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What we can learn from the 2020 shipping fuel switch

Op-eds & Essays by Jamie Webster • November 14, 2019

In less than 50 days the global shipping fleet will have to stop burning high-sulphur fuels, as requirements mandated by the International Maritime Organization come into force. And yet, significant uncertainty still exists on how disruptive this could be to fuel pricing for ships, its knock-on effects to other parts of the economy, and even the strategies shipowners will use for compliance. It wasn’t supposed to be this way. The January 1 2020 date of implementation was originally set in 2008, with a provision for a review on the availability of low-sulphur fuels. Three years ago this month, the IMO decided that sufficient fuel would be available and affirmed the 2020 date. Yet, despite a clear date and clear standard, both the shipping industry and the refining industry did little to react in the first two years. The stasis was caused by a lack of consensus on which industry should, or would adjust; the shipping industry, by installing costly scrubbers, or the refining industry by expanding coking capacity; in a period of focus about the long-term demand prospects for oil in the face of climate change. If both sectors acted, significant capital could be wasted as refiners invested to make more low-sulphur fuel while shipping companies equipped themselves to burn high-sulphur fuel oil cleanly. Sufficient fuel will be available, but the scale of the extra cost remains unclear. Added to this uncertainty was if the regulation would be enforced by the 174 member states, an agreement the IMO relies on for all its regulations. While it took time, countries have now agreed to enforce compliance with the new fuel standard, largely eliminating a source of uncertainty. But several countries were slow or unclear in their support for the new regulation given the economic cost that will be incurred for this environmental improvement, a cost that will be borne by end consumers in a time of uncertain continued economic growth The new fuel standard targets sulphur emissions, not greenhouse gas emissions (IMO has that in its future sights) but the uncertainties in how to comply and if it would be enforced hold valuable lessons for companies and governments and the energy transition(s) ahead. Climate change is creating action from governments, companies and individuals to reduce their greenhouse gas footprint. Within this is a focus about a single, big energy transition — moving to a lower carbon footprint. This big energy transition is important and allows a focal point for interested governments and society to work towards lower carbon policies, solutions and behaviours. But for companies with large energy footprints, this should not be the sole focus. Instead, it should consider the energy transition as a plural. By viewing the big energy transition as many incremental steps, it allows for more strategic and tactical thinking on how best to match business decisions and strategy amid a quickly changing landscape. Focusing on the many smaller energy transitions that have occurred (coal to gas switching in the US, increased vehicle efficiency) and are yet to occur (widespread electric vehicles, greater uptake of renewables) allows the strategic function of companies to fully engage on each of these issues. As companies focus their efforts on the strategies to reduce their carbon footprints, as well as potentially providing services that bundle reduced climate impacts for their customers along with their regular products, the ongoing IMO change provides a valuable lesson. Recommended Special Report: Oil & Gas 4.0 Few energy transitions will provide so clear a date and standard to be met, and yet the still present uncertainty has shown the scale of the challenge. Industries will need to communicate more with one another to better understand actions as well as impacts to those actions across sectors. Governments and policymakers will best serve their aims with consistent clarity on their policies. Finally, strategists within companies should maintain their long-term focus on how the energy transition will impact their business, but also narrow their aperture on how their company can best thrive in the many transitions that will occur on the way to achieving reduced carbon emissions.

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What we can learn from the 2020 shipping fuel switch

Op-eds & Essays by Jamie Webster • November 14, 2019