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World Bunkering Autumn 2010 37 A s well as having to respond financially and operationally to the current economic crisis, shipowners, charter-ers, refineries and physical suppliers now have to deal with the consequences of new environmental standards imposed by Marpol Annex VI. Vessels sailing in the Baltic and the North Sea Emission Control Areas ( ECAs), have been obliged to burn maximum 1% sulphur content bunkers from 1 July 2010. This abrupt change is expected to introduce many disruptions and volatility to the market in the short term. Demand potential For example, one expert in this field, Robin Meech of Marine and Energy Consulting, has recently been quoted as estimating that global demand for 1% LSFO will initially be around 11 million tonnes per annum in 2010, doubling to around 20 million tonnes in 2011, and more than quadrupling to around 48 million tonnes by 2014. We believe this to be a realistic assessment. Refiners and suppliers can employ a number of different opera-tional tactics, including using lower sulphur content crude, desul-phurising the HSFO further, or blending HSFO with gas oil, to meet the initial LSFO demand. At Global Risk Management we believe higher costs, procedural complications and product quality issues associated with these strategies will increase price and availability uncertainty in the physical markets. Availability concerns persist A recent media survey indicated that 47% of the participants were worried about LSFO availability and supply problems, even though major suppliers, including Chemoil and CEPSA, reported sufficient product inventories. In late June the premium for LSFO over HSFO was around $ 30 to $ 35 per tonne depending on the port, and the forward curves were predicting this premium to reach about $ 40-$ 45 per tonne towards the end of the year. Future supply- demand imbalances in the ECA areas, increased cost of sulphur reductions, and the volatility of oil prices pose a great threat to budget, cost and operational stability of vessel operators. Fuel price risk management strategies have become more impor-tant, even vital, for bottom line profit margin protection during such turbulent times. Many vessel operators utilise financial contracts such as swaps and options to minimise price related risks, enabling them to secure profit margins. Unfortunately, these tools fail to protect the companies against another operational risk factor, namely the availability of the right bunker grade. The role of price agreements This is where, Global Risk Management believes, physical hedging tools can come into their own, complementing financial ones. Such tools can include Fixed or Maximum Price Agreements ( FPAs/ MPAs) with guaranteed physical supply in the ports of choice. The advantage to vessel operators is that entering such contracts will give them bunkering priority at times of supply squeezes, which are expected to occur in the Baltic and North Sea ports after the implementation of the 1% sulphur regulation. This strategy can result in 100% hedging efficiency, achieving cost and operational stability at the same time during volatile times that lie ahead. Global Risk Management is part of one of Denmark's largest companies, United Shipping and Trading Company ( USTC), and is a leading provider of customised hedging solutions for the management of bunker fuel price risk. Oil price risk management in the ' green' world The players in today's bunker market could be forgiven for thinking " when it rains, it pours", says Caner Seren Varol of Global Risk Management RISK management