Op-Ed: Cutting fuel costs at the source

Written by Heather Ervin
Per Funch-Nielsen. (Credit: AuctionConnect)

Per Funch-Nielsen. (Credit: AuctionConnect)

By Per Funch-Nielsen, Director, AuctionConnect

The pathway for decarbonization in the shipping industry has been laid out by the IMO, providing clear objectives and checkpoints along the way. The global industry regulator has set a goal of net zero-emissions from ships for around 2050. Indicative assessments of progress require the industry to achieve at least a 20% reduction in emissions compared to 2008 levels and striving for 30%, and a 70% reduction against 2008 levels by 2040, striving for 80%.

The energy transition will be complex, costly and demand significant resources from shipping and individual owners and operators. Existing approaches to managing fuel costs focus on clean technology and vessel optimization to drive efficiencies and reduce fuel consumption, however, organizations need to also look more widely at solutions that can help them to better manage how they procure fuel and minimize the cost-per-tonne of fuel “at source.”

No single technology or fuel is going to deliver the shipping industry to a net-zero end goal, and the sector is rightly exploring all areas to develop a sustainable pathway to lower carbon intensity. Critically, the development, supply and usage of zero-carbon fuels across the sector will be essential to meeting the objectives set by the IMO. However, the challenges faced along the marine energy value chain to develop and adopt the infrastructure and technology to support low-carbon fuels will be long and complex.

The future of marine energy will also be multi-fuel; increasingly common solutions include LNG, biofuel and methanol in the short to medium term, while the use of ammonia and hydrogen offer alternatives for the future. However, availability of these fuels are low and shipping faces competition for supply from other advanced sectors. Crucially, when they do come into the market, they will also be exponentially more expensive than current fuels, which will significantly impact their widespread uptake. When the Maersk McKinney Møller Center for Zero Carbon Shipping looked into the cost of future fuels, it concluded that bio-derived fuels would be at least 2.5 times more expensive than their fossil-fuel alternatives. Differences in energy density between alternative fuels and fuel oils exacerbate this difference in price.

Fuel bills are already the major constituent operational cost for ship owners and operators and they face the continual commercial imperative to reduce them, a force that will only increase with the switch to alternative fuels. However, alongside the focus on technology, owners and operators are missing a major opportunity by overlooking efforts to reduce the cost of fuel at source—before it is bunkered on a vessel—by using digital technology in their procurement practices. Online auction technology can reduce complexity, increase transparency and reduce the cost of procurement by ensuring fuel buyers secure the best prices.

AuctionConnect hosts reverse auctions for bunker fuel, in which buyers invite suppliers to bid against each other to offer the lowest price they will accept for fuel on a per-tonne basis. Putting supplier selection in the hands of the buyers provides reassurance that they are dealing with suppliers they trust. The automatic auction process, which lasts around 20 minutes, saves fuel buyers and suppliers significant time in back-and-forth negotiations. The AuctionConnect marketplace is a simple browser-based tool that can easily be integrated into existing procurement team processes alongside the continuing digitalization of information across the bunker procurement process by organizations, from fuel analyses to BDNs. Crucially, it does not require additional upfront capital investment (like clean technologies) or resource intensive redesign of existing software systems.

What is needed from procurement teams is a change in mind-set. The usual methods of fuel procurement involve time consuming outreach by buyers to suppliers to request quotes, efforts to gather information from different suppliers in one place, and then further rounds of email or phone conversations to respond to the information and negotiate an acceptable price. Automated online auctions allow a buyer to see all supplier bids in one place, cutting the time needed by buyers to manage the bidding process. The auction process also allows suppliers to see the value of the bids made against them—without revealing bidder information—and provides time for them to submit new offers when they are outbid. This level of transparency not only ensures buyers can secure the best possible price, it also assures bidders that they are competing in a fair marketplace.

Relationship building is an important part of the bunker procurement process, trusted relationships between buyers and suppliers help to ensure bunkering operations run smoothly. Supported by digital tools that make it easier to monitor fuel quality, distribution, delivery and usage, trusted relationships remain a vital part of the sector. The use of digital procurement tools does not diminish the value of relationships either. The AuctionConnect platform includes a messaging system that allows buyers and suppliers to communicate directly with each other, and through the buyer selection of suppliers, underpins the importance of trust in the relationships.

AuctionConnect has seen significant savings for our platform users in the cost of fuel; for example, identifying savings of US$6.80 per tonne compared with Platts rates on all fuel fixed on the platform over an 18-month period to end of 2024. The energy transition will demand careful and efficient allocation of resources by owners and operators and fuel will continue to be the major element of their operational costs. By using digital tools to manage price negotiation and secure the best possible price they can, owners will be able immediately impact the cost of the energy transition for their organizations.

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