INTERVIEW: FuelEU compliance pooling market grows, but pricing agreements remain opaque -- CarbonLeap

The compliance pooling sector for FuelEU regulation is becoming increasingly attractive for small- to medium-sized shipowners, but pricing negotiations remain a point of contention as the space develops, Guido Levie, the cofounder of maritime decarbonization company Carbonleap, said.

The EU's FuelEU Maritime Regulation targets a 2% decrease in greenhouse gas intensity by 2025, progressively increasing to an 80% reduction by 2050, by limiting the yearly average well-to-wake GHG intensity of ships above 5,000 gross tonnage calling at European ports.

FuelEU's pooling mechanism allows compliant shipowners to sell their surpluses to compliant-deficient owners externally who require the balance, creating a marketplace as a result.

"There is a divide in larger fleet owners who have done their testing on low carbon fuels and have long had a view on what's coming, and the smaller or medium sized owners who have not been as on top of it. Pooling is the system they can pursue -- without procuring and bunkering the volatile compliant fuels that they are not fully prepared for yet, they are able to have the flexibility of choice," Levie said in an interview with Platts, part of S&P Global Commodity Insights.

Price arrival remains opaque

The arrival of a price for all counterparties is a matter of contention, fundamentally remaining an "opaque" area.

Pool tickets that are issued from compliance sellers to buyers are calculated on a fixed price for a full year, allowing shipowners to pass on costs to clients as appropriate, but arriving at the price is a calculation that Levie believes can be misconstrued in some quarters.

"Finding the price point is a negotiation between a bid and an offer, but the market is still quite opaque at the moment; one thing I don't believe though is some parties in the market are arriving at the price as a percentage of the penalty for non-compliance, which doesn't make sense to me," Levie said.

Furthermore, transactions underpinned by a fixed price for a full year might leave surplus owners open to price fluctuations in an unpredictable alternative marine fuels market, where they may not be able to lift their surplus at the fixed price and then have to bunker a compliant fuel later on in the year at a different price.

Underpinning this is the cost-competitiveness of the compliance pooling options in relation to prices of alternative fuels, where Levie claims that the buyer will understandably aim for the lowest price delivered it can procure.

February's average bunker price for very low sulfur fuel oil, the most commonly used marine fuel, was $560/mt in Singapore, compared with bioblend B24 at $715/mtVLSFOe, LNG at $722/mtVLSFOe and 100% sustainable methanol at $1,955/mtVLSFOe, according to the Platts global bunker cost calculator(opens in a new tab). The most competitive cost for "green ammonia" delivered to the Far East was also $1,955/mtVLSFOe.

Much will likely depend on larger shipping companies that have long positions in compliance surplus pooling. These companies have yet to make the big decisions on portions of compliance they want to keep within their own fleet and what they want to sell, according to Levie.

Surplus owners weigh up choices

According to Levie, CarbonLeap is the first independent organization to broker first agreements between compliance surplus owners and deficit owners, signaling the potential for this market to scale up as more participants come to the table.

At present, however, there is difficulty in finding a high volume of sellers, with the price negotiation difficulties apparent amid a rapidly fluctuating regulatory environment.

"Regarding pooling options, we see people wanting to buy, but we haven't seen people willing to sell compliance," Valerie Ahrens, senior director for new fuels at Bunker Holding, said in an interview with Platts in March.

The International Maritime Organization's potential finalized decision for a net-zero regulatory framework later in the year, with the likely introduction of a carbon trading system rather than a flat levy for implementation from 2027, added to the regulatory uncertainty.

Hopes are high that demand-driven interest will placate more sellers to offer their surplus to deficit buyers, with potential market maturation to follow.

"The price will get clearer and clearer over time, with more platforms for prices. This is just the beginning," Levie added.