marine insurance day 2018 - aimuedu.org · high sulphur and 0.5% fuel oil supply and demand (2020f)...

Marine transport advisors

McQuilling Services, LLC

Marine Insurance day 2018

IMO 2020 Session, October 5, 2018


McQuilling Services, LLC 2

About McQuilling

McQuilling Services is the marine transportation consulting and advisory group of McQuilling

Partners, Inc. The primary focus of McQuilling Services is to provide clients commercial consulting

services related to global seaborne transportation and related disciplines in the supply chain. The

approach of the Company is to develop products and services based on specific client

requirements, data, and the systematic employment of quantitative methods, bringing individually

crafted solutions to client’s needs. The Company employs a collaborative business model

combining experienced internal resources with exceptional industry partners to produce a team of

directed experts. This model creates a targeted, content-rich knowledge and experience base to

serve clients’ needs cost effectively.

McQuilling Partners is a privately-owned marine services company, providing transportation

services to clients in the shipping, commodity and financial services industries. McQuilling

Partners is a respected tanker specialist globally and is one of a select few firms that sit on both

the International and the Asian Baltic Exchange Tanker Route panels. McQuilling Partners

facilitates the physical transportation of liquid and dry bulk commodities annually through the

provision of brokerage services and provides coverage in the wet freight derivatives market for all

the traded routes. The firm has assisted numerous clients in the sale or purchase of marine

assets, and advised them on their directed research and consulting requirements. Today,

McQuilling is a privately held firm numbering over 160 people, specializing in the marine

transportation of commodities for a global client base. Representing broad commercial experience

in the international shipping markets, McQuilling provides professional, reliable and personalized

service to clients from offices located in New York, Houston, Caracas, Lima, Mexico City, Rio de

Janeiro, Athens, Dubai, Mumbai, New Delhi and Singapore.



IMO 2020



The IMO’s Historical Evolution in Environmental Regulations

► The IMO established the International Convention for the Prevention of Pollution

from Ship (MARPOL) in 1973 (entered into force in 1983)

► The primary objective was pollution prevention by oil from operational measures

as well as accidental discharges (Annex I)

► In 1992, amendments to Annex I required all new tankers to have double hulls

and that all single hull tankers be phased out by 2010

► Annex VI of MARPOL introduced regulations to control emissions levels of

nitrogen oxides (NOx), sulphur oxides (SOx) and volatile organic compounds

(VOS)

► This supported the effort to establish Emission Control Areas (ECA) which held

stricter limitation on airborne emissions (US, Baltic Sea, North Sea) – maximum

sulphur content of 1.5% (January 2015 reduced to 0.1%) – China adopted

meaures

► On January 1, 2020, the latest amendment to Annex VI, will set a global sulphur

emissions cap of 0.5%

IMO 2020



Current ECA Zones and Sulphur Directives

IMO 2020



Global Cap Comes into Play in 2020

IMO 2020

► October 2018 – MEPC Meeting 73 will focus on adoption certain compliance

measures to ensure non-carriage of high sulphur fuel oil without the installation of

an exhaust gas cleaning system (Scrubber)

Source: IMO Website



MEPC 73 – Potential Shift in IMO?

IMO 2020

► October 22-26 2018 – MEPC Meeting 73 is viewed as a last chance for the IMO

to shift its position on the forthcoming regulations

► BIMCO, Intertanko, Intercargo as well as major flag states (Panama, Liberia,

Marshall Islands, Bahamas) have lobbied the committee ahead of the meeting

► Flag states are ultimately the “enforcers” of the new IMO regulations in addition to

port state controls, which can impose fines and prohibit vessels trading in their

waters

► The “lobbying committee” has outlined key concerns from owners, including:

► Incompatibility of blended fuel oils with engines

► Lack of ISO standard for new fuel

► Crew safety (off-spec bunkers can cause permanent damage to engines,

while at sea in harmful conditions)

► Fuel availability in all trading regions

► Exemptions were asked as a temporary solution (CARB example)



Bunker Fuel Mix | 2012-2030F

Source: JBC Energy

0%

5%

9%

14%

18%

23%

27%

32%

36%

41%

45%

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

LNGGas Oil0.5% Fuel Oil3.5% Fuel OilScrubbers ShareLNG Share

Bunker Fuel Mix [million b/d, %]

Source: JBC Energy Estimates

► The 2020 IMO regulations will

likely have a pronounced impact

on vessel earnings

► Vessel owners will be required to

switch to a cleaner bunker fuel

(<= 0.5%) or alternatively process

HSFO with the installation of an

exhaust scrubber

► Adoption of scrubber systems will

likely be slow at the onset,

comprising of about 6-8% share

► LNG is one additional solution for the market in the long term (8% market share

by 2030) – infrastructure is not there yet on a global scale

► Owners with scrubber systems in place for the early years of IMO regulations will

benefit the most (expected differential of over US $320/mt – JBC Energy)

IMO 2020



IMO 2020

0.5% Fuel Oil Regional Composition | 2020F

Source: JBC Energy, McQuilling Services

► European pricing for 0.5% fuel

oil is expected to be about US

$320/mt higher than HSFO in

2020

► This region is net short low

sulphur fuel oil, but long high

sulphur components

► In the USG, the premium is

expected to be about US

$290/mt in 2020; this region

should see the tightest spread

► Africa and part of South America with access to low sulphur crude oil feedstock are

likely to produce a Straight Run Fuel Oil (preferred by owners)

► Premium pricing for Medium/Heavy Sweet Crudes to commence in 2020

► Blended fuel oil will likely be higher in places that are long blending components

(cutterstock) including the Former Soviet Union (FSU, US)

41%

42%

54%

38%

62%

46%

63%

49%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Europe FSU Asia Middle East Africa US C&SAmerica

World

Cutterstock SRFO VBFO Other Residue



IMO 2020

High Sulphur and 0.5% Fuel Oil Supply and Demand (2020F)

3

242

-379

-56

244

101 74

-1,600

-1,200

-800

-400

0

400

800

1,200

1,600

N. America Europe Asia Middle East FSU East C&SAmerica

Africa

HSFO Bunker Demand Other HSFO Demand

HSFO Supply Balance

151

-19

-343

-202

227

10 24

-1,600

-1,200

-800

-400

0

400

800

1,200

1,600

N. America Europe Asia Middle East FSU East C&SAmerica

Africa

0.5% Bunker Demand Other 0.5% Demand

0.5% LSFO Supply Balance




Crude Oil and Bunker Price Expectations | 2020-2030F


IMO 2020

200

250

300

350

400

450

500

550

600

650

700

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

Bunker $/mt Rotterdam

MGO 0.1%

LSFO 0.5%

HSFO 3.5%

Scrubber Advantage

133

324

236

170

143

124

111 112119

9992

85

0

50

100

150

200

250

300

350

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

Bunker $/mt 0.5% LSFO Premium to HSFO

Assumes No Change in

IMO Policy & 90%

Compliance Rate in 2020



Source: McQuilling Services

IMO 2020

All Sectors – Fuel Cost Differentials (Left); NPV as % of NB Values (Right)

8.8

4.7

6.0

3.2

4.8

2.6

3.5

1.9

5.1

2.7

4.9

2.62.5

1.3

0

1

2

3

4

5

6

7

8

9

10

2020-25 2026-30

VLCC Average

SUEZ Average

AFRA Average

PANA Average

LR2 Average

LR1 Average

MR2 Average

US$k/day

93

65

49

39

52

45

39

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

-

10

20

30

40

50

60

70

80

90

100

VLCC Suez Afra Pana LR2 LR1 MR2

Current NB Values (w/Scrubber)

NPV of CF (Scrubber) as % of NBValue

US$ million



IMO 2020

Key Takeaways

► The introduction of the global 0.5% sulphur cap will be a major disruption to the

maritime and downstream industries

► Early adopters of scrubbers will likely benefit from increased cash flows in the

context of wide pricing differentials

► Simple refinery configurations will underperform more complex systems and likely

lead to refinery closures in some areas

► Compliance will be a major concern, despite efforts to increase document

gathering by flag states and port control measures (too many ships, not enough

human resources – Norway example of drones can help)

► Fuel quality concerns may cause extensive damages to engines; example of

recent off-spec consequences can be viewed as a sample of liabilities

► We believe fuel availability is less of a concern based on our projection of

balances (trade flows will emerge)

► Potential exemptions from the IMO will need to be addressed at the upcoming

MEPC 73 meeting on October 22-26



McQuilling Services, LLC.

Ocean House | 1035 Stewart Avenue | Garden City, New York 11530

Tel: +1.516.227.5700 | Fax: +1.516.745.6198 | Email: [email protected]

►Management consulting

►Business development

►Ship finance advisory

►Marine logistics analysis

►Market research

► Information technology applications

►Ship construction & repair advisory

►Personnel training

Thank You!

www.mcquilling.com

marine insurance day 2018 - aimuedu.org · high sulphur and 0.5% fuel oil supply and demand (2020f)...

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