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Fuel forecast 2012: the pressure is on


5 March 2012


High fuel prices and stringent environmental legislation mean a demanding 12 months are in store for cruise operators.


In today's increasingly competitive operating environment, two fuel-related issues continue to dominate the agenda.

The first is the constant pressure imposed by high fuel costs, which represent an enormous financial outlay for operators and have led to a greater focus on efficiency.

The second is the challenge posed by stricter sulphur regulations and the subsequent use of cleaner fuels.

For Nigel Draffin, vice-president of the International Bunker Industry Association (IBIA), these twin problems are the most important issues affecting the cruise sector today.

"The rise in the cost of fuel is greater than the rise in port costs, so the fuel element is becoming a much more significant proportion of the variable costs of any voyage," he says.

In its fourth-quarter results for 2011, Carnival Corporation reported a 39% increase in fuel costs, with prices soaring from $488 per metric ton in 2010 to $680 per metric ton the following year. Likewise, fellow cruise line Royal Caribbean recently announced that it had allotted $224m in fuel expenses for the first quarter of 2012 and $889m for the entire year.

"In addition, the size of fuel bills places more strain on lines of credit granted by the suppliers to the buyers," warns Draffin. "Ten years ago a credit line of $1m would have covered ten separate stems of 1,000 metric tons, but today it barely covers one stem."

"The most difficult aspect will be juggling the availability of low-sulphur fuel until the sellers can feel certain of the level of demand."

Price hikes are hitting the bunker industry too. "The bunker suppliers face challenges that are just as severe, and their cash flow is impacted by the high cost of product," says Draffin. "As a result, their confidence in their customers' ability to pay on time is starting to suffer."

The low-sulphur challenge

The introduction of increasingly strict environmental legislation also continues to place a strain on the industry. By 2015, the International Maritime Organisation (IMO) will require ships sailing within designated emission control areas including the English Channel and US coastal waters to burn fuel with less than 0.1% sulphur content. In addition, ships must switch to fuel with a sulphur limit of 0.5% in 2020, no matter where in the world they are operating.

By now, these changes are well-known, but Draffin believes compliance may be easier in some areas than others. "The impact of MARPOL sulphur restrictions is understood and expected," he says. "Europe has come to terms with it, but it will be a challenge for sailing in the US and Canadian emission control zone over the next 12 months as things settle down. The most difficult aspect will be juggling the availability of low-sulphur fuel until the sellers can feel certain of the level of demand."

The pressure doesn't end there, as environmental regulations are likely to tighten still further, but Draffin believes the IBIA is in a position to help. "While legislation on greenhouse gas reduction is still uncertain, it will come, hopefully at an international global level via IMO conventions rather than piecemeal from national or regional regulations," he says. "The IBIA, which has observer status at IMO, takes a proactive stance in disseminating information and guidance to our members on these matters."

While the new regulations affect all areas of the shipping industry, Draffin believes cruise operators face a particular challenge when it comes to compliance. "I am sure operators are working hard to comply with various regulations and to avoid negative publicity that could harm their brands," he says. "The essential environmental rules are the same for all ship types, and the difference for cruise lines is the scale of the problem."

A cleaner future

Unsurprisingly, the shipping industry is increasingly looking to other, more environmentally-friendly types of fuel as a solution. "There are many options, including liquefied petroleum gas (LPG), biofuels, hydrogen and nuclear, but all bring their own difficulties with them," says Draffin. "I expect to see developments in biofuels, but at the moment the financial incentive is not there."

"In my view, LNG will become more important in short sea shipping and will develop outwards from hub ports."

Another viable alternative is liquefied natural gas (LNG), which is seen by many as a clean and sustainable alternative. In November 2011, the IBIA board took a formal decision to become more closely engaged on the issue. At the group's recent annual convention in Barcelona, acting chief executive Trevor Harrison told delegates that the association would become more involved in ongoing discussions on LNG as a fuel at the International Maritime Organisation.

As part of this initiative, Draffin is set to work closely with the Society of International Gas Tanker and Terminal Operators (SIGTT) to provide input into the development of the IMO's Code for Gas as Ship Fuel (IGF-Code).

Delegates at the convention felt that now was the time for the bunker industry to become more involved in the development of gas-powered ships, particularly as bunker costs for operators are set to increase by 70% to 100% when operating in emission control areas.

"I was a convert in the early 1970s; it is a wonderful fuel that is easy to use," enthuses Draffin. "In my view, LNG will become more important in short sea shipping and will develop outwards from hub ports. It may become a significant fuel of the future for deep sea trades. The complexities and costs of the logistics train are much more difficult than using the fuel itself."

Indeed, without a comprehensive infrastructure in place it may be impractical for some operators, and the cost of making the switch could also prove to be prohibitive. "It is easy to make the switch to cleaner fuel, but it is not cheap," says Draffin. "Ships can switch to distillates or bio-distillates with very little onboard costs other than the 40% increase in fuel cost. If everyone did it at the same time it would give us problems with availability. It becomes a balancing act between technical complexity and product cost."

Joining forces

Since it was created in 1992, the IBIA has represented all corners of the bunker industry, and its varied membership includes suppliers, traders, brokers, owners and port authorities. The organisation aims to provide an international forum for bunker-related issues, and represents the industry in discussions and negotiations with policymakers, legislators and other bodies.

For 2012, the group remains committed to its aim of increasing its ranks. "The IBIA is an association that engages with all parties in the bunker process, including buyers, sellers, intermediaries and service companies," says Draffin.

"We need that broad church to allow informed debate. If we focus too much on one side of the transaction, we lose our credibility with the other side. We have a significant number of buyers as members, but we want more." Today, the group has more than 600 members in 66 countries worldwide.

"The bunker industry is in a state of flux. There are changes to the makeup of the European refiners and a very big shift in the centre of gravity of the industry towards Asia."

Over the coming year, Draffin also hopes to build on some of the group's geographical divisions, and plans to increase the IBIA's focus on training. The organisation currently runs a number of courses open to both members and non-members, from a basic one-day training event to a more complex bunker cargo officer learning programme.

"My priorities are to continue to cultivate our regional branches, as well as the provision and development of training," adds Draffin.

Looking forward, 2012 continues to be a challenging time for both cruise operators and those involved in the bunker industry, and Draffin thinks there will be big changes ahead.

"The bunker industry is in a state of flux," he explains. "There are changes to the make-up of the European refiners and a very big shift in the centre of gravity of the industry towards Asia. We are likely to see flat or falling demand in Europe and North America, but significant growth in the Middle East and Asia. There was a lot of consolidation last year and we will see the effects of that throughout this year. It is the Year of the Dragon and we certainly do live in interesting times." ?