Focus: Scrub that: Pandemic forces ship owners to shelve anti-pollution gear

The Great Eastern Shipping

12/06/2020 07:00

By Jonathan Saul
    LONDON, June 12 (Reuters) - Ship owners are postponing or
cancelling the installation of "scrubbers" that extract harmful
sulphur emissions from their vessels as the coronavirus pandemic
tightens finances. 
    Regulations from United Nations agency the International
Maritime Organization (IMO), which took effect in January, were
viewed by the oil and shipping industries as one of the first
worldwide efforts to enforce environmental change.
    The rules aimed to make ships use fuel with a sulphur
content of 0.5%, compared with 3.5% previously. Operators had
the alternative option to install devices - scrubbers - to strip
out the pollutant, which causes lung problems among humans and
contributes to acidification of oceans and acid rain, but has
not been directly linked to climate change like carbon. 
    In the run-up to IMO 2020, dozens of traders and ship
owners, bet on installing scrubbers hoping to make a profit from
buying cheaper high-sulphur fuel as the newly developed 0.5%
alternative would be in tight supply. 
    But with an average cost of $2 million to install just one,
the stakes were already high for fleet operators often facing
investments of more than $100 million. Now the industry
financial squeeze, caused by a decline in demand for freight
services due to the COVID-19 crisis, may mean scrubbers become
less of an option for ship owners to comply with regulations.   
    Leading Norwegian firm Wallenius Wilhemsen  WALWIL.OL ,
which transports cars and other vehicles, told Reuters it had
cancelled scrubbers for nine ships in the past few months and
postponed an additional eight until later this year or 2021. 
    "As a result primarily of the COVID-19 pandemic, customers
have significantly reduced their output of vehicles," a
spokeswoman said. "With that comes a reduction in revenues and
we are taking all necessary steps to reduce cash outflows."
    The global oil price crash has also prompted a slide in the
differential between lower (LSFO) and higher-sulphur fuel (HSFO)
to as low as $40 a tonne, from over $300 at the start of the
year, eating into profitability for companies who paid for
scrubbers and lengthening the time for a return on their
investment. 
    "The scrubber play is not so much a technical or scientific
issue, it is much more of a commercial issue," said Knut
Orbeck-Nilssen, chief executive of risk management group DNV
GL's maritime division.
    Other companies, including Scorpio Tankers  STNG.K ,
Frontline  FRO.OL  and International Seaways  INSW.N , said they
had postponed instalments. Frontline said the postponement of
scrubbers for four of its tankers would provide an estimated
"positive cash impact" of $7.6 million in 2020. 
    
    SCRUBBER PAYBACK       
    Lois Zabrocky, chief executive of International Seaways,
said the company had also decided to postpone the installation
of scrubbers for three vessels. 
    "With the narrow price differential, it doubles the length
of time for scrubber payback. Seaways installed scrubbers on our
highest-consuming ships and the payback period is likely within
2-3 years," she told Reuters.  
    Clarksons Research said it recorded a significant slowing in
the number of ships already in service installing scrubbers,
estimating there were under 100 vessels undergoing retrofits
versus over 300 at the start of the year. 
    Clarksons said the number of ships pending retrofits was 750
– some of which may be postponed or cancelled – versus a peak of
over 2,000 pending in the middle of 2019. They estimated there
were now 3,015 ships fitted with scrubbers, from 506 at the
start of 2019.
    The global ocean-going fleet is widely estimated at over
90,000 ships. 
    Even though COVID-19 restrictions at Chinese shipyards have
gradually eased, shipping sources say industry appetite to
install scrubbers is at its lowest since a rush in 2018. 
    Finland's Wartsila  WRT1V.HE , which manufacturers
scrubbers, said while it had not had any cancellations, there
were postponements, mainly due to delays and congestion at the
yards or other scheduling issues.
    
    'WE ARE VERY HAPPY'
    Asked about the impact of slowing demand for scrubbers, the
IMO said it would have no effect on adherence to its rules as
ships would instead have to use fuels that meet its criteria. 
    When asked about how the regulations have gone so far, a
spokeswoman added: "It seems to have gone very smoothly.
Availability of compliant fuel also seems positive". 
    Tanker group Euronav  EUAV.BR  was among shipping companies
opting to use low-sulphur fuel. 
    "We are very happy not to have spent $350 million
retrofitting our fleet with scrubbers," CEO Hugo De Stoop told
Reuters. 
    Companies that have bought scrubbers say, however, that a
rebound in oil prices – and a narrower difference in costs
between high and low sulphur fuel - will once again make the
devices more cost-effective.
    G. Shivakumar, chief financial officer with the Great
Eastern Shipping Company  GESC.NS , said it would go ahead with
a number of scrubber installations despite the change in the
fuel differential, which he described as "disappointing".  

 (Additional reporting by Roslan Khasawneh in Singapore; Editing
by Veronica Brown and Pravin Char)
 ((jonathan.saul@thomsonreuters.com; + 44 207 542 4357 ; Reuters
Messaging: jonathan.saul.thomsonreuters.com@reuters.net))