Monthly Lecture meeting

1. Impact of IMO Sulphur Regulation
on Tanker market
May-2018
1

2. Presentation Flow
2
What is the regulation?
What it means for shipowners?
How shipowners can comply?
Are refiners ready for this change?
How could it alter the Tanker demand & flows?
How can it impact fleet supply?

3. IMO has decided to reduce the global bunker fuel
Sulphur spec from 3.5% to 0.5% from 1st Jan 2020
3
Bunker demand contributes about 5% to oil demand while it
contributes more than 25% of Sulphur emissions from oil
In EU Sulphur content of road fuels is capped at 0.001%
It was gradually reduced from 0.05% to 0.001% over 10 years

4. Why there is higher Sulphur in FO?
4
Sulphur is heavier than most of the oil products, therefore during
refining it tends to accumulate in heavier products like FO
Source: IEA, BP
Average Sulphur content in straight run FO is more than twice that
of the input crude oil

5. Marine Bunker Demand
5
Containers
22%
Bulk
Carrier
18%
OilTanker
13%
Ferry +
RORO
8%
General
Cargo
7%
Chemical
Tanker
6%
Gas
Carrier
5%
Fishing
5%
Cruise
4% Others
12%
Consumption by Ship type
(mt)
Source: IEA, IMO 3rd GHG study- consumption % for cal 2012
3180 3231
756 767
3936 3998 4000
0
1000
2000
3000
4000
5000
2018 2019 2020
Global Bunker Demand
(kbpd)
FO Gasoil Low Sulphur Fuel Total
?

6. Presentation Flow
6
What is the regulation?
What it means for shipowners?
How shipowners can comply?
Are refiners ready for this change?
How could it alter the Tanker demand & flows?
How can it impact fleet supply?

7. Cost to Shipping
7
Various forecasts pegs cost to shipping at $ 20-70 bn annually
Extra fuel cost* per day at MGO/FO spread of:
Size
Consumption
(in tons /day)
$ 200 /ton $ 300 /ton $ 400 /ton
Bulk Carrier 200k+ DWT 55 6,600 9,900 13,200
Containers 13k+ TEU 100 12,000 18,000 24,000
Tanker 200k+ DWT 65 7,800 11,700 15,600
*Assuming 60% sailing days in non-eca areas
Annual cost* ($ mn) at MGO/FO spread of:
Size
Consumption
(in tons /day)
$ 200 /ton $ 300 /ton $ 400 /ton
Bulk Carrier 200k+ DWT 55 2.4 3.6 4.8
Containers 13k+ TEU 100 4.3 6.5 8.6
Tanker 200k+ DWT 65 2.8 4.2 5.6

8. Presentation Flow
8
What is the regulation?
What it means for shipowners?
How shipowners can comply?
Are refiners ready for this change?
How could it alter the Tanker demand & flows?
How can it impact fleet supply?

9. MGO
VLSFO/ Blended
fuel
Alternative fuel
LNG/ Methanol
Install scrubber &
use HSFO
Options for Ship Owners
No capex
required
No capex
required.
Price should be
lower than MGO
Clean fuel
Quick payback if
spread betn
HSFO and MGO
widens
Compatibility
& Availability
could be an issue
Operational
issues
Lack of infra/
availability
Huge retrofitting
cost
Capex
Space
Corrosion
Future regulation
Likely price spike
Operational
issues
9

10. Can non-compliance be an option?
10
IMO has banned carriage of non-compliant fuels on ships without
the requisite abatement technology
P&I club – insurance is invalid for non-compliant vessels
Difficult to track compliance at high seas
Bunker suppliers could play a key role
Waivers could be given if compliant fuels are not available at a
particular port

11. Scrubber Cost/Benefit Analysis
11
At MGO/FO spread of $ 250/ton
Ship type
Scrubber
cost ($ mn)
Incremental
opex ($ pd)
Consumption
as sea
(tons /day)
Non-ECA
sailing days
Annual
Savings
($ mn)
Payback
Period
(in yrs)
VLCC 5.5 700 65 60% 3.2 1.7
MR 4.2 200 24 50% 1.0 4.2
At MGO/FO spread of $ 400/ton
Shiptype
Scrubber
cost ($ mn)
Incremental
opex ($ pd)
Consumption
as sea
(tons /day)
Non-ECA
sailing days
Annual
Savings
($ mn)
Payback
Period
(in yrs)
VLCC 5.5 700 65 60% 5.3 1.0
MR 4.2 200 24 50% 1.6 2.6

12. Scrubber economics depend upon MGO/FO
spread
12
Forward spread curve peaks in early 2020 & then narrows reflecting expectation of
better low sulphur fuel availability and higher scrubber installation
Source: Reuters

13. Issues with Scrubber
13
Availability of FO itself is a big question mark - mainly in smaller
ports
Open loop scrubber could be banned as it effectively pollutes water
instead of air
Closed loop scrubber – disposal of Sulphur is an issue
Costs may come down in the future
Scrubber not a long term solution - regulations may change in the
future

14. Presentation Flow
14
What is the regulation?
What it means for shipowners?
How shipowners can comply?
Are refiners ready for this change?
How could it alter the Tanker demand & flows?
How can it impact fleet supply?

15. How refiners meet the final demand?
15
To produce higher Gasoil refiners need to invest in secondary units
Lead time for secondary units is around 2-5 yrs
Source: IEA

16. Challenges for refiners
16
To comply with regulations, refiners need to remove more than 90%
of the Sulphur from current 80%
Requires huge investments in secondary units
Increased use of low sulphur light oil
however, spread between light and heavy could go up further
Refining heavy distillate rich crude oil
however it will also produce higher residuals

17. Refiners looking to upgrade / launch LSFO
17
However, acceptance for any new fuel may not happen
overnight

18. Dilemma – To scrub or To refine
18
Most of the Ship owners and the refiners opting for wait and watch
approach due to high capex required
Going by the IMO history, last minute postponement cannot be
ruled out
Source: IEA

19. Presentation Flow
19
What is the regulation?
What it means for shipowners?
How shipowners can comply?
Are refiners ready for this change?
How could it alter the Tanker demand & flows?
How can it impact fleet supply?

20. What happens to the excess FO?
20
Some FO could be blended in other low sulphur products like gasoil
to obtain a compliant fuel
Remaining volumes could find alternative use especially if prices fall
dramatically
Excess FO power generating capacities are available in Middle East,
Russia & Brazil
FO could replace direct crude burn/coal/natural gas in power
depending on the regional prices & policies

21. Refinery runs likely to surge
21
State of the art modern refineries with capacity of 4-5 mbpd are
slated to come online in next 3-4yrs, mainly in MEG/ Asia
However shift of more than 2 mbpd bunker demand from FO to
Gasoil, would still likely to result in Gasoil deficit
Hence, gasoil cracks could surge leading to higher runs especially in
regions with complex refineries like MEG/USG/China/Other Asia
Complex refiners could further shift yields towards gasoil or invent
compliant fuels
However, simple refiners in Europe/FSU/Latin America which
produce huge amount of residuals would have to fight for survival

22. Change in Crude Flows
22
Reduction in FO bunker demand would be a direct hit to the dirty
trade volumes
However, rise in refinery runs could result in uptick of crude trade
If OPEC broadly continues with the supply cut, incremental atlantic-
east flows could boost ton miles
Closedown of FSU/Latin American refineries could free up more
crude for exports
However overall impact remains uncertain

23. Change in Product Flows
23
Sudden spurt in Gasoil flows in H2 19 is likely as bunker suppliers
shift from DPP to CPP infra
Shutdown of simple European/Latin American refineries could be a
boon for product trade
Gasoil deficit in Europe could increase further
Demand is likely to be driven by Gasoil creating increased arbitrage
opportunities
However, high oil prices could dent the products demand

24. Presentation Flow
24
What is the regulation?
What it means for shipowners?
How shipowners can comply?
Are refiners ready for this change?
How could it alter the Tanker demand & flows?
How can it impact fleet supply?

25. Orderbook – a perpetual concern
25
Orderbook can grow mainly for larger tankers
ECO vessels with lower fuel consumption
Easier to fit scrubber on NB than retrofit
Not required to undergo pain of current subdued markets
0
15,000
30,000
45,000
60,000
75,000
90,000
0%
10%
20%
30%
40%
50%
60%
Q1-1996
Q1-1997
Q1-1998
Q1-1999
Q1-2000
Q1-2001
Q1-2002
Q1-2003
Q1-2004
Q1-2005
Q1-2006
Q1-2007
Q1-2008
Q1-2009
Q1-2010
Q1-2011
Q1-2012
Q1-2013
Q1-2014
Q1-2015
Q1-2016
Q1-2017
Q1-2018
Tankers orderbook as % of fleet Tanker Spot Earnings ($ /day) (RHS)
Source: Clarksons

26. Slow steaming to continue
26
With higher bunker costs, speed is unlikely to go up –
in fact it could trend slightly lower capping the fleet supply
Source: Reuters
10
11
12
13
14
15
16
0
20
40
60
80
100
120
2010 2011 2012 2013 2014 2015 2016 2017
Brent Price ($/bbl) Speed (knots) (RHS)

27. Massive Scrapping Potential
27
Owners would find it increasingly difficult to clear 4th & 5th surveys due to
capex required in order to comply with IMO & BWTS regulation
Current high scrap prices could further quicken the scrapping pace
Source: Clarksons
30 25
36
8 17
12
7
40
55
43
0
10
20
30
40
50
60
70
2018 2019 2020
VLCC Scrapping Potential
(No. of vsls)
4th ITSS 4th SS 5th ITSS 5th SS + Total
18
11
31
21
28
3 8
13
8
6
50
53
44
0
10
20
30
40
50
60
70
2018 2019 2020
Afra Scrapping Potential
(No. of vsls)
4th ITSS 4th SS 5th ITSS 5th SS + Total
5.2% 5.5% 4.6%5.5% 7.6% 5.9%

28. Four tier shipping market in 2020
28
Scrubber fitted ECO vessels
Non-Scrubber fitted ECO vessels
Scrubber fitted non-eco vessels
Non-Scrubber fitted non-eco vessels

29. Shipping Industry Response
29
Considering uncertainty around the retrofitted scrubbers, most
of the Tanker/Dry bulk owners are likely to undertake wait and
watch approach & take decision towards end 2019

30. Thank You
30