Jan. 29, 2021
The International Maritime Organization (IMO) is calling for a 40% CO2 intensity reduction by 2030 and a 50% Greenhouse Gas (GHG) reduction by 2050 and we are seeing owners, charterers and other industry players initiating company-specific governance policies and analyzing investment initiatives into new engine designs and other technologies to meet IMO targets.
In 2011, the IMO agreed on a design standard known as Energy Efficiency Design Index (EEDI) to apply to new ships built from 2013 onwards. The baseline is the average efficiency of ships built between 1999-2009, measured by gCO2/ton-mile. Currently, the EEDI is in Phase 2 and the mandate is that ships built between 2021-2025 are required to have a design efficiency at least 20% below the baseline.
Figure 1 – IMO Regulatory Development
Source: McQuilling Services
Fleet renewal programs require a careful examination of engine designs by shipowners to ensure compliance with EEDI requirements and future IMO regulatory hurdles. Concurrently, shipowners need to measure the investment attractiveness each solution offers. Among the more topical solutions being considered is the LNG Dual-Fuel engine design, which has been priced at around US $15.0 million for VLCC tankers. This solution significantly reduces the carbon footprint; however, a byproduct of its utility is methane, a harmful Greenhouse Gas. The IMO, at present, has a 2050 target to reduce GHG emissions by 50%, which would make today’s orders for this design acceptable solutions in this regard.
However, basis the US $15.0 million capex required, our analysis of energy efficiency metrics reveals that the 18% improvement LNG Dual Fuel engines offer versus conventional engine designs, yields only a modest 3.2% return on investment in today’s bunker pricing environment. A such, we are skeptical this solution will gain widespread adoption from owners at current pricing and predict that the cost of the LNG Dual Fuel design engine will be reduced by as much as 33% to incentivize investment. Herein lies a challenge in that by the time production efficiencies lead to the necessary cost reduction, owners will need to ensure that the “methane slip” issues will not interfere with the 50% GHG target the IMO has set for 2050. It is likely that a window will open, where both investment attractiveness and regulatory compliance are aligned, but we think this window will be relatively small. Instead, we would argue that the industry continue to focus on developing other alternative fuels including ammonia as more viable long-term solution to reducing greenhouse gas emissions.
Read more about decarbonization and other topics at our just published 2021-2025 Tanker Market Outlook.