• CRISIL Research Impact Note
  • LSFO
  • Low Sulphur Fuel Oil
  • International Maritime Organization
  • IMO
February 27, 2020

Sailing on low sulphur

LSFO more viable option for shippers in the long run Existing supply hiccups to ease

The International Maritime Organization (IMO) has mandated the use of low-sulphur fuel oil (LSFO; 0.5% sulphur) by ships replacing high-sulphur fuel oil (HSFO; 3.5% sulphur), with effect from January 1, 2020.


To be compliant, ship owners have two options: use LSFO, or continue to burn HSFO by equipping ships with exhaust gas cleaning systems called scrubbers.


So far, only 5-10% of the global fleet (by number of vessels) is estimated to have installed scrubbers, and by the end of 2020, this is expected to improve to only 10-15%.


In other words, shippers are preferring a switch to LSFO.


The low preference for scrubbers is because of two factors: a ban on open-loop scrubbers, which transfer pollution from air to water, at ports; and, two, the ease of transition to LSFO for refiners, which could lead to concerns about availability of HSFO, especially at small ports.


Also, the cost of installing a scrubber is very high at $2.5-4.5 million (Rs 18-32 crore, which is 5-10% of the typical capital cost for a Suezmax or Aframax vessel).


Factoring this, a cost analysis of vessels with and without scrubbers over a 15-year lifecycle indicates that it is beneficial for a ship to run on LSFO even if the price differential between LSFO and HSFO remains at the current level of $300 per mt. And as the price differential narrows, the economic benefit for players operating on LSFO increases, compared with players using HSFO with scrubbers.