The Aftermath of MH17: Russia, Ukraine & Sanctions

Abhorrence, Shock, Outrage, Devastating, Indefensible. This is just some of the justified hyperbole used by governments and media to describe the significance that the shooting down of MH17 has had on the wider world and the Ukrainian crisis. The fact that such an event occurred was enough to refocus the awareness on the rapidly deteriorating situation in the region, one that has got progressively worse as 2014 has developed. The ‘west’ and their allies have announced a round of fresh sanctions targeting Russia, who is widely blamed as the escalating force behind the current impasse in the Donetsk region of eastern Ukraine following its earlier annexation of Crimea this year. These so called ‘Tier 3’ sanctions are more sector specific than those that have gone before and are more akin to the sanctions we see employed against Iran and North Korea. The idea is to severely disrupt the target country’s economy by prohibiting banking and industry specific activities thus creating an unsettled financial and economic environment thereby forcing the target nation into submission or at the very least to join the negotiation table. Up until now the measures seen have been on individuals rather than whole companies and sectors. This latest round can be seen as a victory, in some quarters, for the advocacy of “hawk diplomacy”. Whilst the US sanctions are certainly the most severe, the EU has not gone as far due to its dependence on Russia for energy.

So whilst on a macro level the impact of this is quite clear, how does it translate down the chain to the micro level? And to be specific, Specialised Products? Unfortunately, the answer to this is not as clear cut as one would hope. Trying to navigate and cut through the legal jargon that dominates the language of sanctions is not an easy task. But what we can glean in the relation to shipping markets is that the impact on shipping, and therefore Specialised Products, seems to be quite minimal for now. It appears that the only issue is the treatment of funds which emanate from Russian banks that have been targeted. Of course, this situation can change at any time and so it is probably best not to consider this as set in stone.

Perhaps for shipping the more immediate issue for owners and charterers alike is the Ukrainian Government Directive No. 255. This closes all ports in the territory of Crimea on the basis that the area is temporarily occupied and includes but is not limited to the ports of Kerch, Theodosia, Sevastopol, Yalta and Evpatoria. The fact that the Crimea Peninsula is under Russia control and authority means there is little indication as to whether this could be enforced but there is the possibility that should a vessel call any ports in the Ukraine mainland before or after this then authorities could detain the vessel. The only real test of this that we have seen so far has been in the vegetable oil markets and for now it seems legal workarounds and the use of international waters are possible and so have not impacted on charterers business. Again, the situation is changeable.

In a wider context this current crisis and indeed the problems in Iraq, Syria and more recently Israel could have a further impact on what is already a tense geopolitical situation. Whilst the Ukrainian issue is a problem the fallout over Israel could have a much wider ranging impact on our markets considering its location and the sympathies and emotions the conflict has evoked. If anything, it goes to show just how intrinsically linked shipping is to the norms and mechanics of the globalised world.

specialised blog 27 aug

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A Fuel for the Future? – HDME 50 Marine Fuel

Recently we saw the announcement from ExxonMobil that they had developed a new ECA compliant bunker fuel which combined the properties of 0.1% Marine Gas Oil (MGO) and 3.5% High Sulphur Fuel Oil (HSFO). It appears that the major has come up with a solution, at least in practice, to the problem of switching between fuels that many chemical tanker owners, indeed owners of all types of tonnage, are currently facing: How to comply with the 0.1% max sulphur emission regulations in the North Sea, Baltic and the coast of US and Canada?

There are a number of compliance options available to all whether this is fitting scrubbers, changing propulsion systems or for those who trade exclusively within these areas solely burning MGO. The common denominator amongst all of these options is one of cost and operational compatibility. The former are all expensive options, particularly when one considers retrofitting an already tightly packed chemical tanker and this is before associated dry dock costs and a loss of revenue. Switching fuels seems like the most suitable option of owners trading in and out of the emission control areas but then the compatibility of the engines comes into play and whether they will be able to handle the differing properties of 3.5% HSFO and MGO. Risk of thermal shock to the engine could be rather high for vessels during a switchover between fuels and can result in fuel pump seizures and engine shutdowns. The reasons for this are that MGO is much less viscous than fuel oil and has great lubricity thus can be kept at ambient temperature whilst fuel oil is the opposite needing a higher temperature to operate.

What ExxonMobil have done is to develop a fuel, called ExxonMobil Premium HDME 50, that has the performance benefits of both fuels. The new fuel contains the low sulphur content associated with MGO (ie. 0.1% compliant) and has the higher flashpoint and lower volatility properties found in HFO. These characteristics will enable operators to comply with ECA regulations and reduce the risk of engine and boiler damage. The higher viscosity of HDME 50 makes storage and handling on board similar to that of conventional HSFO.

This all sounds like the perfect solution! Of course, it may well be just that. However, such is the infancy of this fuel that currently there are no known applications of its use. An Exxon company official has said that they have received ‘no objection letters’ from the engine manufacture MAN Diesel & Turbo for use in the company’s B&W two-stroke and B&W Holeby genset designs. The same official has also stated that the fuel is available from its Antwerp refinery and is available on a spot or contract basis for delivery by barge in the ARA region. Pricing is not currently known although it is believed to be competitive with MGO.

Going forward, it seems that the fuel is only available in Europe at the moment but the company is reviewing refinery options for more production which means that availability in North America and Canada has not been ruled out. This development certainly seems like a step forward and one that will give owners an easier method of compliance but until there is a wider adoption it will be difficult to know if this is the answer to owners’ problems. And so, the old saying of ‘The proof of the pudding is in the eating’ comes to mind!

Written by Josh Saxby

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Brighter Times Ahead for Europe?

The woes of the European chemical industry have often been written and commented on in the last couple of years with the majority of coverage rather negative in terms of its future and its ability to compete with the rising prowess of the US and the Middle East. However, a glimmer of hope now appears to be on the horizon with CEFIC now predicting an increase in growth of 2% for 2014 and 1.5% for 2015. It should be noted that the former figure is an upward revision from the previous forecast of 1.5%. This is also on the back of the fact that the same organisation has also announced that for the first four months of 2014 European chemical output grew by 2.8% year on year.

This will make happy reading for producers who operate in the European region but we need to dig a little deeper to really ascertain what is going on underneath. In reality, whist these figures are positive they are really just headline figures as the industry is still facing several challenges not least from regional competition. Overall, chemical output is up but petrochemical output and prices are down – a 0.8% drop in output compared with April 2013 with monthly output remaining below trend growth rates since September 2011, and is still far below post-crisis peak during Q1 2011. Indeed, the performance of the petrochemicals sector bough down EU chemical prices as whole in April, down by 1.9% compared to April 2013, petrochemicals fell 4.1% alone. We should note that the drop in output was partially offset by a 5.1% increase in speciality chemicals output and a 2% increase in basic organics.

So what do we take from this? In terms of Specialised Products markets this news is somewhat of a double edged sword. We cannot detract from the positive but modest figure of 2% growth for 2014, it may still be 6% below the peak level of chemical production recorded in 2008 but any increase is good news. On the other side of the coin, the more sector specific figures may not look so rosy and there are still challenges ahead to reverse what looks to be a depressing situation. In order to rise to this challenge there needs to be concerted effort amongst policy makers and stakeholders to put into place effective programs which can realise, maximise and secure competitively priced energy and feedstock. There is plenty in the pipeline (the Transatlantic Trade & Investment Partnership (TTIP) comes to mind) and for the European Chemical industry to re-emerge as a global player then effective policy management is central to achieving this goal. Perhaps, once the institutional overhaul and political wrangling in the rabbit warren of the EU is complete the chemical market can start to look ahead with a more positive attitude. We can also draw some solace from the fact that a proportion of exports from the US and the Middle East may end up in Europe and thus the hub-and-spoke characteristic of the region could in turn keep chemical tanker demand healthy going forwards. And so, there may be light at the end of the tunnel!

specialised blog 23 July

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Piracy in South East Asia: A New Threat?

All too often the news has been awash with the latest piracy attack off the coast of East Africa by Somali pirates. In fact, more recently such news has been more focussed on West Africa and the change in dynamic between the two regions of the continent. But what has had less media attention has been the growing threat of piracy in South East Asia, particularly Indonesia. Whilst, the Captain Phillip’s-esque hijackings are not their forte; the attacks that do happen seem to be rather slick and sophisticated operations.

The IMB Piracy Reporting Centre released a warning recently that operators of small tankers are under increasing threat from such attacks and that they should strictly adhere to anti-piracy measures. Much like the piracy in West Africa, these pirates are more prone to targeting cargo rather than the crew and/or the vessel itself. The IMB says that they seem to follow a “specific modus operandi, where armed pirates seize a small tanker and siphon off its cargo to large bunker barges or other small tankers in a ship-to-ship operation. In some cases navigational equipment is destroyed but the crew are left unhurt. They then release the hijacked vessels.”

An article by the International Business Times cites a report written by the Nautilus Institute for Security and Sustainability which argues that the roots of piracy in South East Asia are more complicated than those in other regions and cannot be simply stopped by increasing security and patrols. The report argues that there are five factors contributing to the rise in piracy: Over-fishing, lax maritime regulations, organised crime syndicates, radical politically motivate groups in the region and widespread poverty. The combination of these has led to 25 out of 49 worldwide attacks occurring in Indonesia in Q1 2014 and in all cases pirates boarded the vessels and stole cargo, seven crew members were taken hostage in five incidents, while in four incidents the pirates were armed. In 2013, Indonesia accounted for more than half of all worldwide attacks. The Nautilus report also identifies Straits of Malacca and the Singapore Straits as a concern.

If we take a step back and look at piracy on the global level the highly securitised and military patrolled Gulf of Aden has caused a significant drop in the piracy threat from the traditional hot bed of Somalia, although it has not been eradicated. West Africa presents its own set of problems but the Nigerian Navy, in particular, has had varying degrees of success in stymying the problem here as well. All in all, the global threat is still very much alive but the focus is shifting, albeit gradually, to what is a much more complex issue than was previously thought. The situation in South East Asia calls for a more targeted approach from international organisations and governments looking at not just criminal and security policy but social, political and agricultural policy as well. A multi-pronged solution to a multifaceted problem!


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Will Politics Threaten Middle East Petrochemical Expansion?

It was recently reported by the chemicals industry media outlet ICIS that a political fallout amongst the Gulf Cooperation Council (GCC) members (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) could threaten the regions supply of natural gas from Qatar and thus throw a proverbial spanner in the works for the raft of petrochemical expansion projects due to be built in the coming years.

Essentially, the fall out centres on Qatar’s support of Egypt’s ousted President, Mohamed Morsi of the Muslim Brotherhood. The movement is banned in Bahrain, Saudi Arabia and the UAE. Such is the resentment of said group and Qatar’s support of them that all three of the above removed their ambassadors from Qatar.

So why could this issue be so fractious?

Firstly, the GCC was founded in 1981 to foster greater economic cooperation amongst the six Middle East countries listed above. Any political difference between the members particularly on matters of foreign policy will no doubt jeopardise this. Indeed, cooperation is key to the Middle East realising its downstream objectives. Secondly, Qatar is, according to the EIA, the biggest exporter of LNG in the world. It is estimated the Gulf State has approximately 885,000 billion cubic feet of gas reserves and sits on what is believed to be the single biggest reserve in the world – the North Field. Three of the GCC members (UAE, Oman & Kuwait) are dependent on natural gas supply from Qatar whilst Saudi Arabia has enough domestic supply and Bahrain relies on other sources. However, supply worries are growing in both these states yet they resist buying products from Qatar.

Meanwhile, as the program for petrochemical growth plods on, gas demand is expected to increase rapidly which underlines the need for a stable natural gas supplier in the region. All GCC members rely on gas to run their power plants and as feedstock for their petrochemical production. According to the Gulf Petrochemicals and Chemicals Association (GPCA) the GCC is estimated to add 54 million tonnes to its 2012 annual chemicals production over a five year period to 183.6 million tonnes. Whilst other avenues of supply are possible the logistics and political ramifications they may have could be even more of an issue than the current problem. One such alternative is turning to Russia and Gazprom. Indeed, Bahrain already purchases much of its need from Russia but the current situation in the Ukraine over Crimea may test the countries will to follow this policy. Saudi Arabia is self-sufficient for now but with gas consumption rising each year it is quickly looking for alternatives to service its growing petrochemical demand – SABIC are actively looking into to building an oil-to-chemicals complex which should be online by the end of 2020. It is expected to use 10 million tonnes per year of crude oil as feedstock for the production of petrochemicals and speciality chemicals. However, this is some way off and is an expensive avenue to follow. Indeed, we cannot forget the more traditional feedstock of naphtha as well which is still an option.

There is little doubt that politics at government level have caused an issue for GCC members but it seems obvious that if they are to secure the feedstock they need then a resolution will have to be sought. How long this will take remains to be seen!

Written by Josh Saxby


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Boosting Competitiveness: What now for the Asian Petrochemical Market?

Last week the annual Asia Petrochemical Industry Conference (APIC) was held in Thailand and throughout the few days of seminars, speeches and working groups one resounding theme emanated from the over air conditioned meeting rooms: “How will Asia raise its competitiveness in the face of US shale gas?”

Not an easy question to answer but it is becoming more of a talking point in the petrochemical corridors of power, not least in Asia, as to how the region can compete and what measures need to be taken to adapt or to use an industry buzzword: to ‘innovate’. Like much of the world trade the focus in Asia is on Chinese imports of Asian petrochemicals. However and as alluded to on page 4 of this publication, the Chinese economy is going through a slowdown and despite predicted petrochemical consumption of 4.5-5% growth in the region this year (according to ICIS) the reality of this being reached hinges on China’s economic performance which may falter in the short term. The Chinese government has already indicated that it would bail out the economy with a stimulus package. Should this happen it may provide some comfort and indeed the Asia petrochemical industry is expected to weather any Chinese economic crisis but it also draws more attention to the competitiveness of the region as a whole due to the transforming petrochemical industry landscape – US shale gas and downstream Middle East investment.

We all know about the US shale gas phenomenon and without retracing well discussed ground it represents a major game change in producing low cost feedstock. Asia’s petrochemical investment model is based on naphtha economics and it is here that we start to see the problem. ICIS says that shale based ethylene has an approximate production cost of $350 per tonne whilst the more traditional naphtha based production costs in the region of $1,500 per tonne, a differential of $1,150 per tonne. The winner here is clear.

This is not to say that the Asia region has been sitting idly by. Much like the European petrochemical industry it is looking to find ways to boost its overall competitiveness. There is heavy investment in coal to olefins (CTO) and methanol to olefins (MTO) technology in China with considerable levels of new capacity scheduled to be built. However, not only is this expensive but the infrastructure required and the environmental concerns are having an impact on investment projects going forward. Indeed, the Chinese government is being a lot more active in environmental policy surrounding this area. Other ideas have been to emulate Ineos who have commissioned six new ethane gas carriers from Evergas to export shale gas to Europe – with the amount of capacity due on stream then this could be a viable option for Asian players. The region is not devoid of its own shale gas reserves either with Sinopec recently announcing an expansion in annual product capacity at its Fuling shale gas field.

There is much to take on board here but whatever the Asian petrochemical industry decides, a clear, structured and environmental approach is necessary. Technology and innovation helped bring about the US shale gas phenomenon so maybe the same could occur here? For Specialised Products participants, it will certainly be a development to watch!

SP blog 6 June

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Breaking Ground

The announcement last week from Chevron Phillips Chemical (CPC) that it had ‘broken ground’ at the site of what will eventually become its new 1.5 million tonne per year cracker at its complex in Cedar Bayou was significant. Why? Well, it is likely to be the first built in the US for over a decade.

This is certainly a milestone for the company and indeed the country as oil and chemical producers jostle with each other for a slice of the shale gas pie. In fact, over 10 new crackers have been announced on top of several expansions for existing plants. Should all of these be built then US ethylene capacity is projected to increase by as much as 51% by 2020 to over 41 million tonnes per year, according to ICIS. The likelihood that all ten will be built is reasonably high as seven projects are already beyond the feasibility stage and seven of the groups involved have announced capacity figures for eight of their crackers. Within the last three months of 2013 and early 2014, three new projects were announced all of which are being proposed or backed by foreign based companies, which goes someway to show how shale gas is viewed.

There is no doubt that an almost ruthless determination has been adopted to exploit the shale gas reserves within the US. The US government, at both federal and state level, has been proactive in finding ways to make it easier for these reserves to be exploited whilst striking a balance with the right level of regulation. A fact not lost on producers looking to develop a shale gas strategy in Europe. By allowing such levels of investment the US has secured a strong future for its chemicals industry – the American Chemistry Council (ACC) recently announcing that over $100.2 billion is being invested in 148 projects (projects, expansions and process changes). This figure is simply staggering and can only be further boosted by the fact that the new investment could lead to as much as $81 billion per year in new chemical industry output and 637,000 new jobs for the US economy between 2010 and 2023.

For the world’s largest economy that was brought to its knees by the global financial crisis, unlocking the potential of shale gas has been a central pillar of its revival. In terms of the chemical industry that was faced with growing Middle East and Asian competition and a rather static European sector this is nothing short of a godsend. This is why the beginnings of construction on CPC’s new Cedar Bayou cracker is important – the impact that shale gas and associated downstream projects will have on the Specialised Products markets in the future will be considerable for all involved and so we wait and watch to see what will happen!

SP blog 22 April

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Winds of Change in the Methanol Industry?

It has already been well documented by many industry commentators and indeed this publication that due to the huge amount of investment in methane crackers on the back of the US Shale Gas phenomenon, the US will become self-sufficient in methanol production and will no longer need to rely on imports. Currently the US imports approximately 90% of its methanol (around 5 million tonnes) annually. As a result of cheaply derived methane from shale and the announcements from Methanex, OCI, G2X, Lyondell, Valero, South Louisiana Methanol and most recently NWIW, methanol production is now expected to increase by 26% by 2020 according to IHS Chemical and the American Oil and Gas Reporter.

Global demand for methanol is increasing year on year particularly in China where demand is expected to increase to 50 million tonnes by 2016 from the 30 million tonnes in 2013 according to an industry consultant and so it seems natural that new vessels will have to be built to service this demand as China invests billions into MTO (methanol to olefins) technology. The importance that the Chinese have attached two servicing this methanol demand cannot be clearer than in their current plan to develop to 1.8 million capacity plants on the US west coast through a joint venture vehicle called NWIW. A huge investment which although some way off shows the lengths China will go to. Either way producing methanol within China is currently deemed too expensive due to a lack of infrastructure and currently that the industry is based on CTO (coal to olefins) technology.

Whilst almost all of this is a known quantity it is only recently that the supply side of the methanol market has reacted. It seems obvious now that with the huge capacity due to come online that the US will have a lot of volume available for export and so some sort of fleet expansion of the methanol carrying fleet was bound to happen. In terms of this we have seen three of the major producers enter into long term time charter agreements with owners to build a total of 12 new vessels. These include six 50,000 DWT MRs for Methanex with dual fuel engines, two 50,000 DWT MRs for the Atlantic Methanol Company and four Handy’s for MHTL. This is a clear sign that there is a firm belief amongst producers that current methanol carrier supply will not meet the demand in the future, and with the new volume being comparatively cheaper to produce it would be wasted opportunity not to capitalise and challenge the traditional producing region of the Middle East.

What is less clear is quite whether this new supply will be able to keep pace with demand from China. Could it be that even larger sized vessels are needed on the transpacific route? It is certainly possible but as some producers already know from previous experience the larger the ship the greater the costs and so will it actually be cost effective? All we know for now is that this market is developing fast and the next few years will be exciting for all involved!

SP blog 28 Mar

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A New Cold War? Geopolitics and Specialised Products

The Clash of Civilisations, a thesis written by the political scientist Samuel P. Huntington in 1996, seeks to explain that the conflict between countries and peoples of the world would be down to cultural and religious divides rather than by a political ideology. He asserts that:

“Nation states will remain the most powerful actors in world affairs, but the principal conflicts of global politics will occur between nations and groups of different civilisations. The clash of civilisations will dominate global politics. The fault lines between civilisations will be the battle lines of the future”.

How on earth, do you ask, does this relate to the day to day of shipping markets let alone Specialised Products? Well, the answer may be more obvious than you think. The recent political upheaval in the Ukraine has created perhaps the greatest standoff between the West and Russia since the Cold War ended in the early 1990s. What started as a revolution, spurred by pro-European demonstrators to topple a corrupt Russian leaning government, has since escalated to the threat of war. The western media and senior statesmen have sought to frame the deployment of Russian troops on the Crimean peninsula as tantamount to an invasion whilst President Putin claims he is protecting Russian interests and Crimean ethnic Russians who live there. The economic fallout and global uncertainty this conflict has created caused a run on the Russian rouble and Moscow stock exchange not to mention an increase in the Brent crude oil price as investors worried what any potential conflict would mean for supply. Already we have seen the effects a geopolitical event can have on the world markets.

For ship owners and producers in the Specialised Products markets, the Ukraine and ports around the Crimean peninsula are a major supply of vegetable oils, petrochemicals and not to mention oil and gas. The consequences of a geopolitical threat such as this can have on shipping are enormous. This is evidenced by the event of August last year, when oil prices hit $117 a barrel over the prospect of US involvement in the Syrian civil war due to supply worries. As is well known, any rise in oil price will directly impact on the price of bunkers, thereby escalating overall voyage costs. What’s more the Ukrainian conflict is more than just a matter of bunker and oil price. The businesses of countless traders and producers will be directly affected by any threat of war with any contractual commitments thrown into doubt due to forced plant shutdowns. Owners who wish to trade in the area or are committed to do so will run the risk of invalidating their P&I Club insurance. All of this even before the possible safety of crews and terminal staff is considered. Lastly, as is well known charterers wishing to move cargo through a war zone will have to pay hefty war premiums. War represents a major upheaval to our markets, that much is clear.

All in all, Huntington’s assessment that conflicts will be a clash of civilisations may be a little farfetched but if we really think about the standoff going on at the moment then there might be some plausibility to it. The threat of war over the Crimea will affect us all both personally and in the professional workplace and there is no doubt that it is the ‘West versus the Rest’. All involved in Specialised Products shipping markets will feel the effects of this in some way, whether it be bunkers or a loss of earnings however we should all hope that this does not usher in a new dawn of Cold War era politics!

SP Blog 12 Mar

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Using Methanol as a Marine Fuel

We are now a little under a year away before the latest round of regulation on emissions from the IMO comes into force. The well-oiled regulatory machine will introduce the 0.1% maximum in sulphur emissions for all marine shipping in the North Sea, Baltic, US and Canada Emission Control Areas (ECAs) on 1st January 2015.

The differing ways in which owners can comply has been talked about widely through various industry participants with most in agreement that no matter what option is selected it will come at substantial cost to the industry. The Specialised Products market is no different and in a world where time and cost is of the essence owners are increasingly being asked, how will you comply? And what will be the cost of it? It seems that to many the only real option for now is to opt for scrubbing technology which allows vessels to burn low sulphur fuel oil without having to change much of their day to day operations. However, these have their own problems such as dry dock costs, a loss of revenue, lack of proven systems and the major bug bear – the cost and practicality of retrofitting. That being said there are number of vessels in the North West European chemical fleet that can already burn MGO (0.1% compliant) and would not have to go through this expensive process. However, there are other alternative options. LNG is often touted as the obvious choice although this has its own problems associated with it, including the fact there has been no application of it to date in the chemical tanker market. Perhaps the dark horse in this debate is using methanol as an alternative fuel. Indeed there are already a number of vessels in other trades capable of burning methanol. So what are the benefits of opting for this type of fuel?

Firstly, the distribution cost of methanol is lower than that of LNG; secondly, it is biodegradable if produced from biological methods and thirdly has a lower flash point than conventional fuel and is therefore safer. However, like with LNG there are a considerable number of technical, operational and capital investment hurdles to jump if an owner opts for this.

Perhaps most importantly is a lack of infrastructure in key hubs which presents a whole host of problems even before converting to methanol or committing to a bespoke contracting option. There is also the issue of retrofitting which continues to be a problem for tonnage already on the water, particularly when space in chemical tankers is at a premium. The option of newbuildings might overcome this last point but then there is the problem of raising the finance to commission new designs and all the associated vetting and certification costs. This brings us to the last point: it could be argued that burning methanol as a marine fuel will only really work if it is already present within the supply chain. For instance it is now common knowledge that Methanex have ordered 6 ‘eco’-MR’s with dual-fuel engines capable of burning methanol and HFO. Obviously for Methanex, as the world’s largest methanol producer, this makes perfect sense but for others until market develops this propulsion option is a long way from becoming a norm in the industry. How owners will handle the new regulations is not entirely clear at the moment but one thing is for sure: whatever option they go for it will come with associated costs and benefits!

SP blog 24 Feb

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