In July 2011, the European Union adopted stricter sulfur limits in fuel used by ships set by the International Maritime Organization. The new restrictions, set to take effect as early as 2015, would force all ships in the Baltic Sea, North Sea and English Channel to adhere to as low as 0.1 percent sulfur in the fuel used.
In North America, the IMO and EPA will be enforcing similar regulations off its coasts which are deemed as emissions-controlled areas (ECA). Estimates for these sweeping new regulations for the enormous shipping industry (65,000 vessels) could mean an extra €11 billion annually, according to the EU Environment Commission. Granted, cost-savings from significantly reduced pollution could benefit the public by as much as €30 billion.
In the past, there haven’t been many appealing options for ships in desperate need to meet the sulfur limits by 2015. Solutions consisted of paying the significantly higher cost for premium fuel or taking ships out of commission for as long as a year to make upgrades. None of these options offer a cost-effective method for maritime companies.
Interestingly enough, a third option is quickly emerging as a lifesaver of sorts. Poly Shield Technologies, Inc. (SHPR) has found a way to reduce sulfur in fuel to meet the IMO’s limits in a remarkably more feasible and effective manner, according to Rasmus Norling, the Company’s CEO.
To get a better idea of just what Poly Shield Technologies is working with here, Equities.com spoke with Norling to learn more about the Company’s DSOX-15 Fuel Purification System solution and why its market strategy is ideal for the unique situation affecting the future of the shipping industry.
EQ: Can you start with an overview of Poly Shield Technologies and your operations?
Norling: Poly Shield Technologies wants to be on the leading edge of emission control systems for the marine and power-plant industries. There are currently 65,000 ships in the world, all of which will be affected by the new emission control legislation in Europe and the U.S. by 2015. The new regulations will drastically reduce the amount of sulfur that is allowed in the fuel and ultimately in the atmosphere. Our goal is to use our sophisticated technology to reduce the sulfur percentages to acceptable levels. With this solution, Poly Shield Technologies Inc. could expect market sales to reach as high as 20 to 25 percent of the maritime emissions compliance market within five years.
The world cap for allowable marine fuel sulfur levels was steady at 4.5 percent, until 2012, when it was reduced to 3.5 percent. This is the 3.5 sulfur percentage fuel, the sludge or left over from the bottom of the barrel from the refineries.
Selling this high sulfur fuel was fine in the past because the refineries were happy enough to find clients who could use their bottom-of-the-barrel byproducts referred to as “inexpensive high sulfur bunker fuel”, but this is absolutely the worst kind of fuel from an environmental standpoint. It is essentially the leftovers of the refining process and the high sulfur component in this fuel is directly responsible for acid rain.
In order to make the maritime industry more environmentally friendly, the United Nations Framework Convention on Climate Change, which controls the International Maritime Organization, wanted to gradually lower the maximum sulfur content in the fuel from 3.5 percent down to 1.5 percent, and then to 1 percent. By 2015, the IMO mandated that allowable sulfur levels would be reduced to 0.1 percent.
In emission-controlled areas such as the Mediterranean, the Baltic Sea, Canada and the United States, they have already implemented the low sulfur requirement within 200 nautical miles from each of their coastlines, which are now emission-controlled areas. That means that a ship sailing from China or anywhere intent on entering any of these emission control areas has to switch to low sulfur fuel prior to reaching 200 nautical miles from the Mediterranean, Baltic Sea, Canada or U.S. coastlines. That means that they have to have that low sulfur fuel on board at all times.
EQ: To give us an idea of the scope of the market, what kind of cost savings does your DSOX-15 Fuel Purification System provide versus the industry alternatives?
Norling: If you look at our competitors from an economic comparison, one exhaust-gas scrubber may cost around $5 million, sufficient for one engine, but the average cruise ship these days has six engines. So that’s $30 million plus installation costs just to make one ship compliant with the new regulations.
We can offer the same solution for just under $6 million per ship. Also, our equipment is much easier to install. It takes only about 30 days from survey to completed installation, and we intend to have it so that the ship’s crew can install it themselves. Other exhaust-gas scrubbers typically take as much as one year to install. That’s major savings both in time and money for these companies.
There are five major companies in the world capable of exhaust scrubber technology, and they can install and deliver maybe 50 scrubbers per year each. There’s no way that the industry demand can be met by 2015, so I fully calculate that there will be a total emissions solution panic in the maritime industry very soon.
Take as an example any major marine company with a shipping fleet. The new regulations would translate to in excess of hundreds of millions in increased operational costs per year just on fuel (and that is if fuel prices remain static in spite of the significant increases in demand). That’s almost a catastrophic event for any company.
Certain industries will manage that differently. A cargo ship, for example, can add a few dollars to the price of each flat screen TV from China that they transport from point A to point B, which will raise the price on certain shippers cargo, but if they decide to install a DSOX-15 Fuel Purification System they will be the lower cost provider and mostly likely receive more business. Regardless the DSOX-15 Fuel Purification System allows for reduced operational cost by supplying an emissions solution for cheaper fuel. So there’s a huge market for our technology, and that’s why there are so many big companies currently looking into the sector, such as DuPont (DD) , Rolls Royce (RR.LSE), and others. They want to have a piece of this market, and there’s enough to share with everybody so it’s not necessary to compete directly with other companies, but the truth is today we have a smarter, simpler and significantly less expensive solution than any other company in this industry.
EQ: Prior to Poly Shield, you were the research and development manager for Royal Caribbean (RCL) , which is where you were when you began working on the maritime industry’s exhaust emission compliance solution for RCL. Can you talk about your experience there and if you were able to validate the technology?
Norling: As a result of the success of my first fuel invention, Royal Caribbean promoted me to the position of R&D manager for the whole company. But prior to that, I worked my way up from second engineer to chief engineer, and eventually was promoted to ship manager. I was financially and legally responsible for three cruise ships, and everything having to do with them.
The problem was we had gas turbines on the ships I managed, and they were very sensitive to sodium in the fuel, which would cause high-temperature corrosion. It happens within a couple-hundred hours and will more or less ruin the whole turbine.
We had a load of fuel come into the ship that had 23 ppm sodium, and the max level for the gas turbine—which was a GE LN 2500—was 0.2 ppm. So we had a significant contamination of seawater in the fuel. We had large volume amounts of fuel being shipped to the U.S. from Singapore for RCL, and all the fuel in the port was also contaminated. There was no way to get rid of the fuel or use it. That was the motivation behind my invention of a little fuel scrubber that could remove the sodium from the fuel. It ended up saving Royal Caribbean millions in one year because they had signed contracts that were supposed to deliver marine grade fuel but they had used the wrong specifications in the contracts and the sodium limits were extremely high.
So we installed my desalination scrubbers on eight ships for Royal Caribbean, and they now use them as a safety precaution if something goes wrong. If they get a load of fuel that has high sodium levels, then RCL has the ability to reduce the sodium to acceptable levels.
EQ: How did you first get involved in developing sulfur reduction for ships?
Norling: My job at Royal Caribbean was to find any possible savings, in particular to solve the sulfur contaminant problem. For three years, I worked on exhaust gas scrubbers every single day. We installed two different types of exhaust gas scrubber on two different ships; one worked not so well, and one worked very well. But they were extremely expensive.
Although I had solved the exhaust emission problem I hadn’t solved it in an economical way and this was a significantly different problem but I thought if given the time and testing necessary maybe I can solve this problem a little more efficiently. So instead of installing this humongous exhaust gas scrubber in the stack, which takes 25 months of planning and a year to actually do, I started to think about how sulfur could be removed economically from the fuel. I left RCL and began to focus purely on testing components and technology that I thought could make that happen. I started by re-engineering the current exhaust scrubber technologies and found I could make a lighter and somewhat cheaper version but the installation time was still unacceptable. We needed to take a completely different approach and six months later we proved in a simple test that we could remove 50 percent of the sulfur and those results have been improving ever since.
That’s where it started. We’ve refined the process and we are testing it in our laboratory. We will see how much further we can reduce the sulfur levels. Our goal is to have it down to 0.1 in the first quarter of 2014, which will make our fuel purification system, the DSOX-15, fully compliant with any upcoming regulations. And we are confident that with further development we can reach the anticipated 2020 standards.
EQ: Is the technology patented?
Norling: The DSOX-15 Fuel Purification System, based on our development schedule, we expect to patent a number of the significant concepts involved in the DSOX-15 Fuel Purification System. However, the Company may choose not to patent the recipe, which for lack of a better term, is the magic dust and that aspect of the process the Company is keeping as a closely-guarded trade secret. We aren’t standing still either. We have already begun developing upgrades for the system.
EQ: The Company recently announced that it completed a two-ship survey for the DSOX-15 Fuel Purification System. Can you tell us more about how that is going?
Norling: Our surveys are conducted very differently from how other exhaust gas scrubber surveys are done. All of our competitors have been on the same ship and they spend seven days onboard with lasers scanning the whole exhaust-gas casing, and the whole engine room in order to make sure they can keep everything in the footprint. One ship owner told us that they had booked an exhaust scrubber survey, which required seven days and the price quote for the 20 tons of exhaust scrubber for two engines was €8 million. So the competition is very expensive, they are using different technologies that need to have a much larger footprint, and weigh 19-plus tons more than our system. To put it in perspective, that’s 19 tons less cargo or passengers they can get paid for on each and every voyage from the day an exhaust scrubber is installed.
Back to our survey. For us—and it’s kind of funny—when we come onboard, they expect two guys to be onboard for seven days. We do it much more efficiently. We go on board, take pictures, talk to their engineers, and ask them if they have any problems or need any upgrades to the system. We provide the assessment of what the ship needs and where to put it and we are done that day. We deliver the DSOX-15 Fuel Purification System, and they take care of the installation themselves.
Our scrubbers are a fully-integrated system, essentially they come in a box, we just have to find the proper location to install it, and they just cut the pipes, weld flanges and bolt on the DSOX-15 Fuel Purification System in place and turn it on. It’s a very simple installation, and its blows their mind how quickly we’re done. We just collect the information, fuel data, equipment location and take some pictures. It’s a much simpler installation, involves no dry dock time, no out of service time and it can be done anywhere in the world.
EQ: We’ve discussed the immense demand and strict deadline for when the regulations take effect. How does the company plan to approach the market to capitalize on this? Have you considered engaging larger partners to help you?
Norling: We would welcome a strategic partner who can help us with this massive market opportunity. However, the Company currently can easily ramp up production and make over 3,000 DSOX-15 units per year. Any partner would have to have the ability to contribute a significant value beyond our current abilities and fit into our marketing strategy. If there is an issue today for us, the issue would be how to fly to 3,000 places around the world for surveys while training ship engineers to install the system. That’s why the easy installation is critical and building the proper service teams is job one for this company.
So we are open to partnering up with companies capable of doing installations in different parts of the world, and who have contacts in maritime industry markets. I want to focus on selling our DSOX-15 Fuel Purification System, and there are others who can make money on installing it. I think that’s the smart strategy for us.
For example, we discussed the Exhaust Scrubber project with a big cruise line. They wanted 40 scrubbers, and we would need to hire 900 people to do the installation over the course of one year. I would rather give them my box and have them install the equipment themselves, because time and meeting the market demand for our DSOX-15 system is more valuable today than the income from actually doing the installation. The reality is that once the installation protocols are given to the ship’s engineer, it should only take a few days at most to complete any installation.
The shipping market is very unique in one way that is very beneficial for Poly Shield Technologies Inc., most of the ship owners want their engineers to be involved in the installations themselves for a couple of reasons; one to save money, and secondly so they know how it was installed and can do any routine maintenance. They already have their own mechanics and they don’t want to pay extra money for someone else to do that work. We come and do the commissioning and make sure everything works, but spending time and technical resources installing systems is not part of our market strategy.
Perhaps the most significant effect of the new regulations will be the effect of fuel supply and costs. The refineries have said that only 1 percent of the marine grade low-sulfur fuel capacity needed will be ready when the rules come into full effect in 2020. So the price for marine gas oil is going to go up tremendously. The example I used for any major marine company with a shipping fleet paying extra hundreds of millions of dollars a year on fuel after 2020 is just based on today’s fuel price. So that’s not even factoring in the price increase that will result from this extraordinary demand because of the new laws. So I think any projections at this point that use today’s fuel prices are probably significantly undervaluing the costs savings that the DSOX-15 Fuel Purification System can provide.
EQ: You became CEO of Poly Shield in February. Can you talk about how the trajectory of the Company has changed since that time?
Norling: We are now gearing up to unveil our DSOX-15 Fuel Purification System technology to the market, and it’s a very interesting market for me. Gas turbine and power generation is what I’ve done most of my life. We haven’t publicly discussed the potential of our solution to this industry, but we have already managed to generate considerable interest in our system. So I can only imagine what will happen when we start talking more about the size of the market and the contracts that we are currently negotiating. It will certainly impact the value of the Company and I am sure it will be of interest to our shareholders as well as financial media.
Of course, I’m using my reputation as a problem solver in the industry. I have friends all over the world working in new companies now, and when I tell them about my new project, they know that it works because I’ve done it before. Poly Shield Technologies Inc., and it shareholders will have the benefit of my knowledge and expertise, which I believe will give this company a significant head start in the emission control solutions market for maritime industry.
EQ: This story is going to pick up steam very quickly, with 2015 a blink of an eye away. For investors following the Company, what are some goals and initiatives for Poly Shield that they can look out for over the next year or so?
Norling: We are now starting our first pilot project for certification of the DSOX-15, which should leave no doubt about which solution is the best solution. The first quarter of 2014 is when we will see all the pieces really falling into place, certification on multiple ships, fleet contracts and increased production. We have already seen a tremendous amount of interest from an industry that is historically reluctant to try new things. However, we’re fortunate here in that they changed the rules by mandating regulations to this industry, and there’s no better choice than the solution provided by our company. It’s a no-brainer. It’s going to cost shipping companies more money to do nothing because they’ll end up having to pay extremely high operational costs running on marine gas oil, which is something that the industry has already analyzed themselves.
As far as our market penetration, we are much farther ahead than we anticipated. This month of July 2013 we entered into an Installation agreement with LMS Shipmanagement Inc. a wholly owned subsidiary of International Shipholdings Corp. (ISH) . The Agreement will focus, initially, on a two vessel installation and certification of our DSOX-15 Fuel Purification System. The agreement will also allow for DSOX-15 system installations on up to an additional 40 ships. This Agreement with LMS is a significant step forward in achieving our Company's business goals and allowing Poly Shield Technologies Inc. to demonstrate it's DSOX-15 Fuel Purification System's capabilities in a real world environment.