1. The Wilhelmsen Premier Marine Fuels - Bunker Seminar- Autumn 2009 Is it possible to ban the use of heavy fuel oil as bunkers? Possible consequences of the proposals after the Full City spill and the implementation of MARPOL Annex VI Lysaker 8 October 2009 Erik.Ranheim@INTERTANKO.com Manager Research and Projects

2. International Association of Independent Tanker Owners A non-governmental organization established in Oslo in 1970 to represent the interests of tanker operators at international, regional, national and local levels Membership 260 Members 45 countries 3,100 tankers 250 million dwt 330 Associate Members Spokesman – information service - meeting place Oslo - London - Washington – Singapore - Brussels INTERTANKO

3. Norway wants to ban the use of HFO as bunkers after the Full City accident A great deal of misunderstandings and wrong information? Full city became a tanker Bunkers became crude oil Norway championed Annex VI? Catastrophe? The accident to a large extent became a question of using Heavy Fuel oil as bunkers Does shipping have to switch to lighter bunkers? Can it be done?

4. Shipping and the emission Fleet ~ 60,000 ships (above 400 GT) Carries ~ 7,507,000,000 ts goods per year, over An average distance of 4,400 miles, which Carries ~ 80% of total world trade Consumes ~ 11% of world oil Represents ~ 2.7% of CO 2 emission Emission of SOX, NOX, etc regulated by MARPOL Annex VI Regulations on GHGs on the way but The world fleet is cost-efficient pollution per tonne-mile is superior to any other transportation mode Economics of scale: One VLCC ~ 8,000 tank trucks

5. Shipping and the environment Shipping burns the dirties part of the barrel Burning the Residual Marine Fuels cause emission with: SO 2 NOx Heavy metals Soot/particles Emission cause: Premature deaths, ( 39,000 per year in Europe) (James Corbett prof. University of Delaware) Destruction of nature, acidification, utrophication, etc…

6. Reducing harmful emissions from ships May 2005 MARPOL Annex VI into force, but max 4.5%/ 1.5% SECA sulphur limit unacceptable to many parties. IMO started to work for stricter requirements INTERTANKO’s was seeking a solution that was: Ensuring a solid platform of requirements; Realistic and feasible; Produced a long term and positive reduction emissions from ships; and Contributed to a long term and a predictable regulatory regime INTERTANKO saw that: –The world was moving towards cleaner fuels –No abatement technology was available –The introduction of multiple SECAs was problematic

7. Reducing harmful emissions from ships Onboard abatement technology –Scrubbers, filters, separators, catalysts (Reg 4… any fitting any fitting, material, appliance or apparatus to be fitted in a ship or other procedures, alternative fuel oils, or compliance methods used as an alternative to that required by this Annex if such methods are at least as effective in terms of emissions reductions as that required by Annex VI ECAs –Sulphur/Nitrogen Emission Control Areas Type and quality of fuel –Heavy fuel oil = a blending of refinery residues and distillate –Middle Distillates = gasoil and diesel

8. Why switching to distillates? Cleaner, Simpler and more Efficient ships INTERTANKO proposed switching to distillates: a long term simple, solution for 10 good reasons: 1. 1. Reduced overall fuel consumption 2. 2. A global reduction of emission SO2 - 60-80%, PM - 80-90%, NOx -15%, No heavy metals, Less soot Reduced health problems for crew and dockworkers No onboard waste No control or monitoring problems

9. Why switching to distillates?..continue: 6. 6.Cause less engine breakdowns 7. 7.Cause far less pollution when pilled 8. 8.Provides a opportunity for the development of more efficient engines (w. less emission) 9. 9.Applies to all ships and all current engines 10. 10. No safety problem in connection with switching fuels Cleaner, Simpler and more Efficient ships

10. New measures adopted at MEPC 58: SOx emissions Emission Control Area (ECA) 1.0% limit 20102012201520252020 2018 Global 3.5% limit ECA 0.1% limit: IMO review Global 0.5% limit Extension? No measures against ships that do not receive adequate supply EU fuel directive 0.1% limit in ports 01.01.0

11. New measures adopted at MEPC 58: NOx emissions Current regulation Tier I: existing ships built after 2000, base line 201020112016 Tier I: ships built 1990s engine>5000 kWh, cylinders = >90 ltrs - Tier II: 15.5% - 21.8% reduction ships built on, after 1 Jan 2011 Many preconditions: engine rating, fuel consumption, durability, cost/benefit, availability of efficient upgrading system, upgrading at the ship’s first renewal survey Tier II: 80% reduction ships built on, after 1 Jan 2016 Power output > 750 kW In Emission Control Areas (ECAs) ONLY

12. The world is moving away from HFO Oil consumption by product - % share Source: INTERTANKO/BP Review % share mbd

13. How much MDO is needed for shipping Bunker use 2007, HFO 324 m ts/ MD(G)O 54 m ts (14.4% of total) Assume increase until 2015: 2% increase p.a. (2% reduction in 2009), and Increased use of MDO, (req. by ECAs); and Improved fuel efficiency, results in The need of 425 m ts of bunkers in 2015 Assumes that 20% of bunkers used is MDO in 2015 The HFO contains some 20-30% cutter stock, which means that: MDO will have to replace in 2015~ 425*0.8*0.75 = 255 m ts of HFO

14. GLOBAL BUNKERING Source: Poten & Partners ECA ECA 2012

15. At what price? Middle distillate price compared to HFO price Fujarah Source: INTERTANKO/Bunker World %

16. “Many refineries will be challenged if no action is taken to meet future quality and emission legislation” Residue upgrading projects of both the refinery and the communicate will be satisfied: “ Enhance financial performance Eliminate high sulphur fuel projects Replace obsolete utility faculties Meet future product specifications Reduce total refinery emission Provide cost-effective H 2 production based on converting residue Produce power for refinery use and export Increase feedstock flexibility – chance to use low-cost crude oils. Secure or even expand and business opportunities” Dr. Joachim Wolff: license and service manager for liquid and gas gasification for Shell Global Solutions. PhD from university of Dresden in thermodynamics. Piete Zuideveld: departmental manger of the gasification and hydrogen manufacturing technical department in Shell Global Solutions. Working for Shell for 27 years and has experience in gasification, gas treating, gas to liquids and gas business development. Source: http://www.shell.com/home/content/globalsolutions- en/knowledge_centre/pres_speeches_papers/2006/r efinery_residuals_010206.html Enhance financial performance reduce emission more business opportunities

17. Techno-economic analysis of the impact of the reduction of sulphur content of Residual Marine Fuels in Europe CONCAWE report no 2/06 The oil companies’ European Association for environment, health and safety in refining and distribution Quotes from CONCAWE report no 2/06 Residue desulphurisation is not a trivial matter. The process involved are complex, the plants are costly and delicate to operate. Blended fuel stability can cause problems, especially with the heavier sulphur residues. Conversion [to lighter products] also requires costly plants but delivers distillates that are inherently more valuable than residues. Its economic prospects are therefore much better than desulphurisation. Conversion is likely to be more expensive than desulphurisation, but not by a large margin. As a result partial or full conversion will always be an option when desulphurisation is considered. ….”refineries have a clear incentive for further conversion of its entire residual streams to distillate products compared to residue desulphurisation to produce more LSFO”…………… Desulphurisation of Residue Marine Fuel complex, expensive, the same is conversion, but delivers more valuable distillatesand Blended fuel stability can cause problems Annex VI requires cleaner products: DnV reported that a large number of LSFs deliveries contain excessive levels of highly abrasive catalyst fines (AL+Si) from central Eu. Ports (abrasive/instable/ignition problems )

18. Refiners upgrade to reduce HFO production Cepsa's Huelva refinery, include the construction of a new hydrocracking conversion facility with a 2 m tpa middle distillates capacity. Raising total crude oil distillation capacity only 17% will increase middle distillate production by 39%. Essar Oil Gujarat refinery “Conversion of entire negative margin FO into high value added products and Pet Coke.” Own power plant using residues will fuel the refinery Neste Porvo refinery - commissioned 1965, One of the most versatile and modern in Europe. A new diesel line started up in summer 2007 enables the refinery to upgrade heavy fuel oil. The world biggest, Reliance Jamnagar refinery, with a large delayed coker, produces no fuel oil. Sannazzaro Refinery Po Valley projects to reduce the yield of fuel oil to zero by 2012.

19. Regional requirements ECAs Emission Control Areas, the Baltic and the North Sea European Union (EU) Sulphur Directive: Ships at berth (including at anchor) in an EU port must use fuel with maximum 0.1% sulphur content when within 24 nm of the shore California Air Resources Board (CARB) regulation: As from 1 January 2012 ships must use fuels with maxium 0.1% sulphur content for their main and auxiliary engines when within 24 nm of the shore May 2006 Nov 2007 USA and Canada 200 nm ECA ( 1 Aug 2012?) Air pollution knows no borders Most ships operate close to shore International shipping needs global regulations Switching fuels – a safety problem More ECAs on the way (Tokyo Bay Med, Norwegian Sea, Australia, Malacca?)

20. Why not scrubbers? Still under testing (5 pilot tests known*) Large Expensive Difficult (impossible?) to install CO 2 emission (buffering effect) leaves hazardous waste onboard which no-one wants Tonnes of seawater need to be pumped through the ship and processed Pump redundancy We are involved in transportation – not waste treatment *Ferry Pride of Kent (Krystallon), Passenger Ship Zaandam (Krystallon), Tanker MS Suula (Wärtsilä), CABU Baru, (Clean Marine Klaveness), ferry Tor Ficaria

21. Refinery Capacity Additions – by region? The graph indicate that refinery capacity is projected to increase by 9.8 mbd 2008-2014. According to IEA high economic growth scenario oil demand will increase by some 2 mbd over this period (reduction on 2008 and 2009). Most of the increased capacity increase over the period 2008-2014 is projected to come in Asia (4.9 mbd), but in 2013-15 most of the capacity increase will come in the Middle East (1.7 mbd for this period). The IEA Medium Term Oil Market Report has an overview of refinery expansions 2009- 2014. Totally 7.5 mbd is expected to be added over this period of which 2.4 mbd in China, 1.7 mbd in other Asia/Pacific and 1.2 mbd in north America. The biggest expansion is expected in 2009 (1.8 mbd) of which 0.6 mbd in China and 0.9 mbd in the rest of Asia..

22. Refinery output OECD The US – 16 mbd Europe – 15 mbd Asia/Pacific – 7 mbd

23. Incidents attended by ITOPF over the past 5 yearsNumber Source: ITOPF provides (objective technical advice and information on all aspects of pollution response and the effects of spills on the marine environment).

24. Revised Annex VI will gradually come into force as from 2010 in ECAs ( 2020 (25) sulphur emission limit 0.5% down from 3.5%) INTERTANKO seeks: long term practicable measures necessary to reduce emission Shipping is energy efficient - but burning the dirties part of the barrel cause pollution Testing of abatement technology not completed There are 10 good reasons for switching to distillates Refineries are dynamic Large investments necessary over a prolonged period - no matter solution Burning of HFO is cheap because the real costs are not charged The real costs involved are the costs to the society which will be mainly be the impact on the environment (cost effect of increased freight will be marginal) The oil industry is moving towards cleaner fuels Summary