Neptune Atlas

Bunkers

Bunkers and fuel grades

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Fuel is usually the largest single cost on a voyage and the one input nobody warrants. Speed and consumption come off a description, port charges off a disbursement account, commissions are a percentage. The bunker price is a market number that will have moved by the time she lifts, multiplied by a tonnage that depends on the weather. What is actually in the tanks is therefore not an engineering detail. It is where the money is.

The grades, and what the names mean

Marine fuels split into two families. Residual fuels are the heavy end of the barrel, viscous enough to need heating before they can be pumped or burned, and cheap. Distillates are lighter, cleaner, usable cold, and dearer. A ship’s main engine runs on the first; her auxiliary engines and boiler generally run on the second, and in some waters she must run the whole ship on the second.

The names a broker meets are these.

Underneath the trade names sits a specification, and residual grades carry a number that is their viscosity rather than anything to do with sulphur or price. A grade quoted as 380 is a residual fuel of up to 380 centistokes at 50 degrees, which is a statement about how much heating it needs and not about how clean it is. Two fuels can share that number and be very different products.

What she burns doing what

A ship does not burn one fuel at a time and an estimate that assumes she does cannot say the ordinary thing. At sea the main engine burns the heavy grade while the auxiliaries and the boiler burn a distillate, often a small figure, perhaps a couple of tonnes a day. Alongside and at anchor the main engine is stopped and the distillate figure is most of what is left, with cargo gear and generators on it.

This is why a real description of a ship is written with two numbers on every line, in the shape a broker copies straight off an owner’s e-mail:

ABT 12.5 KTS LADEN ON ABT 26.0 MT VLSFO + 0.2 MT LSMGO
ABT 12.5 KTS BALLAST ON ABT 24.0 MT VLSFO + 0.2 MT LSMGO
IN PORT WORKING ABT 3.5 MT LSMGO
IN PORT IDLE ABT 2.0 MT LSMGO

What is not acceptable is blending the two into one price, because the cheaper grade then hides behind the dearer one and the line that moved is invisible. Two tonnes a day of distillate over a month is a five figure sum that an estimate with one fuel price has nowhere to put.

The rule that produced the current shape

Since 1 January 2020 the sulphur content of fuel oil used on board has been capped at 0.50% by mass worldwide under MARPOL Annex VI. Inside a designated emission control area the cap is 0.10%, and has been since 2015. A carriage ban followed shortly after the global cap: a ship without exhaust gas cleaning may not even carry non-compliant fuel for burning, which closed the obvious route around the rule.

There is a permitted alternative. The regulation allows equivalent arrangements, and in practice that means an exhaust gas cleaning system, a scrubber, which removes sulphur oxides from the exhaust and lets the ship go on burning the cheap high sulphur grade. Worth knowing that the regulation nowhere names scrubbers. They are an accepted reading of a general equivalence provision, which is exactly why the question of what may be discharged was never settled internationally and has been left to individual states and ports.

Scrubbers come as open loop, which take seawater in and discharge it, closed loop, which use an alkaline solution and retain the residue, and hybrid, which can do either. Open loop discharge is prohibited in a long and lengthening list of places: Singapore, the Panama Canal, the Suez Canal, Turkish waters, inside twelve miles of Denmark, Sweden and Finland, and Californian waters by a different route, since California requires a distillate outright and does not accept a scrubber as compliance at all. The North-East Atlantic states have agreed to shut it out of their ports and internal waters in two steps before the end of the decade, open loop first and every mode after. None of that is a reason not to fit one. It is the reason the trading pattern decides whether it pays.

The scrubber argument, and why it is a chartering argument

A scrubber pays for itself out of the price difference between the high sulphur grade and the compliant one. That difference is a market spread, it moves, and it has at times been wide enough to justify the installation quickly and at other times narrow enough not to.

What makes it a broking matter rather than an engineering one is who sits on each side of it. Under a time charter the owner installs the scrubber and the charterer buys the fuel. The capital and the off-hire for the retrofit are the owner’s; the saving is the charterer’s. That is not a stable arrangement and it is negotiated explicitly: a scrubber fitted ship commands a premium on hire, or the parties agree to share the spread, and the mechanism for doing so is one of the things the fixture has to say. Get it wrong and one side has paid for an asset the other side is earning from. Worth knowing that the industry bodies considered a standard scrubber clause and deliberately declined, on the view that the split of cost and benefit is a commercial negotiation rather than something a form should settle. Under a voyage charter the question does not arise in the same form: the owner buys the bunkers and keeps the saving, and what the charterer sees is a freight rate from an owner with a lower cost base.

Why it dominates the estimate

The bunker line is consumption times days times price, and all three are uncertain in the same direction: consumption is warranted under weather this passage will not meet, days depend on the port working at the rate somebody assumed, and price is whatever the market is on the day she lifts. Run the sensitivity and it changes what a broker argues about. On an ordinary dry cargo voyage a move of a hundred dollars a tonne on the bunker price is worth roughly the same as most of a dollar a tonne on the freight rate, so a broker who negotiates hard on the rate and accepts an optimistic loading rate without comment has spent the meeting on the smaller number.

How bunker disputes actually start

Almost none are about price. They are about quantity and quality, and they follow a few well worn paths.

Where and when she lifts, and who owns what

Bunkering concentrates in a handful of hubs, and they sit on the main trade routes, which is no coincidence: Singapore by a very long way, then the Amsterdam to Antwerp range, Fujairah, Zhoushan, the Gibraltar strait and Panama. So a bunkers-only call is an ordinary feature of a voyage plan rather than an oddity, and it is worth saying so in the terms: a deviation to lift fuel is a deviation, and whether it is permitted and at whose time is a charterparty question with a real answer.

Ownership of the fuel follows the charter form. Under a voyage charter the owner buys the bunkers and the cost sits inside the freight. Under a time charter the charterer buys them, which is why the fixture has to record the quantities and prices on board at delivery and again at redelivery. On a large ship that is a seven figure sum changing hands twice.

Do not assume there is one convention for pricing it, because the printed forms do not agree: the current price at the respective port, a fixed price written into a blank, the same quantity back with the difference at the invoice price, or the price actually paid on a first in first out basis. Those diverge as soon as the market moves, so the recap has to pin the quantity basis, the price basis, and whether barging is in or out.

The problem nobody prices

Heavy fuel used to be simple to store. Compliant heavy fuel is not, because the blend components that bring the sulphur down are more paraffinic, and paraffins make wax. The temperature at which wax starts to appear sits well above the pour point printed on the specification sheet, often by twenty degrees or more, so a fuel comfortably above its stated pour point can already be dropping wax. Wax is also a poor conductor of heat, so once enough has settled over the heating coils there may not be enough heat getting through to melt it again. The recovery from that is not a procedure. It is people digging solid wax out of a tank.

None of it is a breach of anything. The specification permits a pour point of thirty degrees on the heavier grades, summer and winter alike, and merely notes that the purchaser should satisfy themselves it suits the trade. That footnote does an enormous amount of work: it is the clearest case in the subject of a fuel fully within spec and completely wrong for where the ship is going.

The one honest thing to say about the price

An estimate written on last month’s bunker price is not conservative. It is wrong in an unknown direction, and because fuel is the biggest line it is wrong by more than any other input could make it. The discipline that helps is small: record which price was used, for which port, quoted on what day, so a stale figure announces itself instead of hiding inside a total. A number with a date beside it can be questioned. A number without one gets believed.

References

Emission control areasTen areas where the fuel a ship may burn is capped tighter than the global limit. Which lines are exact, which are traced, and which do not bite yet. Time charter equivalentFreight per tonne means nothing next to hire per day until you divide it by the voyage. This is the arithmetic that does it. Voyage charter vs time charterThe risk split behind the two main charter forms, what each side pays for, and which terms only exist on one side of it.

Neptune Atlas

Neptune Atlas prices each state of the voyage on the grade it actually burns, so the heavy grade on the legs and the distillate in port are separate lines rather than one blended figure. The prices are the desk’s own quotes, entered by whoever was quoted them, with the port and the date shown beside the number. Nothing here comes from a market assessment, and that is deliberate: the assessments worth having are licensed and none of them may be redistributed inside software. Every paid plan starts with 7 free days. A card is needed to start them, and cancelling before they end costs nothing.

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