Fuel, Propulsion, Emissions & the Decision to Scrap or Refit
When the maritime history books are written, 2020 will be viewed as a year of pivots, re-invention and new paradigms. By February 2020, concerns about marine fuel’s sulfur content quickly shifted to near-term disruptions induced by the COVID-19 pandemic. By mid-year, with demand recovering, the conversation turned to longer term questions surrounding the moves towards reduced maritime carbon emissions and alternative fuels. How will this all impact the current fleet?
Perhaps the most extreme reaction to the shifting landscape is the ongoing “pivot” of Scorpio Bulk (NYSE: SALT), an operator of mainly owned drybulk carriers, which has the intention to sell its entire fleet of Ultramax and Kamsarmax bulkers, and invest the proceeds in Wind Turbine Installation Vessels (WTIVs). While the bulk carrier market chugs along, with occasional short-lived upward spurts, forecasts point sky high for offshore wind demand in the 2020s. As of mid-December, 2020, SALT had sold nearly two dozen vessels (for prices between $16 - $20 million each), which would leave a fleet of 32 ships either owned, or on long-term leases, and five ships operated under time-charters. The vessel sales, to be completed by end 2021, will result in a staggering write-down on vessel disposals approaching $500 million; as its mid-2020 fleet of 55 vessels had aggregated 3.2 million dwt. Scorpio Bulk had announced, in late September, its intention to finalize an order for one WTIV from South Korea’s Daewoo (DSME) to be delivered in 2023, with a price tag estimated at $265 million to $290 million, and options in place for an additional three vessels. From an investment standpoint, betting the whole ranch on renewables may be a savvy move, writedowns notwithstanding.
“Offshore wind capacity is growing rapidly in existing and new markets, supporting increased wind turbine installation vessel demand. As demand grows, the average project size is increasing, from around 100MW average farm size 5 to 6 years ago to around 600MW by 2025,” according to Philip Lewis, Director of Research, World Energy Reports (WER). “This growth is more easily achieved with larger turbines, increasing from 4MW turbines on the largest utility scale wind farms in 2014 to 9.5MW in 2019. By the end of 2022 installations of turbines of up to 14WM will be underway. These turbines require heavier lifts of more than 1,500 tons to higher heights from 125-150m. Further, we expect 160 to 180m lift heights for the next generation 20MW+ turbines before the end of the decade.” According to Lewis, much of the current Wind Turbine Installation Vessel (WTIV) fleet was not built with these new-generation turbine in mind. Outside of China, WER see 9 WTIV capable of lifting the 10MW and up wind turbines and of these only two are currently capable of lifting 14MW turbines, but these will be joined by a further five vessels currently being built or modified by 2023 and a further four by the middle of the decade.
“Growing overall demand and growing local content market demand will provide potential supply side opportunity for new building, conversions and upgrades, but we also caution against speculative new builds that are not aimed at specific markets, projects or turbines,” Lewis said.
“Much of the current Wind Turbine Installation Vessel (WTIV) fleet was not built with the new-generation turbine in mind. Outside of China, World Energy Reports sees 9 WTIV capable of lifting the 10MW and up wind turbines and of these, only two are currently capable of lifting 14MW turbines. These will be joined by a further five vessels currently being built or modified by 2023 and a further four by the middle of the decade.”
Philip Lewis, Director of Research, World Energy Reports
- The Fuel Conundrum
Paradoxically, confusion about fuels may have salutary impacts on shipping markets in the coming years. Those analysts that were putting positive outlooks on dry bulk (with coal volumes shrinking) and tankers (with oil flows severely battered by 2020’s demand destruction) have cited a possibly lower supply of vessels, with scrapping of older ships and, importantly – a reduction in new vessel orders – because of uncertainties about future regulations surrounding fuels. Uncertainty abounds, leaving some owners watching from the sidelines. For example, in an investor call detailing Q3 2020, in response to a question about ordering newbuild ships:
- Trygve Munthe, co-CEO of Double Hull Tankers (NYSE: DHT, an owner of 27 VLCC’s, many on charter to oil majors), told investors: “…we’re not there to do anything at the moment in terms of renewing or expanding the fleet… we’re on the fence for now. Propulsion is certainly one issue.” His co-CEO, Svein Moxnes Harfjeld, in response to another analyst question on fuel choices, offered a detailed shipowner view: “Propulsion is certainly a very important component when we make these considerations. But we think that the conventional technology is able to …meet the targets that we set out for 2030. But there could still be improvements to be made on not just main engines, but also auxillaries and other sort of aspects of being more energy efficient on more of the ships. We do not think that dual fuel is the way to go. We think it might be sort of a short-term fix. It’s a basic technology.”
Harfjeld, who has worked at shipping companies including Klaveness and Mitsui OSK, brought up the issue of obsolescence, which looms large in any owner considerations, saying: “But the …proposition in – the way the market works is that the ship owner will take the residual value on that technology maybe already being outdated after five, six, seven, eight years. So, to make such a big CapEx commitment up front without having anybody to sort of support it with income, we don’t think that’s a good investment decision practice. So, from that regard, we’ll wait.” In discussing future fuels like ammonia, he said: “…there’s still a …lack of clarity, if you like, and not really something available for these type of big ships just yet. So, that we think is something to come maybe way down the line.”
MOL’s Gas Agility is the world largest LNG bunkering vessel with 18,600 cu. m. tanks. Capable bunkering vessels lie at the heart of LNG expanding its presence as a marine fuel globally. Photo: MOL
- Fit for Refit?
Energy efficiency on existing ships can be achieved through retrofitting, which can offer efficiencies that go way beyond “slow steaming,” usually in response to weak hire markets (but with environmental benefits). In a recent webinar, consultants Marsoft Inc. suggested that 18,000 bulkers, tankers and containerships (typically 5 to 15 years of age) could be the subject of retrofits, a market that could be worth $12 to $16 billion. Using hypothetical economics for a 2004 built Supramax bulk carrier, the consultants economic model suggested that a package of hull, propeller and engine retrofits could eliminate nearly all of the fuel consumption inefficiencies compared to a 2017 vintage vessel.
On the same webinar, Wärtsilä provided detailed economics on carbon reduction actions (including digital upgrades, flow devices, and improvements for existing two-stroke engines), using the case study of a 2011 built MR tanker, in the context of the Average Efficiency Ratio (AER), a carbon intensity measurement integrated into European Union annual reporting requirements. Importantly, financial institutions, notably those members of the Poseidon Principles consortium, look closely at this measure when gauging compliance with decarbonization targets over time. Another measure, Energy Efficiency Operational Indicator (EEOI), which differs slightly, will be the numeraire for another important program: Sea Cargo Charter, where top bulk cargo providers will seek vessels with better carbon intensity ratings. In its MR tanker example, Wärtsilä estimated that a $970,000 retrofit package would improve daily earnings capability by nearly $1,000/day, raise the net asset value by $2.1 million, and extend compliance with Poseidon Principles metrics by 6.7 years, enabling more attractive financial pricing than if the vessel did not meet the requisite AER targets.
In conversations about fuels, Liquified Natural Gas (LNG) now has a place on the map as a solution for reducing carbon emissions in the broader maritime fleet (beyond specialized LNG carriers- which can consume boil off gas, from their cargo, as a fuel) well out into the future, at least part of the way to 2050. As the fueling infrastructure has grown, LNG fueling is now being taken up more broadly. In the container sector, where voyages follow standard routes, LNG took hold. In the U.S., Crowley and Tote’s Florida/ Puerto Rico trades are both served, with each company having a pair of gas fueled vessels, from an LNG fuel hub in Jacksonville. CMA CGM is building nine LNG fueled 23,000 TEU containerships in Chinese yards (in addition to chartering in several smaller gas-fueled vessels from tonnage providers), and has fine-tuned its fueling infrastructure in concert with the oil major Total, a leader in the LNG sector. As 2020 was drawing to a close, Hapag Lloyd announced that it would spend $1 billion on six dual fueled (LNG and conventional marine fuels) containerships of 23,500 TEU to be built at Daewoo, with 2023 deliveries. Fueling of vessels has also led to growth in the fleet of barges or small tankers to deliver LNG to vessels; oil giant Total, for example, has been supplying fuel to CMA CGM vessels in Rotterdam using the world’s largest LNG bunkering vessel, the 18,600 cu. m. capacity Gas Agility.
In the tramp trades, a number of LNG-ready vessels had been built to handle LNG as a fuel; NASSCO, for example, delivered eight 330,000 bbl. tankers (with a Daewoo design) to American Petroleum Tankers (part of Kinder Morgan NYSE: KMI) and a Seacor (NYSE: CKH) joint venture, capable of retrofits at a later date. But with more confidence in fuel availability, the tide is turning, even for ships on irregular routes. In 2019, the Greek owner Capital Shipping and Trading (Marinakis) was hinting at an order for multiple LNG fueled VLCCs at the Hyundai yard, though it was not clear if this came to fruition.
The Sea-LNG consortium, a group promoting LNG fuels for ships, and a member roster including TOTE, Total and two dozen others, pegged the gas fueled late 2020 fleet at 175 ships on the water, with 232 on order. The LNG-ready fleet totaled 232. In a November, 2020 webinar, Sea-LNG’s General Manager, Steve Esau, made the case that investment modeling showed that fitting vessels for LNG fueling provided “…the best return on investment (ROI), on a net present value (NPV) basis, over a 10-year time horizon…” with “relatively fast” payback periods. In a December webinar concerning the Poseidon Principles first year results, Société Générale shipping banker Paul Taylor, the Poseidon consortium’s Vice Chair, stressed the importance of retrofitting vessels, saying: “It’s not all about investment in new tonnage ... there are plenty of things that one can do with an existing portfolio.”
The business case for growing with refitting existing ships (rather than building new vessels with reduced emissions) is a very real concept. In mid-December, the Oslo-listed BW LPG (controlling 46 gas carriers, and part of the much larger BW Group, which has a large stake in DHT) announced that it would be refitting three vessels with MAN two-stroke engines with a “dual fuel” capability to burn LPG. All told, BW LPG would be retrofitting 15 vessels with MAN LG-IP engines. According to MAN Energy Solutions: “The vast majority of current orders for LPG carriers over 30,000 cu. m. are with ME-LGIP technology, enabling these vessels to use their own cargo as fuel in the future.”
For the BW LPG 15 vessel retrofitting program, Wärtsilä has been designated as the system integrator, which involves not only installation of its LPG Fuel Supply System (LFSS) system, but also the required ship design modifications. According to Wärtsilä’s description of the LFSS: “ The LPG fuel tank(s) is loaded through dedicated bunkering lines, or in case of a LPG carrier reloaded from the cargo tanks. From the fuel tank(s), the LPG is conditioned and prepared as fuel. A system consisting of pumps and heat exchanger is used to supply the engine with a stable and reliable fuel flow, at the correct pressure and temperature.”
Vessel modifications need to be financed. In mid-December, BW LPG announced its intention to acquire 39% of the equity in Navigator Gas, another listed owner of LPG vessels, from investment funds tied to WL Ross & Company. At the same time, Epic Gas, a company in the BW orbit, announced that it would be joining forces with Lauritzen Kosan, adding 34 pressurized LPG carriers, in a $900 million deal anticipated to close in early 2021. Regulatory filings showed BW LPG also taking a stake in Avance Gas, another owner in the sector. Transactions of this type are a prelude to further consolidation in the sector, and among shipping companies generally, which, in turn, will enhance owners’ ability to raise capital to fund refits, initially, and new construction later as new fueling alternatives are proven out.
Battery power has also emerged as a real solution to carbon reduction, usually as part of “hybrid” solutions in conjunction with main engines powered by fossil fuels. Because of their recharging profile, batteries are suitable for short sea transits, or coastwise or intra harbor segments of longer voyages. They are also used in the OSV sector to supplement main engines running at high loads, and also to power vessels holding in place with dynamic positioning. “Hybrid” solutions continue to make inroads into OSV’s. In the North Sea; Eidesvik Offshore has retrofitted multiple diesel electric vessels for battery power beginning in 2015. Another environmentally-minded OSV owner, Seacor Marine Holdings, had retrofitted a diesel electric “SEACOR Maya”, working for Pemex in the Gulf of Campeche, with a battery solution, at Bollinger’s Morgan City yard in Spring, 2018.
In November, 2020 the Brazilian operator Companhia Brasileira de Offshore (CBO, a listed company with a stated intention to reduce its emissions) has announced plans to fit its PSV CBO Flamengo, an Ulstein design built 2012 working for Petrobras, with a battery pack as part of the installation of the “Wärtsilä Hybrid Solution.” The install, set for the first half of 2021, will gain a DNV “Battery Power” notation. Now, the U.S. OSV operator Harvey Gulf Marine, owner of five DP- equipped dual fueled PSVs (low sulfur diesel and LNG), is moving to “tri-fuel”, supplementing the fossil fuels with a Wärtsilä Energy Storage System (ESS), which includes a 1,450-kW lithium ion battery. One vessel, Harvey Energy, working for Shell in the Gulf of Mexico, has already been fitted with ESS; four sister vessels are to be fitted during 2021 and into early 2022. According to Wärtsilä, “When stationary in the field or in port, the boats will be able to operate on battery power only, greatly reducing both fuel consumption and exhaust emissions.”
ABS, which has now introduced its “ESS-LiBATTERY” notation, describes tri-fueled vessels as “…shaping the future of sustainability.” Paradigm watchers may well agree.
