Cast your mind back to that holiday moment on the rear deck of a cruise ship. Did you notice the trail of greasy black smoke under the azure sky?
Ocean liners and almost every other working vessel on the high seas are burning the dirtiest fuels on the planet. So bad are the emissions from marine fuel oil that just one of the larger cruise ships is reckoned to emit five tonnes of nitrogen oxide, 450 kilograms of ultrafine particles and more sulphur than several million cars in a single day.
Shipping causes more air pollution than the entire world's car fleet; most ships burn residual fuel oil, stuff that is left in a barrel of crude after the more valuable gasoline, diesel and jet fuel has been extracted. It explains the brown haze that spoils your seaside view. Yet cruise ships are only a small, albeit a growing part, of a global environmental and public health problem that the International Maritime Organization (IMO) has, belatedly, decided to tackle.
The good news is that after a decade of argument, the member states of the IMO have agreed that from 2020 ships must use fuels with a maximum sulphur content of 0.5 per cent; that compares with the current standard of 3.5 per cent. The bad news is that the shift to cleaner marine fuels could be another blow to Canadian crude.
The IMO's 2020 sulphur cap has been so long debated because of the global shipping supply glut and the appalling economics of commercial shipping. This is set to get worse: fuel represents about 40 per cent of the operating cost of a typical container ship, and the switch from cheap residual fuel oil to higher-quality diesel or other low-sulphur fuel could be a body blow to ship owners operating on wafer-thin margins.
A recent study by Wood Mackenzie, the energy consultancy, concludes that higher crude prices and limited availability of marine gas oil (MGO), a lower-sulphur alternative to fuel oil, could raise a ship owner's fuel costs fourfold, adding $60-billion (U.S.) in annual costs to the global shipping industry by 2020.
The extent of the price surge depends on whether the world's oil refiners have the capacity to make enough diesel to satisfy the anticipated surge in demand from global shipping. Oil majors, such as ExxonMobil, Shell and BP, insist that it can be done but it means heavy investment in upgrading refineries to produce more middle-distillate fuels (such as diesel) and less heavy fuel oil. Ship owners also have the choice of installing scrubbers on vessels that clean the emissions from the stack, and there is the ultraclean option for larger vessels operating between major ports of converting their fleet to liquefied natural gas.
For most ship owners, who lack big capital budgets, it will be about buying the cleaner fuel and that poses opportunities and threats for the oil-refining industry. It is a complex business, a juggling act in which day-to-day changes in the price of a barrel of crude oil and in the price of the different products that come out of each barrel, can boost or destroy the refiner's profit margin. Faced with the opportunity of new demand for a more expensive product, the oil majors will want to supply the new marine market for cleaner fuel. That can be done in two ways: investing in very expensive equipment to upgrade more residual fuel oil into middle distillates, such as diesel, or by investing in equipment (also very expensive) that strips the sulphur from the fuel oil.
The third way is to put a different blend of crude into the refinery. There are hundreds of crude oils and each has distinct characteristics, including sulphur content levels. If a refiner wants to produce lots of low-sulphur transport fuels, he will opt for so-called light, sweet crudes, such as Brent from the North Sea or West African crudes such as Bonny Light. Crude oils with a high sulphur content, known as "sour," are generally sold at a price discount to the sweet blends; the sour crudes include Venezuelan heavy oil and Western Canada Select.
Platt's, the oil price assessment agency, reckons that the IMO's sulphur cap will affect the price discounts at which sour crudes sell compared with the light sweet benchmark crudes. "[The cap] will likely result in a lowering of the forward value of heavy sour hydrocarbons, given the deeper discounts required by refineries to make up for higher investments in secondary processing units."
The race to cleaner fuels at sea follows the drive onshore to low-emission fuels in our cities. Even as shipping switches from dirty fuel oil to diesel, the popular low-cost road transport fuel is on the verge of being banned from the centre of major European cities, including Paris. The worldwide push for cleaner air will have big ramifications for the global oil industry and for Canada.
Carl Mortished is a Canadian financial journalist based in London