U.S.-Backed Plan for Phased Start of Ship-Fuel Rules Fails

(Bloomberg) -- The International Maritime Organization rejected a proposal -- supported by both the U.S. and shipping groups -- for a phased start to rules that will limit the sulfur content of ship fuels starting in 2020.

The agency’s Marine Environment Protection Committee, meeting in London, rebuffed the proposal for a so-called experience-building phase, noting that it was vague and needed further defining.

It wasn’t initially clear whether the experience-building proposal was killed for good or indefinitely delayed. An index of U.S. refining stocks, which slumped the most in almost three years on Oct. 19 when the Trump administration said it would support the plan, briefly pared losses.

“The whole thing was a tempest in a teapot,” said James Lucier, managing director of Capital Alpha Partners in Washington. “The proposal in question was vague and lacked specificity. It was offered at the last minute without a plan to make it happen.”

The IMO is meeting this week to iron out the details of rules that take place in just 14 months and will have major implications across the transportation, shipping, aviation and refining industries. The agency, which is part of the United Nations, two years ago adopted its sulfur-cap rules -- commonly known as IMO 2020 -- and has pledged to be firm on implementation.

From Jan. 1, 2020, the world’s ships will have to burn fuel containing no more than 0.5 percent sulfur, down from 3.5 percent in most parts of the world today. Vessels fitted with scrubbers to remove the pollutant can continue using existing high-sulfur fuel. Fuel is the shipping industry’s single-biggest expense.

Shipping trade groups, facing billions of dollars in increased costs, have warned that the new rules could result in damage to vessels’ engines if fuels prove incompatible among different suppliers. Oil analysts have predicted the upgrade will add to the price of crude, and there have been warnings that world trade could be undermined. Even airlines are hedging prices forward to cover themselves.

Shipping Proposal

Three shipping trade groups and four flag states -- usually tiny countries where thousands of the world’s merchant ships are registered -- made a submission to the IMO in late August requesting an experience-building phase.

See: Refiners Slump as Trump Looks to Slow-Roll Shipping Rules

While some analysts said the experience-building phase amounted to a request for a delay to the IMO 2020 rules, that would be an incorrect characterization, BIMCO, one of the shipping groups behind the proposal, said earlier. Instead the goal was to get clear guidance -- and a pragmatic approach -- for when vessels either inadvertently fail to comply, or are unable to purchase the correct fuels.

Although the request for the experience building phase has been rejected, the aim of the proposal “is very much alive,” Lars Robert Pedersen, BIMCO’s deputy secretary general in charge of environmental matters, said by email on Wednesday.

The BI North American Refining & Marketing index briefly pared losses before closing down 5.3 percent in New York. The benchmark slumped last week on concern any delay would hurt an industry that stands to gain from the increase in demand for cleaner-burning diesel fuel. American companies have also invested billions in upgrading their facilities to produce fuel that meets the new rules.

©2018 Bloomberg L.P.