According to MarineCircle News issued from Oct.19^th.,2019, Yesterday afternoon, the third International Petroleum and Natural GasEnterprises Conference held a quite "lively" parallel forum at the Hilton Hotel in East Harbour, Zhoushan. The theme of the forum was "change in low sulfur fuel oil (LSFO ) conversion period and shipowner's choice". This forum was co-sponsored by China Shipowners Association, China Petroleum Circulation Association, Zhoushan portfree trade zone Administrative Committee and Zhejiang Provincial Seaport Investment & Operation Group Co, Ltd., Invited nearly 300 heads fromwell-known domestic and foreign fuel suppliers, traders, shipping companies,financial institutions, shipping consulting companies, etc., to discuss how themarine fuel oil market and shipowners will respond and choose when the newregulations are about to take effect in-depth communication.

It is less than 3 months before theIMO 2020 Sulfur Cap is officially implemented. The issue of ‘low sulfur fueloil conversion’ affects such kind of marine fuel related jobs that were listedblow, including shipowners, charterers, fuel suppliers, ports, governments,regulatory agencies, insurance companies and industry organizations. Therefore,the "popularity" of this forum is also reasonable, and it can bedescribed as ‘difficult to get a ticket’! Not only was the venue full of seats,all the spaces that could stand were packed with participants who came to‘enjoy brainstorming’, and even the front and back doors of the venue werepacked with ‘listeners’. It also shows that this is a high-quality forum that hasdrawn much attention, and it has demonstrated the leading position of Zhejiang Free Trade Zone in China's marine fuel supply industry.

The topic of the forum is closely relatedto the sensitive period of " low sulfur fuel oil conversion" that theindustry is currently most concerned about. What responses and choices need tobe made by shipowners and relevant parties in the marine fuel oil market. Thespeeches of various speakers basically discussed the following issues that everyone is most concerned about.

Is the supply of LSFO sufficient?
By the time 2020 'Global Sulphur Cap' is officially implemented onJanuary 1^st, 2020, will the supply of low-sulphur fuel oil on themarket be sufficient? This is the issue that most shipowners are most concerned about. Sun Hougang, the general manager of China Marine Bunker Co., Ltd. also mentioned in the keynote speech that mr. Kitack Lim, the head of the International Maritime Organization, acknowledged his concern about the fuel supply in January next year, and the four major international shipping industry associations all have expressed their concerns about the compliant fuel oil supplyin line with the requirements of IMO 2020.

He said that the global fueldemand for ships is about 300 million tons, of which about 200 million tons ofbonded fuel, and the estimated marine LSFO is less than 100 million tons, mostof which are replaced by diesel. At present, the production and processing of LSFOis very hot. All traditional companies, BP, Total, Sinopec, and PetroChina havebeen processed to supply LSFO to the market. In addition, some investment companies include shipping companies such as Maersk, as well as shipping terminal operators and warehousing companies, which have gradually joined theentire low-sulfur processing and production chain.

The domestic refineries that produce LSFO are mainly fromthe two giants: Sinopec and PetroChina. Mainly, Sinopec has 10 refineries and 8+1 refineries of PetroChina, which have already planned to produce LSFO, Sun Hougang said, "China is now ready. If the country's policies give us general trade and export policies, our resources arestill abundant." In a speech during the discussion, Deputy General Manager Xu Tao of Sinopec Fuel Oil Sales Co., Ltd. stated that Sinopec has made preparations to ensure the supply of LSFO from four aspects: production, logistics, outlets and services. Sinopec will give full play to the advantages of integration ofrefining and sales, and has deployed 10 refineries in China to producelow-sulfur heavy fuel oil, and can guarantee a production capacity of 10million tons in 2020.

Where can I add LSFO?Whether there are enough compliant fuels available in the market by 2020, only by next year will we know. LSFO will beover-concentrated in some core ports. This is another issue that shipowners areworried about, and even worried that resource shortages may occur during acertain period of time. Sun Hougang said, "At present, there are only morethan 100 ports in the world that can provide low-sulfur fuel oil supply." The number of ports that can supply LSFO is insufficient. This is what shipowners need to be prepared for, which will seriously affect the ship's bunkering strategy.

The unpredictability of LSFO marketin the future makes shipowners have to take measures to lock up some futuredemand for LSFO. This has also changed the form of oil supply orders for oilsuppliers, with more and more forward contracts. Sun Hougang said that later theamount of contracts China Marine Bunker had signed with shipowners now accountsfor almost 50%.

As the largest domestic and top 10 bonded fuel bunkeringport in the world, Zhoushan has prepared for all aspects towards next period’s comprehensivesupply of LSFO. Wei Xiaohong, director of Zhoushan Port Free Trade Zone Administration Committee, announced in a speech entitled "Building InternationallyCompetitive Bonded Oil Bunkering Centers" that Zhoushan basically has apotential of low-sulfur fuel oil production and supply center, in the future it will be in line with export tax rebate policies. She said that the effectiveness of Zhoushan fuel oil blending gradually appeared. Since the policy was opened in 2018, the blended volume of bonded fuel oil has reached to 3.2 million tons. Among them, PetroChina International Co., Ltd (PCI) used domestic fuel oil components to smoothly carry out oil blending business with different tax numbers. China Marine Bunker Co., Ltd（Chimbusco）successfully produced low-sulfur fuel oil by blending oilfrom domestic refineries with different tax codes under the full supervision of Zhoushan Customs. This operation is the first of its kind in China and has opened up a new channel for domestic oil to flow into bonded-oil market andwhich enriched bonded oil resources in China.

Director Wei also said, ‘Zhoushanhas started the preparation of LSFO storage. Huangzeshan ’s 1.15 million cubicmeters of oil depots have been basically completed and can be put into use thismonth. Dading, ocean and other oil depots have carried out clean-up work andhave accumulated preparations for the storage capacity of low sulfur fuel oilexceeds 2 million cubic meters, which lays a solid foundation for the smooth switch over period.’

　　In terms of bonded fuel supply anchorage planning, she said, ‘In addition, four fuel bunkering anchorages have been demarcated at Xiushan east anchorage, and five anchorages and pontoonshave been expanded at Mazhi anchorage. There will be 10 Bonded oil bunkering anchors in Tiaozhoumen outer Anchorage be put into full use by the end ofOctober.’

Where can I add LSFO?

It iscertain that Zhoushan can add qualified LSFO! In fact, there will be another question in the future. Where can I add high sulfur fuel oil? From Platts'analysis of global marine fuel demand, it can be clearly seen that by 2020, the demand for HSFO will suffer "a cliff-like drop. Sun Hougang believes that the future HSFO will be concentrated in somecentral ports, such as Singapore, ARA area, Houston, several major ports in China, Zhoushan, Dalian, Qingdao, etc. "

How high is the price of LSFO?

Another issue that shipowners are most concerned about is how high the price of LSFO will be. Ms. Irene Tang, senior market strategist at S&P Global Platts, a leading international energy price consulting agency, gave their judgements on thefuture low sulfur fuel price level in their "Asia Compliance Marine Fuel Market Report". She believes that the price difference between 5% LSFO and HSFO 380 will be in the range of 200-250 RMB, and the price difference between diesel and HSFO will be between 295-328 RMB.

As the current deadline of IMO 2020 sulfur regulation is approaching, and some ships have already begun switch to LSFO,the demand for LSFO has clearly increased. This point is very obvious in the chart displayed by Irene Tang. The 0.5% LSFO has a rapid increase in HSFO 380 discount from October, and even exceeded 200 US dollars / ton. At the sametime, the price difference of diesel to high sulfur 380 exceeded US $ 300 /ton.
Irene Tang believes that inthe long run, the price of LSFO will approach diesel in the future. This alsoshows that the price of LSFO in the future will refer to the price of diesel.Sun Hougang believes that after the implementation of 2020 'Global Sulphur Cap',the demand for HSFO will fall steeply, and prices will fall very sharply. He said, ‘At present, Singapore's LSFO prices are still being observed. The liquidity is still not quite good, so it has not really played a more importantrole. Now the main thing for everyone is to use diesel to price.’

As an important bunkering port in Northeast Asia, relying on the superior policies of Zhejiang Free Trade Zoneand the foundation of oil industry, Zhoushan will inevitably get greater development opportunities in the international competition of LSFO. WeiXiaohong said that Zhoushan already has its own fuel price index. Platts andArgus have started to price Zhoushan fuel since July this year, including 0.5%low sulfur 380 and MGO 0.1% ，which are compliance with with 2020' Global Sulphur Cap' and mainstream fuel oil varieties form the price of Zhoushan that the market can refer to.

Of course, the export tax rebatepolicy is an important factor affecting the international competitiveness of Zhoushan's LSFO supply. Wei Xiaohong said that Zhoushan is trying to pilot LSFO export tax rebates. In response to China's forthcoming LSFO export tax rebatepolicy, with the strong support of the Ministry of Transport, the State Administration of Taxation, Custom General Administration of China and other departments, using Zhoushan's supervision experience to activelystrive for LSFO general trade export tax rebates and export supervision supportingpolicy, first to land in Zhoushan, and enhance Zhoushan's fuel supply capacityand price competitiveness. Xu Yan, Deputy Director, Zhejiang Zhoushan Port Free Trade Zone Administrative Committee, China, alsoanswered questions about the tax refund policy in the final discussion.

He believed that the implementation of the taxrefund policy for fuel exports was only a matter of time. Even after thespecific export tax refund policy comes down, it will still have some minor issues at the operational level. They are also actively working on local operation plans and supervision plans for the State Administration of Taxation.He said that the policy must be national in the future, but at first it willland in Zhoushan.

What challenges do shipowners face?

The increase in the cost of fuel oil issomething that shipowners have to accept, and it is necessary to find ways totransfer it. However, during the LSFO conversion period, there are still manyreal challenges for shipowners. The biggest challenge is naturally the qualityof the fuel. Mr. Zhuang Wei, Regional Manager of Asia, BIMCO, frankly stated inhis speech that he expects that in January 2020, there may be a large number ofdisputes over fuel quality in the first half of the year.

Regarding the shipowner's concerns about fuelquality, he humorously quoted a colleague in the industry, referring to theblended oil as "melamine" oil. Sun Hougang, General Manager of ChinaMarine Bunker, also mentioned the fuel quality problem, saying that becausemany LSFO are Blended by diesel, what is the compatibility, will it be layeredover time, will there be other quality problems after blending, this is whateveryone is worried about.

It is gratifying that LSFO providedin Zhoushan is mainly produced by refining, and the stability of oil productsis the best. This is also an important reflection of Zhoushan's internationalcompetitiveness in the era of LSFO.
　　If the ship is fueled with questionablefuel, it will be a series of troublesome things for the owner. May affect the performance of charter, Zhuang Wei said that BIMCO has developed two clauseslast year, namely fuel compliance clauses and transitional clauses.

In the final discussion session, Zhejiang Zhoushan Port Free Trade Zone Administrative Committee, China, answered three questions about fuel quality raised by the hostess, and gave three reasons foreveryone to have confidence in the quality of Zhoushan fuel. As far as thegovernment is concerned, Zhoushan has already become China's largest fuel oil distributioncenter, and has a wealth of experience in quality inspection and control; andthis year, Saybolt, one of the four international oil inspection agencies, setup a laboratory in Zhoushan for the service of oil quality inspection, Zhoushanshould be the most powerful place in China; he pointed out that in a relatively competitive market, enterprises will have the incentive to make their ownquality. Zhoushan is the most market-orientedarea for bonded oil supply, therefore where is also the best place for qualitycan be best grasped.
　　In order to further enhance the environment of Zhoushan Bonded Marine Fuel Oil Supply and Service, ZhoushanPort Free Trade Zone Administrative Committee and China Maritime Arbitration Commission jointly formulated the ‘Standard Format of China (Zhejiang) FreeTrade Pilot Zone Bonded Marine Fuel Oil Supply Contract (2019 Edition)'. They also cooperated to create the "Fast Processing Platform for the Dispute of Bonded Fuel Oil Filling in China's"Zhejiang "Free Trade Pilot Zone," and launched the launching ceremony of the platform at this forum. Subsequently, Gu Chao, Deputy Director andSecretary-General of China Maritime Arbitration Commission, gave a briefintroduction on the rapid processing platform and the standard format of thesupply contract.

Shipowners cannot evadeinspection of fuel compliance by port states. Mr. Zhang Chunchang, Director ofthe Hazard Management and Pollution Prevention Division of China MSA, explainedthe operational options of many shipowners in the event of non-compliance inhis speech on "China's Implementation Plan for the IMO 2020 sulphur cap’.For example, what if the ship were not filled with compliant fuel? He said thata "Compliant Fuel Unavailable Report" can be completed and submittedto the local maritime management agency. The maritime department will reviewthe actual situation of the report to prevent shipowners from reporting suchreports at will.

Zhuang Wei also reminded the shipowner that it is not easy to write the "Compliant Fuel Unavailable Report" because all the burden of proof will be on the shipowner. IMO hopes that all contracting states will pass all their maritime authorities to provideall the non-compliance reports that had been collected, which means that thisis a big data that is connected at the back, and it will be very troublesome ifit is used blindly.

Another example is a ship entering Zhoushan Port. Zhoushan has compliant fuel, but the ship is loaded with non-compliant fuel. How to deal with it? Director Zhang Chunchang said that in the forthcoming policy, shipowners are offered two options. The first option is to dischargein Zhoushan, but it is very difficult to discharge non-compliant fuel. Itinvolves various tariff policy issues, as well as fuel ownership and subsequent disposal issues. If the shipowner is unwilling to discharge, he needs to submita letter of commitment to the local maritime management agency, promising thatalthough the fuel is on board, it will not be used in the waters under Chinese jurisdiction. He also reminded shipowners that some countries will require compulsory discharge. In different countries, it should be noted that eachcountry has different approaches to the implementation of IMO policies, whichmay cause certain troubles to shipowners.

In fact, during the LSFO switchover period, it is not to be overlooked that the crew is provided with targeted training. Zhuang Wei reminded the shipowners: ‘No matter what changesyou make, don't forget that your ship was sailed by the crew in the end, which means you have to make sure that the crew will operate this thing and keep corresponding records. Remember people-oriented, shipowners must train crewswell. ’　
　　The amount of information in this forum istoo fruitful, it can be described as very meaningful! The above are just someof the points of view of some speakers. Due to space limitations, there arestill many speakers' wonderful speech contents that cannot be presented here.Finally, quote conclusion from the hostess of this forum, Mrs. Liao Na, the vicepresident of Shanghai Ganglian Energy & Chemical Information TechnologyCo., Ltd at the end of this news

‘Really hope that the conferencecan also promote mutual understanding, strengthen ties and deepen cooperationbetween all of you. Of course, I hope that everyone will continue to supportthe construction of the Northeast Asia Bonded Marine Fuel Oil Supply Center in the Zhejiang Pilot Free Trade Zone. Under the global sulfur gap and the globalgreen shipping pattern, we will achieve mutual benefit and realize Win-win Cooperation in a new round of development opportunities.’

Source: MarineCircle News