The anticipated cobra effect of scrubber exhaust bans in European waters

Sweden’s scrubber exhaust ban

On 27 June, Sweden announced its decision to ban the discharge of ship scrubbers into their territorial waters. Scrubbers are devices installed on ships to remove sulfur oxides from exhaust gases, helping vessels comply with the International Maritime Organization's (IMO) regulations on sulfur emissions. While scrubbers help reduce air pollution, their use often results in the discharge of wastewater containing harmful substances, such as heavy metals and polycyclic aromatic hydrocarbons, into the marine environment. With this decision, Sweden has joined the growing list of countries, including Denmark and Finland, that have partially or completely banned scrubber water discharge. Given the similar regulatory trajectory between Sweden, Denmark and Finland, it is worth analysing what effects such scrubber discharge regulation may have on the Northern European HSFO markets from 2025 onwards.

Under the Swedish Government proposal, open-loop scrubber discharge has been banned starting from 1st July 2025. From 1st January 2029, all types of scrubber discharge will be prohibited in all the territorial waters of Sweden. Denmark has also imposed limits on scrubber water discharge in their waters.  

Potential effect on the offshore bunkering market

This sparks the question of how this will affect the HSFO demand and shipping dynamics within the prominent Skaw/Gothenburg bunkering market, as well as the offshore industry in general. 

The overall conclusion in this research article is that the conversion from open loop scrubber system to closed loop scrubber systems still generates enough savings to justify the investment compared to transferring bunker planning fully to Low Sulfur Fuel Oil (VLSFO). However, as the majority of active vessels in the Baltic region are not scrubber-fitted, and investments into open loop scrubber systems remain prominent, the regulation will minimise the amount of legible vessels that can use HSFO in a compliant manner, which will negatively impact the Baltic HSFO market in the short term because open loop scrubber investment will be economically unfavourable for ships operating on these routes.

The economics of scrubbers and current prominence in shipping industry

Under the new ban affecting Swedish waters, and in next five years Danish waters also, open loop scrubber systems would be a risky investment as shipping operators would need effective control and storage over scrubber discharges, adding a new dimension to prudent ship operations and voyage planning.  

The investment costs for different types of scrubbers vary significantly based on their complexity, installation requirements, and operational capabilities. Within the upcoming regime, those with open loop scrubbers will need to either update their scrubber system to hybrid or closed loop systems or lift Low Sulfur Fuel Oil (VLSFO) instead.

Rough economic breakdown:

1. Open-loop scrubbers:

Open-loop scrubbers are the least expensive among the three types. They use seawater to neutralize sulfur oxides in the exhaust gas and discharge the resulting wastewater back into the sea. The initial investment for installing an open-loop scrubber on a vessel typically ranges from $1 million to $3 million, depending on the size and type of the vessel.

2. Closed-loop scrubbers:

Closed-loop scrubbers use a recirculating system with alkaline substances (like sodium hydroxide) to treat exhaust gases, and the wastewater is stored on board for disposal at port facilities. The installation cost for closed-loop scrubbers ranges from $3 million to $6 million, considering the need for additional equipment like storage tanks and treatment systems.

3. Hybrid scrubbers:

Hybrid scrubbers offer the flexibility to operate in both open-loop and closed-loop modes. They are the most expensive due to their dual functionality and the extra equipment required. The cost for installing a hybrid scrubber typically falls between $5 million and $10 million, reflecting the versatility of the system.

Conversion costs

Switching from Open-Loop to Closed-Loop Scrubber System: Converting an open-loop scrubber system to a closed-loop system involves several modifications and additional installations. The key components required for this conversion include:

• Alkaline dosing system for treating exhaust gases.

• Additional storage tanks for holding treated wastewater.

• Upgraded control and monitoring systems.

• Wastewater treatment units for cleaning and recirculating water.

The estimated cost for this conversion can vary widely based on the vessel's size, existing infrastructure, and the complexity of the modifications. However, the conversion cost generally ranges from $2 million to $4 million. This estimate includes the cost of new equipment, installation labour, and potential downtime during the retrofit.

Considering the sizeable market spread between High Sulfur Fuel Oil (HSFO) and Low Sulfur Fuel Oil (VLSFO), the conversion of an open loop to closed loop scrubber system, or the installment of a scrubber from scratch, could indeed be justified if the Baltic or Northern European region (or passing through Swedish waters) was key to the ship operator’s routes.

Overview with example calculation

Let’s imagine a scrubber-fitted refined products tanker is sailing from the Gdansk Refinery, Poland to the Le Havre Oil Terminal in France. 

Assuming standard operating conditions and no significant deviations or delays, travelling at ~12 knots, an Aframax tanker may need around 210 tonnes of HSFO for this voyage. Let’s assume the tanker lifts this bunker amount in the Gothenburg offshore.

1. Open-loop scrubber:

If the tanker is equipped with an open-loop scrubber, which discharges treated wastewater directly into the sea, it would not be able to discharge this wastewater in Swedish and Danish territorial waters where such discharges are banned. This means the vessel would need to switch to compliant fuels (such as low sulfur fuel oil).

Given typical spread levels between HSFO and VLSFO price levels (based on benchmarks), a 210 metric tonne VLSFO stem would be significantly more expensive on a per tonne basis compared to the potential to lift a 210 metric tonne HSFO stem.

Assuming spreads of roughly $60 - $80 between HSFO and VLSFO within the Skaw/Gothenburg region, the higher charge of VLSFO compared to HSFO could be in the realm of USD 12,000 – 17,000 for this 210 tonnes parcel.

2. Closed-loop or hybrid scrubber:

If the tanker is equipped with a closed-loop or hybrid scrubber system, it would be feasible to hold the discharge onboard while in Swedish and Danish territorial waters. These systems are designed to store the effluent in dedicated tanks until the ship reaches waters where discharge is permitted. Therefore, the tanker could operate using its scrubber system in closed-loop mode while passing through these regions.

The payback time of investing in a closed loop scrubber or converting an open loop scrubber to a closed loop system, would depend on the time spent sailing in or passing Swedish/Danish, or other open scrubber banned waters and the annual bunker consumption of the vessel. Where the Northern European region is key to a fleet’s employment and utilisation rate, it is plausible to achieve economic payback on scrubber investments within two to five years compared to VLSFO bunker planning. The payback time on hybrid scrubber is naturally longer as higher upfront investment in installation, however, may be worthwhile for ships with international routes to optimise wastewater storage onboard by moving in between the open loop and closed loop modes depending on the regulations of the specific territorial waters.

Once the tanker exits Swedish and Danish territorial waters and enters international or other territorial waters where scrubber discharge is permitted, it can switch back to open-loop mode if equipped with a hybrid system and legally discharge the stored wastewater.

In summary, the ban on scrubber discharge and open loop scrubber systems does not necessarily mark an inevitable decline of HSFO demand within offshore bunkering markets in or passing Swedish waters, particularly given the high tanker activity that passes through the region. 

Estimation of market impact

Overall, the regulatory regime does not signal the end of the HSFO market but really the decreased economic attractiveness of open loop scrubbers in European waters. As such, the impact of the scrubber discharge ban is proportional to how many scrubber-fitted vessels are fitted with open loop scrubber systems specifically, and these shipowners’ willingness to pay for upgrades to closed loop systems to keep using the cheaper HSFO fuel.

Investment in scrubbers in the first place began to increase significantly around 2010, coinciding with the introduction of Emission Control Areas (ECAs) in North America and Europe, which enforced stricter sulfur limits (0.1%) within these zones. As the IMO 2020 sulfur cap approached, the pace of investment accelerated dramatically. Reports indicate that by the end of 2019, around $12 billion had been invested in scrubber technology, with open-loop systems accounting for a significant portion of this spending. Major shipping companies, including Maersk, MSC, and Carnival, made substantial investments with the cheaper and more convenient (in terms of retrofitting downtime) open loop scrubber. There has been a slight trend in favour of closed loop and hybrid system investments post-2020, nevertheless, investment choice in open-loop systems remains substantial, with estimates suggesting that several thousand vessels are equipped with these systems.

More than anything, the ban will add complexity to ship operations for scrubber fitted vessels that can still use HSFO, as they will need to coordinate storage allocation, tank management, potential fuel switching, wastewater discharge rates and compliance documentation. Though this is not completely new to shipping companies with an existing scrubber-fitted fleet, this may act as an initial deterrent for those looking to invest in scrubbers for the first time.

Overall, the environmental ban on open loop scrubbers is consistent with the general trend within European waters and adds a layer of new investment, complexity and storage planning necessary to continue using HSFO fuel. In my view, this could likely lead to a “Cobra Effect” in the Northern European bunkering market, particularly because the inclusion of shipping in EU ETS, and the implementation of FuelEU Maritime in 2025, means that shipowners and charterers are anxious to control fuel costs more than ever within Europe.

The Cobra Effect refers to a situation where a new rule or regulation leads to an immediate change in behaviour, but once the rule's impact is understood and perhaps exploited, the situation reverts to its previous state.

In this context, I believe the introduction of the regulation will cause a corresponding decline in HSFO demand that correlates with the number of scrubber-fitted ships that are fitted with open loop systems only. However, once ship operators can properly navigate their options within the closed loop, hybrid, and open-to-closed loop conversion scrubber markets, and are forced to manage long-term fuel costs with the advent of carbon costs under FuelEU Maritime and EU ETS, there will be a dramatic surge in closed loop scrubber investment like that seen in 2010 with the introduction of ECAs and in the runup to the IMO 2020 sulfur cap.

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