IMO 2020: Anything but smooth sailing to lower emissions
IMO 2020: Anything but smooth sailing to lower emissions
Insight

IMO 2020: Anything but smooth sailing to lower emissions

As global shipping industry struggles with the IMO 2020 mandate, risk analytics provide opportunities to gain a competitive advantage.

The global shipping industry is bracing for massive disruption. In 2016, the United Nations’ International Martine Organization (IMO) announced a mandate known as IMO 2020 that requires the global shipping industry to burn 85 percent less sulfur by Jan. 1, 2020. Despite the four-year compliance period, Bloomberg Intelligence reports two-thirds of the shipping industry is non-compliant while nearly the same percentage of oil refiners are not prepared to produce the required fuels.1

But shippers and refiners can seize opportunities to leverage data and risk analytics to develop strategic responses and transform IMO 2020 into a competitive advantage.

Current solutions for vessel owners, operators and refiners

Despite the close effective date, there is still uncertainty of how the demand side—or shippers, fuel oil users—will evolve and how the supply side—refiners—will respond. While we expect an equilibrium to be reached, analysts have identified four key strategic options that may help demand and supply stakeholders to achieve compliance:

  • Very low sulfur fuel oil
  • Marine gasoil
  • New or refit scrubbers
  • LNG (reduced Sox, Nox, and PM emissions liquefied natural gas).

Each of these options come with various benefits and risks. For example, on the demand side, very low sulfur fuel oil may minimize operational difficulty and does not require large investments, but producers have concerns regarding compatibility and stability, as well as possible quality and availability difficulties. The supply side may see increasing margins due to the price difference between high sulfur fuel oil and very low sulfur fuel oil.

Scrubbers, another possible solution, are relatively cheap and have a shorter payback period, but there’s limited operating experience and the risk of future regulations on carbon emissions and acidification. Meanwhile, refiners may see a reduction in displaced high sulfur fuel and won’t need to upgrade their equipment, but scrubbers are currently in short supply. This may prevent many shippers who opt for scrubbers to miss the IMO 2020 deadline.

Get ahead of disruption with data-based approaches

Choosing the right strategy and tactic to manage your future state requires data-based approaches to assess current and future demands and develop an effective response. From the demand side, this includes understanding storage contracts, selecting new fuels, and completing adequate testing to ensure the current fleet will be able to burn the new fuel. Likewise, refiners will need to assess their supply chain constraints, and both shippers and refiners will need to address credit concerns that will arise from higher prices and increased volume. 

A risk analytics modeling-type approach can help. This enhanced methodology analyzes key variables and constraints in the supply chain and production process, and reveals how key factors may evolve through different market scenarios. A four-step process deploys models and algorithms to find the optimum solution for IMO 2020 compliance for both refiners and shippers:

  1. Planning—Demand forecasting, competitive intelligence and asset management
  2. Operations—Route, refueling and price optimization
  3. Risk—Contract analysis and credit scorecard
  4. Compliance—Testing and reporting, and regulatory compliance

KPMG’s Risk Analytics professionals can help you transform IMO 2020 into a competitive advantage, starting with the creation of a vision that encompasses your priorities, drivers, and opportunities across the supply chain. Then, we can help you translate that vision into supply chain alignment for the affected business functions and design a roadmap to execution.

Learn how to start strategizing your IMO 2020 response by reading “How do you use analytics insights to drive action today?” or contacting our Risk Analytics professionals

 

1Forbes, Oil Markets Could See Volatility, Arbitrage As Shipping Fuel Shifts, August 9, 2019.