Indonesia’s backtracking on IMO 2020’s January 1 target for sulfur caps on domestic shipping raises the specter of wider non-compliance, as the marine fuel regulation becomes increasingly disruptive and policymakers seek to control its economic fallout, executives said at a gas conference “Gas Indonesia Summit & Exhibition 2019” in Jakarta, July 31 – August 2, 2019.
It also hints at key issues faced by oil refineries, including the lack of an outlet for excess high-sulfur fuel oil and the absence of a cohesive strategy and investment among national oil companies to tackle the new regulations in developing countries.
On Monday (July 29), Indonesia’s transport ministry said the government will follow IMO’s 0.5% sulfur rules for international shipping, but it will continue to allow domestic shipping to burn 3.5% sulfur fuels citing national interests and a large volume of domestic high sulfur fuel oil.
The government had asked state oil company Pertamina to supply low sulfur fuel, and up to 380,000 kiloliters/year of 180 CST 0.5% sulfur marine fuel oil will be available at the ports of Tanjung Priok and Balikpapan, while 380 CST marine fuel oil will have to be imported, it said.
Pertamina produces 1.9 million kiloliters/year of high sulfur 180 CST marine fuel oil with 3.5% sulfur content from the Cilacap refinery, which is a large volume. It will need to be consumed by state power utility Perusahaan Listrik Negara, or PGN, local industries and the shipping sector, Sudiono, the ministry’s director of shipping and maritime affairs, said.
Accordingly, the Coordinating Ministry for Maritime Affairs decided some time ago that all Indonesia-flagged ships sailing in the territory of Indonesia can still use fuel with 3.5% sulfur content until it runs out, considering the large supply, he added.
The Indonesian government needs to ensure that national shipping and Pertamina’s capacity to supply low sulfur fuel have enough time to adjust, and national interest needs to be urgently prioritized before the January 1, 2020 deadline, Sudiono said.
It is unclear whether Pertamina invested in the production of enough low sulfur fuels to meet IMO 2020 rules, especially with its heavy reliance on refined product imports and long-delayed plans to build a greenfield refinery in the country.
If Asian refineries with high fuel oil yields are unable to find an outlet for HSFO, they will likely struggle to maintain their refinery utilization rates.
“There is some initiative from Pertamina that we need to have the appropriate infrastructure in response to IMO initiative in 2020, especially whether it meets the specifications of the diesel oil we produce from our refineries,” Heru Setiawan, director of investment planning and risk at Pertamina (Persero), said.
“We are working with ENI to produce high grade diesel oil,” Setiawan said on the sidelines of the Gas Indonesia conference in Jakarta.
“I can see why Indonesia may have done it. [IMO 2020] is expensive and disruptive,” Walter Purio, founder of the LNG Marine Fuel Institute, said, adding that the decision was short-sighted and puts economics ahead of environmental obligations.
“Is there some pain? Absolutely. Everybody is experiencing some pain here, but this isn’t about the individual country,” he said. “We have to look at it as an aspirational goal. It’s altruistic. I think you have a responsibility if you join a league of nations that’s quite important.”
According to the IMO, “The sulphur oxides regulation (MARPOL Annex VI, regulation 14) applies to all ships, whether they are on international voyages, between two or more countries, or domestic voyages, solely within the waters of a Party to the MARPOL Annex.”
The transport ministry said Indonesia will comply with IMO’s January 1 deadline for international shipping and it had issued a decree under which all non-compliant vessels will be confiscated by Port State Control.
Meanwhile, the Trident Alliance said late Wednesday that Indonesia’s decision to backtrack from the IMO 2020 rule for domestic shipping will likely expose the country to legal consequences.
“Aside from the unfair distortion to the competitive landscape, it is unclear how a failure or refusal to enforce the new sulfur cap would not expose a state to legal consequences,” it said in a statement.
“States such as Indonesia, that are party to IMO’s MARPOL Annex VI, do not have the facility to exempt merchant vessels from compliance. Additionally, states party to Annex 6 can be held liable for non-enforcement by the other states that are party to it,” it added.
The only surefire way to successfully implement the new global sulfur cap is following the regulations to the letter, Trident Alliance Chair Roger Strevens said.
Any local deviations from this would create unfair competition and may lead to non-compliance on a wider scale, he said, adding that it was extremely unhelpful to make such decisions so late in the day given the expense and effort the industry has already expended in preparing for the rule.