A container ship transporting goods leaving the port of Hong Kong, China.
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A much-anticipated and historic rule change to shipping fuel standards will come into force in less than two weeks, leaving energy market participants braced for a period of confusion and uncertainty.
On January 1, 2020, the International Maritime Organization (IMO) will impose new emissions regulations designed to significantly curb pollution produced by the world’s ships.
Amid a broader push toward cleaner energy markets, the IMO is poised to ban shipping vessels using fuel with a sulfur content higher than 0.5%. At present, the upper limit on sulfur oxides is 3.5%.
Major oil companies and shipowners have spent billions of dollars preparing for the changes but energy analysts have expressed some concern that many in the oil and shipping industries still appear to be unprepared.
“The market is in complete flux. Nobody seems to have the answers of how this will play out,” Patrik Berglund, CEO of Xeneta, a Norwegian-based company that crowdsources freight data, told CNBC via telephone.
Berglund had previously described IMO 2020 as the “opportunity of a lifetime” for shipping liners to raise their prices, since the entire industry expected increased costs.
“We would have expected to see these cost increases already… (but) shipping liners are definitely not capitalizing on this opportunity. It is flabbergasting.”
“It is a complete mess and the customers are suffering with all of this uncertainty,” he added.
The new regulations are the result of a recommendation that came from a subcommittee at the United Nations (UN) more than a decade ago and was adopted in 2016 by the UN’s IMO, which sets rules for shipping safety, security and pollution.
The entire industry is under intense pressure to slash its sulfur emissions, given the pollutant is a component of acid rain, which harms vegetation and wildlife and is also blamed for some respiratory illnesses.
More than 170 countries, including the U.S., have signed on to the fuel change.
A crane loads a shipping container branded A.P. Moller-Maersk onto a freight ship.
Balint Porneczi | Bloomberg | Getty Images
It means that ships found in violation of the new laws risk being impounded and ports in cooperating countries are expected to police visiting vessels.
Matthew Smith, director of commodity research at ClipperData, told CNBC that he believed there was going to be “very strong compliance” with the new rules — at a rate of around 90%.
“The reason for this is threefold: because the major shipping companies already have their ducks in a row, because major ports won’t want the black eye of providing non-compliant fuel, and because shippers will lose their insurance, and hence, their livelihood if they use non-compliant fuel.”
Xeneta’s Berglund agreed that shipping liners would most likely not want to be seen taking risks when it comes to non-compliance, especially with so much attention on the intensifying climate crisis.
“I think it would be extremely harmful for anybody to try and push the boundaries on this,” he added.
Record volumes of US crude seen heading to Europe
Maritime transport is critical to the global economy, with more than 90% of the world’s trade carried by sea, according to the United Nations (UN).
It is also — by far — the most cost-effective way to move goods and raw materials.
Ahead of the implementation of IMO 2020, ClipperData’s Smith said it was clear that light sweet crude was “very much” in demand — pointing out that record volumes of U.S. crude had been seen heading into Europe in November.
“At the same time, you’re seeing Urals exports — which is a heavier sour crude — tanking due to lower demand,” Smith said.
The world’s two largest container shipping lines, A.P. Moller-Maersk and MSC, have both said that falling in line with IMO regulations would incur extra costs of at least $2 billion each.
When asked exactly what market participants could expect when stricter shipping fuel standards take effect, Tamas Varga, senior analyst at PVM Oil Associates, replied: “I see confusion and I see uncertainty.”
“A lot of people don’t quite know what is going to happen. We have to wait until next year,” Varga told CNBC via telephone.