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Environmental Regulations on Vessels Giving Rise to Mixed Market Prospects

Environmental Regulations

The International Maritime Organization (IMO) decided to strengthen its sulfur content regulation from 3.5% to 0.5% for ships on international routes beginning in 2020.

There are mixed prospects on how the oil refinery and shipbuilding industries will respond as the International Maritime Organization (IMO) will tighten environmental regulations on vessels beginning in 2020. While the oil refinery industry which currently dominates the vessel fuel market has begun to keep their markets, the shipbuilding industry is expecting liquefied natural gas (LNG) to rise as a substitute for current oil for ships. 

According to the oil refinery and shipbuilding industry on November 6, the IMO decided to strengthen its sulfur content regulation from 3.5% to 0.5% for ships on international routes beginning in 2020. So, the decision is expected to drive changes not only to the shipping industry but also to related industries.

There are three ways for shipping companies to respond to the IMO’s tightening of gas emissions regulations. The first is to use low-sulfur oil conforming to IMO standards and the second to mount scrubbers which are sulfuric acid reduction devices on existing vessels. The third is to dismantle existing vessels and build new LNG-powered vessels.

The problem is that all three methods need money from shipping companies. The use of low-sulfur oil as a fuel means that the investment cost will be smaller than that of installing sulfuric acid reduction devices or ordering new vessels but freight cost burdens will rise. This is because the price of low-sulfur oil is more than twice as high as that of current oil for existing vessels. If you install a scrubber or build a ship that uses different fuels such as LNG, fuel cost burdens may decrease. However, it is never easy for shipping companies to invest tens to hundreds of billions of US dollars or to attract ship finance funds in the current downturn of the shipping industry.

While the shipping industry is more troubled with the issue, the refining industry is preparing for a market change by investing in desulfurization facilities. SK Energy, a subsidiary of SK Innovation, will invest one trillion won in the Ulsan Complex by 2020 and build a desulfurization facility with a production capacity of 40,000 barrels per day. This facility will be able to extract gasoline and diesel oil from crude oil and oil residues will be re-processed to obtain fuel oil with low-sulfur content and basic petrochemical raw materials. S-Oil, which invested a total of 4.8 trillion won (US$4.3 billion) in the construction of facilities such as “Future Advanced Complex”, will increase production of low-sulfur oil starting next year.

“The IMO and governments of nations around the world are also strengthening environmental regulations to prevent air pollution,” said an official of the oil refinery industry. “As demand is expected to decline, high-sulfur oil production systems will disappear in the next few years and the vessel oil market will be led by low-sulfur oil.”

The shipbuilding industry has been taking a wait-and-see attitude. In the beginning, the shipbuilding industry expected shipping companies to start ordering LNG carriers this year, considering that it takes one to two years to build a ship. However, shipbuilders are delaying ship fuel selection and global new shipbuilding orders are not meeting expectations this year. According to the shipbuilding industry, the Hyundai Heavy Industries Group received 21 orders for LNG-powered ships and LNG-ready ships (ships that can be converted to LNG-powered ships), while Daewoo Shipbuilding and Marine Engineering and Samsung Heavy Industries landed two LNG-powered vessel contracts, respectively.

“It is up to the shipping industry to decide whether to use low-sulfur oil or LNG as a fuel,” said an official of the shipbuilding industry. “Currently, we are leaning toward LNG-powered ships but the overall trend is to change like the automobile market where cars were divided into gasoline- and diesel-powered and electric cars.”

The Original Posted by MIchael Herh/Business Korea

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