Cleaning up: the impact of scrubber technology

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While the bulk of the shipping industry will move towards cleaner fuels from 2020, scrubber technology means the deadline will not be the end of fuel oil’s use at sea.

Exhaust gas cleaning systems, or scrubbers – a technology long familiar to the power generation industry on land – have seen renewed interest from the shipping industry in recent years, and a surge in orders in 2018. The systems clean a vessel’s emissions on board, allowing it to continue burning high sulfur fuel oil while still complying with the new sulfur limit.

The technology works by spraying alkaline water into the vessel’s exhaust, capturing sulfur and other unwanted emissions as they are produced. The systems require an upfront capital investment of about $2 million-$6 million per vessel, as well as a running cost, and the shipowner hopes to see this paid back over time by the savings made from buying high sulfur fuel oil instead of more expensive alternatives.

The installation period can be relatively painless – one shipping executive who has overseen scrubber installations said it can be done without dry-docking in some cases, with an installation time of as little as seven to nine days.

S&P Global Platts Analytics estimates around 490 vessels now have scrubbers installed, and another 400 have them on order. The company forecasts 2,200 vessels will have scrubbers installed by 2020, burning around 500,000 b/d of HSFO. But the outlook for 2030 is less clear – the company has recently raised the possibility of total installations peaking at 6,000 as the financial incentives worsen over time.

The pace of installation accelerated sharply in 2018 with the deadline rapidly approaching, and some shipping companies previously skeptical of the technology appear to have been turned around.

A common open-loop scrubber design

Container line Maersk, the largest shipping company in the world, says it now intends to install scrubbers on “a limited number of vessels in our fleet” – having previously said it did not plan to use the technology.

In August, Hong Kong’s Pacific Basin Shipping, said it was assessing two main methods – low sulfur compliant fuel oil versus scrubbers – as it geared up for the 2020 specification change. The shipping company had earlier said it thought that scrubbers were neither technically nor environmentally an effective solution.

Recently, VLCC new buildings fitted with scrubbers, for delivery in 2019, were snapped up by charterers for three years at a hefty premium of around $10,000/day over the prevailing rates for non-scrubber ships.

“We are prepared to install scrubbers if the charterers need them and agree on higher time charter rates,” Alexandros Tsirikos, CFO of Top Ships Inc, said in September.

One of the company’s Medium Range new build orders has a scrubber fitted, while the other is scrubber-ready, he said. Both the ships will be delivered early in 2019.

In October 2018, global dry bulk shipping company Seanergy Maritime Holdings Corp said it had inked agreements with three dry bulk charterers for installing scrubbers on five of its Capesize bulk carriers.

Upon completion of the installation, the vessels will begin index-linked period employment with the charterers ranging from three to five years, it said in a statement. As part of the time charter agreements, the charterers will cover 100% of the equipment and installation cost for retrofitting the vessels with scrubbers, it said, adding that the total investment, to be covered by the charterers, is expected to exceed $12.5 million.

Price gap

The fuel oil forward curve is currently projecting a significant price gap between HSFO and low sulfur marine fuels from 2020, indicating a swift payback time for scrubber investments. S&P Global Platts Analytics forecasts a payback time of less than one year in some cases.

This is prompting many shipowners and charterers, particularly in the tankers segment, to order scrubbers. And the attractive potential returns are also opening new financing options.

In June, Norwegian independent tanker operator Frontline said it was raising equity to finance its growth, including the purchase of scrubbers.

More recently, Star Bulk Carriers said it had entered into a $310 million loan agreement to grow its business. The loan included a $70 million tranche to exclusively finance the procurement and retrofitting of scrubbers for up to about 50 vessels in Star Bulk’s fleet, it said in October.

Banks and private equity funds have also become increasingly proactive to assist shipowners with scrubber purchases. These new sources of funding coming into the shipping industry – at a time when banks have generally retreated from shipping – have played a pivotal role in supporting the rapid growth in installations.

In May, Goldman Sachs said it set up a financial entity to help shipowners finance marine scrubber installations. Under this arrangement, the bank would seek to recoup its investment over one to two years from the savings the shipowner can secure by burning HSFO rather than paying more for a 0.5% sulfur product.

In another innovative model, one tanker operator has taken a stake in a scrubber manufacturer to secure access to the systems for its ships and get a share in the potential profits.

In June 2018 Frontline said it had acquired a 20% stake in scrubber manufacturer Feen Marine Scrubbers. The tanker operator agreed to order FMSI exhaust gas cleaning systems for 14 vessels, with options to order an additional 22 systems at fixed prices.

Some shipowners have told S&P Global Platts that they see scrubbers as a short-term solution, meant to help them tide over the initial period of uncertainty when the availability of the new 0.5% sulfur fuels may be limited. They see the pricing economics for scrubbers worsening over time, with refiners continuing to cut fuel oil production and more 0.5% sulfur product becoming available.

Meanwhile, the question of the choice of scrubber has also fixated some shipowners, particularly due to the possibility of stricter water discharge regulations in future.

Open-loop scrubbers take in naturally alkaline seawater and then flush the discharge out to sea. Some have argued that this simply moves the pollution from the air to the sea. Further, open- loop scrubbers have already been banned in Belgium, California and Massachusetts in the US and along the Rhine river in Germany, with the fear that many new regions worldwide could follow rendering their long-term viability uncertain.

Singapore’s announcement in December that it would ban open-loop discharge has been another major blow to the industry, with the Exhaust Gas Cleaning Systems Association attacking the decision as “disappointing” and “politically motivated.”

Closed-loop systems have the option of the discharge being retained to dispose of at port but the systems use caustic soda to raise the alkalinity of the water being used. There may be difficulties involved in purchasing it due to restricted usage at many ports. Availability of shore reception and sludge landing facilities at ports also remains limited.

Hybrid systems with the option to work in either open- or closed-loop modes are available, but they are usually more expensive.

There are also potentially some mechanical challenges associated with scrubbers. The systems can potentially break down or malfunction for a number of reasons, including mechanical failure of pumps and pipe leakages. Corrosion of overboard discharge pipes also presents a threat. Owners need to provision for this contingency, including complexities involved in repairing scrubber units while the vessel is located in remote regions.

Still, despite the capital expenditure involved and other challenges, scrubbers remain an economically attractive and favored solution for many owners not only in the run up to 2020 but also in the immediate years that would follow it.

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