Weight of Freight - Oil shippings: EU ETS cost starts at 500mn

2024 marks the beginning of carbon pricing on ship emissions in Europe with the inclusion of shipping into the EU’s Emissions Trading System (ETS).

Listen to Nicholas Watt, Editorial Manager of Freight, and Elena Domashenko, Senior Analyst, discuss the additional costs shippers should expect to pay this year and how freight and marine fuels markets will be affected.

Key topics covered in the podcast:

• Argus coverage of ETS costs in freight, bunkers markets
• CCF (Carbon Cost of Freight) assessments for crude, refined products, petroleum coke, coal, iron ore, grains, and
• Conventional vs. alternative fuel pricing
• LNG bunkering outlook
• Shifting regulatory landscape in Europe
• Possibility of a two-tier shipping market

Related links

• https://www.argusmedia.com/en/blog/2023/September/27/weight-of-freight-eu-ets-compliance-will-add-about-3-4pc-to-freight-bill

Transcript

John: Hello, and welcome to the "Weight of Freight" podcast, where we explore the intricate and powerful connections between freight, marine fuels, and the commodity markets. Today, we'll be discussing the EU Emissions Trading Scheme, also known as ETS, which was implemented in January this year, as well as its impact on the shipping and marine fuels markets. I have with me here, Elena Domashenko, senior analyst and editor of the Argus Marine Fuels Outlook. Welcome, Elena.

Elena: Hi, John. Pleasure to be here.

John: And representing the freight side of things, we have Nick Watt, editorial manager of Freight. Welcome, Nick.

Nick: Hi, John. Thanks for having me.

John: For those who don't know, 2024 marks the first year of shipping's inclusion in the EU's Emission Trading Scheme. This scheme is a cap-and-trade program that requires companies in certain sectors operating in the EU to pay for their carbon emissions.

John: The global shipping fleet is 100,000 strong and produces around 2% to 3% of global carbon emissions on its own, and the vast majority of it still runs on oil-based fuels. Until now, there has been sulfur regulations, but there has been little to address its carbon output. So, Nick, how is shipping going to be involved in the EU ETS scheme?

Nick: Thanks, John. So, starting this year, you have 40% of the covered emissions. That's what you'll have to pay for. Starting next year, it's going to be 70%. And then starting 2026, it's going to be 100%. And what do I mean by covered emissions? I mean, 50% of emissions on routes that involve one EU plus Norway port and one non-EU port, and then 100% of emissions for entry EU voyages. So, this is the first carbon tax really on shipping anywhere. And we'll see how it goes and if it changes in the years to come, but that's the situation we have right now.

John: Excellent. And, Elena, how is this regulation affecting the marine fuels market?

Elena: Yeah, so conventional marine fuel prices in Europe are expected to rise this year as a result of shipping's inclusion in the EU ETS. Argus publishes daily EU ETS traded CO2 prices. And on the 2nd of January, this price stood at $81 per ton CO2 equivalent. So, at this price, EU ETS would add $113 per ton to VLSFO prices this year. And in 2025, it will be $174 per ton. And in 2026, it will be $253 per ton to VLSFO price in Northwest Europe. In 2026, it's when the shipowners will have to pay 100% of emissions.

John: Interesting. And how about for some of the alternative fuels that we see out there? Is there much more uptake of these?

Elena: Yeah. So, currently, marine biofuel blends are the most actively used type of alternative fuel. Unlike LNG, methanol, ammonia, biofuel can be burned by conventional marine engines, and vessels do not require retrofitting. If we look at Argus B30 biofuel blend in ARA, which is 30% of advanced FAME 0 and 70% of VLSFO, EU ETFs will add just $71 per ton to the price of B30, which is 30% less than pure VLSFO. However, B30 ARA prices are expected to rise next year. So, even with additional carbon costs, B30 prices are forecast to be at premium to VLSFO at least till the end of 2025. And the same is applied to premium of pure marine biodiesel, B100 to MGO. But the spreads are expected to narrow following the transitional period. So, they're going to narrow when 100% of carbon emissions cost will be applied because the EU ETFs support high MGO and VLSFO prices.

John: Excellent. So, that's going to be a fairly substantial extra cost onto the bunker fuel. And given that bunker fuel is the single largest cost for any shipping voyage, Nick, how is this going to affect the freight rates for shipments coming into the EU?

Nick: Yeah, that's a good question. It's putting some upward pressure on the market. One way to look at it is it's the usual freight rates plus a little bit of a premium for the EU ETS, and we see it at about 3% to 4%. Generally speaking, it's going to depend based on the type of vessel and the type of trade. But at about 3% to 4% to the freight bill, it's important also to note the scope of this regulation. It's not just for oil tankers, it's for dry bulkers, it's for container ships, it's for LPG carriers. So, each one of those segments and even some others will be affected, and they will have to pay these ETS costs.

And if we look specifically at the oil market, the U.S. is the largest supplier of crude to Europe now. Those shipments will be affected by the ETS, looking specifically at Aframax as they're the main type of vessel to carry U.S. Gulf Coast crude into Europe. That is about 13 cents per barrel right now if you take into account around voyage. Looked at a lump sum, that's about $70,000. So, 13 cents per barrel, it's not a huge chunk of a delivered cost of crude, but it really adds up. So, it's a ton of volume moving in and out of Europe. For all oil trade, we estimate that the total ETS cost in 2024 is going to be over $500 million. And that's excluding the other segments that'll be affected.

John: And that $500 million is assuming a 40% payment level for the emissions.

Nick: True.

John: So, the phase-in is going to push that $500 million up.

Nick: Yeah, that's absolutely right.

John: So, Nick, you mentioned 13 cents a barrel. This is one of Argus's carbon cost of freight assessments. What sort of assumptions are you using to generate those numbers?

Nick: Sure, I'll try not to bore you with the details too much in this, but we take the EUA price, which is market price. Argus assesses that it's about $80 per ton right now, multiplied by the carbon emissions on a given route. And we take a bunch of assumptions to figure out what those carbon emissions are. It's roughly 3 tons of carbon per ton of 0.5% fuel burn, that's actually a little bit over that. To figure out the tons of fuel burned, [we take] the ship's consumption, the ship's speed, and from that and a few other assumptions like time in port, whether or not it's an ECA zone, we can come up with the tons of fuel oil burned, assuming 0.5%. And that's what we assume because like was mentioned earlier, that's the vast majority of the global shipping fleet running on oil-based fuel. So, all of the details are available in our methodology, too, if someone wants to check them out.

John: Fascinating. Now, Elena, the vast majority of these ships, as Nick mentioned, are all burning 0.5% fuel oil. But looking forward, do you expect the EU ETS to create a bit of a shift in the type of bunkers that shippers are going to buy?

Elena: Yes. So, marine biodiesel bunkering demand, and in general, uptake of alternative bunker fuels. Dual fuel vessel orders are expected to rise as a result of EU ETS. Also, it's supported by carbon intensity index targets and ratings set by IMO from this year. The FuelEU Maritime initiative, which is set to start in 2025, could also support it. Regarding LNG, for example, LNG bunkering for dual-fuel vessels could become more attractive as a result of shipping inclusion in the EU ETS. Since last year, LNG-delivered prices have been holding a discount to MGO in Northwest Europe, and projected lower natural gas prices with shipping's inclusion in ETS could result in even lower LNG bunker prices relative to VLSFO and MGO. All these price forecasts are published in Argus Marine Fuels Outlook. You can find it there.

John: Excellent. And we've seen how important ETS regulation is and how so much of the market can be changed with the stroke of a pen. Are there any other regulatory items on the landscape that could influence the type of bunkers that shippers buy?

Elena: Yeah, apart from what I already mentioned, there's one which affected biofuels demand, actually. So, the recent Dutch government's decision to have subsidies for marine bio blending from this year could affect the demand growth for biofuels. Marine biofuels prices in ARA are expected to rise because of that. And Rotterdam prices had a competitive edge, thanks to the subsidies, whereas in Singapore, there were no incentives for biofuel use in the marine sector so far. So, this decision to cut subsidies, plus the inclusion of shipping in the ETS system, could even result in biofuel blends like B30. Dob ARA flipped to premium to buy blends in Singapore, like the most used bio blend there, B24, which is UCOME plus VLSFO.

John: Excellent. I think we'll wrap it up there. Nick and Elena, thank you very much for sharing your expertise today. And thank you to everybody for tuning in. You can find further information on the EU ETS in the "Weight of Freight" blog and the Argus Marine Fuels Outlook. Have a great day.