This study supplements CE Delft’s 2018 assessment of the costs and benefits of a Residuals bunker fuel ban in the IMO Arctic waters and analyses the potential impacts on Russian trade flows of a ban on use and carriage of heavy fuel oil (HFO) for use by ships in these waters (referred to further as ‘the Arctic HFO ban’).
The study is not a comprehensive assessment of the cost implications of an Arctic HFO ban for Russian trade flows, but rather estimates the potential additional shipping costs of such a ban and analyses the potential cost pass-through by means of a case study.
The trade flow selected for the case study is crude oil shipped from the Varandey export terminal in the Pechora Sea, a southeastern part of the Barents Sea, to the Kola Bay near Murmansk by means of three shuttle tankers. The Varandey case was selected because it is an example of an established Russian transport flow that we expect to be impacted by the Arctic HFO ban to an extent relevant to this study’s aim. In addition, relevant data and information are sufficiently available in the English-language literature, as the Varandey project dates back to 2000.
The study assumes the Arctic HFO ban would become effective in 2021 and the analysis also focuses on that year. In 2021 ships will have to comply with the global sulphur requirement for maritime ships, which becomes effective in 2020.
The case study indicates that if the shuttle tankers were LNG-fueled in 2021, the Arctic HFO ban would lead to no additional shipping costs. If it meant the three shuttle tankers having to switch fuel and they adopted distillate fuel, however, total additional 2021 shipping costs would range from USD 0.3 to 10 million, depending primarily on how the tankers comply with the sulphur requirement as well as on 2021 bunker fuel prices.
In the baseline price scenario, with a medium price range between distillate and baseline fuel (either HFO or low-sulphur HFO), bunker fuel expenditures would rise by 6 to 50%, depending on the sulphur requirement compliance option adopted by the vessels.
It should be noted that in estimating the ban-related additional shipping costs, it was assumed that if vessels need to switch to a different, ban-compliant fuel because of the ban, they sail on that fuel on the entire roundtrip. However, if tankers choose to use (low-sulphur) HFO on the outbound voyage from Murmansk, which is outside the IMO Arctic waters, ban-related additional shipping costs would be lower than estimated.
Total additional 2021 shipping costs if the tankers need to switch fuel and adopt distillate fuel amount to 0-0.2% of the value of the crude oil being transported.
Because most competing crude oil suppliers are unlikely to be affected by the Arctic HFO ban, in the case analysed it is unlikely that these additional costs can be passed on to parties buying the crude. The ban-related costs would then have to be incurred by other actors in the value chain, such as the shipper or tanker owner. This may trigger the use of alternative compliance options, such as a switch to LNG, if cheaper, or a search for alternative transport modes such as pipelines.
It should also be noted that the costs of the Arctic HFO ban would be incurred by different actors in the supply chain in the case of other products being shipped, depending on the associated market structure. For products other than crude oil, the cost effects of the Arctic HFO ban may thus differ.