Forget future fuels (for now)...

 ......‘carbon hacks’ and policy will fuel the next decade of decarbonisation

The shipping industry has been set on an inexorable path to environmental compliance that will see it reducing its carbon intensity by 40% before 2030 and 70% in 2050. It must decarbonise, but the technology does not currently exist to enable it to do so. At the same time, almost the entire global fleet is reliant on fossil fuels, and modern efficient vessels built today are likely to be considered ‘carbon impaired’ assets long before the end of their operational lifespan. This presents a very unique set of challenges. Does shipping realistically have a chance to reach the 2030 milestone? The answer is possibly yes, but the path is far from clear.

I have seen so many headlines over the last year about the pros and cons of different fuels – it’s logical that LNG, Ammonia and Hydrogen etc get so much attention because they potentially fit into the ‘one size fits all’ logic that pervades an industry built around economies of scale. However, these are ‘future fuels’ and are not likely to adopted in any meaningful way until after 2030. For this reason, they provide no real solution to the more pressing problem of the industry needing to find a 40% reduction in C02 intensity over the next nine years. Nine years is not a long time when we consider the typical operating life of a merchant vessel is 20-25 years. So, what changes can we expect to see before these future fuels start to come into play? What can the industry do now to ensure it is ready to comply with 2030?

I envisage the industry pursuing two paths in parallel, one based around operations and technology, and the other around policy:

 

Operations and Technology Path:

The operations and technology path encompasses the exploration of new fuels and new power trains for vessels. It also covers the new ways to reduce vessel energy requirements and carbon output – these ‘carbon hacks’ include, carbon capture, slow steaming, scrubbing, efficient vessel designs and yes, pushing the envelope of fossil-fuelled engine design to increase energy efficiency. It is likely that many of these hacks will find their way into vessel operations very quickly (some are already in operation) and they will go some way to enabling shipping to reach its 2030 deadline. The research around new fuels will produce a significant and lasting positive change, but it will be longer before we see the effect of this (likely after the 2030 milestone).

Policy Path:

The policy path will see downward, punitive pressure placed on the industry by industry bodies (e.g. the IMO) as well as local and regional governments. We can expect to see the European Union pushing shipping into its Emissions Trading Scheme (ETS) just like it did with aviation. This effectively means that the more Co2 produced by vessels, the more they will have to pay for this privilege. At the same time, major charterers and some shipping companies have now started to ‘pull’ shipping towards a greener future by organising themselves around the same issue (creation of the The Sea Cargo Charter - SCC), and major shipping financiers have now combined to create a framework around ‘responsible’ ship finance (The Poseidon Principals - PP). This leaves the shipping industry caught in the environmental crosshairs between regulation, indicative customer demand (charterers) and supplier demand (financiers). Conditions are now ripe to make some positive change on this basis.

 

So now that the stars are beginning to align for genuine, positive environmental change in the shipping industry, what are the stumbling blocks? Almost too many to mention:

Arguably the largest problem is the fact that shipping can’t currently rebuild itself around one single environmentally friendly fuel source – why? Simply put, it doesn’t exist, and it possibly never will. Right now, the whole industry is propelled by fuel oil and MGO (both different parts of the same barrel of crude) – this singularity of focus is exceptionally good for economies of scale. Fuel is extracted from the ground in huge quantities, refined and made available in many locations on the back of a long and well-tested infrastructure. Energy density is high and delivered prices are relatively low. In recent years, when the shipping industry had to make a step towards environmental compliance it looked towards the oil majors and waited for market forces to work their magic. This time it’s different – the majors definitely have their part to play, but the shipping industry must look into itself and all stakeholders in the cargo supply chain for solutions (charterers, refiners, engine manufacturers, fuel traders). We now appear to be looking at a multi-fuel future that will probably see different shipping trades attracting different sources of propulsion.

Despite the complexity of the task, I expect shipping to make significant use of the ‘carbon hacks’ mentioned above to achieve greater operational efficiency as it heads towards 2030. It is highly likely that slow steaming will play its part in the industry’s response to the environmental challenge – some suggest that by reducing speed of the global fleet by 10%, we would see a 20% decrease in emissions. Additionally, scrubbers and carbon capture can play their part, but many purists would argue that neither of these solutions are really addressing the problem – they are just ‘kicking the can’ because carbon is still produced. More efficient vessel and engine design will play its part too, and new technology around diesel electric power trains or even battery-powered vessels could become more prevalent in short-sea routes, or where smaller vessels typically spend a long time in port. However, all of these measures and developments could just be seen as ‘marginal abatement’ measures to bring compliance closer, without actually dealing with the elephant in the room – the fact that entire global fleet is relies on fossil fuels whilst no viable alternative exists. In the absence of a ‘silver bullet’ solution, this pursuit of operational efficiency is the only practical path that the industry can walk towards 2030.

In addition to the implementation of the ‘hacks’ mentioned above, regulation and incentives are likely to significantly accelerate shipping’s journey to compliance over the next ten years. It is inconceivable to me that shipping will avoid some sort of major carbon ‘cap and trade’ scheme on a major scale. This could start in Europe as early as 2022 – that is just over a year away. Additionally, if Joe Biden takes the President’s chair next month, we could see the USA heading towards membership of a ‘Carbon Club’ of countries more closely aligned with the European Union’s mode of thinking on an emissions trading scheme (ETS). I suspect that the industry is not yet ready to enter any sort of ETS, and many would argue that the shipping industry should wait for the IMO to provide some more guidance. However, on the issue of decarbonisation the EU appears to be carving its own path. It pulled aviation into its ETS scheme in 2012, and it is now surely a matter of ‘when’ rather than ‘if’ for shipping. This will challenge shipping companies both financially and operationally – I suspect many companies in the sector are not ready for this change and are surprised by how quickly this appears to be happening outside of the IMO domain. What is interesting to note from this is that both the IMO and the EU want to achieve the same thing (decarbonisation), but they appear to be working along different timelines and are not fully aligned. Perhaps recent news from the EU on this issue might force the IMO to speed up their response on this issue.

Whilst regulation can be a blunt but effective method to ‘push’ participants towards future environmental compliance, it is only the opportunity to profit from it that can provide some real enthusiasm towards the task at hand. As mentioned above, there does seem to be some consensus between vessel financiers and the major charterers (SCC and PP respectively) on the ‘why’ but not the ‘how’. The creation of these bodies commits their members to report the carbon output of their respective portfolios – a kind of public self-flagellation that encourages better environmental discipline, but this is not a concrete commitment to reduce emissions. Some of the largest companies in the world (including major charterers) are now happy to release statements about their ambitions to run ‘carbon zero’ operations. This is a noble pursuit, but until shipping companies feel that their customers (the charterers) will pay a premium for greener cargo transportation there is unlikely to be any genuine eagerness towards decarbonisation. Additionally, it’s important to point out here that China remains largely quiet on its decarbonisation ambitions within shipping specifically – considering its involvement in the chartering and ship finance space that is potentially a significant piece of the decarbonisation puzzle that is missing, although it is starting to make the right noises on a national level.

Over the past 150 years we have seen shipping switch from sail to coal, and coal to oil. Each transition was supported by market forces (customer demand and a desire for shippers to achieve economies of scale), but the process still took several decades. Today the need for change is more important but the economic drivers are currently missing from the equation. Everyone in shipping understands the need to invest in the future (decarbonisation), but right now any capital expenditure will likely result in a ‘first mover disadvantage’, and that creates a significant barrier to innovation. The next nine years won’t be easy, but there is no doubt in my mind that during this critical period significant, practical progress will be made towards the IMO’s decarbonisation goals – just don’t expect the silver bullets to arrive before 2030.

 

Daniel Rose 

CEO  - LQM Petroleum Services

 

But what do you think ? Do you agree that the path to 2030 will be fueled by carbon hacks and policy ? Please leave a comment below.

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