Baltic conditions: market analysis

The International Maritime Organisation's (IMO) decision to establish an emissions control area (ECA) in the Baltic Sea seems set to remain a point of contention for some time across the region's shipping industry.

As a catchment area covering roughly 1.64-million square kilometres, and with a long history of maritime transport and trade, the lukewarm response is hardly surprising. After all, the shift from traditional bunker fuels to new low-emission technology can be a costly and complex business.

The IMO regulation, known as 'MARPOL Annex VI', which also covers the North Sea and the stretch of water within 24 miles off the California seaboard, is as follows: vessels are required to restrict their sulphur limits to 0.1% (it currently stands at 1.0%) after 1 January 2015.

But, with a predicted rise in sea transport costs at the hands of expensive new fuel sources, there seems to be a genuine concern that competiveness in the region could taper off, losing out to ports as-yet-unrestricted by an ECA.

This viewpoint was couched in stark terms in an op-ed, featured last year on Portnews, a Russian news website dedicated to the region's maritime affairs, in which its author anticipated that an irreversible atrophy could be experienced in Baltic waters.

"The initiative to establish NO_x content limits in the Baltic Sea area could finally finish off the shipping sector, taking into account an extremely difficult situation for the freight market."

A hint of scaremongering? Perhaps, but it is undeniable that the transition from traditional bunker fuels to costly low-sulphur and low-nitrogen equivalents will put unprecedented financial pressure on shipping companies and ports - and price some out of the market altogether.

Then there's the potential upshot for the Baltic's lucrative cruise sector to consider. A presentation given at the Cruise Lines International Association's (CLIA) leadership forum in November shed light on the industry's feedback to 'MARPOL Annex VI' via a selection of unattributed quotes from operators.

"We will slow down ships in ECA but increase length of time in ports. We have ships that are less affected by ECA, and we are still in the process of making that puzzle," read one such statement.

"I don't expect major changes in volume," followed another.

However, while the two examples above hardly carry the tenor of despondency, cruise lines operating in the ECA will need to make a number of well-informed decisions over their fuel strategies - if they haven't already.

Strict regulations

Operators have three options to meet IMO regulations. The first is to change to distillate fuels, such as marine gas oil (MGO), which, according to a 2012 report conducted by local think tank TransBaltic, "will probably be most popular due to the fact that using marine distillate in the main engines does not pose a major technical challenge".

Yet, while MGO technology may necessitate less investment overall, the report also makes mention that distillates are still more expensive than residual fuels, with supply and demand at the mercy of unpredictable geo-economical and geo-political events.

There is also increased discussion about the benefits of incorporating new solutions, including scrubbing systems that, through the means of a set of air pollution control devices, can allow ships to still operate with a higher sulphur fuel content.

However, in spite of increasing commercial application in the region - Finnish company Wärtsilä has patented its own technology, as has its subsidiary Hamworthy - there are still reservations concerning scrubbing's cost efficiency. While contingent on the type of ship, as well as engine, investments can often reach €2-4 million.

The third option, which appears to have gained more traction with Baltic states of late, concerns using liquefied natural gas (LNG). Used as a marine fuel since 2001, natural gas is the cleanest fossil fuel and remains a popular choice for shipping companies looking to demonstrate their green credentials.

But, akin to scrubbing systems, the implementation of LNG as a ship's fuel can be a taxing process. Due to their large size - LNG tanks take up almost double the volume of the likes of marine diesel oil - retrofitting can pose a problem. Consequently, LNG is almost exclusively the reserve of new builds; notably, in 2013, the MS Viking Grace became the first LNG-powered passenger vessel to operate in the Baltic Sea (Turku-Stockholm).

Deciding factors

Aside from on-board challenges, in order to bunker ships with LNG, SECA ports will need to adapt accordingly. In collaboration with cruise operators, the Cruise Baltic association has developed a "port services standard" tool, which provides an overview and rating system of each terminal in the region.

Classified as an essential criterion, bunkering will require ports to loosen the purse strings in the coming years, too. This will come in the shape of updating facilities and infrastructures with the likes of tank trucks, storage tanks and overall terminal expansion.

This, in turn, throws up a number of factors that need to be taken into consideration, mainly concerning the physical limitations of the respective port, the type of vessel and bunkering volumes, as well as the successful meeting of technical and safety regulations.

Under the stewardship of the Baltic Ports Organisation (BPO), responsible for improving competition among the region's maritime companies, it is hoped that such LNG installations will be viewed as an opportunity for ports to better their existing infrastructures, and, in time, become even more competitive.

In 2012, with EU support, BPO launched its 'LNG in Baltic Sea Ports' project. Partners to have already joined include the ports of Aarhus, Helsingborg, Helsinki, Malmö-Copenhagen, Tallinn, Turku and Stockholm.

And, independent of the initiative, there has also been some response. In 2011, Nynäshamn in Sweden became one of the first ports to launch an LNG terminal, while Gothenburg recently received an EU subsidy worth €34 million to build a facility, set to hold a capacity of 20,000m³.

More recently, in January 2014, Estonia's economy minister, Juhan Parts, proposed to Finland that both countries should look to build LNG terminals rather than compete for one central site, in a bid for diplomacy.

Likewise, Lithuania has thrown its hat into the ring and is said to be planning to construct a floating LNG terminal by 2015.

Meanwhile, ports unable to adapt their bunkering facilities at this current time will be anxious. The aforementioned report by TransBaltic also theorises that, in the coming years, long and medium-distance cargo flow in the Baltic will drop significantly as a result of new fuel requirements.

Instead, short-sea services, particularly between northern European and Baltic seaports, will jump in volume. Furthermore, we may well see a multimodal backshift, by which long-sea routes are divided into a mix of shorter maritime routes and road travel.

In light of this, roll-on/roll-off (ro-ro) vessels travelling from German Baltic to Russian Baltic ports are expected to suffer higher losses.

And what of Russia in all of this? As yet, unlike some of its neighbours, it has not given any indication that it will be implementing LNG bunkering infrastructures in its ports. Similarly, the notion of transferring to MGO in a country where bunker fuel prices remain low has, unsurprisingly, gathered little momentum.

It's hard to say what the next step will be for Baltic ports in their bid to not only offset the ramifications of ECA but also the overriding fear that consumer and cargo vessels will instead favour unrestricted waters, such as the Mediterranean.

At 2013's aforementioned CLIA conference, one cruise operator was quoted as saying: "I expect that the Baltics will come out better [in 2015] than 2014, despite ECA regulations".

There are clearly some who would take issue with such words, but, in light of the ongoing dialogue between ports, local maritime organisations and operators - as prickly as it sometimes appears to be - few could claim that the Baltics are taking ECA lightly. Hopefully, as a result of this awareness, the region will be able to ready itself for what comes after 1 January 2015.