Axelrod Energy Projects LLC

Axelrod Energy Projects LLC www.axelrodenergyprojects.com


SHIPS AND ECAS:WHAT DO SCRUBBERS HAVE TO OFFER?

Lawrence AxelrodAxelrod Energy Projects LLC

2013 Energy Conference October 27-29, 2013

Miami Beach


Introduction

1. The ECA Problem2. A Scrubber Solution?3. Scrubber Realties

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The ECA Problem• Ship engines are a source of air pollution• The International Maritime Organization is charged with regulating

international shipping matters (including safety, security, and pollution)

• The IMO first addressed air pollution from ships in MARPOL Annex VI, effective May 19, 2005

• Marpol Annex VI sets an evolving cap on sulfur content of bunker fuel used on the high seas (which now stands at 3.5%S)

• Annex VI permits the creation of shipping zones that are deemed to require special fuel-related regulations

• Originally, these zones were known as SOx Emissions Control Areas (SECAs).

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The ECA Problem• SECAs were restricted to 1.5%S max bunker fuel• SECAs established in:

– Baltic Sea (effective May 2006) – North Sea/English Channel (effective November 2007)

•SECAs become ECAs (Emissions Control Areas)– 1%S max bunker fuel, effective July 2010

•Two new ECAs• North America (effective August 2012)—two hundred nautical

miles• US (including Hawaii)• Canada

• Puerto Rico/US Virgin Islands (effective January 2014)

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The ECA Problem• ECA sulfur cap falls to 0.1%S max effective January 1, 2015• Shipowners face a large financial burden• Ships have traditionally burned high sulfur IFO on high seas• The shift to low sulfur bunker fuel in ECAs has added an expense

to shipowners• Rotterdam IFO-380 LS/HS Differential– $44.73 mt (Jan-Dec 2012)– $27.13 mt (Jan-Sept 2013)

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The ECA Problem

• While 1.5%S max and 1%S max IFO have been available from bunker suppliers at an increased cost, the shift to 0.1%S bunker fuel raises the economic stakes to another level

• By moving the bar to 0.1%S max the IMO is essentially eliminating (or at the very least enormously reducing) the ability to burn fuel oil in ECAs

• To meet the 0.1%S cap bunker suppliers will need to make use primarily of middle distillate

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The ECA Problem

• Middle distillate trades at a significant premium to fuel oil

• Rotterdam Barges– 1%S Fuel Oil premium to 3.5%S Fuel Oil• Jan-Dec 2012: $40.92 mt ($3.89 million btu’s)• Jan-Sep 2013 $20.82 mt ($3.55 million btu’s )

– 0.1%S Gasoil premium to 1%S Fuel Oil• Jan-Dec 2012: $282.48 mt ($6.39 million btu’s)• Jan-Sep 2013 $298.94 mt ($6.88 million btu’s )

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The ECA Problem

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Rotterdam Barges Differentials(Dollars per Metric Ton)

0.1%S/1%S 1%S/3.5%S


The ECA Problem

• To give an idea of the financial burden that ECAs impose on shipowners, it is necessary to employ rough estimates of the amount of 1%S bunker fuel being consumed in ECAs

• Baltic/North Sea/English Channel: 9.6 million mt/year• North America: 2.2 million mt/year • Total: 11.8 million mt/year

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The ECA Problem

• Notional incremental costs (basis 2012 Rotterdam prices)―1%S/3.5%S• NW Europe: $393 million• N America: $90 million• Total: $483 million

—0.1%S/1.0%S• NW Europe: $2.71 billion• N America: $621 million• Total: $3.33 billion

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A Scrubber Solution?

• IMO regulations permit shipowners to meet sulfur caps through technological means

• Shipborne scrubbers are capable of handling IFO with sulfur as high as 4.5%S – Emissions on par with use of 0.1%S bunker fuel

• Scrubbers can be retrofitted on existing vessels or installed on newbuilds

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A Scrubber Solution? • Scrubber Technology:

o Open loop uses seawater to remove sulfur from exhaust gas. Filtered/treated wastewater from the ship is discharged into the sea.

o Closed loop uses seawater to remove pollutants from exhaust gas. Ships store accumulated waste. Disposed at port.

o Hybrid system combines the two systems, allowing a vessel to operate in either closed or open loop mode.

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A Scrubber Solution?

• Classification societies play a role in certifying that scrubbers can meet standards set by the IMO– American Bureau of Shipping: Belco– Bureau Veritas: Belco– Det Norske Veritas (DNV): Green Tech and Wartsila– Germanisher Lloyd: Couple– Lloyd’s: Alfa Laval and Ecospec

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Scrubber Realities

• Cost of a scrubber varies with type and size of ship-- – low end: $500,000– high end: $5 million

• Payback varies with: – Cost of scrubber – Time vessel spends in ECAs– Cost of MGO versus IFO– Fuel consumption

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Scrubber Realities

• Projected payback on scrubber purchase will vary with underlying assumptions:–Under 10% of operations in ECAs: 6-9 years –45-50% of operations in ECAs: 4-6 years–100% of operations in ECA: 2-3 years.

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Scrubber Realities

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Scrubber Examples: Non-Cruise CompaniesShipowner Scrubber Company Scrubber DeliveryAlgoma Central Corporation (Canada)

Wartsila Ordered 2011, first delivery in 4Q 2013

Canada Steamship Lines (Canada)

Ecospec Ordered 2012, delivered 2013

DFDS (Denmark) Alfa Laval (and possibly other scrubber companies)

Deliveries in 2013 and 2014

Ignazio Messina & Co. (Italy)

Wartsila Ordered in 2010 and delivered in 2011

Oceanex (Canada) Couple Ordered in 2012 and delivered in 2013

Spliethoff (Germany) Alfa Laval Delivered in 2012


Scrubber Realities

• For most part, ships operating in ECAs post-2015 will not be equipped with scrubbers:– Not worth spending the money on older ships– Prefer gradual, newbuilds to retrofits, which take

ships out of service– Scrubbers seen as too costly, especially for ships only

in ECAs for limited periods of time

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Scrubber Realities

• Compared to other types of shipping companies, cruise lines show greater interest in purchasing scrubbers, since —– Some of their cruise vessels spend a significant

portion of their time in ECAs– Cruise ships, unlike other vessels, cannot generally

slow steam

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Scrubber Realities

• These cruise lines are investing in scrubbers: – Royal Caribbean announced in July 2013 that it

would have scrubbers installed in two newbuilds – Norwegian Cruise Lines announced July 2013 that

two newbuilds will have scrubbers based on Green Tech technology

– Carnival announced Sept. 2013 that 32 of its cruise vessels will be outfitted with scrubbers (both retrofits and newbuilds) at a cost of $180 million

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Conclusion -- Near Term

• ECAs will move to 0.1%S max bunker fuel in January 2015 • Bunker companies will need to expand their MGO lines• 0.1%S Gasoil/1.0%S (3.5%S)Fuel Oil diff can be expected

to expand• Shipowners will face higher fuel costs for those ships that

sail in ECAs• Positive development for those that burn 1%S in on-land

applications• Scrubbers will be more the exception than the rule,

though seem to be gaining traction in cruise industry

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Conclusion -- Longer Term

• IMO will cap bunker fuel at 0.5%S max– To be reviewed in 2018– To be implemented earliest 2020, latest 2025

•Given anticipated incremental costs associated with burning 0.5%S bunker fuel on high seas, at least some shipowners will likely be willing to consider (if not embrace):

– Scrubbers– LNG (pending availability of infrastructure)

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