The majors are certainly positioning for 2020 with a lot of distillate supply and some LNG, despite legitimate concerns over the bunkering infrastructure, standards and pricing for the latter. Exhaust gas cleaning systems, or scrubbers, continue to realize some small pick-up, but again the upfront capital costs to retrofit are prohibitive in an industry still struggling with liquidity. The major scrubber manufacturers have also failed to invest in winning the PR battle to overcome market concerns in relation to operational performance and the lack of necessary yard space should there be a sudden rush to retrofit, as well as the continual headlines that impact reputation and credibility in relation to washwater.  

So, bar the more future-gazing solutions such as biofuels, methanol and so forth, for ship owners and operators this is their lot for compliance. It’s hardly a vast smorgasbord of choice that sets the pulse racing. Indeed, part of the problem that explains why the majority of ship owners are not doing anything to develop a compliance strategy, is that they don’t really know what to do with this information. Worse still, the many physical fuel suppliers and traders that really should know, don’t have the internal set-up, knowledge, vision, or predictive intelligence capabilities to help, and provide proper consultation. If they do, they are holding their cards very close to their chest.

What is required is real consultancy that delves into the bowels of a ship owner’s operations to develop a compliance strategy that first optimises current fuel procurement, and then simulates business as usual post 2020, from which a compliance solution can be developed on a vessel-by-vessel basis within their fleet.

The reality is that even right now, ship owners and operators are not adopting an effective fuel procurement strategy; one that drills down into buying the right product grades, at the right port, at the optimal time, and at the right quantity and price; or from the right supplier where efficiencies (time = money) can be generated, for example through the use of mass flow meters. The main reason for this is that the price of fuel continues to be relatively cheap. It’s certainly far from the highs of the 2014 prices where MGO was anything up to $1,000 per ton, and fuel accounted for over 70% of a vessel’s operating costs. There’s not the urgency. But there should be. Particularly when you can save 1% to 2% in fuel costs per vessel just by implementing the right procurement strategy.  

This becomes even more important in a post 2020 world. There is myriad of opinion in terms of what fuel prices will look like in less than two years time. Crude prices continue to rise – at the time of writing it was $65 per barrel – and there are questions in relation to the supply of compliant product, particularly in Europe, which could push distillate prices further north. A number of opinion formers that claim to be ‘in the know’ are predicting premiums of up to anything from 200% to 400% for distillates over Heavy Fuel Oil (HFO). Whatever it works out to be, one thing we can be sure of: it will be a lot more. It will certainly impact the bottom line, and in some severe cases, business continuity. And all of a sudden, those 1% to 2% savings look rather good.

Of course, in an ideal world, there would be total clarity over what the future looks like – the presence of an oracle or crystal ball to show us the future. But in their absence, we have technology and its advancements beginning to provide this kind of foresight. The whole world is obsessed with Big Data, Artificial Intelligence and Machine Learning. It’s hard to find an article in a maritime publication that doesn’t reference digitalization. For a reason! It’s really important, and can help owners and operators mitigate the risks of compliance and create the right and most viable, cost effective fuel procurement strategy.  

As part of 20|20 Marine Energy’s growth strategy, we are in discussion with technology partners to bring to market a predictive analysis model that enables owners and operators to simulate what their post 2020 fuel costs look like, based on current trading routes and optimizing their existing strategy.  Once this is done, the best compliance solution on a vessel-by-vessel basis can be developed; ‘this vessel needs to buy MGO from this port, in this quantity, at this price and from this supplier’; ‘this vessel should retrofit a scrubber, and based on predicted HFO costs, this is the return-on-investment timescale’, and so forth. Real analysis, and real consultancy, based on in-depth knowledge and experience.

But the planning needs to happen now. There is no room, or excuse for apathy. This leads to disaster. There is no question that change is genuinely scary; the 2020 regulation will undoubtedly have the greatest impact on the marine fuel supply chain since we moved from wind power, (which could come back again, but that’s for another article). There are also huge complexities to overcome, but by creating clarity and transparency amongst the chaos, real opportunities can be seized.

*Senior Associate, 20|20 Marine Energy

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