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MARPOL 2020 Emission Regulations Challenges for shipowners and the Refining Market

August 1st, 2018

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Index

1. Who we are: fleet and business units

2. IMO 2020 Sulphur emissions cap

3. Impact to our fleet: a case study

4. Tangible options for compliance: scrubbers or light distillates

5. Compliant product availability: Brazil

6. Trading opportunities: globally and in the Americas

7. Alternative clean fuels

8. Concluding remarks

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Part of the Ultramar Group

Shipping Activities Towage / Salvage Offshore

Agencies, Ports & Logistics

Other Investments

• Crude + Product Tankers

• Gas Carriers

• Chemical Tankers

• Bulk Carriers

• Container Feeders

• Break Bulk / Project Cargo

• Ship management/Crewing

• Harbor Towage

• Salvage and Special Services

• Offshore Supply Vessels (PSV)

• Pilot Boat Services

• Shipping Agencies

• Shipping Lines Rep.

• Airline Representations

• Port Operations

• Stevedoring

• Inland Container Terminals + Trucking

• Logistics & Warehousing

• Sulphuric Acid Plant

• Coal Mining

• Real Estate

• Others

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Ultranav Holding

Product / Crude Oil Tankers

Local Trades

Coastal trade in Argentina

Product / Chemical / Gas Tankers

Coastal trade in Perú

Product / Chemical / Containers / Drybulk

Coastal trade in Chile

Regional Trades

Crude Oil Tankers Pool Manager

Product Tankers Pool Manager

Continental trade in North & South America

Global trade

Break Bulk / Project Cargos

Continental trade in Chile & West Coast South America

Dry Bulk Carriers

Continental trade in North & South America

Global Trades

Gas Tankers Dry Bulk Carriers

Continental trade in Europe and Asia / Unigas Partner

Global trade

Crude Oil Tankers Pool Co - Manager

Continental trade in North & South America

Product / Chemical

Continental trade in the Americas

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Stainless Steel Fleet

Blue means next deliveries

Vessel Built DWT N2 output

(m3/h) Grades Trade

Alpaca I (*) 2010 33,600 2,000 16 Domes&c  CH  Vicuña (*) 2008 22,100 1,900 28 Domes&c  CH  Guanaco (+) 2003 21,085 1,500 28 Interna&onal  Taruca (*) 2005 19,983 600 22 Domes&c  BR  Sveva 1999 15,200 1,000 19 Domes&c  BR  Celsius Manila 2002 19,997 1,250 28 Interna&onal  

Celsius Malaga 2008 20,832 1,250 22 interna&onal  

Shamrock Mercury 2009 19,832 1,250 20 interna&onal  Shamrock Jupiter 2010 19.998 1,500 20 interna&onal  Bunga Lotus 2012 19,992 30 16 interna&onal  Lincoln Park 2012 19,800 1,500 18 interna&onal  Goldengate Park 2013 19,800 1,565 16 interna&onal  Albatross Trader 2015 19,700 1,100 18 interna&onal  Halcón Trader 2016 22,481 1,250 20 interna&onal  Birdie Trader 2016 19,700 1,250 18 interna&onal  Condor Trader 2016 22,500 1,250 20 interna&onal  BTS Selena 2013 19,998 1,500 20 interna&onal  TBN 2 Q3/2018 19,700 1,250 18 interna&onal  TBN 3 Q3/2018 19,700 1,250 18 interna&onal  (*) owned            

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IMO 2020 Sulphur Emission Cap

§  Summary:

§  IMO developed MARPOL in 1973 with the goal to eliminate pollution from ships

§  Emission Control Areas (ECAs) were introduced in 2008 to protect sensitive

areas as of 2010-12, limiting Sulphur content to 1,00% in the Baltic, North Sea

and the Baltic.

§  In October 2016 IMO announced a decision to lower emissions of SOx and

particulates from 3,5% to 0,50% globally.

§  As of September 2017, 88 states representing 96,16% of the world tonnage are

parties to the convention, including top 10 flag states.

§  Flag states might grant exemptions for coastal fleets and/or trades between

them (Argentina, Brazil, Mexico, Chile are still lacking ractification)

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IMO 2020 Sulphur Emission Cap

§  Non compliance implications/likelyhood:

§  Since the ECAs were created, controls by the member states have been

sporadic and no unified code of conduct was set out by the IMO.

§  The USCG has released a penalty policy in 2015 imposing fines of USD 25,000

per violation per day

§  “If a vessel fails to comply with the requirements of the MARPOL 2020

Convention, then it would effectively be in breach of the flag state national

law, and the vessel’s MARPOL certificate may be withdrawn, or at least

suspended, by the flag state,” a report by Marsh said in December 2017

§  Failure to utilize compliant fuels is likely to result in a vessel be deemed

“unseaworthy”, key members of the insurance industry have warned.

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Segments Controlled Ownership

Drybulk 130-160 vessels 9 vessels

Product Tankers 47 vessels 2 vessels

Crude Tankers 17 vessels 3 vessels

Chemical Tankers 19 vessels 2 owned

Coastal Dedicated 30 vessels 30 owned

Total number 243 units 46 vessels

Fleet Breakdown

Our exposure is here!

But with 65% domestic trades, likelyhood of flag state exemptions

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Bunker Demand – case overview

§  Our group currently purchases 930,000 tons/year of IFO and 120,000 tons/year

of MGO, totaling 1,050 million tons/year.

§  Main bunkering areas are Singapore, USWC, Santos, Gibraltar and Rotterdam

§  Currently about 70% of the groups fleet is already operating in-out of Emission

Control Areas (ECA) with multiple grades onboard.

§  89% of our global bunker purchase has sulphur content above 0,5%

§  Our coastal fleets in South America (Chile, Argentina, Peru and Brazil) might

be exempted by their flag states.

§  However, fleets are dynamic and limiting modern vessels to lifetime domestic

trades is not an option: we have to be prepared in all segments.

§  So, our challenge is to adjust emission levels of nearly 930k tons/year in about

18 month time!

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Scrubbers as alternatives

§  Scrubbers are devices that can remove particles and clean exhaust gases.

§  Largely used in Europe in industries like coal burning plants, foundries and

still mills.

§  Very limited ordering this far for vessels, except for cruise ships/ferries/ro-pax

segments that has been using scrubbers since 2011-2012 (!)

§  Only 7% of world’s bunker demand are represented by such segments.

§  81% of total IFO demand is under Bulkers/Container/Tankers.

§  In the world fleet of 89,952 vessels* only 442 vessels have scrubbers installed

or contractual options to install as of April 2017.

§  New buildings are being offered/signed scrubber fitted (60% of Korea’s

orderbook) and sales of equipment accelerated dramatically passing 1,000

units! (MSC, Frontline, etc)

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Scrubbers as alternatives

Conventional industry to the maritime world:

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Scrubbers: challenges

§  Equipment cost between USD 2,0 – 4,0 million, depending on vessels size and

if closed/open loop or hybrid, plus time at drydock.

§  Additional power requirement plus maintenance costs of will bring the OPEX

to about USD 50,000/year.

§  Closed-loop and Hybrid scrubbers generate a significant amount of discharge

water which needs to be pumped ashore. Particularly expensive and not

always an option in South America.

§  Last but not least: an in-house study of our handysize bulker fleet showed

that out of 35 vessels only 1 was capable to physically accommodate a

retrofitted scrubber.

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Scrubbers vs shifting to MGO

§  Assuming an open loop scrubber installed on an 8 year old vessel with a 20

year life time: 12 years of linear depreciation equal USD 181,250 per year.

§  Adding OPEX, these additional scrubber cost equals USD 226,250/per year.

§  Current spread between HSFO and LSMGO is $250/ton and, assuming 55%

sailing days per year x 20ton/day consumption vessel.

§  The equation brings us to an additional cost of USSD 923,000 per year/per

vessel for simple switch to light distillates, thus a very short payout time for

scrubbers.

§  So, are scrubbers definitely the way?? Not in our point of view.

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§  Shipowners are likely to hold off until last minute as current depressed

earnings are limiting investments: to have our operated fleet fully fitted would

require nearly USD 500 mill investment.

§  Shipyards will likely not be able to cater for the demand prior to 2020.

§  Lifetime of a scrubbers, reliability of maintenance costs and availability of

qualified services when growing in scale are still very questionable.

§  A response will likely come from the supply side, with on-spec IFO made

available or a shift to lighter distillates, pricing is the big question mark.

§  Higher OPEX will be converted to higher freight levels and further

consolidation in the shipping industry.

§  Scrubbers will surely start to be the standard for new buildings and large

container ships

Scrubbers: why not?

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Trading opportunities – globally

§  Heavy fuel oil will make up around 84% of the bunker market in 2020, out of

320 million mtons only 233 million mtons will be 0,5% compliant *

§  Excess supply of 87-90 million tons will be available at a hefty discount.

§  Developed nations shifted to cleaner fuels but developing countries tend to be

price-driven.

§  Saudi Arabia, Bangladesh and Pakistan are potential homes for European

HFO, main usage being power generation and cement plants.

§  Russia will also likely use its domestic fuel oil for power generation,

displacing gas.

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Trading opportunities – Americas

§  Mexico, Venzuela, Colombia, Peru and Trinidad, combined production of HFO

of about 220 million mtons will have to find a new home.

§  Mexico and Venezuela run their own refineries on sour and heavy crudes and

lack coking capacity.

§  Brazil, Puerto Rico and Argentina still use heavy fuel for power generation and

could take advantage of the new regulation, creating local arbs.

§  In addition, cheap fuel oil could compete with coal for power: largest coal

fired plants regionally are in Chile (6 plants, 2763 MW), Brazil (3 plants, 2614

MW), Colombia (5 units total 1394 MW),

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Product availability – Brazil

§  Brazil: natural lower sulphur content but NOT offhand compliant as many

believe.

§  Santos and Salvador grades, which are main bunkering ports are nearly

compliant both for IFO/MGO: 0,40% - 0,60% SOx

§  Rio de Janeiro and other ports still offer high SOx levels for both grades. BDN

samples from our fleet show levels between 1,5 - 3,40% Sox

§  Blending and refinery adjustments will still be needed but at a much lower

scale than at other markets

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Product availability – Brazil

§  Petrobras exports significant volumes to Singapore (1,545k cbm/year),

Curacao (406k cbm/year) and Rotterdam (549k cbm/year) as they could not

capture any premium in the current market: this is prompted to change.

§  Export volumes have been gradually decreasing since 2012 from 7,2k cbm/

year to 3,9k cbm/year in 2016 as a result of increased demand for

thermoelectric plants and lower production overall.

§  Exports represented 53% of the total IFO production in 2012 versus 34% in

2017.

§  Industrial use still account for 75% of domestic IFO sales (2016 figures), and

there is no strict regulation for emissions except in South/South East states

where 1pct SOx is required.

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Product availability – Brazil

§  With a reduced spread between compliant IFO and distillates, Brazil will very

likely become a relevant regional supplier of compliant IFO.

§  Long haul exports to Asia and Europe will likely switch to closer markets with

similar premium but lower costs of logistics.

§  Current industrial consumption could switch/stick to HSFO at discounted

prices.

§  As a greater share of Brazil´s HSFO finds a premium market, new import flows

of non-compliant FO for industrial use may be the result.

§  Presently, MGO being supplied at Brazilian ports are largely non-compliant: so

ULSD blending and a stronger import flows may also be seen.

§  As one may note: there are a lot of uncertainties going forward!

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•  Salina  Cruz   •  Punta  Cardon  

•  Pecem  

•  Santos  

•  Quintero  

•  Cartagena  

Asia  

Compliant  IFO  

Non-­‐Compliant  IFO  

Trading opportunities IFO

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Concluding remarks:

§  Pricing of compliant IFO is uncertain, the discount compared lo lighter

distillates is being speculated with no clear fundamentals: the spread is likely

to be slim.

§  Pricing of non-compliant IFO will largely depend on whether the excess fuel

will find new markets and how will refinery outputs adjust: we expect a

relevant spread.

§  Scrubbers are a logical and efficient solution with short payback time,

however requiring large capital commitments, will likely be installed on large

container ships and new-buildings.

§  Anticipate trading opportunities of HSFO to some industrial markers whereas

Brazil´s compliant IFO will likely stay at closer markets / shorter haul voyages.

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Alternative Clean Fuels

-  Ground breaking technology but hard to see it gain scale. Only one LNG

bunker location in the Americas.

-  High capital commitment required and/or Government funding!

§  LNG fuelled vessels: Terntank Sweeden (15,000 cubic tankers) In June 2016 first LNG propulsed newbuilding in the AVIC SERIES arrived. The remaining three vessels will all arrive in the next coming months. The vessels are equipped with a newly developed Wärtsilä two stroke dual fuel main engine, and an advanced hull design from Rolls Royce. The vessel will reduce emissions of particles by 99% working towards Ports and Governmental institutions for a reduction in port costs and fairway dues. The project was also granted EU support in the application Baltic Solution, therefore this project is co-funded by EU

§  Methanol fuelled vessels: Waterfront Shipping (50000 dwt tankers) INDUSTRY WELCOMES WORLD'S FIRST OCEAN-GOING VESSELS CAPABLE OF RUNNING ON METHANOL April 11, 2016) - Starting in April, Waterfront Shipping Company Ltd. (WFS), Mitsui O.S.K. Lines, Ltd. (MOL), Westfal-Larsen Management (WL), and Marinvest/Skagerack Invest (Marinvest) are proud to welcome innovative, clean-burning, fuel-efficient vessels to the sea. These seven 50,000 dead weight tonne vessels are built with the first-of-its kind MAN B&W ME-LGI 2-stroke dual fuel engines that can run on methanol, fuel oil, marine diesel oil, or gas oil.

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Alternative Clean Fuels – LNG

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§  Ingerslev, Thomas: Low Emission rules, their implementation and impact on the dry bulk

market. Copenhagen Business School, 2018

§  ANP – Anuario Estatistico Brasileiro do Petroleo, Gas Natural e Biocombustiveis, 2017

§  39th International Bunker Industry Conference, 2018, IBIA

§  Americas Bunkers Markets trends and Marpol 2020 Strategy – Argus, 2018

§  Carbon Brief, website and reports (/www.carbonbrief.org/)

§  S&P Platts, Tamara Sleiman and Jack Jordan, 2018: “Power sector's thirst for fuel oil after

IMO low sulfur cap shifts bunker demand”

Sources:

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THANK YOU!

bernardo.pinheiro@ultratank.com or Linkedin