By Managing Director Brian Coyne, KPI OceanConnect
A succession of industry initiatives, such as the COP26 “Shaping the Future of Shipping” Conference, demonstrate the shipping industry’s decarbonization ambitions and commitment, however, it is important to recognize what can realistically be achieved now.
The industry cannot wait for new fuels to be available at scale before acting on its 2050 goals as regulatory timetables are forcing action. While some of the details may still be under discussion, the importance of reaching net-zero emissions by 2050 was key to discussions at COP26. The International Maritime Organization’s (IMO) existing target of a 50% reduction of Greenhouse Gas (GHG) emissions by 2050 came under fire.
Subsequently, at the IMO’s Marine Environment Protection Committee (MEPC 77), member states recognized the need to strengthen their ambitions. While decisions might not be taken at the IMO until 2023, existing regulations including the IMO’s Carbon Intensity Indicator and unilateral regulations such as the EU’s Fit for 55 legislation are forcing shipowners to act on decarbonization.
The fastest way to achieve results is through carbon offsetting. Carbon offsets enable emissions and CO2 output to be balanced with the purchase of an equivalent offset that funds certified projects that generate clean and renewable energy. It is a “now” and “then” strategy because it is also a way of supporting the scale-up of renewable energy projects that can lead to the production of zero-carbon fuels.
In July 2021, KPI OceanConnect demonstrated the path forward by completing its first carbon offset transaction with a respected seismic research vessel owner and long-term client. The voluntary carbon units were derived from a wind farm in Texas and verified by Verra Registry.
Shipowners moving to LNG or other transitional gray or blue fuels still need to consider their carbon footprint. While the carbon fuel coefficient (kg of CO2/kg of fuel) for fossil fuels is high at over three, for alternative fuels such as methanol and ethanol it is about half as much, which is still significant. When considering new fuels on a well-to-wake basis, their total emissions are greater still. Even the least carbon-intensive fuels such as ammonia need to be produced through green processes before they can be considered zero-carbon.
LNG has a lower carbon fuel coefficient than the liquid fossil fuels used in shipping but COP26 saw greater attention being paid to methane due to its high impact as a GHG gas. More than 100 nations have now taken the Methane Pledge to reduce methane emissions across the whole LNG supply chain.
Given these developments, we expect more ship operators to offset their fossil fuel use while new fuel availability is limited and in the medium-term offsets are likely to continue to be important because most new fuels will have some degree of carbon footprint for many years to come.
Looking ahead, we expect to see consolidation in the bunker supply industry as the transition to new fuels develops, although this development may initially increase the number of new suppliers and new source locations. While the large global bunker hubs, such as Singapore and Rotterdam, are already proactive in establishing the supply infrastructure for alternative fuels, not all ports will be able to offer the full range of products, while others may gain new status as key supply hubs.
Fuel security will be a key priority for shipowners and charterers going forward because the cost of alternative fuels is currently substantially higher. Moreover, availability and quality vary substantially by region.
Contract markets will likely be established initially for some of the new fuels due to limited availability and a lack of distribution infrastructure. This is likely to mirror the situation that played out during the 2020 Sulfur Cap transition, but it could take longer to return to business-as-usual.
TRANSACTIONAL TO PARTNERSHIP
Accurate forecasting will be nearly impossible with very few established precedents. There will be a rapidly changing portfolio of different fuels for shipowners to choose from and this will require financial and technical guidance from their counterparts. Digitalization will be key to success in this dynamic environment and our online marine fuels marketplace KPI AuctionConnect is at the forefront of this technology.
Robust risk management, access to credit and the swift handling of claims will continue to be important with new fuels in both the short and medium-term. In line with these challenges and increased complexities, fuel providers have a significant role to play and a clear responsibility to help shipowners and operators manage the transition.
This requires a real shift in the traditional, commoditized relationship that suppliers have with their customers; moving from a purely transactional approach to one founded on partnership, transparency and implementing custom energy strategies that meet a shipowner’s immediate needs, as well as planning for the future.