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Read the article in Bunkerspot magazine featuring Kevin O'Reilly & Daniel Rose

Direction of Travel

Kevin O’Reilly, CCO of international hedging provider Global Risk Management, and Daniel Rose, CEO of LQM, a hybrid trader and broker of marine fuel, have been in the shipping and oil industry for many years. They are both seeking to provide sustainable solutions to their clients around the world within their respective fields of operation, and the pair met for a virtual coffee and an informal discussion on shipping’s energy transition out to 2030.

Kevin O’Reilly: The shipping industry has set sail on a path to environmental compliance that will see it reduce carbon intensity by 40% before 2030 and 70% in 2050. Do you see the industry being able to comply with the regulations by 2030?

Daniel Rose: Shipping must decarbonise, but the technology does not currently exist to enable it to do so. 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 lifespans. So, in short, the answer is possibly yes, but the path is far from clear.

There were many headlines over the last year about the pros and cons of different alternative fuels – which do you think could be potential substitutes for conventional bunkers?

It is logical that LNG, ammonia and hydrogen get so much attention because they potentially fit into the ‘one size fits all’ approach that pervades an industry built around economies of scale. However, these are ‘future fuels’, still largely in their deployment infancy and are not likely to be adopted in any meaningful way until after 2030.

They provide no real solution to the more pressing problems of an industry needing to find a 40% reduction in C02 intensity over the next nine years. Nine years is not a long time when considering the operating life of a merchant vessel is up to 20-25 years.

What changes can we expect to see before these future fuels start to be adopted and what can the industry do now to ensure it is ready to comply with 2030?

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

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).

The policy path will see downward, punitive pressure placed on the industry by bodies such as the IMO, as well as local and regional governments. We can expect to see the European Union pushing shipping into its Emissions Trading System (ETS), just like it did with aviation. This effectively means that the more CO2 is 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 (the creation of the Sea Cargo Charter – SCC), and major shipping financiers have now combined to create a framework around ‘responsible’ ship finance (The Poseidon Principles – PP).

This leaves the shipping industry caught in the environmental crosshairs between regulation, indicative customer demand (charterers) and supplier demand (finan-ciers). Conditions are now ripe to make some positive change on this basis.

With the stars aligning for positive environmental change in the shipping industry, what are the stumbling blocks?

They are legion. Arguably the largest problem is that in future shipping can’t rebuild itself around one single industry, as is the case at present. Shipping is currently propelled by fuel oil and MGO (different parts of the same barrel of crude oil) and this is exceptionally good for economies of scale. Crude oil 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. What is different this time?

The majors have their part to play, but the shipping industry must look to all stakeholders in the cargo supply chain for solutions (charterers, refiners, engine manufacturers, fuel traders). We are looking at a multi-fuel future that might see different shipping trades attracting different sources of propulsion.

In your opinion, how can the shipping industry then achieve greater operational efficiency heading towards 2030?

Despite the complexity of the task, we expect shipping to make significant use of the ‘carbon hacks’ mentioned above. It is likely that slow steaming will play its part in the industry’s response to the environmental challenge with some suggesting that by reducing the speed of the global fleet by 10%, we would see a 20% decrease in emissions.

How about scrubbers and carbon capture?

Scrubbers and carbon capture canplay their part, but many purists would argue that neither of these solutions are really addressing the problem – they are just ‘kicking the can down the road’ because carbon is still being produced.

More efficient vessel and engine design will play its part too, and new technology around diesel electric power trains or even batterypowered 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 relies on fossil fuels whilst no viable alternative currently exists. In the absence of a ‘magic 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, what other actions could speed up the compliance rate?

Regulation and incentives are likely to significantly accelerate shipping’s journey to compliance over the next 10 years. It is inconceivable to us that shipping will avoid a carbon ‘cap and trade’ scheme on a major scale. This could start in Europe as early as 2022.

The aviation industry entered an emission trading system in 2012. Is the shipping industry heading down the same path?

The industry is not yet ready to enter an ETS and many would argue that the industry should wait for the IMO to provide some more guidance. However, on the
issue of decarbonisation the EU appears to be charting its own course and it is only a matter of ‘when’ rather than ‘if’ for shipping.

How will this affect the shipping industry?

This will challenge shipping companies both financially and operationally, with many companies in the sector not ready for this change and being surprised by how quickly this appears to be happening outside of the IMO.

Interestingly, both the IMO and the EU want to achieve the same thing, namely decarbonisation, but they appear to be working along different timelines and are not aligned. Perhaps recent news from the EU on this issue might force the IMO to speed up its response on this issue.

How will shipping industry participants be encouraged to head towards compliance?

Whilst regulation can be a blunt but effective tool to ‘push’ participants towards environmental compliance, it is only the opportunity to benefit 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 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. However, this is not a concrete commitment to reduce emissions permanently.

Some of the largest companies in the world (including major charterers) are now happy to release statements about their ambitions to run ‘zero carbon’ operations. This is a noble pursuit but until shipping companies feel that their customers (the charterers) will pay a premium for greener cargo transportation transportation there is unlikely to be any genuine eagerness towards decarbonisation. It is important to highlight that China remains quiet on its decarbonisation ambitions, within shipping specifically. Considering its involvement in the chartering and ship finance space this is potentially a significant piece of the decarbonisation puzzle that is missing.

How does this change in shipping fuels compare to historic changes in the industry?

Over the past 150 years shipping switched from sail to coal and from 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, despite an obvious environmental need, 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 will not be easy, but there is no doubt that during this critical period significant, practical progress will be made towards the IMO’s decarbonisation goals – just don’t expect the magic bullets to arrive before 2030.

Bunkerspot magazine. Volume 17, Number 6, December 2020/ January 2021

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