Consequences of The IMOs New Marine Fuel Sulphur Regulations

CONSEQUENCES OF THE IMOS NEW MARINE FUEL SULPHUR REGULATIONS
SOURCE: VTI
SWEDISH MARITIME ADMINISTRATION
14-5-2009
CONSEQUENCES OF THE IMOS NEW MARINE FUEL SULPHUR REGULATIONS
Date: Our designation:
2009-04-15 0601-08-03406
SWEDISH MARITIME ADMINISTRATION SE-601 78 Norrkping Tel: +46 11 19 10 00 Fax: +46 11-19 10 55
Consequences of the IMOs new marine fuel sulphur regulations
Contents
CONSEQUENCES OF THE IMOs nEW MARINE FUEL sULPHUR REGULATIONS ............................................................................................................... 3 Summary ............................................................................................................................ 3 Mandate ............................................................................................................................. 8 The IMO decision and EU Marine Fuel Sulphur Directive......................................... 10 Global scope ...................................................................................................................... 10 SECA (Sulphur Emission Control Area)........................................................................... 10 EUs Marine Fuel Sulphur Directive................................................................................. 11 What is happening within the EU? ................................................................................ 12 Results from the environmental impact study carried out in Finland........................ 14 Availability and pricing of marine fuel ......................................................................... 19 Situation and possibilities of the refineries ....................................................................... 19 A crossroads for the refinery industry............................................................................. 20 Alternative fuels .............................................................................................................. 22 Which road will the refinery industry choose for 2015? ................................................. 22 Use of scrubber technology ............................................................................................... 23 Prices ................................................................................................................................. 25 Supply and demand for ship fuel up to 2020 ..................................................................... 28 Bunker fuel price assumptions in the following work .................................................. 32 Transfers to other modes of transport .......................................................................... 34 Description of the freight model ....................................................................................... 34 Cargo groups ................................................................................................................... 34 Demand for freight transportation ................................................................................... 34 Vehicle and Ship types.................................................................................................... 35 Infrastructure restrictions ................................................................................................ 35 Maritime transport network and costs ............................................................................. 35 Base case scenario ............................................................................................................. 37 Scenarios selected ............................................................................................................. 38 Scenario 1 ....................................................................................................................... 39 Scenario 2 ....................................................................................................................... 39 Scenario 3 ....................................................................................................................... 40 Results from running of scenarios ..................................................................................... 40 Results from Scenarios 2 and 3 ....................................................................................... 46 Conclusions ....................................................................................................................... 49 Impact on industrial costs............................................................................................... 51 Forest industry costs.......................................................................................................... 51 Steel industry costs ............................................................................................................ 55 Ferry market ...................................................................................................................... 57 Consequences for the shipping industry ....................................................................... 58
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Consequences for Swedish registered vessels ................................................................... 58 Consequences for vessels calling at Swedish ports in 2008 .............................................. 59 Cost increase a summary ................................................................................................ 64 Effects on emissions of particulates .................................................................................. 64 Safety and technical consequences for ship operation on entering/leaving the ECA areas ................................................................................................................................. 66 Engines .............................................................................................................................. 66 Boilers ............................................................................................................................... 67 Demands on the public authorities and other organisations ....................................... 69 How to mitigate the effects for Swedish industry and shipping .................................. 71 Annex 1............................................................................................................................. 72 Charts of differences in tonnes compared with base case scenario ................................... 72
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Summary
In October 2008, the IMO adopted tighter limit values for the sulphur content of marine fuels. The new regulations mean that the limit value for sulphur in the Baltic Sea, the North Sea and the English Channel (so-called sulphur control areas or Sulphur Emission Control Areas [SECA]) is finally lowered to 0.1% by weight in 2015 and globally to 0.5% by weight in the year 2020 or, depending on fuel supply, at the latest by the year 2025. This report has concluded that the availability of low-sulphur fuel will be sufficient after the year 2015. This is an assessment that is shared by the Finnish environmental impact study, the Swedish petroleum industry as well as analysts in the USA/Canada in relation to their joint application to institute an Emission Control Area (ECA) off the North American coast. Efforts should be made within the EU, in the first place, to include in future all those EU areas that are not, at the present time, covered by lower sulphur content requirements. In the analyses that have been made of the consequences for both Swedish industry as a whole and for the shipping industry, the starting point has been the price level that was applicable during October/November 2008. For crude oil, the price then was about 60 USD/barrel (159 litres). Calculations concerning a future price for marine fuel are based on the January 2009 forecast of the IEA (International Energy Agency) where a crude oil price of 100 USD/barrel was adjudged to be reasonable in 2015. In the analyses concerning the risk for the transfer of freight from maritime transport to land transport, which were conducted by the Swedish National Road and Transport Research Institute (VTI) on behalf of the Swedish Maritime Administration (Sjfartsverket), two scenarios have been run where the crude oil price has been adjusted upwards by an additional 75 and 150% respectively. It has been here assumed that a change in the crude oil price is fully translated into the price for marine fuel. The results of the three different scenarios which have been run to investigate the risk for the transfer of freight from sea to land show that transfers of freight from ship to both truck and train will indeed take place. An increase in road transportation would seem to be less desirable from an environmental viewpoint, particularly bearing in mind the policy documents
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drawn up within the EU for example, that clearly express the desire to bring about greater marine and rail transportation. In Scenario 1, marine transportation measured in tonne-km is estimated to decrease by two per cent at the same time as transportation by rail is largely unchanged while road transportation increases by about two per cent. In Scenario 2, the transport performed declines by no less than seven per cent for shipping whereas rail and road transportation increase by eight per cent and two per cent respectively. The effect in Scenario 3 on transport performed is a decline for shipping of ten per cent and an upturn for rail and road transportation of five and six per cent respectively. There is also a certain risk that the cost increase for shipping in Finland brings about an increase of transit truck traffic through Sweden for onward transport from e.g. the port of Gothenburg or via the ferry/resund bridge with the associated environmental impact. This has not been given detailed consideration in this report. It must be pointed out that the model that is used in the task of calculating transfers from shipping to land transportation is a test version of the freight model jointly developed by the national transport agencies and SIKA (Swedish Institute for Transport and Communications Analysis). This model has, nevertheless, been assessed as being able to satisfactorily estimate transfers between transportation types. A certain corroboration of the model has been carried out through certain actual transport operations being compared with the outcome of the model operations. All in all, the estimates of the effects on the shipping industry that have been made indicate an increase in the fuel costs of about 50-55% in 2015, assuming an unchanged crude oil price. For vessels that mostly transport cargoes between ports within SECA, the increase in the fuel costs may, however, amount to around 70%. The total increased cost for the ships that called at Swedish ports during 2008 has been estimated at about SEK 13 billion for 2015. At the same time, sulphur emissions decline by 79 500 tonnes, corresponding to a socioeconomic benefit of SEK 4 billion. Examples show that bunker fuel costs comprise between 40 and 50% of the total expense of operating a vessel. Therefore, the more expensive fuel will entail increases in shipping transport costs by an average of 20-28%. Manifested in terms of transported freight, the increase has been estimated at between SEK 20 and SEK 100 per tonne. The relatively large variations
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are due to differences in the transport set-up, the size of vessels and filling ratios as well as the existence or not of return cargoes. For certain transport shipments the increase in the marine transport cost may be slightly higher than the 20-28% that is shown above. For a ferry line with passenger vessels in traffic between Stockholm and Turku (bo) in Finland, currently using fuel with a sulphur content of 0.5% by weight, the additional cost is estimated at SEK 41 m. or in passenger terms at SEK 20.50 per passenger. The annual emissions of sulphur have been estimated to decline by just over 110 tonnes, equivalent to a socioeconomic benefit of SEK 5.5 million. If one assumes that this ferry line has operated its vessels on a fuel with 1.5% by weight sulphur content, the additional cost amounts to SEK 75 million or SEK 37.50 per passenger. The Swedish Maritime Administration sees certain difficulties in transferring the increased cost on to the buyers of transport through increased prices, since Swedish shipping competes in a global market with varied requirements in respect of the sulphur content in bunker oil in different parts of the world. The cost picture is therefore not the same in competing countries and there is an evident risk that profit margins will shrink in the distorted competition situation that the IMOs new regulations imply; profit margins that already today are very small. The difference in costs demonstrates the need, at a high level, to pursue the issue of instituting new control areas outside SECA and the proposed Emission Control Areas (ECA) since this is no longer merely an environmental question but a question of finding a balance between environmental measures and fair competition for Swedish industry primarily within Europe but also globally. Over and above the socioeconomic benefits of reduced sulphur emissions, there is the added benefit of reduced particulate emissions which are expected to decline by almost 80-85%. The decline in larger particulates (< PM 10) has, in this case, most significance for the local environment. More low-sulphur fuels in modern engines normally lead to the particulates formed being very small (< PM 2.5 and < PM 1.0). These are spread over larger areas and are more prone to affect peoples lung tissues and blood circulation. It is worth mentioning that the United States Environmental Protection Agency (EPA) expects a reduction of 79% in the number of premature deaths caused by particulate emissions (< PM 2.5) from shipping.
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Emissions of particulates in the Baltic Sea and North Sea are estimated by the consultancy company IIASA, in a report in 2007 for the EU Commission, at 26,000 and 61,000 tonnes respectively. A reduction by 80% would, therefore, reduce the particulate emissions by about 21,000 and 49,000 tonnes respectively. All in all, the socioeconomic benefit is estimated at between SEK 18 and 51 billion. The study by the Finnish Ministry of Transport and Communications into how the IMOs decision will affect the freight costs in Finland shows that the total transportation costs are estimated to increase by between two and seven per cent and the costs for marine transport may be expected to rise by between 25 and 40%. Manifested in transported tonnes, the increase will be Euro 2-10, i.e. SEK 22-110 (exchange rate SEK 11) for the Finnish shipping industry. The results presented indicate that the Swedish Maritime Administration report and the Finnish study have arrived at similar conclusions despite certain differences in the underlying assumptions. In the case of a move to low-sulphur fuel by 2015, merchant shipping faces a similar need for modifications and updating of engines and associated equipment that the road transport fleet was forced to, in connection with the introduction of more environmentally sensitive fuels with a sulphur content of < 0.001%. A number of safety risks are connected with the utilisation of different fuels within shipping and these must be taken into account with a view to 2015. Controls of compliance with the decision may be relatively difficult and lengthy to implement to a satisfactory extent. As things stand at present, compliance can only be checked through on-board visits in the case of Port State Control. Steps should be taken to bring into operation the measuring equipment on aircraft which enable quota measurement of flue gases. This would mean that ships with too high a sulphur content can be preselected for a more detailed control. The IMO decision includes no sanction facilities whatsoever in the event of contravention of the sulphur levels in bunker oil. There is a proposal that the government, in this case, introduce sanctions in Swedish legislation in the form of an administrative fee. The level of the charge should be very high in order to prevent shipowners from consciously and systematically operating on high-sulphur oil where the profitability in this case exceeds the cost of paying a fee for infringement of the regulations.
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Against the background of the increased costs for Swedish shipping 2015, it is proposed that measures are instituted in order to alleviate the effects of the IMO decision. A summarised sample of suggestions and ideas has been highlighted by certain participating organisations in the expert group. Suggestions should not be seen as concrete proposals from the Swedish Maritime Administration.
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Mandate
Through a Swedish government decision II 28 (N2008/7711/TR), the Swedish Maritime Administration was given the mandate inter alia of studying the consequences for Swedish trade and industry of the International Maritime Organisations (IMO) new regulations concerning the content of sulphur in marine fuel and emission of nitrogen oxides by ships. Under the terms of the mandate, the Maritime Administration has consulted with and obtained relevant information from an expert group that comprises 18 public authorities and business organisations. The group includes the following organisations. Swedish Coast Guard (KBV) Swedish Environmental Protection Agency (NV) Swedish Energy Agency (EM) Swedish Institute for Transport and Communications Analysis (SIKA) Swedish National Road and Transport Research Institute (VTI) Swedish Transport Agency Swedish Business Development Agency (NUTEK) Air Pollution and Climate Secretariat Jernkontoret (Swedish Steel Producers Association) Swedish Shippers Council Swedish Forest Industries Association Swedish Society for Nature Conservation Swedish Petroleum Institute (SPI) Confederation of Swedish Enterprise Ports of Sweden Swedish Shipowners Association Swedish International Freight Association Swedish Shipowners Association for Smaller Passenger Vessels (SWEREF)
The Swedish Society for Nature Conservation has given notice that in the above project it is represented by the Air Pollution and Climate Secretariat while the Confederation of Swedish Enterprise has notified that the assignment is to be handled by member organisations. The Swedish Industrial Freight Association has not responded to the invitation to join the expert group. The Swedish Shippers Council, during the course of the
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work, has submitted an official communication to the Swedish Maritime Administration concerning the matter. This is enclosed with the report. In relation to the new regulations on the sulphur content in marine fuel, the Swedish Maritime Administration shall, after consultation with the expert group: Report how the availability and pricing of low-sulphur fuel is developing. Evaluate whether the regulations lead to the transfer of freight transport from shipping to other forms of transport. Propose measures that facilitate for the public authorities concerned the implementation of the regulations and ensure that these are observed. Draw up proposals for voluntary initiatives that can facilitate for shipowners the application of the regulations.
The Swedish Maritime Administration shall also follow and share experiences with the enquiry being undertaken by the Finnish Maritime Administration that aims to clarify the effects on logistics costs of the decision to reduce the sulphur content in marine fuels. The part of the mandate, which involves an action plan to reduce ship emissions of nitrogen oxides being sent to the Swedish government by 15th October 2009 at the latest, will be shown in a separate report. Participants from the Swedish Maritime Administration: Thomas Ljungstrm, Project Manager Jrgen Leyendecker, Project Secretary Stefan Lemieszewski, Technical Specialist
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The IMO decision and EU Marine Fuel Sulphur Directive

Shippings airborne emissions are regulated in Annex VI in MARPOL 73/78 (International Convention for the Prevention of Pollution from Ships). On 9 October 2008 the IMO adopted the more restrictive limit values for sulphur in marine fuel. The new regulations mean the following. Global scope At present, the maximum permitted sulphur content in marine fuel is 4.5% by weight. As of 2012, this limit is cut to 3.5% by weight and, as of 2020, to 0.5% by weight. An overview of availability of low-sulphur fuel on the international market shall, nevertheless, be carried out in 2018. If it is then demonstrated that the supply of the fuel is too limited, the limit of 0.5% by weight will be deferred to 2025. SECA (Sulphur Emission Control Area) Within the Baltic Sea, the North Sea and the English Channel (so-called SECA) the limit value of 1.5% by weight is applicable at present. A limit that is to be changed on 1 July 2010 to 1.0% by weight and further to 0.1% by weight on 1 January 2015
Diagram 1: New limit values within SECA
5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 2009 juli2010 SECA 2012 Globalt 2015 2020
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EUs Marine Fuel Sulphur Directive In accordance with EUs marine fuel sulphur directive (1999/32/EG, Article 4 with amendment as per directive 2005/33/EC), the sulphur content in marine gasoil within the territorial waters of an EU member state may not exceed 0.1% by weight. This applies to all vessels regardless of flag. As of 1 January 2010, the sulphur content of any marine fuels may never exceed 0.1% by weight for ships in port with the exception of short stays in port (demurrage).
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What is happening within the EU?

Within the EU a proposal is being drawn up to align the applicable EU legislation in the environmental area with e.g. the decision concerning lower sulphur content in marine fuels that was adopted within the IMO in October 2008. In the course of work on this, a number of studies have been started and will be started in order to assess the influence the decision has on the EU legislation, inter alia on the marine fuel sulphur directive (1999/32/EC). Studies that are relevant include the following: 1. Change in demand for fuel with the emphasis on the refineries possibilities of supplying fuel with low sulphur content as well as the environmental consequences of the refinery production. Expected to be completed in August 2009. 2. Investigation of aspects of revision of the marine fuel sulphur directive, including estimates of costs and benefits of the IMO decision, and different possible ways of implementing this revision in the directive. The study shall also include diverse questions at issue such as problems related to the move to low-sulphur fuel for steam turbine driven vessels with boiler operation. Expected to be completed at end of 2009. 3. Trading system with emission rights for shipping with the emphasis on how such a system fits in with EU and international legislation. The practical aspects as well as the environmental and financial consequences of such a system shall also be included. Expected to be completed at end of 2009. 4. Remote sensing with online monitoring of airborne emissions from shipping in order to facilitate monitoring and making preparations for penalising infringements of applicable regulations within ECA and within the framework of a trading system. Unclear when this study shall be completed. 5. A pilot project to introduce a trading system with SOx and NOx in the Baltic Sea. How a trading system shall function when the sulphur content in the marine fuel is regulated is unclear. The invitation to tender is planned to go out in May.
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6. Investigation of risk of transfer of freight from short-sea and coastal shipping to other modes of transport. The first phase of the study will clarify whether possible negative effects may arise as a consequence of the IMO decision. Expected to be conducted during 2009. It is too early to draw any conclusions on the basis of the aforementioned studies. The Swedish Maritime Administration has attempted to obtain information from the studies that have been initiated but this was not successful. In the opinion of the Maritime Administration, it can be of great value to await results from certain of these studies before a position is taken on how the negative consequences of the IMO decision shall be managed in Sweden. This particularly applies to the studies 1, 2, 4 and 6 above. It would be a good idea for Sweden, preferably together with Finland, to be involved in the aforementioned studies in order to be able to influence the work within the EU in a direction desirable for both our countries. The present report may, for example, provide input for the above studies and in that case primarily the studies 2 and 6.
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Results from the environmental impact study carried out in Finland

The Finnish Ministry of Transport and Communications has commissioned a study in to how the IMO decision will affect the freight costs in Finland. The enquiry has been carried out by the Centre for Maritime Studies at the University of Turku. The time frame that applies for the Swedish Maritime Administration unfortunately does not permit access to the Finnish report that was only translated during the month of May. The Swedish Maritime Administration, however, has together with the expert group met project managers in Finland and thereby been acquainted with the results. The results presented indicate that the Swedish Maritime Administration report and the Finnish study have arrived at similar conclusions despite certain differences in the underlying assumptions. The results of the Finnish study may be summarised in the following key items: 1. A calculation model for fuel consumption has been developed and used in the project. 2. A range within which the fuel prices in 2015 may be expected to vary. 3. Estimated fuel costs for fuel with varying sulphur content. 4. The effect of higher fuel costs on the freight transport prices. The study has worked on the basis of two scenarios where the difference in price for thick oil, with a maximum of 1.5% sulphur by weight, and a marine gasoil with maximum 0.1% sulphur by weight both vary. The differences in prices that are assumed for the year 2015 and that are used in the study lie at Euro 111/tonne (price level on 9 March 2009) and 480 Euro/tonne (price level in May 2008). In Swedish kronor (exchange rate SEK 11) this corresponds to SEK 1,221 and SEK 5,280 respectively. In the Swedish Maritime Administration report, a difference in price of USD 297/tonne is used (average of the price level October/November 2008), which at an exchange rate of SEK 9 is equivalent to SEK 2,673. The cost increase/change which is the consequence for the Finnish shipping industry after 2015 has been calculated and the future use of marine gasoil
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with a sulphur content under 0.1% by weight leads to the following supplementary costs. The total freight transport costs are expected to rise by between two and seven per cent. The costs for transportation by sea can be expected to rise by between 25 and 40% as a consequence of the more expensive fuel. The effect per transported tonne of freight will be an increase of Euro 2-10, i.e. SEK 22-110.
The Finnish report has also carried out industry-specific calculations on the basis of an expert assessment that is an average of two scenarios. In the table below the assumptions are shown that have been made in these calculations. Price MGO Price LS380 1.5% S Price difference LS380 and MGO 485 Euro/tonne 271 Euro/tonne 214 Euro/tonne
Transport time on North Sea (24 hr.) 4 Transport time on Baltic Sea (24 hr.) 7 Fuel consumption, total 2,116 ktonne
According to experts within both Finnish shipping companies and in Finlands trade and industry association for the sector, the increased fuel costs are transferred, allowing for a certain delay, entirely to the marine transport price. Owing to this, shippings freight transport prices will rise considerably when the new regulations on sulphur content enter into force. The increasing freight prices influence, above all, those sectors that have large-scale import and/or export and lie far from their main markets, such as the steel and forest industries. In the table below is shown the percentage increase in costs compared with the present price for certain types of freight as a consequence of the fuel price increase on the changeover to more low-sulphur fuel.
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Sulphur content Freight type Container Oil Paper (roll) Timber Freight tonne bulk carrier Steel products 1.0% 4-13% 3-8% 3-10% 3-10% 0.5% 8-18% 5-11% 6-14% 6-14% 0.1% 44-51% 28-32% 35-40% 35-40%
4-11% 3-10%
7-15% 6-14%
39-44% 35-40%
Industrial sectors are affected differently by the expected price increase. The following table shows the additional cost for Finnish industry. The distribution has been carried out on the basis of the respective sectors share of Finlands total export and import. Calculated extra cost, Euro 1,763, 994 382 8,668,913
Sector Agriculture Forestry Mines and mineral exploitation Construction industry Forest industry
Export Import Total 0.0% 0.0% 4.7% 0.7% 0.0% 0.0% 0.41% 0.00% 2.02%
0.9% 51.5%
8.1% 9.5%
5.02%
21,581,213
27.64% 118,890,562
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Metal industry Engineering industry Chemical industry Food industry Other industry Retail sector Other services Total
9.1% 0.4% 24.1% 3.1% 3.7% 2.3% 0.2% 100%
18.4% 0.4% 6.8% 2.1% 2.3% 6.9% 44.9% 100%
14.36% 61,776,307 0.43% 1,838,810
14.22% 61,169,232 2.51% 2.89% 4.92% 10,812,674 12,416,636 21,153,124
25.58% 110,023,494 100% 430,095,340
In the summarising comments it was decided to show the cost increase with the aid of two examples. In accordance with model calculations, a changeover to more low-sulphur fuels (< 0.1% by weight sulphur) entails that the freight costs are expected to increase as follows: Where the difference in fuel price is Euro 111 per tonne (price level March 2009), the annual costs in the maximum scenario increase by Euro 273 million and in the minimum scenario by Euro 190 million. Where the difference in fuel price is Euro 480 per tonne (price level May 2008), the annual costs in the maximum scenario increase by Euro 1,182 million and in the minimum scenario by Euro 823 million. The Swedish Maritime Administration has carried out similar calculations that are presented in the present report. The results from the Administrations enquiry appear, in brief, as follows. Fuel costs are estimated to rise by between 50 and 55%. Fuel costs constitute between 40 and 50% of the total costs of operating a vessel. The costs for marine transport increase by between 20 and 28%. Per transported tonne of freight, the increase is between SEK 20 and SEK 100.
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Any closer analysis of the Finnish study, as mentioned above, cannot be carried out since it is not available in Swedish or English before this reports completion. It should, however, be pointed out that the risk of transfer to other types of transport is considerably larger in Sweden than in Finland which can be regarded as an island to an even greater extent than Sweden. There is, on the other hand, a risk that the cost increase for shipping in Finland brings about an increase in truck transport through Sweden for onward transport from e.g. the port of Gothenburg or via ferry/resund bridge with the associated environmental impact. This has not been taken into consideration in detail in this report.
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Availability and pricing of marine fuel

Situation and possibilities of the refineries Crude oil is refined and processed into a number of different products. Crude oil from different parts of the world has, through its origin, different compositions and the choice of crude oil has great importance for what is to be produced. The price and the refinerys design and function vary depending on the portions of the different hydrocarbons the product contains, e.g. gasoline, gasoil and thick oil. The content of e.g. sulphur and heavy metals has a great impact on prices. In the refinery, crude oil is divided up in to different fractions due to boiling range, i.e. when they change from liquid form to gas or from gas to liquid.
Figure 1: Production temperature for different oil products.
Source: SPI
Through control of this process the refineries can regulate the production of gasoline, diesel as well as light and heavy heating oil depending on market demand. The output of the different products depends on how large a share of different fractions the crude oil includes as well as how the individual refinery is configured. Heavy heating oil which at present is less in demand may, nevertheless, be further refined into lighter and more attractive products. This refining takes place in so-called upgrading plants such as e.g. thermal crackers, hydro crackers, catalytic crackers or in coker units. Thermal cracking means decomposition of the long hydrocarbon chains under high temperature and reduces the viscosity of the residual fuel oil (the residue is of low viscosity) and increases the output of diesel fuel, lighter
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heating oil and gasoline. In the hydrocracking process there is the possibility of producing middle distillates (gasoil, diesel) from heavy fractions (thick oil). Catalytic cracking means that heavy heating oil is refined into products for which there is more demand, such as gasoline, diesel fuel and heating oil, through so-called upgrading. In the production process a number of different fractions are combined in order to handle demanding production specifications and standards for vehicle and ship fuel with a specific sulphur content, aromatic content, ignition quality etc. The refineries may in this way produce vehicle and ship fuel with a sulphur content down to 0.5% as a minimum. This applies primarily to refineries that do not have any additional conversion capacity and which therefore choose to process low-sulphur crude oils. In order to produce fuel with a sulphur content of less than 0.1% the oil must be further refined. A crossroads for the refinery industry In order to meet an increased demand for fuel with lower sulphur content by 2015 the refineries must reorganise their present production profile. Here there are certain different routes or combinations of routes to take within the oil industry. 1) Optimising heavy fuel oil stream separation and mixing in order to obtain low-sulphur bunker 2) Processing more low-sulphur crude oils 3) Desulphurising heavy fuel oil 4) Converting heavy fuel oil to vehicle fuel 5) Exporting surplus of high-sulphur bunker. Optimising heavy fuel oil stream separation and mixing in order to obtain low sulphur bunker The technology is based on raising the refining level of crude oil in the direction of medium and high distillates in line with the increase in demand for these products. This takes place through the admixture of different middle distillates in order to reduce the sulphur content in the fuel. The refineries, through this process, can develop a fuel with a minimum 0.5% sulphur by weight. The potential for this, however, is limited.
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Process more low sulphur crude oil The demand for low-sulphur crude oils has increased and, with all probability, will increase after 2015 since the low-sulphur crude oil has a lower refining requirement than the high-sulphur crude oil at the same time as the supply of low-sulphur crude oils is limited and the competition for these will only increase. The shortage of low-sulphur crude oil will very likely entail a larger admixture of high-sulphur crude oil in the production process. Desulphurising heavy fuel oil The Swedish refining industry is dominated by a few operators with Preem as the largest with refineries in Gothenburg and Lysekil. Preem adjudges that the demand for heavy fuel oil will decline 2015 and that the inputs that would be required to desulphurise heavy fuel oil to 0.1% presupposes much too large investments whereas the investments leading to an increased utilisation of waste oil for production of middle distillates are considerably less and more future-oriented. To desulphurise heavy fuel oil also results in increased CO2 emissions, which also applies to all refining although to a varying extent. Converting heavy fuel oil to vehicle fuels Substantial investment costs for heavy fuel oil desulphurisation in combination with reduced demand mean that the demand for marine fuel will be further shifted from heavy fuel oil to middle distillates up to the year 2015. Preem adjudges that the coker units that are required to refine heavy fractions (heavy oil) for vehicle and ship fuels, despite the significant investment costs, have a short repayment period, about 4-5 years time and the refineries are able therefore, in all probability, to select this method for producing vehicle and ship fuel after 2015. Investments in coker units are, however, sensitive to possible engineering applications in the form of natural gas as propellant or desulphurisation equipment for flue gases on board ship which could then signify continued use of high-sulphur bunker fuel.
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Exporting surplus of high sulphur heavy distillates. To desulphurise and reformulate heavy fuels (thick oil) to meet applicable standards in 2015 requires substantial investments in coker units and the refining industry is currently doubtful of making additional investments owing to the economic downturn. One conceivable scenario for 2015 is that parts of the high-sulphur heavy fuel oil will, for a period, be exported to areas with a higher permitted limit for sulphur in marine fuels or alternatively it is used as a back-up fuel or base fuel in land-based power stations with desulphurisation. Alternative fuels The refinery business has a well-oriented environmental focus with the development of alternative fuels. The supply of renewable fuels is, however, limited and the refinery business is therefore working with the goal of increasing the admixture of alternative fuels in the marine propellants. Preem carries on research concerning e.g. biodiesel from tall oil and biomass with the objective of developing diesel by thirty per cent alternative fuel admixture. The volumes from this production are limited and will mainly be utilised within the road transport sector in order to meet future binding goals for the proportion of renewable fuels as well as to tackle greenhouse emissions in the transport sector. Which road will the refinery industry choose for 2015? The Swedish Maritime Administration has identified five possible approaches for the refinery industry to develop a more low-sulphur fuel. Factors that affect the choice of the refineries are e.g. investment costs, the long-term sustainability of the technology as well as sensitivity to new technology and development. The technique of optimising the separation and mixing of heavy fuel oil streams into low-sulphur bunker fuel is limited to marine fuels with a minimum of 0.5% sulphur by weight. Preem AB and SPI adjudge that the refineries with this technology will not be able to produce fuel with a maximum sulphur content of 0.1% by weight. During a relatively limited period the refining industry will be able to export heavy oil residues with high sulphur content to areas with higher limits for
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sulphur in marine fuels. The Swedish Maritime Administration adjudges that this possibility will be further limited until 2015 since more areas, in addition to the present SECA and future ECA, will surely introduce limitations for sulphur in marine fuels. Certain oil residues may in future be used in land-based power stations with flue gas purification. To refine heavy fuel oil to meet the applicable regulations in 2015 requires significant investments for the refinery business. The oil industrys willingness to invest is largely influenced by the long-term sustainability of the technology, the level of demand and profitability. The refineries also have the possibility to process crude oil into middle distillates with hydrocrackers at significantly lower investment costs, frequently at already existing hydrocracking plants. The demand for heavy fuel oil for marine use is declining and will decrease further until 2015. The desire to process a mixture of low-sulphur crude oils in a straight- run process will increase somewhat up to 2015. The increase depends on the so-called hydroskimming refineries capacity to deliver, which is deemed to be uncertain since many of these did not survive rationalisations within the sector. The limitations lie primarily in the supply of low-sulphur crude oil and therefore with the greatest likelihood it will involve the admixture of further refined high-sulphur oil. To process a mix of low-sulphur crude oils is a relatively cheap process in order to develop marine fuel with lower sulphur content in relation to further refining oils with a higher sulphur content. To combine both these alternatives as well as to further refine oil residues will be a realistic alternative in order to develop low-sulphur fuel until 2015. The development of alternative fuels for the admixture and/or as own propellant is largely dependent on political and economic steering tools but these fuels will very probably acquire increased significance until 2015. Use of scrubber technology The technique of further refining and distilling heavy fuel oil into fuel with a lower sulphur content than 0.1% by weight is sensitive for technical developments on ships in the form of flue-gas cleaning systems, so-called scrubbers but also for other technology or other propellant such as natural gas for ships. Vessels that have installed scrubbers are able to use a fuel with significantly higher sulphur content also after 2015 which influences the preconditions for investments in this alternative.
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It is, however, worth noting that the regulations that have been drawn up within the IMO for discharges of wash water containing sulphur from socalled open saltwater scrubbers are based on the conditions in a pure marine environment with high salt content and high alkalinity in order to neutralise the acidic emissions. This constitutes a problem for the skerries, the rivers and other environments subject to acidification, e.g. the Baltic Sea area, where exceptional volumes of water would be required in order to lessen the environmental impact to an acceptable level. The lack of ships that are equipped with this technology has entailed that a project study for clarification of whether this technology for flue gas cleaning can be accepted in the Baltic Sea or not must be put to one side for the time being. There is much that suggests that the marine conditions that prevail in the Baltic Sea can hardly tolerate such a frequent recurring environmental loading. For this reason the Swedish public authorities and institutions that are engaged in the marine environment work are adopting, for the time being, a wait-and-see attitude to the open scrubber technology. If it is then shown that the environmental impact of such systems is altogether too great the issue will be raised in the HELCOM work with the focus on an IMO prohibition of discharges from open scrubber facilities within the Baltic Sea. Closed fresh water scrubber systems that neutralise sulphur from the flue gases in ships with the aid of natrium hydroxide are, on the other hand, possible to accept from the marine environment viewpoint on condition that no emissions are let into the marine environment. However, they create work environment safety problems and presuppose that reception facilities are established in the ports for taking care of the remaining leached fluids that ought to require handling of environmentally dangerous waste with associated costs for transport and destruction. Under no circumstances may this fluid be mixed with sludge or spill from fuel handling since the treatments are different. An important issue, therefore, is through increased financing in research within this area, to develop new technologies that can reduce emissions of hazardous substances from shipping. The most important issue on the agenda, despite everything, is to reduce emissions from shipping regardless of the technical means adopted.
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C Consequences of the IMOs new marine fuel f sulphur re egulations
Prices The cost of o ship fuel is character rised by larg ge fluctuatio ons but seen n over a period of ten t years th he price has risen signif ficantly. The e backgroun nd to the price incre ease is main nly an increase in the cr rude oil pric ce and an in ncreasing demand. The T internat tional price of both crude oil and marine m fuel is steered by supply and deman nd but is sha aped in the short s term also a by expe ectations ns are shape ed by econo omic forecas sts, unrest about the future. The expectation nt parts of th he world, pr roduction fo orecasts from m the oil-pr roducing in differen countries, stock levels, seasonal variations, weather for recasts, acci idents and much else e. The crude e oil price in n Western Europe E is rel lated to the price of crude oil of o high qual lity that is produced p fro om the oil fields fi in the North Sea of so-calle ed Brent ty ype. Other crude c oils th hat are purc chased in W Western Europe are e priced wit th the Brent t oil as com mparison in its i capacity as socalled ma arker crude . Crude oils s from other r parts of th he world are e priced on the basis of o a marker crude that has h been sel lected e.g g. West Tex xas Intermedia ate from th he USA.
Diagram 2: Crude C oil price trend t during per riod 1997 200 08
S Source: SPI
From the diagram d it appears a that t the price tr rend for cru ude oil has b been significant t in the last ten years an nd that the price p fluctu uates. When viewed over a lon nger period of o time the crude c oil pr rice has rise en constantly y. In mid-
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2008 the highest level so far was noted with a crude oil price of around USD 135-140 per barrel (159 litres) in order to fall to about USD 40 per barrel in December of the same year. The sharp price decline is due to the financial crisis and the ongoing economic downturn which reduces the demand for crude oil but also for the distillate fuel. The price trend for crude oil until 2015 is influenced by a series of different factors, e.g.: Supply of crude oil Demand Development of alternative fuels Energy effectivisation Geopolitical developments
The supply of crude oil is primarily steered by the countries within OPEC and a high crude oil price has both positive and negative effects on the oil production. In the short term, a high crude oil price favours investments in the refineries and creates preconditions for additional investments in e.g. coker units for production of distillates. In the longer term a high oil price may have the opposite effect for the oil industry. The high crude oil price of recent years has hastened the development of alternative fuels and energy sources which may negatively affect the prerequisites for new investments in crude oil production and in the refineries as well as to impair the results of investments already carried out, both within the oil industry and for the oil-producing countries long-term investments in the developed countries. This may lead to actions from the oil-producing countries that, using pricing of crude oil as an instrument, may brake the development of alternative fuels and other energy sources and thereby retain the demand for oil at a high level. In line with the increased fuel prices and clear environmental impact awareness, the focus is now increasingly on the development of alternatives to petroleum-based propellants. Furthermore, new fuel products have made a breakthrough, e.g. ethanol and biodiesel as an admixture. A majority of the worlds oil-producing countries lie in zones of periodic geopolitical turbulence; unrest in these areas may affect the supply of crude oil until 2015. At the present time those countries that are part of OPEC produce about 40% of all crude oil and the remaining 60% derives from
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other countries. Two thirds of the worlds known oil reserves, according to the SPI, are located in the Middle East. All in all, there is a multitude of factors that must be taken into account in the hypothesis of a realistic crude oil price for 2015. These factors also show the difficulty of assessing the price development up to 2015. Forecasts have been made by a number of organisations and e.g. the International Energy Agency (IEA) adjudges that the crude oil price will lie around USD 100 per barrel in 2015. Like the price for crude oil, the price position for different ship fuels is steered by the supply and demand in the fuel market. The diagram below shows the price trend for ship fuel with different sulphur content during the period 2003-2008.
Diagram 3: Sales price for ship fuel 2003 2008
1400 1200 1000 USd/mt 800 600 400 200 0 2003-04-15 2003-08-13 2003-11-27 2004-03-16 2004-07-05 2004-10-19 2005-02-04 2005-05-25 2005-09-09 2005-12-23 2006-04-12 2006-08-01 2006-11-15 2007-03-05 2007-06-22 2007-10-08 2008-01-28 2008-05-15 2008-09-01 2008-12-15
05-07% SRNWECFH Usd/M T 1PCTNWECCH
3.5PCTNWECCH
GO01/02NWECCH
Datum
Source: Preem AB
From the diagram, it appears that the price trend for marine gasoil with 0.10.2% sulphur by weight (light blue curve) has gone from about USD 400 per tonne in 2004 to the peak price of around USD 1 300 per tonne at mid2008, in order to subsequently decline to about USD 400 per tonne at the end of 2008. The sharp price decline for all fuels in the latter part of the second half of 2008 can wholly be related to the global financial crisis and the following economic downturn. From the diagram it also appears that the price difference between heavy fuel oil (yellow curve) and marine gasoil
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during the entire period was around USD 250-300/tonne. In this study a price difference of USD 297/tonne has been assumed (price level October/November 2008). Supply and demand for ship fuel up to 2020 According to the Swedish Petroleum Institute (SPI) and Preem AB, the oil industry will be able to process sufficient low-sulphur fuel until 2015 in order to meet shippings requirement within the SECA. The demand for fuel up to 2015 is expected to be further shifted towards distillates e.g. marine diesel oil (MDO) and marine gasoil (MGO).
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Diagram 4: Forecast demand for fuel within the EU
Source: Concawe
The diagram shows an increased demand for fuel within the EU from 674 m. tonnes in the year 2000 to 739 m. tonnes in 2020 which corresponds to an increase of about 10% during the period. Furthermore, the demand for heating fuels is estimated to decline sharply at the same time as an increased demand for ship fuel is expected. The demand for fuel is assumed to decline whereas the demand for middle distillate is expected to continue to increase. The availability and pricing of middle distillate until the year 2015 will also be influenced by the demand for diesel fuel and gasoline for land-based transport.
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Figure 2: Distribution between import/export of fuel 2005
Source: Europia
At the present time, Europe has a surplus of gasoline and a deficit of diesel. This imbalance is compensated largely with the surplus of diesel fuel that exists in the USA through refining and the high demand for gasoline there. Increased oil prices have, however, resulted in an increased demand for diesel primarily in the USA and the continued development of demand for diesel in the USA will affect the supply and pricing in Europe up to 2015. An establishment of the ECA (Emission Control Area) in USA and Canada, along the coasts and 200 nautical miles out reinforces this picture and means that a not negligible amount of diesel fuel will be consumed by shipping in the vicinity of the American and Canadian coasts. The USA and Canada have recently, through their environmental authorities, submitted an application to the IMO in which sulphur emission requirements, within the same time horizon, will be equally restrictive as the North European ones. These regulations shall apply in the area that is the United States and Canada Emission Control Area as well as in the Great Lakes. Should the joint application by the USA and Canada be accepted by the IMO, the rules on emissions will be tightened in three stages, starting in 2012. The new emission regulations will increase demand for low-sulphur fuel. The US Environmental Protection Agency adjudges, however, that there should be sufficient refinery capacity to produce the quantity of low-
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sulphur fuel that will be demanded. Based on what emerged in the enquiry undertaken by Ensys Energy & Systems, which was initiated by the Secretary-General of the IMO through its International Scientific Group of Experts, the US Environmental Protection Agency is of the opinion that a cost increase per tonne of bunker oil of USD 148 is to be expected in the ECA areas in 2015 where the sulphur content is reduced to 0.1% by weight.
Figure 3: Proposed limits for the ECA in USA/Canada
Source: US Environmental Protection
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Bunker fuel price assumptions in the following work

Table 1 shows the type of fuel used by ships arriving in Swedish ports during 2008. The Swedish Maritime Administrations list of vessels having a valid SECA Compliance Certificate for discounted fairway dues has been used as a basis. In the certificate application sent in by a shipping company or shipowner, the sulphur content of the fuel is given according to the bands shown in the table below. For vessels not having a valid compliance certificate, the sulphur content has been set uniformly at the maximum of 1.5% by weight, corresponding to the maximum value permitted under SECA.
Table 1: Number of arrivals at Swedish ports in 2008 by sulphur content (% by weight)
Shiptype Bulkcarrier Drycargoship Passengership RoRo Tanker Tug Containership Othervessels Total
<0.1
<0.2 <0.5 <1 <1.5 273 123 816 7,067 268 407 5,403 568 61,668 8,689 20,593 143 956 2,589 624 5,384 7 0 2,390 109 71 819 568 69,782 9,151 1,363 37,735
Total 1,212 13,145 91,518 3,688 6,008 7 2,390 999 118,599
Source: Swedish Maritime Administration
In this further work, it has been assumed that vessels use the fuel types shown below with their corresponding sulphur contents. The price stated is an average value of the prices during October/November 2008 in Rotterdam. This period has been chosen to avoid months with extremely low or high prices. During October/November 2008, the price difference between a bunker oil with a sulphur content below 1.5 % m/m and marine gasoil with a sulphur content of under 0.2 % m/m was approximately USD 300 per tonne. This difference fluctuated relatively strongly during 2008 but, judged over a longer time period, it has been reasonably stable at around USD 250-300 per tonne (see Diagram 3).
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% Sulphur Fuel type < 0.1 < 0.2 < 0.5 < 1.0 < 1.5
Price (USD per tonne) 662 662 603 396 365
Marine gasoil Marine gasoil Marine diesel oil Low-sulphur heavy fuel oil (LS 180) Low-sulphur heavy fuel oil (LS 380)
A weighted mean price, where account is taken of the proportion of ships with different sulphur contents in relation to the number of arrivals in port in the respective column in Table 1, gives the following cost in USD per tonne in the rough breakdown of ship types below. No account has therefore been taken of the individual fuel consumption of the ships. It should be pointed out that the costs are not valid for every individual ship. Today, for example, low-sulphur oil is mostly used by passenger vessels in resund traffic where the number of calls is high. These vessels are more significantly affected in terms of cost than e.g. the Sweden/Finland ferry. RoRo Passenger ship Other ships 385 590 486
A price of USD 365 per tonne has been used for container ships where almost all use heavy fuel oil for propulsion. These mean values have been used to evaluate the probability of a transfer from maritime transport to other transport types. With this in mind, a test version has been used of the freight model which has been developed in a joint project between the four Swedish transport administration agencies and SIKA (Swedish Institute for Transport and Communications). Although the model is currently at an evaluation stage, it is nevertheless considered adequate to fulfil the aims of this project. The results of the model test runs will also be able, excepting possible transfers to other transport forms, to show possible major changes in the pattern of marine transport, for example in arrivals at alternative ports or changed destinations. Naturally a changed pattern for calls in port will also influence the provision of land transport to and from the ports.
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Transfers to other modes of transport

In order to evaluate the probability of maritime traffic transferring to other forms of transport, as previously stated, a test version has been used of the freight model developed by SIKA and the four Swedish transport administration agencies. Model development and model trials have been carried out by VTI (Swedish National Road and Transport Research Institute) on behalf of the Swedish Maritime Administration. The results of the model trials are reported in the form of flow charts as transport performed, measured in tonne kilometres and in transported tonnes. Description of the freight model The model minimises the aggregated logistics costs (transport costs, transshipment costs, order administration costs, storage costs and the tied-up capital costs of goods in storage and during transport) for all freight transported during one year. This project focuses solely on selection of route and transport chain. Various adaptations are calculated by the model relating to both selection of transport type and vehicle type within each traffic type, transshipment terminal etc. and selection of route. Cargo groups The logistics model covers 34 freight categories. In view of the limited time available for the project, it was only possible to make generalised analyses, with the exception of some types of forest industry products and metal products. The project does not specifically cover all the different types of goods and the different patterns for incoming and departing transports. Demand for freight transportation The demand for freight transport to and from Sweden (expressed in tonnes) between each pair of shipment and receiving areas is taken as given, that is, it is assumed that all transports take place between given pairs of geographical areas. Neither the goods volume nor the shipper/receiver geographical pattern is affected by increased or decreased transport costs. On the other hand, the demand for freight transport by specific transport types varies according to the aggregated logistics costs.
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Vehicle and Ship types Thirty-three types of vehicles in all are covered by the model, divided into road (5), rail (8), maritime (19) and air (1). Substitution between different types of vehicle and ship types is noted. Infrastructure restrictions The model takes account of infrastructure restrictions applicable to the defined vehicle types in the form of, for example, deep water for ships, maximum permitted weight for trucks and axle load for trains. In terms of harbour capacity and track capacity (in the number of freight trains), no assumptions are made in terms of restrictions. Results for Sweden, however, may be compared with the Swedish Rail Administrations information on the total track capacity per line section and the freight trains capacity for each section. This has not, however, been done within the framework of this project. The degree of detail in the description of the transport infrastructure decreases as the distance from Sweden increases both on land and sea. Maritime transport network and costs In the maritime transport network which is encoded in the model and which is shown in the diagram below, most of the major ports in Europe are represented. Outside of the Mediterranean and the UK/Ireland, there is no detailed maritime transport network where individual ports are represented.
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Figure 4: Maritime transport network in the freight model
Source: Swedish National Road and Transport Research Institute
Costs for maritime transport are divided between link costs (costs during the voyage) and node costs (transhipping costs). Link costs comprise distancedependent costs, time-dependent costs and infrastructure charges. Maritime transport link costs are analysed as follows: Distance-dependent costs comprising fuel costs Time-dependent costs (time charter rate which includes all other costs) and Link-based infrastructure fees (pilot and fairway costs and Kiel Canal costs).
The link-based infrastructure fees have been kept unchanged in the model runs that have been carried out. The distance- and time-dependent link costs have been updated, in accordance with the terms of reference for this project, to the price levels which applied to fuels during October/November 2008 for distance-dependent costs and the average time charter rates during the last four year period.
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Maritime transport costs comprise, in addition, node costs in the form of transshipment costs in ports, including harbour dues. The 21 ship types represented in the model naturally involve a significant limitation which unfortunately is necessary because of the difficulty of retrieving input data and also to limit the runtime of the model. The model results at the overall level have been compared with information on actual transport operations in certain fixed relations. No more comprehensive analysis or calibration has been possible because of the very limited time frame. Base case scenario Model analyses of the differences in bunker prices between October/November 2008 and 2015 require an assumption to be made on the fuel price in 2015. According to the IEA (International Energy Agency) January 2009 forecast, the 2015 price of crude oil is estimated at USD 100 per barrel (159 litres). It is forecast that the price of crude oil will be fully reflected in the bunker prices for maritime transport, i.e. an increase in the price of crude oil from USD 60 to USD 100 per barrel will lead to an increase in bunker fuel prices of close to 70% in 2015. In the base case scenario, as stated previously, an average of the prices applying in October/November 2008 has been used. The price of crude oil during this period was approximately USD 60 per barrel. The bunker oil consumption and the bunker prices which have been used in the base case scenario in the model runs are shown in Table 2 for the 21 ship types. The table also shows the time-based charter cost. In all calculations in this report, the following currency exchange rates have been assumed: SEK 9/USD 1 and SEK 11/Euro 1. The assumed fuel consumption for all ships has been taken to be 190 g. per kWh.
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Table 2: Bunker fuel costs in the base case scenario and time charter rate for the ship types in the freight model.
Shiptypes Containership Containership Containership Containership RoRoship RoRoship RoRoship Passengership Passengership Passengership Railferry Otherferry Otherferry Otherferry Otherferry Othervessel Othervessel Othervessel Othervessel Othervessel Othervessel
Gross
Time charter Speed km/hour
tonnage rate 4,309 13,008 22,114 81,301 14,391 19,724 24,994 9,862 19,724 29,586 19,724 714 1,786 2,500 3,571 7,143 14,286 28,571 57,143 71,429 178,571
SEK 111,600 182,700 242,100 641,700 57,825 87,570 117,000 99,000 121,000 165,000 132,000 40,500 49,500 58,500 66,150 333,000 288,000 288,000 495,000 720,000 261,000
30 32 39 39 30 30 30 30 30 30 30 22 26 26 28 30 30 30 30 30 30
Bunker USD/tonne fuel Price consumption Oct/Nov Cost/hour Tonne/24 hours 2008 15.0 365 2,053.13 36.0 365 4,927.50 46.0 365 6,296.25 200.0 365 27,375.00 12.0 385 1,732.50 38.0 385 5,486.25 40.0 385 5,775.00 17.0 590 3,761.25 32.0 590 7,080.00 55.0 590 12,168.75 25.0 590 5,531.25 2.5 486 455.63 6.0 486 1,093.50 6.5 486 1,184.63 9.0 486 1,640.25 15.0 486 2,733.75 22.0 486 4,009.50 24.0 486 4,374.00 37.0 486 6,743.25 55.0 486 10,023.75 64.0 486 11,664.00 Bunkerfuel
Bunker fuel cost SEK/km 68.44 153.98 161.44 701.92 57.75 182.88 192.50 125.38 236.00 405.63 184.38 20.71 42.06 45.56 58.58 91.13 133.60 145.80 224.78 334.13 388.80
Source: Swedish Maritime Administration, Lloyds Register Fairplay, Swedish Shipowners Association
Scenarios selected Scenario methodology has been used in view of the prevailing uncertainty regarding the future price of fuel. As a result, three scenarios have been run and compared with the base case scenario, which uses an average of the bunker price in Rotterdam during October/November 2008 and the sulphur content currently being used operationally by the ships. The alternative scenarios selected are:
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Scenario 1 An adjustment of the bunker price in the base case scenario according to the requirements which will apply from 2015, that is MGO (marine gasoil) with a sulphur content under 0.1% where the price at the selected price level (October/November 2008) is equivalent to USD 662 per tonne. Here, account has been taken of the fact that approximately 650 vessels are already using low-sulphur content bunker oil operationally, which means that the increase is applied in differentiated amounts over the four main groups of ship types covered by the model. The increases range between 12 and 81%.
Passenger ship RoRo Container ship Other ships
12 % 72 % 81 % 36 %
These percentage increases, which are based on a weighted average for each type of ship, can be significantly higher or lower for individual types of ships and for different ferry services. Scenario 2 Scenario 2 involves an upward adjustment of Scenario 1 by a further 75%. In Scenario 1, the crude oil price is approximately USD 60 per barrel. IEA predicts, as stated previously, a crude oil price of USD 100 per barrel in 2015, in which event an upward revision of nearly 70% entails. If account is taken of the increased competition for fuel between trucks and shipping, which will be a consequence after 2015, there is reason to make a further upward revision of the fuel price. The magnitude of this price increase is however extremely difficult to estimate, partly because of the lack of information on the elasticity of demand for truck and marine fuel. Therefore the price of fuel for trucks has been kept the same in all scenarios. Another reason for doing this is to separate out the effects on marine transport. It can be assumed, however, that the bunker fuel price for shipping will rise more than fuel for road haulage on the assumption of a significantly higher price elasticity resulting in the prices in this scenario being further revised upwards. The overall upward price adjustment for Scenario 2 has been set at 75%. This means that the price for marine gasoil in this scenario has been
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set at approximately USD 1,158 per tonne (USD 662 per tonne according to Scenario 1 plus 75%). Energy effectivisation in marine transport will have increased importance until 2015 since this will strongly influence the total design and construction package in ship newbuilding. Included in this is the rapidly advancing development of diesel electric technology for different on-board functions to permit optimal engine efficiency at varying engine speed. The Swedish Maritime Administration has thus assumed that an increased use of alternative fuels and improvements in engines, both in road haulage and shipping, will be of the same order of magnitude and therefore these variables have not been factored in any of the scenarios which have been run. Scenario 3 In a third scenario, a larger increase in the price of crude oil has been assumed in order to illustrate the effects of a considerably higher oil price. In this scenario the cost of bunker oil has been raised by 150% compared with Scenario 1. This means that the price for marine gasoil in this scenario has been set at approximately USD 1,650 per tonne (USD 662 per tonne according to Scenario 1 plus 150%). In all scenarios, the cost of marine fuel has been differentiated depending on the proportion of shipping going outside SECA or not, since vessels operating outside SECA will, in all probability, use the maximum sulphur content allowed by changing over to tanks with different fuel. This fuel has also been adjusted upwards in price by 75% and 150% respectively in Scenario 1 and Scenario 2 as a result of the full effect of the higher crude oil price impacting on all types of marine fuel. Results from running of scenarios For the sake of clarity, the effects of increasing fuel costs for shipping are shown in map form in terms of respective mode of transportation where the same scale has been applied. Charts outline the differences in freight quantities, measured in tonnes in the case of shipping, road and rail, between the three alternative scenarios and the base case scenario (red = increase, black = decrease). In certain ratios here, red and black can appear simultaneously which means that an increase in one direction takes place and a decrease in the other. No chart for transportation by air exists, since
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this mode of transportation amounts to a very small share of transported goods measured in tonnes. However, the model does indicate a certain marginal transfer of transoceanic shipping to air freight. The results of the three scenarios point unambiguously to a relatively large risk of transfer of cargoes from ship to both truck and train. An increase in transportation by truck would indeed be less desirable from an environmental point of view, especially against the background of policy documents within the EU, for example, which clearly state a preference for more freight transport by sea and rail. In this context, reference could be made to the fact that the Commission, in its maritime transport strategy, expresses a desire to ensure that modal back-shift from short-sea shipping to road is avoided. An estimate of the negative environmental effects caused by increased truck traffic has not been calculated at all within the framework of this assignment. In Scenario 1, transportation operations for shipping, measured in tonnekilometres, are estimated to decrease by two per cent while, at the same time, transportation involving rail changes only marginally and road haulage increases by one per cent. In Scenario 2, transportation performance is estimated to decrease by seven per cent for shipping, while the increase for rail and road transportation amounts to eight and two per cent respectively. The effect in Scenario 3 for transportation is a decline in shipping by ten per cent and an increase in rail and road by five and six per cent respectively. By way of comparison, transport performance in Sweden in 2007, measured in billions of tonne-kilometres (tonne-km), totalled 40.5 for road, 23.3 for rail and 38.6 for shipping, of which 7.9 tonne-km was inland shipping. The fact that transport performance by rail increases less in Scenario 3 than in Scenario 2 is partly a result of the fact that relative costs differ between modes of transport, resulting in a variety of transport solutions which in terms of cost are favourable, for example different large vessels. In Scenario 3, for example, there is an increase in marine transport shipments from the southern part of Swedens east coast, whereas they decrease in Scenario 2. In Scenario 3, fewer transport shipments than in Scenario 2 are estimated to go via the north Norwegian ports due to higher
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fuel costs even outside SECA. Furthermore, it is estimated that the total number of transshipments between modes of transport decreases with the exception of transportation by rail in Scenario 2. Outside Sweden, however, the total number of transshipments decreases in all scenarios. This generally means that intermodal transport chains involving road and shipping decrease whereas transport chains involving rail increase. All in all, in Scenario 1 the total transport performance inside and outside Sweden is expected to decrease by one billion tonne-kilometres, and by five billion in Scenario 2, and by ten billion tonne-kilometres in Scenario 3. This is due to shorter transport distances on land than at sea resulting in reduced transport performance in case of transfers from shipping to land transportation.
Figure 5: Differences in tonnes of freight by sea in accordance with Scenario 1.
Source: VTI
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The above figure clearly outlines those transfers which, according to the models that are run, are estimated to result from the IMOs decision. The figure shows differences in freight transported by ship measured in tonnes between the base case scenario and Scenario 1. The transfers that are most obvious indicate that transfers via ports in Norrland (northern Sweden) decrease and that goods are transported instead via Narvik (Norway), which is not included in SECA, and from Swedish ports on the west coast and in that case primarily Gothenburg. A certain transfer of metal products from the East coast to the Port of Gothenburg is also expected. With regard to forestry products, a certain transfer is expected to take place from ports in northern Sweden to ports in southern and central Sweden. Possible capacity shortages in these ports have not been taken into account. In order to provide an overall picture of transfers between modes of transportation, charts for road and rail transportation are also shown below according to this scenario.
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Figure 6: Differences in tonnes of freight by rail in accordance with Scenario 1 1.
Source: VTI
The greatest change for rail transport is the fact that transportation to and from northern and central Europe is expected to increase somewhat in this scenario, and that a part of the transported freight (e.g. metal products) is transferred from routes via the Port of Gothenburg to routes via the resund Bridge, which in reality must be seen as less likely since traffic already at present on the bridge is very significant. As previously mentioned, capacity shortages of the rail network have not been taken into account in the model
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Figure 7: Differences in tonnes of freight by road in accordance with Scenario 1.
Source: VTI
As far as road transport is concerned, Scenario 1 represents the fact that transport operations are expected to increase especially in southern and central Sweden as well as to and from the port of Narvik (Norway) which lies outside SECA. The effects are, as foreseen, much less concentrated than in the case of shipping and rail. In respect of road haulage, separate charts indicating decreases and increases are also presented for improved clarity (see Annex 1). In Europe, modest changes in road haulage are expected. The pattern of transportation is determined by the choice of ports, among other things, and the share of transportation by rail. In the model, there is the assumption that transfers between larger container ships and feeder vessels take place in
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Hamburg, Bremerhaven, Rotterdam and Antwerp. Transfers between vessels in other ports (e.g. outside SECA) are thus, based on current data, not possible to show in the model, and therefore limit the choice of routes within shipping. It is, however, most likely that these ports also in future will remain important transshipment ports in terms of transoceanic transportation and in terms of feeder shipping. Ports in France could most likely grow somewhat in significance, especially Le Havre. Results from Scenarios 2 and 3 Figure 8 shows the differences between the tonnes of freight carried by ship in the base case scenario and in Scenario 2 through an upward adjustment of 75% in fuel costs for shipping.
Figure 8: Differences in tonnes of freight by sea in accordance with Scenario 2.
Source: VTI
Those tendencies appearing in Scenario 1 are further reinforced here, i.e. the transfer from shipping to land-based transportation is greater. Affected here, too, is marine transportation to and from the Mediterranean, which is expected to decrease in extent.
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In considering the effects in terms of land transportation in Scenario 2, it can clearly be deduced from the figure below that rail transportation is on the increase in southern Sweden as a whole. Contrary to Scenario 1, rail transportation increases here to and from the Port of Gothenburg. An explanation for this could be the ever increasing fuel costs for shipping making the route via the Port of Gothenburg more favourable than direct maritime transportation, e.g. to and from east central Sweden.
Figure 9: Differences in tonnes of freight by rail in accordance with Scenario 2.
Source: VTI
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The corresponding figure for road traffic below shows that also the transfer from shipping to road haulage is increasingly taking place, and this, above all, between the east and the west coasts of Sweden. This applies to forestry products especially.
Figure 10: Differences in tonnes of freight by road in Scenario 2
Source: VTI
Also in Europe, major effects are estimated to arise for truck transport which is expected to decline in the vicinity of the continental ports in the first place owing to shippings fuel costs having a major influence on the choice of ports in central and southern Europe. In Scenario 3 the picture of transfers shown in Scenario 2 is further reinforced. For detailed maps, see Annex 1 where also separate charts with increased and decreased freight flows are shown.
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Conclusions The question at issue that VTI was assigned to answer was whether the IMO demand for lower sulphur contents in marine fuel may lead to transfers of freight transport from shipping to other transport types. The calculations indicate that a transfer from sea to land transport will probably take place. The transfer is estimated to mainly take place to road in Sweden and to railway outside Sweden. The transfer from routes via the Port of Gothenburg to routes via the resund bridge is the single largest effect. The transfer to road is estimated to take place primarily in southern and central Sweden. For shipping, the results show that a transfer of freight transport from Swedens east coast to west coast will take place. With the assumed costs it will also be advantageous to wholly avoid SECA, i.e. to choose the port of Narvik [Norway] instead of the ports in northern Norrland [Sweden]. Transfers are also expected to take place from ports in northern Sweden to ports in central and southern Sweden. This leads to longer connecting transport journeys on land. Within Sweden, a marginal increase of transport operations on road and rail and a decrease in marine transport operations of around one billion tonnekilometres, equivalent to about two per cent of the combined marine transport performance. The number of transshipments between modes of transport is expected to decline, apart from transshipment to rail for crossborder transportation. In Scenario 2 and 3 it is assumed that the fuel costs for shipping (the fuel costs for other transport types is assumed to be unchanged) increase by an additional 75 % and 150 % respectively as a consequence of higher crude oil prices in and outside the sulphur control area. In these cases, the model calculations show major transfers from sea to land. These scenarios also affect marine transport to/from the Mediterranean area whereas the effects in Scenario 1 are largely limited to northern Europe. The Swedish Maritime Administrations rough calculations indicate that the more stringent emission standards would lead to sulphur emissions declining by more than 80 % per vessel kilometre. Shippers are expected, to a limited extent, to be able to choose transport solutions that include landbased transportation in order to avoid the higher costs for marine fuel. These
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transport solutions, however, will result in unwanted external effects in respect of emissions, traffic safety etc. The socioeconomic costs of the three scenarios shown have not been calculated. It is clear, however, that the consequences for society of a transfer of freight transport from shipping to road are not desirable from an environmental perspective. The socioeconomic effect of the reduced sulphur emission is calculated in summary form in the sections Impact on Industrys Costs and Consequences for the Shipping Industry..
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Impact on industrial costs

In order to highlight the effects on shipping costs for Swedish industry, a number of transport modes have been used as a starting point for the calculations. The transport types describe certain transportation set-ups on the part of the export-heavy industry forestry and steel sectors and on the part of the ferry sector. In respect of the effect on these transportation types, solely the change in bunker fuel prices has been taken into account so as to demonstrate, in a clear manner, the impact on transportation costs that arises as a result of the IMO decision concerning reduced sulphur content in marine fuel. The bunker prices assumed are the same as in Scenario 1, in the model demonstrations carried out to show transfers from marine transportation to other forms of transport, i.e. an upgrading of the fuel to marine gasoil with a sulphur content of < 0.1% by weight and a price of USD 662 per tonne. Certain calculations of the effects that are brought about in the case of a higher crude oil price and that are simulated in Scenarios 2 and 3 in running the model have not been undertaken since these can be assumed to affect all vessels equally in percentage terms in a global perspective. According to the simulations that are shown in the previous section, there is a significant risk of transfer of marine cargoes to both rail and road transportation. Forest industry costs For the forest industry, the average marine transport cost per tonne of freight carried by ship is estimated to increase by between SEK 20 and SEK 100 per tonne or by between 25 and 35%. The bunker fuel cost share of the total marine transport cost is estimated to increase from about 45% to 60%. The total marine transport cost for one of the major forest industry companies with three different shipping routes, with a volume of about 2.5 m. tonnes per year between Swedish ports and continental ports, is estimated to increase by just over SEK 230 m. annually. The Swedish forest industrys total export volumes by sea amount to about 13.7 m. tonnes. A very rough estimate of the additional cost for the entire forest industry amounts then to about SEK 1.3 billion provided that the size and filling ratio of the ships does not deviate too much between the vessels that carry goods on behalf of the forest industry.
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According g to the abov ve diagram, , the export prices for sawn s woode en products during d the period p 2000-2008 wit th the excep ption of the r record year 2007 have fluc ctuated betw ween SEK1, ,600 and SE EK 1,800/m m3, which converted at 550 kg/m m3 is equiva alent to abou ut SEK 3,10 00/tonne. W With a rise rtation costs by an aver rage of SEK K 80/tonne this t represe ents a need in transpor to increase e the export t prices by 2.6%. 2
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The above e diagram sh hows the pr rices for prin nting paper in Germany y from January 19 995 to Janu uary 2009. The T prices fo or medium quality are around EUR 500/ /tonne on av verage whic ch, when con nverted to SEK, S repres sents about SEK 5,500 0 /tonne. Ac ccording to calculation ns carried ou ut the cost in ncrease for a majo or newsprint t producer amounts a to about a SEK 15 million o or SEK 20 per tonne freight, whi ich entails a need for price p increas ses for print ting paper of 0.4%. This produ ucer current tly operates s, on a volun ntary basis, half its time charter fleet on a fuel with su ulphur conte ent under 0. .2% by weig ght. Should d these instead be e operated on a fuel wit th a maximu um of one per p cent by w weight sulphur co ontent, as is common within w the fo orest industr ry, the cost i increase amounts to o SEK 38 per p tonne of f freight.
Above are e shown the prices for linerboard l during d the period p Janua ary 1995 to January 20 009. During g this period d prices, on average, ha ave been about EUR 450 per to onne which is equivalen nt to SEK 4,950 per ton nne. Calculatio ons have bee en made of the costs fo or a major li iner produce er and the increase in n the fuel co osts amount ts to about SEK S 39 mil llion or to SEK 97 per tonne of tr ransported freight. f This s cost increa ase correspo onds to a ne eed for price rises s of just ove er two per ce ent.
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In the figu ure above ar re shown the prices for r bleached so oftwood sul lphate pulp durin ng the period d January 1995 to Janu uary 2009. The T prices, during the period in question, q ha ave been app prox. SEK 4,500 4 per to onne. Estimates have been made m of the e increased fuel costs fo or a major p pulp unt to about t SEK 25 million m or to SEK 35 per tonne of producer. These amou his cost incr rease corres sponds to a need n for pri ice transported goods. Th o just below w one per cent. c increases of In summar ry, the incre eased cost for f bunker fuel f with low wer sulphur r content means tha at the produc ct prices wo ould need to o be raised by b 0.4 and 2 2.6%. For round timb ber, the cos st increase is s probably larger l in per rcentage ter rms owing to the low wer product price. p The need n for pric ce rises to compensate c the forest industry fo or the increa ased maritim me transpor rt costs is th hus depende ent on which pro oduct is stud died but in kronor k it lies s between SEK S 20 and 100/tonne. To pass on n this increa ase to the in ndustrys cu ustomers in a global bject to inte ense compet tition may be b difficult. For this rea ason the market sub new regulations on lo ower sulphu ur content will, w most pr robably, red duce the gins and, in the worst case, c depend ding on supp industrys profit marg ply of the forest raw w materials, lead to a mo ove of prod duction facil lities closer to the outlets for r export goo ods. Through going g over to t a marine fuel with a sulphur con ntent of < 0.1% by weight the e quantity of sulphur th hat is emitte ed from the fictitious fo orest companys marine tra ansportation n, whose co osts are show wn below, w will
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decline from almost 1,000 tonnes to under 100 tonnes per year, which corresponds to an enhanced socioeconomic benefit of SEK 45 m. in accordance with the ASEK4-valuation of SEK 25/kg SO2 (SIKA PM 2008:3). The effect of the reduced particulate emissions has not been separately taken into consideration. The socioeconomic benefit of reduced sulphur emissions for the three major producers for which costs have been calculated as per above has been calculated at: Producer of Reduced sulphur emissions, tonnes/yr. 61.9 145.4 94.4 Socioeconomic benefit increase, SEK m. 3.1 7.3 4.7 Increased fuel costs
Newsprint Liner Pulp
SEK 15 m. SEK 39 m. SEK 25 m.
It should be observed that the socioeconomic benefit of a reduction in emissions of particulates is additional to the above. Account should also be taken of the risk of transfer of freight transport to road from shipping, with the associated environmental impact which has been shown previously. Steel industry costs Increased fuel costs for the steel industrys freight transport is highlighted through a small number of transport types in which assumptions have been made on ship size, bunker fuel consumption etc. A major representative steel company ships steel products from Swedish ports on three different routes. The increased cost of bunker oil with a sulphur content of < 0.1% by weight amounts to about SEK 32 million annually, which corresponds to a percentage increase of the annual bunker costs by no less than 66%. In the calculations an annual operating time of 6,000 hours has been assumed with 75% of power output.
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Table 3: Fuel costs for a major steel company 2008 and 2015
Bunker/yr, Tonnes 1 1,539 2 1,582 3 1,919 4 2,340 5 2,309 6 2,340 7 757 8 757 Summa 13,541
Ship
Sulphur contentin Cost Cost fuel 2008,SEK 2015,SEK 1.5 5,055615 9,169,362 1.5 5,196,049 9,424,067 1.5 6,302,667 11,431,138 1.5 7,687,343 13,942,524 1.5 7,583,423 13,754,043 1.5 7,687,343 13,942,524 0.2 4,508,270 4,508,270 0.2 4,508,270 4,508,270 48,528979 80,680,197
Though the changeover from fuel with a sulphur content as per the table above to a bunker fuel with a sulphur content of < 0.1% by weight, the amount of sulphur emitted from these eight vessels operating in European ports on three different routes will decline by about 170 tonnes per year, equivalent to a socioeconomic benefit increase of SEK 8.5 m. As a rule, the steel industry utilises vessels with a lower loading capacity and with lower engine output than the forest industry for which reason the financial effects are adjudged to be somewhat lower for a single company. Within the terms of this project to calculate the effects for the steel industrys entire marine transportation has not been possible since the supply of information on the steel industrys transportation has been limited. It is clear, however, that the effects for both the forest and steel industry will be significant. In summary, the increased costs for bunker fuel with lower sulphur content mean that there is a need for price increases to compensate the steel industry for the increased maritime transport costs. To charge higher prices from the industrys customers, where prices are set in a global market exposed to hard competition, seems difficult on the other hand. For this reason the new regulations on lower sulphur content will, with all probability, also reduce the steel industrys profit margins.
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Ferry market The consequences for the ferry market of changing over to a fuel with < 0.1% by weight vary depending on which bunker oil is used for operation of vessels at the present time. The effects are highlighted through a calculation example from a ferry line between Stockholm and Finland. In this case, the ferry traffic is handled by two sister ships which are assumed to be in operation with 75% engine power output during 6,000 hours a year. The vessels are operated at the present time with a fuel whose price level is about 75% of the price for a marine gasoil, i.e. about 500 USD/tonne, but from 2015 they will be forced to change over to marine gasoil (MGO) with a tonne price of USD 662. The cost for bunker oil for this line, based on these assumptions, is calculated to increase by just over 30% or almost SEK 41 m., from SEK 126 m. to SEK 167 m. and the annual emissions of sulphur have been estimated to decline by just over 110 tonnes, corresponding to a socioeconomic benefit of SEK 5.5 m. The additional cost naturally also affects the ferry markets profit margins but it should be somewhat easier for passenger vessels to pass on the supplementary costs to the passengers price for transport and on-board activities. The number of passengers transported on this line during 2008 amounted to about two million (according to the shipping companys press release). The passenger price rise requirement is thus calculated at SEK 20.50 per passenger. If account is taken also of the number of transported cars and caravans as well as the volume of freight, the requirement is probably somewhat lower. In another scenario, where a shipping line on the same route set-up operates vessels at the maximum permitted 1.5% by weight sulphur in the current situation, the cost increase is considerably larger for the more expensive marine gasoil, approximately SEK 75 m., or SEK 37.50 per passenger. Most vessels that are currently established in traffic to Poland, the Baltic countries and Germany operate their ships on fuel with a maximum 1.5% by weight sulphur.
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Consequences for the shipping industry

Consequences for Swedish registered vessels The consequences for Swedish shipping are difficult to foresee but in order to be able to demonstrate the effects of the changeover to a low-sulphur marine gasoil for Swedish registered vessels, the costs for ship fuel today, compared with the more expensive quality in 2015, have been calculated for Swedish-registered vessels with a gross tonnage of over 200. The annual operating time for the ship engines has been assumed to be 6,000 hours with an average power output of 75%. Furthermore, it is assumed that the vessels are in operation during all their 6,000 hours within SECA, which indeed cannot be considered to be wholly realistic but, nevertheless, still provides a relatively satisfactory picture of the increase in cost for shipping companies that operate their vessels solely within SECA.
Table 4: Fuel costs for Swedish registered vessels 2008 and 2015 Type of vessel Work vessels PCTC vessels Tug Container, roll-on Chemical tanker Dredger Oil/chemical tanker Oil tanker Passenger ship General cargo ro/ro General cargo Other Cost 2008 11,167,292 909,280,445 244,264,847 43,646,810 681,731,276 3,061,456 17,694,653 180,235,145 3,654,241, 514 1,741,787, 297 256,904,708 18,209,763 Cost 2015 20,254,102 1,649,160, 697 443,022,819 79,162,159 1,214,594, 067 5,552,558 32,092,767 281,056,228 4,714,478, 413 3,080,605, 081 369,657,735 20,620,876 11,910,257, 501 Difference, Difference, SEK Per cent 9,086,810 81.4 739,880,252 81.4 198,757,972 81.4 35,515,349 81.4 532,862,791 78.2 2,491,102 81.4 14,398,115 81.4 100,821,083 55.9 1,060,236,899 1,338,817,784 112,753,027 2,411,113 29.0 76.9 43.9 13.2
Total
7,762,225 205
4,148,032, 296
53.4
The total additional cost for these Swedish registered vessels amounts to SEK 4.1 billion, which means a cost increase of 53.4%. The difference in the cost increase between the different vessel types is due to the fact that
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account is taken of the sulphur content in the bunker oil which in the present situation is used for operation. Where it is assumed that the Swedish registered vessels after 2015 will operate 4,000 hours within SECA and 2,000 hours outside SECA and that the Swedish Maritime Administrations sulphur charges within the framework of the environmentally differentiated fairway dues are scrapped, i.e. that vessels in that case operate with the highest permitted sulphur limits outside SECA, the additional cost is SEK 2.4 billion or 31%. Since a very large share of the Swedish merchant fleet operates within SECA the additional cost will probably be about 50% or SEK 3.8 billion. In a project for the Swedish Shipowners Association, the Institute of Shipping Analysis (Sjfartens Analysinstitut) has made a calculation of the increased fuel costs for all vessels within SECA (Baltic Sea, North Sea and English Channel) and thereby recorded increased costs of 54% or about SEK 64 billion, i.e. a percentage increase that indeed tallies with that reported above for the Swedish merchant marine. The enquiry that the Institute of Shipping Analysis carried out is based on ISA data and covers all traffic within both the SECA areas, but account has not been taken of the sulphur content in the fuel that in current circumstances is used for running the vessels. The ISA results cannot therefore be wholly compared with the calculation that the Swedish Maritime Administration made but nevertheless it indicates the level of the cost increases for the more low-sulphur marine fuel. Consequences for vessels calling at Swedish ports in 2008 The Swedish Maritime Administration has also carried out a calculation of the effect of the reduction decided in sulphur content for all ships that during 2008 called at Swedish ports. The results are very much dependent on the assumptions on operating time for the ships engines as well as the geographical separation that is made for which reason three different calculations have been carried out. In alternative one the operating time has been set at 6,000 hours per year, which yields a result that shows costs and the environmental impact from a vessel that, during the whole year, only operates within SECA. The engine power output is assumed to be 75%. The same prices have been used as in previous sections, i.e. the October/November 2008 average for all qualities.
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Bunker fuel consumption within SECA, tonnes/yr. Bunker fuel cost 2008, SEK thousand Bunker fuel cost 2015, SEK thousand Increased cost, SEK thousand Increased cost, per cent Sulphur emission 2008, tonnes Sulphur emission 2015, tonnes Reduced emissions, tonnes
16,596,598
58,153,147
98,882,532
40,729,385 70.0
230,761
16,597
214,164
It is, of course, wholly unrealistic to assume that all vessels that called at Swedish ports during 2008 solely operated within SECA during the entire assumed operating period of 6,000 hours. In this case, nevertheless, the results show the positive effect on the environment in the Baltic Sea and the North Sea with adjoining land areas that a cut in the sulphur emissions imply as well as the increased annual cost for all shipping companies that operate traffic to Swedish ports with their vessels assuming that these ships only operate on marine gasoil with a sulphur content below 0.1% by weight and the whole time within SECA. In reality the vessels will, during parts of the overall operating period, also operate outside SECA and change fuel when a SECA is left. In the second alternative, therefore, an operating period within SECA of 6,000 hours for ferry traffic as well as 4,000 hours and 2,000 hours for other vessels inside and outside SECA respectively has been assumed which yields the following results.
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Table 5: Fuel costs 2008 and 2015 for ships that called at Swedish ports in 2008
Inside SECA Bunker fuel consumption, tonnes/yr. Bunker fuel cost 2008, SEK thousand Bunker fuel cost 2015, SEK thousand Increased cost, SEK thousand Increased cost, per cent Sulphur emissions 2008, tonnes Sulphur emissions 2015, tonnes Reduced emissions, tonnes 11,507,290 40,752,759 68,560,435 27,807,676 68.2 157,984 11,507 146,477
Outside SECA 5,089,308 16,718,377 16,718,377 0 0 76,340 76,340 0
Total 16,596,598 57,471,136 85,278,812 27,807,676 48.4 234,324 87,847 146,477
According to this alternative, for all vessels that during 2008 called at Swedish ports the costs rose by almost SEK 28 billion, on the basis of the assumptions shown above, which implies an increase in the fuel cost of 48.4%. What is positive for the environment is that the sulphur emissions decline sharply by 146,477 tonnes. This decrease in sulphur emissions constitutes a socioeconomic benefit of SEK 7.3 billion if the ASEK4-value SEK 25/kg SO2 for the regional effects of emissions is used as valuation basis. It should be mentioned here that Swedish shipping companies have already borne a part of the increased cost for a low-sulphur fuel through voluntarily and in advance operating vessels on low-sulphur fuel. This cost amounts to about SEK 1.2 billion, according to the calculations of the Swedish Maritime Administration. This means that the total increased cost above would have amounted to just over SEK 29 billion without the voluntary initiative by the shipping companies. From this figure, however, it is necessary to deduct the discount on the gross tonnage-based fairway charges that the shipping companies have received which reduces the additional cost to about SEK one billion or a total of about SEK 29 billion.
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In order to describe the sensitivity in the above results a further alternative calculation has been made based on the assumption that the vessels that called at Swedish ports in 2008 have an operating period within SECA of 6,000 hours for ferry traffic and 2,000 hours and 4,000 hours for other ships inside and outside SECA respectively. In accordance with this calculation, the fuel consumption within SECA is 6.5 million tonnes and the fuel cost rises by about SEK 13 billion in 2015. The sulphur emissions decline in this alternative scenario by 79,500 tonnes equivalent to a socioeconomic benefit of SEK 4 billion. This calculation must indeed be considered as the most probable of the alternatives that have been calculated, especially against the background of the results presented by the Finnish environmental impact analysis as well as the report that the Institute of Shipping Analysis drew up on behalf of the Swedish Shipowners Association. It must be pointed out that the Swedish Maritime Administration does not have access to the assumptions made in these studies for which reason a direct comparison is hard to make. However, as an indication of the probability in the results that are presented here the studies are adjudged to fulfil a purpose. According to the Institute of Shipping Analysis (ISA) report, the cost increases for all shipping traffic in SECA, as mentioned earlier, by about SEK 64 billion. On the other hand, the Finnish study reported increased fuel costs for shipping that calls at Finnish ports of about two to three billion kronor (Euro exchange rate SEK 11) in the case of a price difference between heavy fuel oil and marine gasoil of about USD 135/tonne and SEK 13 billion in the case of a price difference of about USD 485/tonne. In this report a price difference of USD 297/tonne has been assumed.
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Figure 10: Goods transported by coastal and short-sea shipping within shipping areas in 2006
Source: Eurostat
The total freight transported by coastal and short-sea shipping within the Baltic and North Sea area in 2006, according to Eurostat (see illustration above) amounted to about 1.1 billion tonnes (438 m. tonnes and 673 m. tonnes respectively). If this is compared with the cost increase for all traffic within SECA that has been produced by ISA on behalf of the Swedish Shippers Association, i.e. about SEK 64 billion, the cost increase per tonne of freight amounts to SEK 58/tonne on average. Naturally, in the individual cases, this depends on the carrying capacity and the filling ratio of the ships and therewith may vary sharply. Examples from the forest industry show that the average transportation cost per tonne of transported goods by ship will increase by between SEK 20 and 100.
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Cost increase a summary In summary, the calculations carried out indicate an increase in the fuel costs of about 50-55% in 2015. For vessels that mostly transport goods between ports within SECA the increase in the fuel costs may amount to almost 70 %. Examples show that the bunker fuel costs comprise between 40 and 50% of the total cost of operating a ship. Thus, the more expensive fuel will result in increases in shipping transport costs by an average of about 20-28%. Manifested in terms of transported freight, the increase has been calculated at between SEK 20 and 100/tonne. The relatively large differences here are due to the differences in the transport set-up, sizes of ship and filling ratio. It should be pointed out that the cost increase per tonne of freight varies sharply between different types of ship depending, among other things, on loading capacity, for example the increased marine transport cost is significantly lower for a bulk vessel than for a RoRo vessel or a car carrier. The sensitivity to the cost increase naturally varies also depending on the value of the goods. According to the Confederation of Finnish Industries, the increased fuel costs, with a certain delay, will wholly be transferred to the transportation purchasers through increased freight transport prices. The Swedish Maritime Administration sees a difficulty in transferring the increased costs on to the purchasers of transport since Swedish industry is competing in a global market with varying demands on sulphur content in the bunker oil in different parts of the world. The cost situation is therefore not the same in Swedish industry s competitor countries and there is a clear risk that the profit margins will shrink in the face of the distorted competitive situation that the IMOs new regulations imply, margins that already at present are very small. Effects on emissions of particulates The lack of heavy hydrocarbons of the asphalt type and the lower sulphur contents in the ship fuels that apply to ECA as of 1 January 2015 lead to the emissions of particulates in bulk decreasing in size by the order 80-85%. The decrease largely comprises the larger particulates (> PM 10) and has an effect primarily on the immediate environment. Better fuels and higher injection pressure in the fuel system for modern engines normally leads to the particles formed being very small (< PM 1.0). These small (micrometer
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sized) particulates tend to remain hovering in the air for a longer time and therefore disperse over larger areas. By their character they are more prone to penetrate more deeply in the lung tissues and reach the blood circulation. It is, however, very clear that the decrease and change in particulate emissions is of great importance and health-promoting. Particulate emissions from marine diesel engines and its consequences are an area that in recent time has acquired ever increasing attention. It may be stated that the problem area requires more research since studies carried out are still not of a scope for certain conclusions in all respects to be drawn (Fridell, IVL). The lower sulphur content allows certain technical measures, adopted in ships to achieve lower emissions, to secure better preconditions for application and may therefore become relevant in the long term. This is not least caused by the fact that particulate emissions of so-called black carbon (soot) and its significance in the ever more rapid melting of glaciers and polar ice is being brought into focus. The latter is an issue that is noticed in the Arctic co-operation, not least through the fine particulates being carried on the wind and weather systems across large distances thereby constituting so-called long-range, trans-boundary air pollution. Emissions of particulates in the Baltic Sea and North are calculated by the consultancy company IIASA, in a report in 2007 for the EU Commission, at 26,000 and 61,000 tonnes respectively. A reduction by 80% would therefore reduce the emission of particulates by about 21,000 and 49,000 tonnes respectively. With a valuation of between 12,000 and 35,000 Euro/tonne for the Baltic Sea and between 28,900 and 80,000 for the North Sea, which is used by the EU Commissions CAFE-program (Clean Air For Europe), the socioeconomic gain from the particulate reduction, (with a Euro exchange rate of SEK 11) is estimated at between SEK 2.8 billion and SEK 8.1 for the Baltic Sea and SEK 15.6 billion and SEK 43.1 billion for the North Sea. All in all, this means an enhanced socioeconomic benefit of between SEK 18.4 billion and SEK 51.2 billion.
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Safety and technical consequences for ship operation on entering/leaving the ECA areas
Engines The sulphur content in ship fuel as well as its viscosity is of great importance for the diesel engines fuel system. Distillate fuels, by nature, are considerably drier than heavy fuel oil and require little preheating in order to obtain a viscosity suitable for injection in the combustion chamber. The sulphur content in the fuel also contributes to lubricating moving parts in fuel pumps and fuel valves. The high injection pressure in modern diesel engines makes high demands on minimal tolerances (play) in order thereby to minimise the fuel leakage. Situations with binding and increased wear and tear in fuel pumps and fuel valves were not wholly uncommon within the road vehicle fleet in connection with the early introduction of environmental fuel caused by this dry fuels more or less lacking sulphur as well as the high kerosene content (paraffin about 70%). This problem is eliminated through e.g. admixtures of lubricating additives in the fuel in combination with an improved material selection for moving components in the fuel systems. A similar development is expected where ship engines are concerned. However, there occur a number of problems for those vessels that through their traffic pattern enter and leave SECA and therefore will probably shift from heavy fuel oil operation to operation with low-sulphur distillate fuel. In ship engines the fuel systems tolerances are generally adapted for a fuel oil temperature of 130-140 oC. In the case of alteration to low-sulphur and cold distillate fuel, certain gasification (vaporisation) in fuel pipes, preheaters and pumps can be expected also where care is taken. For this reason, the change should take place under controlled conditions and under low load of the main engine so as not to cause regulator problems, loss of individual cylinders with overloading of others as a consequence as well as risk of binding and abnormal wear and tear through too fast an introduction of low-viscose fuel on to heated areas in hot fuel pumps. In connection with the introduction of heavy fuel oil as ship fuel during the 1960s and subsequently when the engines were really designed to be driven with mixed fuel oils, so-called intermediate or marine diesel oil, this change from heavy fuel oil to diesel was the normal procedure prior to every port visit. The need for corrective measures was caused by the fact that
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heavy fuel oil otherwise congealed in the fuel pipes and therewith risked damaging pumps and camshafts through its inability to be compressed. Fairly soon, recirculation was arranged in the fuel systems with heating with the engine idle so that heavy fuel oil could be used also in manoeuvring and in port. Rinsing of fuel systems with marine diesel oil nowadays takes place normally only for shipyard visits. Where there is a need for updating of the fuel system through the leakage of gasoil being much too widespread, manufacturers should be able to supply replacement parts without major difficulty through fuel pumps and fuel valves, even in normal operation, being exposed to wear and tear and therefore being replaced or renovated at regular intervals. Modern regulating systems for control of the fuel viscosity should also be able to reduce damage connected with alteration between heavy fuel oil and gasoil. For four stroke trunk piston engines that operate exclusively within SECA a changeover is required of the system lubricant oil to an oil with a lower reserve alkalinity number or Total Base Number (TBN) adapted for the lower sulphur content since the sulphuric acid-neutralising additives may otherwise be deposited on the cylinders and therewith damage pistons and piston rings. This also applies to the cylinder oil for 2 stroke cross-head marine engines, where ships that go in and out of SECA and therefore change over fuel frequently, should have two different tanks with cylinder oil. One of the tanks is for low-sulphur fuel and the other is for high-sulphur fuel. Boilers Another safety problem to which attention should be drawn, caused by the changeover from heavy fuel oil to distillate fuel, is the risk for boiler explosions. The differences in the drip ignition point between heavy fuel oil that ignites at about 180-200 oC in contact with hot surfaces compared with 450-500 oC for gasoils, mean that there exists the risk of build-up of an explosive carbonised atmosphere in a boiler during changeover of fuel. In the case of boiler trip (stop of firing) it is of the utmost importance, at the earliest opportunity, to stop the fuel supply in particular of gasoil and subsequently to ventilate very carefully before a new ignition attempt is made. The problem can be overcome by technical means through a special pilot burner that ensures a flame during the changeover as well as through
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awareness of the problem in association with rigorous safety and operating procedures.
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Demands on the public authorities and other organisations

Controls of compliance with the decision, i.e. that those vessels that are in traffic in a SECA area after 1 January 2015 do not operate on a fuel with a sulphur content that exceeds 0.1% by weight, can be very difficult to implement to a satisfactory extent. While waiting for full development and capacity for large-scale use of the technology that is now being tested in cooperation between the research world and the Swedish Maritime Administration, that implies quota measurement of SO2 and CO2 in the flue gases from vessels, there only remains the possibility of clarifying through Port State Control on which fuel the vessel is operating on this occasion. Controls take place through a ship inspector (Port State Control Officer)checking the bunker fuel receipt and the data in the ships engineroom log and oil record book where information on position and exact time for change of fuel as well as which bunker tankers were used must be entered. Thus, an experienced inspector is able to establish whether the vessel contravened the regulations. When the method for quota measurement of the flue gases is available on a large scale those vessels with too high a sulphur content can be selected for a more extensive control on next arrival in port. The IMO decision includes no sanction facilities whatsoever in the face of infringement of the sulphur levels in the bunker oil. The procedure that applies is that violations shall be reported to the IMO in order subsequently, as in the procedure in the case of e.g. the formal prohibition against a vessel continuing to operate in connection with Port State Controls, to be published, in most cases, on a so-called black list. In the Swedish Act (1980:424) on Prevention of Pollution from Ships, sanction facilities have been introduced in Swedish legislation where any operator that deliberately or through negligence is in breach of the regulations may be sentenced to fines or imprisonment for a maximum of two years. In certain cases an administrative fee, called water pollution fee, may be charged to the shipping line that contravened the regulations on discharge of oil in the water. One proposal is that the government also in this case introduce sanctions in Swedish legislation in the form of a charge. The level of the charge should be very high in order to prevent shipowners deliberately and systematically operating on high-sulphur oil wherein the profitability exceeds the cost of paying a fee for contravening the regulations. An additional and possibly
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more effective measure is to publicise violations in accordance with the socalled name and shame principle.
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How to mitigate the effects for Swedish industry and shipping

In 2015, the cost increases will be relatively large when the Swedish shipping industry, and shipping using Swedish ports, will be forced to use abunker oil with a maximum 0.1% sulphur content by weight. The transportation cost is estimated to increase by between SEK 20 and 100 per tonne and the marine transport cost by between 18 and 28%. Against the background of an evident risk for transfer of goods from shipping to both rail and the worse environmental alternative i.e. road, as highlighted in previous sections, it is proposed that measures are adopted in order to alleviate the effects of the IMO decision. It is not the task of the Swedish Maritime Administration, within the framework of this assignment, to propose possible measures but the ideas below have been emphasized by certain of the organisations participating in the expert group. These should only be viewed as a sample of conceivable measures in order to secure the supply of marine fuel at a reasonable cost for Swedish industry and not as concrete proposals on the part of the Swedish Maritime Administration. a) Transport subsidies to ports in e.g. Bothnian Sea and Gulf of Bothnia. b) Increased funding for research and development of alternative fuels, better purification methods and development of more efficient engines. c) Investment grants with same focus as in b) above. d) Reduced fairway charges (requires increased grant to Swedish Maritime Administration). e) Fully internalise the environmental effects for all modes of transport. f) Tax-free shoreside electrical supply to ships. g) Through international collaboration between the Baltic Sea countries to take up the question at EU level for appropriate action.
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Annex 1
Charts of differences in tonnes compared with base case scenario Below are charts that show the difference in transported tonnage between the base case scenario and Scenario 3. These are followed by charts that show decreases and increases respectively for road transportation for each scenario compared with the base case scenario. All charts are obtained through the project undertaken by VTI (Swedish National Road and Transport Research Institute) to analyse the risk of freight transfers from marine transport to rail and road transport.
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Figure 1: Estimated difference in tonnes of freight by sea in Scenario 3 compared with base case scenario
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Figure 2: Estimated difference in tonnes of freight by rail in Scenario 3 compared with base case scenario
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Figure 3: Estimated difference in tonnes of freight by road in Scenario 3 compared with base case scenario
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Figure 4: Estimated decrease in tonnes of freight by road in Scenario 1 compared with base case scenario
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Figure 5: Estimated increase in tonnes of freight by road in Scenario 1 compared with base case scenario
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SWEDISH MARITIME ADMINISTRATION SE-601 78 Norrkping Tel: +46 11 19 10 00 Fax: +46 11-19 10 55

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CONSEQUENCES OF THE IMOS NEW MARINE FUEL SULPHUR REGULATIONS

SWEDISH MARITIME ADMINISTRATION

CONSEQUENCES OF THE IMOS NEW MARINE FUEL SULPHUR REGULATIONS

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Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

The IMO decision and EU Marine Fuel Sulphur Directive

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

What is happening within the EU?

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Results from the environmental impact study carried out in Finland

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

9.1% 0.4% 24.1% 3.1% 3.7% 2.3% 0.2% 100%

18.4% 0.4% 6.8% 2.1% 2.3% 6.9% 44.9% 100%

14.36% 61,776,307 0.43% 1,838,810

14.22% 61,169,232 2.51% 2.89% 4.92% 10,812,674 12,416,636 21,153,124

25.58% 110,023,494 100% 430,095,340

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Availability and pricing of marine fuel

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

C Consequences of the IMOs new marine fuel f sulphur re egulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Diagram 4: Forecast demand for fuel within the EU

Consequences of the IMOs new marine fuel sulphur regulations

Figure 2: Distribution between import/export of fuel 2005

Consequences of the IMOs new marine fuel sulphur regulations

Source: US Environmental Protection

Consequences of the IMOs new marine fuel sulphur regulations

Bunker fuel price assumptions in the following work

Total 1,212 13,145 91,518 3,688 6,008 7 2,390 999 118,599

Source: Swedish Maritime Administration

Consequences of the IMOs new marine fuel sulphur regulations

Price (USD per tonne) 662 662 603 396 365

Consequences of the IMOs new marine fuel sulphur regulations

Transfers to other modes of transport

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Figure 4: Maritime transport network in the freight model

Source: Swedish National Road and Transport Research Institute

Consequences of the IMOs new marine fuel sulphur regulations

Consequences of the IMOs new marine fuel sulphur regulations

Time charter Speed km/hour

Consequences of the IMOs new marine fuel sulphur regulations