Lloyd's List: Quality concerns and new business models will fuel a bunker revolution

Analysis published by Lloyd's List on 02 July 2024 | Written by Enes Tunagur and Richard Meade
Reproduced with permission, view article on their website here.

The bunker sector has struggled to maintain quality standards for conventional fuels, so the seismic overhauls required to facilitate a more expensive, more transparent and potentially more dangerous multi-fuel future require a wholesale reinvention of the entire sector.

Singapore represents the gold standard of bunker quality safety having adopted mass flow meters more than 10 years ago. Source: MPA Singapore

Over the past 12 months a series of out-of-court settlements between a major bunker supplier and several shipowners have quietly been agreed.

The details remain confidential, but Lloyd’s List understand that the agreements will close off the latest round of bunker contamination claims made against traders and draw a line under many long-running and heated disputes.

The settlements will not, however, improve the perception of a sector that has struggled with successive governance scandals, pollution incidents and widespread mistrust among shipowners.

Nor will they allay the concerns regarding the bunker sector’s ability to safely transition into an era of more expansive and potentially more explosive and toxic green fuel.

The bunker sector is overdue a potentially seismic round of consolidation and a reinvention of some business models driven by new fuels, new regulations and customer demands, but the most immediate concerns remains quality.

“It’s still the wild west out there is some parts of the bunker sector,” said one of the shipowners involved in a recent settlement.

While the bunker suppliers have a PR battle ahead of them, the rate of contamination cases appears to have plateaued, for now.

Fuel quality assessors VPS issued 28 bunker fuel quality alerts in 2023 to highlight short-term quality issues, compared with 36 in 2022, with most of the alerts relating to flash point and sodium issues.

Most common bunker grade very low sulphur fuel oil was only off specification in 2% of deliveries in 2023 globally, according to bunker supplier Integr8 that received data from over 120m tonnes of fuel deliveries last year.

Off-specification bunker deliveries in 2023*

Source: Integr8 Fuels
*: Data from over 120m tonnes of fuel deliveries

But when the contamination cases come, they routinely have far-reaching consequences that linger on far beyond the initial mechanical damage cause.

In 2022, about 80 ships in Singapore reported issues with their fuel pumps and engines after receiving contaminated residual fuel oil. Investigators found that Glencore had sold some of the tainted fuel to another supplier, and the two had offered it to about 200 ships.

That episode sparked another round of stringent new regulations for bunker fuel quality from the Maritime and Port Authority of Singapore, which ultimately came into force last month.

That should have been the opportunity for Singapore to start showcasing its bunker quality and safety standards in the wake of the last scandal, but less than two weeks after the new rules entered into force the MPA was otherwise engaged in a major clean-up operation after a dredger hit a bunker barge, spilling more than 400 tonnes of oil.

Singapore represents the gold standard of bunker quality and safety having adopted mass flow meters to clean up its bunkering market more than 10 years ago.

Other bunkering hubs have been slow to follow Singapore’s lead.

Singapore top bunker suppliers by volume in 2023

MFM will finally become mandatory from 2026 in both Rotterdam and Antwerp-Bruges, but new systems alone are not a silver bullet.

“What really makes a difference is the enforcement behind the mass flow meter. The MPA in Singapore was extremely good and really strong in enforcing the use of MFM in verifying and checking that it was used and used the correct way,” said Timothy Cosulich, chief executive at independent bunker supplier Fratelli Cosulich.

Quality issues persist in the main bunker hubs, but outside of them exists a patchwork of unreliable national enforcements and a fragmented market of suppliers where competition is high and corners are routinely cut.

The infamous “cappuccino” scam of pumping oil into a ship’s tank with compressed air, creating a layer of foam and less fuel than is being sold, is the least of an owners’ concerns. In more dangerous instances, suppliers who are eager to plump up profits sometimes blend shipping fuel with liquids such as used car lubricants, paraffin or industrial waste.

Privately, bunker officials and even some executives concede that governance issues have been “challenging”, but they also accept that the entire sector is poised to go through a difficult period of change ahead of shipping’s energy transition.

Consolidation is widely accepted as inevitable, as are tightened regulatory requirements, but the biggest factor driving change will likely be the shipping companies themselves as they demand higher quality products with comprehensive sustainability certificates in an era of more expensive green fuels.

“The market needs to operate in a different way and this is what we are trying to draw everyone’s attention to. What we have seen in the past few decades will need to change. The clients will ask for something different than what we have seen before,” said Kenneth Dam, global head of bunkering at Trafigura-backed TFG Marine.

The primary change for bunker supply will be the cost, as future fuels such as green ammonia are expected to be significantly more expensive than fuel oil. Initial estimates put green ammonia prices at $2,000 per tonne, according to price reporting agency Argus Media. Ammonia’s lower energy density is expected to require higher bunker volumes than conventional fuels, pushing up potential costs even higher.

“The products we’re going to trade and deliver to our clients are much more expensive. So the expertise and balance sheets are now really coming into play,” said Dam.

Another key challenge facing the bunker industry will be alternative fuel supply, as there are legitimate concerns around some of these candidate fuels’ scalability despite the flurry of dual-fuel vessel orders over the past few years.

Singapore bunker sales

Source: Maritime & Port Authority Singapore

“The deep shipping decarbonisation debate is very much centred around ammonia versus methanol. But supply chain is very, very immature on both fronts, but especially on the methanol side as we have real concerns about the scalability of low-carbon methanol,” said Margaux Moore, head of the energy transition research group at Trafigura.

Rising costs and the introduction of new fuels are expected to usher in significant changes to the current bunkering model that allows shipowners easy access to residual and distillate bunkers in several major refuelling hubs.

TFG expects to see a “completely different” bunker market in the coming years, arguing that the market is not ready to handle several different products, according to Dam.

“The spectrum of products will be completely different, so you will see a lot of disruption in that market,” Dam continued.

Dam suggests the current bunker buying model will not be viable in the future, arguing that buyers will need to be “much more strategic” in their refuelling plans.

“Today’s shipping model is one where you are basically taking orders on your books before you have booked your bunker requirements. And in the future bunker environment you will not be able to expect that you have gasoil, very low sulphur fuel oil and high-sulphur fuel in all ports,” Dam warns.

“Our market will become much more reliant on contracts and where you actually source fuels.”

All that adds up to a series of major changes in fuel buying models, which in turn is expected to spur a round of consolidation, not least because shipping companies are increasingly expected to opt for directly securing new fuel supplies with energy producers.

Which leads back to Singapore and the reason it has been investing so heavily into an enforceable regime that will allow it to maintain its standing as a green bunkering hub of the future.

The Maritime Singapore Decarbonisation Blueprint, launched last year, has committed the city state to an ambitious period of trialling new green fuels and technologies, with $300m committed to initiatives over the next decade. The government said last month it is ready to offer full-scale commercial operations for the bunkering of methanol as a marine fuel.

But to maintain its ambitions to become the future fuelling hub of green energy tomorrow it will first need to prove that it can address the quality and safety issues that the rest of the industry is still grappling with today.