Residuals bunker fuel ban in the IMO Arctic waters

An assessment of costs and benefits

The IMO has agreed to start working on the development of a ban on the use and carriage of heavy fuel oil (HFO) as fuel by ships in Arctic waters. Such a ban would not prohibit the carriage of heavy grade oil in bulk as cargo, but would require ships sailing in the Arctic waters to use and carry non-HFO bunker fuels only. This would lead to a reduction of black carbon emissions and reduce costs and damages in case of an oil spill, but also impose additional costs on ship owners/operators that otherwise would have used and/or carried HFO bunkers or blends thereof for on-board combustion purposes.

Concerns have been raised regarding the potential impact of the ban on maritime trade, in particular on Arctic communities and economies. In this context, the objective of the study is to assess costs and benefits of a ban on the use and carriage of HFO as fuel by ships in Arctic waters. The study does however not constitute a comprehensive cost-benefit analysis.

More specifically, the study assesses (1) the ban-related additional costs for ship owners/operators on the IMO Arctic fleet level and (2) at individual ship level, differentiated by ship type, (3) the potential impact on consumer prices by means of two case studies, and (4) assesses the clean-up costs that could be saved in case of an oil spill.

The main findings of the study are as follows:

  1. We have estimated the ban-related costs for the year 2021 on the Arctic fleet level for ships’ activities within the IMO Arctic waters, assuming that all ships choose to comply with the ban by using distillate fuels. Depending on the 2021 bunker fuel prices, these costs are assessed to amount to between 4 and 21 million USD in Low and High cases; and 13 million USD in the Base Case Price Scenario. The latter assumes a medium price spread between distillate fuel and residual fuels. This means that the Arctic fleet’s fuel expenditure for its activities within the IMO Arctic waters would, depending on the bunker fuel prices, increase by 3 to 18% in 2021 due to the HFO ban; in the Base Case Price Scenario by 9%.
  2. We have estimated the ban-related additional average per ship costs differentiated by ship type. Again, this was done for ships’ activities within IMO Arctic waters and under a scenario in which all ships comply with the ban on use and carriage of HFO fuels by ships by switching to distillate fuels. For the Base Case Price Scenario, we found the additional average costs for individual ships to increase by 2% for ships choosing LSHFO to comply with the global 2020 sulphur cap and, depending on the scrubber costs, to increase by 4 to 15% for ships choosing for HFO in combination with a scrubber to comply with the global sulphur cap; the majority of the ships is expected to sail on LSHFO to comply with the global sulphur cap.
  3. The potential impact of the HFO ban on consumer prices has been analysed by means of two case studies. Both case studies show that the impact of the ban on consumer prices can be expected to be relatively low, even if the ban-related additional transport costs would be fully passed on to the consumer. One case study estimates the potential ban-related additional costs for consumers in Greenland, finding a 0.2 to 0.5% increase of the average import and export price due to the HFO ban. A second case study looks into the potential ban-related additional costs of food shipped to Iqaluit in North Canada, finding a 0.2% increase in household expenditures due to the HFO ban.
  4. Clean-up costs that accrue in case of an oil spill are lower if ban-compliant fuel was spilled instead of residual fuel. The benefit of the HFO ban in terms of the clean-up costs saved is estimated to amount to between 3.4 and 45 million USD (LSHFO spill) and between 5.3 and 70 million USD (HFO spill) for one bunker fuel spill, depending on the ship type and size involved and assuming that all bunker fuel carried by a ship would be spilled. Next to the clean-up cost savings, the HFO ban also reduces the socio-economic and environmental damage costs in case of an oil spill. To actually asses at which frequency of occurrence of an oil spill the benefits of the HFO ban still outweigh its additional costs thus requires a comprehensive assessment of the benefits of the ban.

Projectleader

Dagmar Nelissen

Residuals bunker fuel ban in the IMO Arctic waters
Complementary case study (2019)

Authors CE

Dagmar Nelissen
Eric Tol

Delft, August 2018