In line with the global oil price, the price of bunker fuel has been plumbing the depths over the past few months. According to the Bunkerworld Index, a weighted daily index that covers 20 major bunkering ports, the price of the fuel that powers the shipping industry has nearly halved in the space of a year, from close to $1,400 in August 2014 to $700 now. Cruise operators will undoubtedly enjoy this period of reduced operating costs.
Although they hedge fuel prices as best they can, the past few years have seen a number of brands, including P&O, Cunard and Swan Hellenic, forced to add a £4-a-day fuel surcharge to their passengers’ bills – a necessary but counterproductive move as the industry tries to increase its stubbornly low penetration rates.
The low-price environment does not, however, detract from the bigger long-term challenges faced by the bunker fuel market. Environmental regulations have made low-grade, heavily polluting varieties of bunker fuel unviable, but the economics of introducing cleaner fuels and new green technologies are still uncertain.
In 2013, the International Maritime Organization (IMO) added a new chapter to its Marpol Annex VI regulations, creating the first globally binding regulations aimed at reducing shipping industry emissions. The regulations came into force on 1 January 2015, and the new chapter requires all vessels to devise a ship energy efficiency management plan, setting out in detail the strategies and tools that will be used to reduce greenhouse emissions. It also mandates the use of fuels that meet a 0.1% sulphur limit within emissions control areas (ECA) in the Baltic Sea, the North Sea, off the west coast of Canada and the US, and in the US Caribbean.
Comply or die?
As ECAs comprise some of the world’s major cruise routes, these regulations are of serious consequence; fortunately, there are fuels on the market that are in compliance. Robin Meech, of Marine and Energy Consulting, a frequent participant in IMO negotiations, says that more than 12 ECA-appropriate fuels "with varying degrees of attractiveness" are already on sale.
Though such fuels have long been viewed as expensive – generally 70-100% more costly than high-sulphur alternatives – low global oil prices have made them a much more economical proposition. The most widely used low-sulphur fuel is marine gas oil (MGO), and according to Ian White, field marketing manager with ExxonMobil Marine Fuels and Lubricants, the reason this is the "default choice" is that it’s "widely available and well understood".
Though low-sulphur fuel is cheaper than it has ever been, it is difficult to get an accurate picture of how many operators are adhering to the new sulphur content rules. For the shipping industry as a whole, Meech, in a blog post, posited that based on emissions measurements and inspection results, "noncompliance in Europe could be as high as 20% at sea and less than 10% in ports". In North America, the level of compliance is thought to be higher, helped by the fact that the coast guard is allowed to fine those that don’t comply and publish the names of guilty parties.
The proportion of noncompliance accounted for by the cruise industry is also tricky to ascertain. Although certain operators, such as Disney Cruise Line, release an annual sustainability report, most publish scant environmental data. The annual industry environmental report card for 2014, compiled by NGO Friends of the Earth (FOE), revealed that Princess Cruises (B grade) and Disney (B-) are some way in the lead on air pollution reduction. While Holland America scrapes into respectable territory with a C-, it is followed by a smattering of Ds and a splodge of Fs.
These measurements were taken before the new rules came into force, so it is possible that next year’s results will see a considerable improvement. Last year was also the first in which cruise lines did not volunteer their environmental data to FOE, with Christine Duffy, then CEO of the Cruise Lines International Association (CLIA), arguing in a letter to the NGO that the report card "does not advance the public’s understanding in a meaningful or objective manner". In response, FOE added a ‘Transparency’ column, and duly assigned an F grade to all 16 cruise lines under examination.
The task of reducing emissions will only become more difficult for cruise operators. In 2020 (or 2025, depending on the outcome of a 2018 review), the maximum sulphur content of all bunker fuel will be capped at 0.5%, down from the current 3.5%. Such fuels are estimated to be $150 more expensive per ton, increasing the cost of bunkering across the entire shipping industry by an eye-watering $22 billion (22% year-on-year) in 2020 alone, according to the Bunkerworld website.
Alternative means
A focus on bunker fuel alone will not be enough to meet the new emissions targets, and cruise operators know it. In March, consultancy MEC Intelligence analysed the public announcements of 70 global shipping companies to get an idea of how they are meeting increasingly stringent environmental legislation. It concluded that 75% of cruise lines and ferry companies have expressed approval of scrubber technology, with Brittany Ferries ($500 million), Carnival Corporation ($400 million for 70 vessels) and Royal Caribbean Cruises (15 vessels) among those with the biggest spending plans.
Carnival Corporation even won an award for Best Marine Solutions Company in this year’s Clean Tech Awards held by The New Economy, a quarterly magazine that focuses on new technology in a range of industries. The judges praised the firm’s commitment to adopting scrubber technology, which will be on 17 Carnival Cruise Line ships, nine Holland America ships, seven Princess Cruises vessels, ten Aida ships and Cunard’s Queen Mary 2 by 2016.
Looking further down the road, growing numbers of cruise operators are considering LNG as an alternative fuel source. Speaking on a second-quarter earnings call, Bjorn Rosengren, CEO of the Finnish marine propulsion specialist Wartsila, praised Carnival for its multibillion-dollar purchase of four LNG-powered vessels, and emphasised the important role to be played by early adopters.
"Every harbour wants a cruising ship to come, because cruising is big business: thousands of tourists coming in and spending money in the port," he observes. "But if you are going to have cruising ships driving round on gas, you have to build up the infrastructure. That is the biggest thing holding back the development of gas as a fuel in the marine industry."
Regulate to innovate
While there have been some encouraging developments, the rate of advancement towards greener fuels and technologies is heavily influenced by market forces. The study by MEC found that global oil prices have had a negative effect on the adoption of scrubber technology, with orders nearly doubling between April and September 2014 but growing by only 19% between November and February. This isn’t such a bad thing in the short-term – the reduction in the price of low-sulphur fuel means scrubbers are deemed less necessary. But once the 2020 global limit kicks in, just using low-sulphur fuel won’t be good enough.
"Recent lower fuel prices are affecting short-term interest," says Garrett Billemeyer, global technology development manager at scrubber manufacturer DuPont, in an interview with Platts.com. "But with the International Chamber of Shipping coming out with a statement indicating that the global ECA will most likely be adopted in 2020, [it] means shippers with a long-term view will focus on marine scrubbers as an advantageous solution."
But scrubbers and LNG are not silver bullets. Both require high upfront expenditure, and scrubbers require a lot of extra energy to run, somewhat defeating their purpose. LNG, though clean and relatively cheap, has some major question marks around its use as a fuel. In a February 2014 study, scientists at Stanford University, the Massachusetts Institute of Technology and the Department of Energy’s national renewable energy laboratory demonstrated that benefits gained from burning LNG are negated by the methane leakage that occurs during the drilling and extraction process.
The move by Carnival to invest heavily in LNG is something of an exception. This is still a conservative industry working with increasingly tight margins, and major changes to something as important as propulsion aren’t likely to be made unless operators know that the investment is watertight and their rivals are doing the same thing. With this in mind, the most recent raft of IMO regulations will certainly not be the last.
