Ernest Czermański, Sławomir Droździecki, Maciej Matczak, Eugen Spangenberg, Bogusz Wiśnicki Suplphur Regulation – technology solutions and economic consequences for the Baltic Sea Region shipping market Institute of Maritime Transport and Seaborne Trade University of Gdańsk Gdańsk 2014 Reviewer Prof. Dr. Thomas Pawlik, Hochschule Bremen Scientific editor Ernest Czermański Typographic composition Maksymilian Biniakiewicz Cover photo Ernest Czermański © Copyright by Uniwersytet Gdański Instytut Transportu i Handlu Morskiego ISBN 978-83-7939-007-6 Uniwersytet Gdański Instytut Transportu i Handlu Morskiego ul. Armii Krajowej 119/121, 81-824 Sopot tel./fax 58 523 13 89 e-mail: [email protected] Contents Introduction . 5 Chapter 1 . Sulphur Emissions Limits in the Maritime Transport . 7 1. Legal background ............................................................... 7 2. An overview of accessible solutions ............................................... 10 3. Baltic shipping market state-of-the-art report ...................................... 16 4. Sustainable waterborne transport „Toolbox” (2011) ................................. 18 Chapter 2. Sulphur emissions abatement methods for Baltic shipping. 23 1. Scrubbing technique for maritime vessels .......................................... 23 2. LNG as an alternative fuel for vessels .............................................. 31 Chapter 3. MGO – fuel change solution and its economic impact .................... 56 1. Change of fuel type from HFO/LSHFO to MGO .................................... 56 2. Fuel characteristics and assumptions .............................................. 58 3. Calculation assumption ......................................................... 61 4. Calculation of fuel changing costs ................................................ 66 5. Results and conclusions ......................................................... 72 Chapter 4 . Economic speed as a factor affecting the efficiency of shipping in the BSR area . 77 1. Introduction ................................................................... 77 2. Assumptions for the BSR container shipping model ................................. 79 3. Description of the models ....................................................... 80 4. Models’ exploration ............................................................. 84 5. Conclusions ................................................................... 89 Chapter 5 . Economical impact and comparative risk and costs analysis .............. 90 1. Analysis of the pros & cons of each solution ....................................... 90 2. Risk analysis ................................................................... 90 3. Investments overview in the Baltic Sea Region shipping market ....................... 93 4. Freight rates and increase of tariffs ............................................... 94 5. Rates increasing in tramping shipping ............................................. 96 6. Comparative investments cost analysis ............................................ 99 Chapter 6 . European Union political activity and legislation to support the implementation of Sulphur Regulations ............................109 1. New European Union strategy for transport fuels .................................. 109 2. European Union strategy to promote and use LNG in shipping ...................... 111 3. Development of alternative fuels infrastructure .................................... 114 4. Evaluation of Directive on alternative fuels development (proposal) .................. 116 5. Conclusions, evaluation and discussion ........................................... 118 3 Summary . 123 References . 125 Appendix Working table with Baltic liner shipping per-formance and marine fuel consumption . 129 4 Introduction In recent decades global economic and social development has prompted the estab- lishment of many different regulations and restrictions concerning further growth and development, the majority of them concerning the limitation and/or reduction of its neg- ative impact on the world and the environment. An evaluation of such regulations would likely vary according not only to the evaluator, but also the aim and scope of the evaluta- tion. However, in general it can be agreed that all implemented regulations are based on legitimate assumptions and positive results. Undoubtedly this was also the reason for the issuing of Annex VI to the MARPOL 73/78 Convention a few years ago. Through the evaluation of Annex VI, most often called the “Sulphur Regulation”, arises the veritable doubt as to whether the issuer – Interna- tional Maritime Organization (IMO) was aware of all of the most important impacts and consequences, both technological and economical, when it was decided that the final limit of the sulphur content in a ships exhausts will be limited by 35 times (from 3.5% to 0.1%) as of 2015. Doubts also arise when analyzing the area of this limitation, reaching out to the SECA zones (Sulphur Emission Control Area) established for Europe within the area of the entire Baltic Sea and the majority of the North Sea. The aim, however, remains quite clear - the reduction of sulphur pollution as caused by sea transport. However, based on 5 years of observation and analysis, it is safe to state that the mari- time business has more doubts and problems than previously predicted or expected. Many different processes and phenomena have been noted, which leads us to the general conclu- sion that the Sulphur Regulation brought about more problems than benefits1. With this in mind, the monograph is an attempt at a market description and a sum- mary of the current situation immediately prior to the new regulations taking effect. An attempt was made to collect all the most important aspects of the Regulation and possible solutions to the issues, including existing technologies, as well as those newly designed or under development. All of these solutions were finally subjected to synthetic, economic analysis. Additionally, we have endeavored to complete the survey on risk analysis and cost calculation with sensitivity analysis according to specific assumptions. The aim of this publication is to give an accurate overview of the shipping market, especially in the Baltic Sea Region, which we judge to be most seriously affected by the 1 See: M. Matczak, Redefining the Baltic Sea Maritime Transport Geography as a Result of a New Environmental Regulation for the Sulphur Emission Control Area.[in:] Marine navigation and safety of sea transportation. Edit. A. Weintrit, T. Neuman. CRC Press Taylor & Francis Group, London UK 2013, pp. 2. 5 Regulation. The overview consists of a technical part in which the most popular and most probable solutions that shipping owners will undertake and invest in are presented. The second part concerns the economic consequences of specific, chosen technologies with special attention given to the cost analysis of them and the potential impact on the trans- portation market, which will affect freight rates and tariffs directly in the shipping indus- try and indirectly in the rail and road transport sector. The reader will find in this book a few aspects, which vary in the way in which they are defined and/or named. This comes from the diversity of the regional and national no- menclature and business language. In choosing not to consolidate these terms, it was our intention to illustrate the complexity of the problem and to present some specific differ- ences. Moreover, each contributor, being as they are experts in specific areas, draws from the knowledge of their expertise and hence the associated terminology. Furthermore we wish to make the Reader aware about the need for further research, which we intend to carry out post January 2015 in the form of an ex post analysis in order to show the real impact of the Sulphur Regulation in the Baltic Sea Region shipping mar- ket. This will gain in importance especially following further evaluation of the Sulphur Regulation in 2018, during which a decision will be made with regards to the extension of the SECA zones on a global level as of 2020 or 2025. Finally, we wish to thank all who have supported us in our research and to highlight the co-operation that has taken place between the Maritime Academy in Szczecin, the Maritime Academy in Gdynia and the University of Gdansk’s Institute of Maritime Trans- port and Seaborne Trade. 6 Chapter 1 . Sulphur Emissions Limits in the Maritime Transport 1 . Legal background One of the most important legal acts concerning environmental aspects of maritime ship- ping (mainly to minimize pollution of the seas) is the MARPOL 73/78 – International Convention for the Prevent of Pollution From Ships. It was drafted in 1973, but thanks to its modification by the Protocol of 1978 was ratified by more than 150 countries, repre- senting over 99% of total world’s merchant fleet.1 During this time a number of annexes were introduced concerning the following: oil pollution (I), Noxious Liquid Substances (II), Seawage (IV), garbage (V) and prevention of air pollution by ships (VI). The Annex VI standards entered into force in May 2005. This act established Emission Control Areas (ECA - an area where special mandatory measures are required to control NOx, or SOx and particulate matter (PM), or all three types of emissions from ships) with a global cap of 4.5% on the sulphur content of fuel, with a 1.5% limit in SECA (Sulphur Emission Con- trol Area) zones. These standards were incorporated