Little more than 2 1/2 years from now, the global fleet ofmerchant ships has to reduce drastically how much sulfur ships'engines belch into the atmosphere. While that will do good things —like diminishing the threat of acid rain and helping asthmasufferers — there's a $60 billion sting in the tail.

That's how much more seaborne vessels may be forced to spendeach year on higher-quality fuel to comply with new emission rulesthat start in 2020, consultant Wood Mackenzie Ltd. estimates.For an industry that hauls everything from oil to steel to coal,higher operating costs will compound the financial strain oncash-strapped ship owners, whose vessels earn an average of 70%less than they did just before the 2008-09 recession.

The consequences may reach beyond the 90,000-ship merchantfleet, which handles about 90% of global trade. Possibleconfusion over which carriers comply with the new rules could leadto some vessels being barred from making deliveries, which woulddisrupt shipments, according to BIMCO, a grouprepresenting ship owners and operators in about 130 countries.Oil refiners still don't have enough capacity to supply all thefuel that would be needed, and few vessels have embarked on costlyretrofits.

“There will be an absolute chaos,” said Lars Robert Pedersen,the deputy secretary general of Denmark-based BIMCO. “We aretalking about 2.5 million to 4 million barrels a day of fuel oil tobasically shift into a different product.”

Merchant ships around the world are required to cut the amountof sulfur emitted under rules approved in October by theInternational Maritime Organization, a UN agency that sets industrystandards for safety, security and the environment. As well ascontributing to acid rain, sulfur, combined with oxygen, can formfine sulfate particles that can be inhaled by humans and may causeasthma and bronchitis, according to the U.S. EnvironmentalProtection Agency.

There are two main ways to comply: vessel engines are fittedwith scrubbers that would eliminate the pollutant, or oil refinerswill have to make lower-emission fuels. The limit on sulfur contentwill drop to 0.5% from 3.5%.

So far, neither the refining industry nor shipping is doinganywhere near enough for owners to achieve compliance in 2020, saidIain Mowat, a senior analyst at Wood Mackenzie.

“Ship owners are reluctant to install scrubbers to continueusing the same oil because of uncertainties and lack offunding,” Mowat said. “And most refineries won't invest toconvert heavy fuel because that will cost more than $1 billion andtake about five years to complete.”

Just 2.2% of the fleet will have scrubbers installed by 2020that would allow them to continue using current fuels, estimatesthe International Energy Agency in Paris, an adviser to 29nations.

“The compliant technical options are still very immature, and itis hard for us to see them as a real compliance option for ourfleet,” said Aslak Ross, head of marine standards at Maersk Line,the world's biggest container shipping company. For Maersk alone,the additional fuel cost will amount to billions of dollarsannually, he said.

$4 Million Per Engine

Most ships will switch to using a mix of lower-sulfur fuel oilor more-expensive middle distillates, said Jan Christensen, head ofglobal bunker operations at Bomin Bunker Holding, a Hamburg,Germany-based fuels supplier.

The scrubbing technology could cost as much as $4 million perengine, depending on its size, said Nick Confuorto, president andchief operating officer at scrubber supplier CR Ocean Engineering.Retrofitting engines might be worth doing, possibly paying off intwo years, because the price of compliant fuel probably will bethree times higher than what ships currently burn, he said.

While the world's largest owners are already reserving spacesfor refits, smaller operators are taking a more wait-and-seeapproach, said Neil Carmichael, chief executive officer at PacificGreen Technologies.

Wood Mackenzie estimates about 70% compliance globally by 2020and full compliance by 2025 after a transition period.

Merchant ships earned an average of about $9,800 a day thisyear, according to data from Clarkson Research Services Ltd., partof the world's biggest shipbroker. Ten years ago, they were earningabout $34,000. In the industry's three main markets — containershipping, dry-bulk cargo transportation, and oil tankers —there'sbeen evidence of overcapacity and depressed rates over the pastseveral years.

Those tough markets are making it harder for owners to secureinvestment and finance they need to comply, which means the IMO andits member states will probably permit some kind of transitionperiod when the 2020 rules begin, Simon Bennett, policy directorand external relations at the International Chamber of Shipping,said in a phone interview.

“If there were no flexibility on Jan. 1 and owners couldn't getfuel, then that would have an impact on world trade,” Bennett said.Either way, “this will have a profound impact on the economics ofshipping.”

From: Bloomberg News

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