Hapag-Lloyd Hedging its Bets for IMO 2020

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Global container line Hapag-Lloyd will comply with the upcoming 0.5%S cap through a combination of compliant fuels, employing scrubbers and by using liquefied natural gas.

The container line’s primary method of compliance with the International Maritime Organization’s sulfur cap will be 0.5 percent low sulfur fuels, while scrubbers and LNG will be run on a smaller scale to test the viability of the technology in terms of cost, performance and fuel availability.

Hapag-Lloyd has already run a number of their vessels on 0.5%S fuel because the company’s fleet has been operating within the Chinese sulfur emission control area (ECA). The Chinese ECA requires vessels operating within Chinese territorial waters to burn 0.5 percent sulfur fuels and has been in operation since Jan. 1, a full year ahead of the IMO 2020 sulfur cap. Hapag-Lloyd said it had no issues regarding quality of the 0.5 percent fuels used in these ECAs.

Hapag-Lloyd has also tested 0.5 percent fuels for other vessels in its global fleet, which are said to have had significantly lower viscosity and much higher pour points than conventional high sulfur fuels the shipping industry typically uses.

Not all of the fuels that Hapag-Lloyd have seen so far have the suitable qualities required, so the container line is carefully selecting suitable bunker suppliers.

Hapag-Lloyd has a fleet of 235 vessels, 10 of which will be retrofitted with scrubber technology to allow the ships to continue burning high sulfur fuel oil (HSFO) past the IMO 2020 deadline.

The decision to run 10 vessels with scrubbers came after successful trials on two vessels with scrubbers in early 2019. The vessels are going through a staggered retrofitting process in order to reduce the impact of putting too many vessels out of commission at once. The process is expected to run through the fourth quarter with completion expected before the sulfur cap goes into force.

Shipowners fitting their vessels with scrubbers have to consider time out of service when calculating the scrubber pay-back time, with fitting taking around one to two months. All the vessels that Hapag-Lloyd is fitting with scrubbers are Hamburg class. The cost of fitting the scrubbers is around $8.5 million per vessel.

Hapag-Lloyd  is predicting  an increase in bunker bills running over $1 billion in the next few years, assuming a high and low sulfur bunker fuel spread of $250 per ton. Hapag-Lloyd has been running a Marine Fuel Recovery (MFR) mechanism since Jan. 1, so the company can reflect the expected cost increases involved with the more expensive marine fuel environment when the sulfur cap goes into force. The MFR is normally reviewed quarterly, but will be reviewed monthly if there is a bunker fuel variation of more than $45 per ton during any single month period. The MFR takes into account the vessel fuel consumption per day, fuel type and price, sea and port days, as well as carried twenty-foot equivalent units.

Beginning in the fourth quarter, Hapag-Lloyd will start gradually replacing the fuel component of the MFR calculation from HFSO to 0.5%S fuels in order to reflect the switch to compliant fuels and the associated cost increase.

Hapag-Lloyd is not concerned about HSFO availability post-2020 because its vessels primarily call at the world’s largest ports, which are expected to continue offering all fuel grades from 2020 onwards. Large ports are able to keep selling HSFO because they have the largest storage capacity and have the most vessels calling for bunkers, so liquidity is much higher than at smaller ports. Smaller ports are expected to reduce or stop selling HSFO because the storage costs may not justify the small volumes that will be required by customers.

Oil majors such as Exxon Mobil and Royal Dutch Shell have announced supply locations for their new 0.5%S fuels, and the world’s biggest ports such as Singapore, Fujairah and Rotterdam will be the first to sell the fuels. Smaller ports will then follow.

The majority of Hapag-Lloyd’s fleet will burn 0.5%S fuels. Burning 0.5%S fuels means the vessels can continue operating as normal, with no time taken out of service and no significant upfront investment. The fleet will begin switching over to the new fuels in the fourth quarter. Hapag-Lloyd is planning to move all the vessels over to the new fuels well before the Jan. 1 deadline because their container ships may be at sea for up to 90 days, which can make bunker planning more complicated. The purpose of switching the fuel ahead of the sulfur cap is to ensure tanks are sufficiently clean with no high-sulfur sludge left over from the old fuels, which could leave vessels running non-compliant.