Annabel Young: Get ready for fuel price rises in 2019

NZ Herald By: Annabel Young

COMMENT:

Prices at the petrol pump were a regular item in the 2018 news but spare a thought for businesses that buy fuel by the tonne (1000 litres). In shipping circles, the expectation is that the price of oil-based fuel products will rise steeply in 2019 and that they will keep going up. International price rises will be reflected in prices in the domestic market, at the suburban fuel pump.

Here is why this is happening and how it will affect you.

By January 2020, most ships in the world will be subject to restrictions on sulphur emissions. This is the effect of a treaty known as Marpol Annex VI which imposes a maximum level for sulphur content of emissions at 0.5 per cent. Currently the maximum limit is 3.5 per cent sulphur content although it should be noted that in practice, many ships operate below that level.

New Zealand has not ratified Marpol Annex VI yet but it is assumed by the sector that this will be done by at least 2023. In the meantime, the majority of ships operating around New Zealand are flagged to countries that have ratified the Annex and they are therefore bound by it.

Sulphur emissions from fuel are a result of the fuel used and there are a number of ways to address this, but there is no easy option. The fuel oil used by most ships originates from crude oil as the fuel is the residual left after the diesel or other distillates have been extracted. The residual becomes bitumen and fuel oil, termed HFO, IFO and LFO. When the residue is no longer used as a shipping fuel, it may continue to be used in shore-based oil-fired consumers, eg power stations.

Designing a new vessel to operate on an alternative fuel to oil is much easier than retrofitting an existing ship. By way of example, a shift to methanol would be a great way to solve the emissions problem but it costs about $2 million extra to build a methanol ship; whereas it costs significantly more to retrofit an existing vessel. So methanol, being emissions free and locally sourced from Taranaki, looks perfect but may be difficult to implement as a replacement.

Liquefied Natural Gas (LNG) is another option widely available in Australia, but in New Zealand it is tricky to source. Nuclear power is not currently an option for commercial vessels (it is for warships) but may feature as a civilian propulsion choice in the future.

The practical option for most current ships operating on fuel oil is to shift to a lower sulphur oil-based fuel. The obvious choice is diesel because other low sulphur oil-based fuels are not yet in significant production.

An alternative to switching fuels is to install so-called “scrubbers”, that is equipment that uses sea water to clean emissions. About 1 per cent of the current world fleet uses scrubbers; and it is not expected that scrubber production will be able to scale up in the short or medium term. Of course, the scrubber option is only useful if the current higher-sulphur-content fuel remains available.

So what is the likely impact of most ships in the total worldwide fleet shifting to diesel? Ship operators expect significant increases in fuel costs and also worry about availability. At current prices, diesel is at least 35 per cent more expensive than the fuel currently used by ships. Prices are expected to climb rapidly as demand increases, especially in New Zealand as we already rely on importing at least 30 per cent of current diesel needs and would have to import any increased usage.

To achieve the 2020 deadline, it is expected that the worldwide conversion of ships to a low-sulphur fuel will begin in mid-2019. The effect will be a steep rise in demand for diesel. And increased demand means increased prices. The six month lead-in is because changing the type of fuel used by a ship is not as easy as switching on a lamp. It is almost a case of saying that the engine has to want to change.

Around the world, the change in fuel is expected to throw up a range of engineering issues on every vessel, and in some cases the issues will be unable to be resolved leading to the removal of that vessel from the fleet. Some ship lines have already imposed an additional tariff to cover the cost of the switchover.

As the price rises in the world market, the effect on the price of any oil-based fuel (not just diesel) at the local petrol pump is likely to be substantial and immediate.

The impact of higher costs of ship operations will also play out in the cost of everything that you buy because virtually everything has a component of transport in its price.

Ship operators are even wondering if they will be able to source fuel at all.

• Annabel Young is the executive director of the New Zealand Shipping Federation which represents coastal ship operators.