Decarbonization: How to order future-proof ships when we don’t know the end game?

The path toward decarbonization of the shipping industry in line with the IMO 2050 target – a reduction of 50% by 2050 compared to 2008, which still fails to deliver fully on the Paris Agreement objectives, is filled with uncertainty, which might be the main obstacle to the very vision this journey promises to accomplish.

The topic is being vehemently debated among the industry players in panels and webinars that are dominating the industry’s public space in the COVID-19 reality.

Often referred to as the trillion-dollar opportunity, the decarbonization endeavor has seen the industry join efforts in developing and delivering retrofitting solutions, charting the way forward. However, it appears that the main thing is missing: defining the end game.

“The next thing that the shipping industry really needs to do is figure out, to the extent possible, what is the end game,” Hamish Norton, President of Star Bulk Carriers Corp., said during Capital Link’s 14th International Shipping Forum’s panel on decarbonization.

“There are a lot of intermediary steps that we really know about: LNG as fuel, hull fouling reduction, wind-powered solutions, etc. What is not known is the final zero-carbon solution that we need to work toward, and until we know that there will be a tremendous amount of uncertainty in the shipping industry. Frankly speaking, it will be very difficult for ship owners to order new ships.”

“It really appears that we don’t have any sense of where we are going in a regulatory or economical sense,” Tony Gurnee, CEO of Ardmore said while speaking on a Marine Money webinar on decarbonizing the shipping industry.

The comments deliver a straightforward insight into the stark reality shipowners are faced with, fueled with the prevailing sense of uncertainty about the future.

“In the old days, shipowners could be reasonably confident that if they build a ship that was legal at the time they built it, that it would be grandfathered into the rules’ framework for its entire useful life.

“Right now the political environment is making shipowners very concerned that the ships they order today will not be grandfathered in and may become obsolete in five or ten years. I am terrified about the prospect of ordering ships and other shipowners I know are terrified as well,” Norton said.

There are a lot of ways of boosting the efficiency of the existing fleets by optimizing fuel consumption through different software solutions, retrofitting to wind rotors and sails, or opting for the intermediate fuels such as LPG, LNG, and methane.

Nevertheless, one thing that has been pointed out throughout numerous panels on decarbonization is that: the technological solutions we have on the market are not sufficient to attain the decarbonization goals of the IMO for 2050.

“All shipowners will look at those type solutions for our existing fleet, but it won’t get far enough along the way to meet the 50 pct reduction, let alone zero carbon,” Jeffrey Pribor, CFO of International Seaways (INSW) said during Capital Link’s panel, stressing it would be of crucial importance to determine what would be the right technology to decarbonize, so the capital invested in the future doesn’t end up stranded.

“As long as we are a fossil fuel-based industry we won’t meet the 2050 goals that the IMO has set and we are not going to meet the goal beyond 2050 which is decarbonization as soon as possible after 2050,” John Butler, President & CEO of the World Shipping Council, pointed out during Capital Link’s panel.

As explained by Butler, the industry doesn’t know which of the proposed options would be feasible for the transoceanic ships as numerous issues arise with respect to the storage of those fuels on ships, engineering challenges as well as energy density.

Zero-emission vessels need to be put on the waters in early 2030 in order to meet the decarbonization targets, which is just around the corner.

The current situation shows that there is a wide discrepancy between what is offered as a solution and what is required by the regulatory bodies to push decarbonization of the industry forward.

On the other hand, there seems to be a “pass the buck” mentality with the maritime industry, where engine manufacturers expect the shipowners to decide on the fuels of the future, while on the other hand, the shipowners depend on the infrastructure and scale of certain fuels in order to be able to make the switch ending up in a vicious circle.

When it comes to net-zero solutions, hydrogen and ammonia have been identified as solutions with the greatest potential as the fuels of the future.

Ammonia in particular seems to be an attractive path toward decarbonization, however, numerous challenges regarding its production and adoption onboard ships are yet to be resolved.

When compared to hydrogen, ammonia as a fuel for two-stroke engine propulsion has a higher volumetric energy density than liquid hydrogen, and it is less expensive and complex to transport and store, since hydrogen requires cryogenic temperatures to store.

“The key point to making the 2050 mission a success is the extent to which the alternative fuels like hydrogen or ammonia can be produced in an effective way from alternative sources,” Lambros Kaiktsis, Professor and the Vice Dean at the School of Naval Architecture & Marine Engineering of the National Technical University of Athens, explained during an ABS webinar on decarbonization paths.

“The production cost of these fuels is pretty high, so the industry will not be motivated to move along those lines. Therefore, production of these fuels in an economical way will define the success of decarbonization.”

Apart from looking at fuels, reinventing ship design should also be a contributor to GHG reduction in the shipping industry.

“We have to look at new ship designs. We have to look at larger vessels and we might have to look at slower vessels. However, the issue is that if we look at the bigger vessels, then we have to talk about the port facilities and other stakeholders involved which do not seem to be willing to discuss these issues at this moment,” Stavros Hatzigrigoris, Managing Director of Maran Gas Maritime Inc., said during a webinar organized by ABS.

As explained by Hatzigrigoris, the industry has to reduce its emissions by adopting the lowest risk possible which is increasing the size of ships.

Hatzigrigoris believes the industry has to take a holistic approach to regulatory frameworks and learn from past mistakes.

“We managed to reduce NOX emissions at the expense of greenhouse gas emissions. We said we were ready to face the low-sulphur fuel situation and the decision was made to switch to 0.5 % sulphur fuel with reassurances from engine manufacturers that burning low-sulphur fuel would no be a problem,” he said.

“What we see now are fuel availability problems, engine performance issues and lubricant suppliers puzzled with what TBN to use.”

“I hope the situation will be resolved soon. But, before we do anything about emissions, we have to be sure that what we decide to do is scientifically documented.

“We have to learn from 0.5 % sulphur cap situation and push engine manufacturers to do something proper,” he said, adding that the industry is nor ready to make the leap toward decarbonization.

The need for a common, holistic approach to speed up the efforts and define the end game as soon as possible has resulted in a joint proposal for a fund that would come up with solutions.

Eight trade associations have proposed to set up a research and development facility that would be funded by the industry to answer the question of what will be the fuel of the future once the switch from fossil fuels is made.

The establishment of a $ 5 billion worth IMO GHG reduction research and development program aims to accelerate the introduction of low-carbon and zero-carbon technologies and fuels and coincides with the growing pressure on the shipping industry to cut its emissions.

Under the proposal, cosponsored by BIMCO, CLIA, ICS, INTERTANKO, INTERCARCGO, INTERFERRY, IPTA and WSC, the core funding would be collected via a mandatory R&D contribution per tonne of fuel oil purchased for consumption.

It is proposed that $2 be collected per tonne of fuel oil, generating about 5 billion dollars over a ten year period, which is expected to be sufficient to accelerate the intensive R&D effort to fully decarbonise the sector.

The shipping industry’s proposal was scheduled to be discussed by governments in London at the next meeting of the MEPC, which ended up being postponed due to COVID-19.

Getting to Zero Coalition is another example.

Shipping being a capital intense industry will definitely impact the pace of decarbonization, as shipowners work to avoid rabbit holes on the journey and minimize risk.

Cutting CO2 emissions has to go hand in hand with fleet optimizations and boosting performance in order to enable owners to cut costs and save money.

When it comes to capital investments in zero-emission fuels and zero-emission vessels, making a wrong decision can prove to be economically disastrous due to the scope of the needed investment as well as regulatory complexities.

The shipping industry cannot take the sole burden of decarbonizing its operations, so the way forward must be through partnerships in order to harmonize efforts, learn from each other, and drive the transition forward.

One of the ways of doing that is from the financing sector to reward owners for decarbonization efforts with favorable loan arrangements.

Poseidon Principles commit their signatories to align the climate impact of their portfolios with the trajectory of the greenhouse gas emissions set by the International Maritime Organization.

As part of the agreement, banks pledge to make sure that any lending decision they make takes into account a variety of climate considerations.

By tracking the progress of those trajectories, financing institutions can decide to lower the debt margin for owners making the reduction of GHG emissions pay off.

Other economic incentives from insurers, ESG investing and social pressure come into play as well, as explained by Gurnee.

It is also up to the governments and regulators to make decarbonization commercially profitable for shipping companies.

Nevertheless, the impact of the COVID-19 on the industry’s decarbonization efforts should not be underplayed.

“I don’t think that shipping is in any place yet to decide on decarbonization time-table and alternative fuels until we see what the landscape and the appetite look like post this pandemic,” Mark O’Neil, CEO of Columbia Shipmanagement, said during Capital Link’s panel, stressing that the impact would be over any time soon.

On the one hand, the pandemic is likely to feed the green movement in the world, paving an opportunity for the governments to “tear up the old”.

However, the disruption the pandemic has brought is more likely to see the impact of the economies being broken to crush the interest in paying for green action, O’Neil explained.

“To say that we will happily trot along with any plans we might have had on decarbonization is woefully downplaying the significance of COVID-19. Therefore, the landscape will change radically and to plan now, in this context, would be premature,” he added.

“I believe the decarbonization efforts will probably have to take the backseat, whilst we reconstruct and regroup and take our businesses further forward.”