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Horizons article 14 April 2021

Funding identified as key challenge in decarbonising shipping

  • Maritime energy transition
  • Digital transformation
Issue 57
Side of vessel, blue skies in the background.

A recent Watson Farley & Williams webinar, featuring speakers from DNB Bank, Shell, LR and MSC, highlights funding as a major challenge needed to pay for multi-trillion dollar process.

Christos Tsakonas, Global Head of Shipping at DNB Bank discussed the decarbonisation challenge facing international shipping at the webinar organised by WFW and specifically the thorny issues of who is going to pay for the multi-trillion-dollar process.

“The targets are extremely ambitious. We do not have an option to fail. And we need collaboration across all stakeholders.”

Christos Tsakonas

Global Head of Shipping at DNB Bank

Spread risk

Revealing that the bank would use its own balance sheet, he said that it would also use its expertise to structure risk and spread it between stakeholders. “We need to be prepared to share,” he declared. Following the launch of the Poseidon Principles, Tsakonas pointed out that for the first time, banks were now able to put a number on the carbon intensity of their loan portfolios. It was not a perfect tool, he acknowledged, but it was definitely a step in the right direction.

Katharine Palmer, LR’s Global Sustainability Manager. warned that a wait-and-see approach to the energy transition process would mean no chance of achieving the IMO’s ambitions. “Net zero by 2050 is the end goal but system transformation must begin now. The longer we leave it, the harder it will be,” she declared, warning of the danger of going down one fuel technology route to the exclusion of others, and pointing out that emissions do not relate only to carbon. The immediate challenge, she said, is to get to 2030 with a scalable option so that 2050 targets can be achieved. “Essentially we are looking at the transition pathways that are safe, sustainable, commercially viable and meeting society’s needs in terms of emissions,” she said.

Meanwhile, MSC’s executive vice president for maritime policy and government affairs, Bud Darr, warned owners to be careful what they wished for. They should consider the profile of customers through the lifecycle of their assets. Clearly this is particularly relevant for cruise lines, but Darr was talking in broader terms. “Think about your customer profile and what their needs, their values look like for the future,” he said, pointing out that younger people today have already think very differently to those in the older demographic. 

"Words are cheap, but people need to actually put their money where their mouth is."

Christos Tsakonas

Global head of Shipping at DNB Bank

Who pays?

This, unfortunately, boils down to money. From a business perspective, why would owners invest in technologies from which they would reap little or no benefit? If charterers are footing the bunker bill, as is the case under many charter contracts, any steps to raise fuel efficiency is a direct benefit to shipping’s customers, not the owners of ships that transport their cargoes.

Both MSC’s Darr and DNB’s Tsakonas referred to carbon levies, in whatever form they might take – either some form of carbon pricing, or an emissions trading scheme such as the EU has in place and in which shipping will soon be included. Darr sees some form of carbon pricing as inevitable if the industry is to take up alternative low- or zero-carbon fuels on the scale that is required.

Meanwhile, Shell’s General Manager for Commercial Shipping and Strategy, Claire Wright, says that funding the energy transition will require cross-sector commitment. And she stressed the need Words are cheap, but people need to actually put their money where their mouth is. Christos Tsakonas, Global head of Shipping at DNB Bankfor fuels to be assessed on a well-to-wake basis, rather than the shipping industry’s tank-to-wake metric. Pointing out that no alternative fuel currently being considered has an energy density equivalent to the hydrocarbons used in ships’ engines today, Wright also said that the operation of ships would have to become more efficient in the future. She did not elaborate on this but fewer and shorter ballast hauls, more efficient port calls, and voyage optimisation technologies are all relevant possibilities. Wright did not refer to the oil major’s recent commitment on VLCC charters, a timely example of cross-sector collaboration. Shell will sign seven-year charters for ten new LNG dual-fuelled VLCCs with three separate shipowners – Advantage Tankers, AET, and International Seaways. The vessels are believed to be costing about $100 million each, a premium of 10-12% on prevailing prices of conventional VLCCs.

What Katharine Palmer thinks

Speaking to Horizons after the webinar, Palmer questioned how many shipowners really understand ESG principles and their implications for funding new ships in the future. She highlighted and concurred with a comment from DNB Bank’s Christos Tsakonas’ that new ship finance models will be required, stressing that collaboration will be essential between parties including owners, charterers, builders, governments and, on a risk assessment basis, classification societies. 

She also stressed the importance of developing different fuels so that scalable options are available by 2030. “By then,” she said, “we must have completed R&D, pilot projects and operational trials to reveal how we can achieve the IMO’s 2050 ambitions. It is essential that we keep options open and don’t consign ourselves to one track that subsequently proves sub-optimal.”

Palmer emphasised the need to focus on operational innovation since none of the carbon-zero fuel options currently being considered will prove as efficient as those in use today. Their lower energy density is likely to require more storage space on board ship, or more frequent bunkering. Either way, there will be an impact on ship productivity. This, she said, would have to be compensated for by improvements in operational efficiency made possible by digitalisation, automation and real-time connectivity.

Classification societies have a vital role to play, she said, in supporting and assessing the risks of different fuel technologies. That is why LR has adopted a multi-fuel strategy of engaging in projects relating to all the fuel possibilities.

ESG rules, rather than IMO regulations, will nudge shipping to net zero