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Risk in Context

Sulphur Emissions Cap 2020 – Costs vs. Insurance

Posted by Bradley Saunders July 27, 2018

Gas emissions discharged from commercial cargo vessels have become one of the major global environmental concerns within the maritime industry. These harmful gases are produced through the burning of the bunker fuel[1] used to power most large cargo ships around the world, with ships using between 1 and 16 tonnes of bunker fuel per hour.

On January 1, 2020, there will be a turning point in what has become an accepted negative consequence of human demand for goods. This is the date that a new International Maritime Organisation (IMO) regulation will come into force in many countries around the world; capping the emissions of sulphur coming from ships from the current globally permitted limit of 3.5% to 0.5%.[2]

A costly solution

This positive step will however come at great cost to vessel operating companies, as they must choose between:

1.    Switching from high sulphur fuel oils (HSFO) to low sulphur fuel oils (LSFO).

2.    Fitting expensive “scrubbers” to their ship engine exhaust systems.

3.    Changing the fuel they use altogether, to liquid natural gas or another alternative.

With regard to the former, HSFO bunker fuel currently costs around US$450 per tonne.[3] By comparison, the equivalent LSFO currently costs around US$752 per tonne.[4] Switching to a fuel source that enables compliance with new regulations could cost an average vessel operating company an extra US$2.78 billion per year.[5]

Some vessel operating companies have as many as 150 vessels or more to control, so the cost of fitting said "scrubbers” and having to purchase expensive fuels will become very costly very quickly.

What now?

So where will vessel operating companies find the required additional capital to fund their regulatory compliance? An organisation’s insurance purchasing strategy could provide the answer.

Finding the optimal balance of retained risk and insurance premium spend (for risk transfer), could be one way for vessel operating companies to help finance the additional fuel costs that the new regulations will require. To achieve this, it will be critical to understand and quantify the risk volatility of the various marine risks for which insurance is purchased; including: marine cargo, marine hull, protection and indemnity, and other liability insurances.  

Although unlikely to fully fund all the costs of the necessary sulphur regulatory changes, such an exercise could lead to lower premium insurance spend and unlock funds that may go some way to assisting those who own, operate, or charter commercial vessels.

[1] Typically heavy, residual oil left over after extracted light hydrocarbons from crude oil during the refining process.

[2] Outside of the two major emission control areas of North America and North West Europe; where the permitted limit is 0.1%.

[3] Ship & Bunker. World Bunker Prices, available at https://shipandbunker.com/prices, accessed 23 July 2018.

[4] Bunker Index. Bunker Index MGO, available at http://www.bunkerindex.com/prices/bixfree.php?priceindex_id=5, accessed 20 July 2018.

[5] US$6.93 billion - US$4.15 billion: Calculated on an example fleet of commercial cargo ships (i.e. using 8 tonnes of bunker fuel per hour) and assuming that each individual ship is burning fuel for 24 hours a day and operating its main engines for 320 days each year.

Related to:  Analytics , Marine

Bradley Saunders

Business Development and Sales, Marsh Risk Analytics