New fuel rules could bump freight rates by 8%


New low-sulfur fuel standards for marine ocean carriers go into effect Aug. 1, and the near-term result is likely to be a 20 percent to 25 percent hike in fuel costs for a special blended diesel carriers will have to use.

The switch in fuels is required to meet a 1 percent sulfur limit set by the U.S. Environmental Protection Agency, several shipping companies have said.

EPA drops the other shoe in 2015, when the sulfur standard is lowered to 0.1 percent.

One vessel operator, Totem Ocean Trailer Express Inc., or TOTE, estimates that a 25 percent increase in fuel costs to meet the EPA standard effective in August will translate to about an 8 percent increase in shipping rates, according to its president, John Parrott. TOTE operates general cargo vessels from the Port of Tacoma to Anchorage.

Horizon Lines Alaska LLC, which also operates general cargo vessels on the same route, has not yet releases its estimates of increased costs.

Both TOTE and Horizon Lines said no significant engine modifications will be needed to use the fuel blend, however.

To meet the more stringent 2015 standard of 0.1 percent sulfur fuel, Parrott said TOTE will likely use 15-part-per-million Ultra Low Sulfur, or ULS, diesel to meet the standard because the ULS is readily available from refiners although it is expensive.

ULS diesel, which is now used by on-road trucks and equipment in the U.S., could cost about 50 percent more than the bunker fuel now used in TOTE’s ships, Parrott estimated.

U.S. Sen. Lisa Murkowski said she has been told by shipping companies that a 50 percent increase in fuel costs by 2015 could translate to a 20 percent increase in rates.

One added complication, Parrott said, is that the energy content of the ULS is less than that of the fuel now being used by ships so there will be an as-yet-undetermined loss of efficiency of the engines.

Also, engines in TOTE’s ships and no doubt other operators will require modifications by 2015 to run the ULS.

“Our immediate problem is that the 1 percent sulfur fuel is a boutique blend that will require our suppliers to blend and then store the fuel for us. To get the blend we’ll mix Ultra Low Sulfur with the fuel we’re using now to get down to 1 percent sulfur,” Parrott said.

TOTE will actually blend down to 0.9 percent sulfur to ensure it will meet the standard in August, and avoid the $25,000 per day EPA will levy as fines.

West coast carriers serving Alaska from the Pacific Northwest, such as TOTE and Horizon Lines, are particularly affected by the new rules because all of their Alaska voyages, which are from Tacoma to Anchorage, will be within the 200-mile offshore zone where the new fuel rules apply.

Other west coast shipping will be less affected. U.S. or foreign ships arriving and departing from west coast ports, or going to and from Hawaii, are under the rule only when they are within the 200-mile zone. Outside of that ocean carriers will be able shift back to high-sulfur fuels.

Large cruise ships operating in west coast and Alaska waters during the summer will be under the rule, which will also catch them when they are in the middle of the summer tourist season in Alaska.

Cruise ships will have to use the blended fuel for the remaining weeks of the tour season and then shift to other fuels when cruise ships move to the Carribbean or other destinations for the winter season.

The EPA rules are part of the U.S. compliance with International Marine Organization rules on emission standards, but are also stricter than the IMO requires, said Richard Berkowitz, director of the Transportation Institute, a shipping industry trade group.

Canada, which has also signed onto the IMO agreements, has requirements similar to the U.S. but with a delayed effective date, Berkowitz said. The rules will not apply off Mexico, shipping industry sources said.

Shipping on the Great Lakes are operating under an exemption secured by Congress in 2010 and not affected now by the new rules, Berkowitz said.

Because TOTE and Horizon Lines will use the blended fuel and ULS diesel in 2015 for their entire voyages, shipping rates will be affected.

In comments during a meeting in May with EPA Administrator Lisa Jackson, Murkoswki said, “Eighty percent of the groceries and consumer goods for most of Alaska’ population comes north on the ships operated by TOTE and Horizon. A 20 percent increase in rates caused me a great deal of concern.”

Parrott said TOTE is still hoping EPA may delay the rule, but so far the agency is sticking with the August effective date.

06/06/2012 - 5:48pm