The Eco Argument
A.P. Moller-Maersk CEO Soren Skou estimates that the upcoming restrictions on sulfur emissions could increase annual fuel costs for the shipping industry by over $50 billion. It's no wonder, then, that the demand for eco-tonnage is expected to grow.
Demand for eco-friendly newbuildings ebbed along with oil prices in 2015 and 2016, but the argument for such vessels is again strong given the current high-fuel price environment as 2020 approaches, says Stuart Nicoll, Director at shipping analyst firm MSI: “With a surge in marine gas oil prices built into the futures markets, on top of some recovery in the oil price, a return to prominence could be in the cards.”
However, there are counter-arguments to joining the rush to the newbuilding yards. “The solution to the sulfur cap has yet to crystallize,” says Nicoll, “and then there are CO2 regulations just around the corner that may seriously undermine the attractiveness of conventional tonnage with a 25-year lifespan. LNG has been touted by many, but this is not a viable industry-wide solution to lowering CO2 emissions. The trick is to invest in a newbuilding that is flexible enough to accommodate whatever fuels and technologies emerge.”
Rajiv Malhotra, Technical Manager at Thome Ship Management, says the capital investment required for emissions technologies is influencing orders: “New vessels are still not being proactively equipped for compliance where expense is high like it is for installation of scrubbers, selective catalytic reduction (SCR), exhaust gas recirculation (EGR), or burning unconventional fuels in dual-fuel or LNG engines. This is due to uncertainty about what solution will be most acceptable commercially and the reliability of new technologies in general.”
Thome is yet to take over management of a vessel installed with a scrubber, and Malhotra is not seeing scrubber installations being included in many newbuilding contracts even though installation at the shipyard offers a definite economic advantage over retrofitting: “Owners seem to be refraining from investing in scrubbers. They are relying more on the safer option of using compliant fuel with sulfur content below 0.5 percent.” And this is despite the fact that the price differential between low-sulfur fuel and conventional fuel cannot be forecast with any certainty.
“For complying with NOx Tier III emission limits,” he adds, “solutions such as EGR, SCR, dual-fuel engines and LNG engines are still not very widely installed. But we see owners considering these for future newbuilding contracts as more regions are expected to get added to the list of NOx Emission Control Areas.”
MSI is predicting a surge in newbuild activity and rising prices. The surge results from a combination of improved earnings, rising cargo demand from increased trade, low rates of fleet growth and a big step-up in scrapping. Higher prices are the result of rising shipyard costs that have escalated rapidly over the last two years and are projected to go even higher in 2018 before stabilizing over the period to 2021. In addition to surging orderbooks, forward cover (an assessment of the size of the orderbook against effective newbuilding capacity) is being boosted by ongoing capacity reductions.
MSI has already seen increased activity in the ordering of dry bulk, oil and LNG tankers, and Vitaly Chernov of PortNews says that after a long period of stagnation Russia has at last embarked on wide-scale construction of commercial vessels. Tankers have led the way with a series of 23 built by Krasnoye Sormovo shipyard and 14 by Okskaya Shipyard since 2010. The vessels are designed for mixed (river-sea) shipping of liquid bulk crude.
Orders at Japanese yards were up 150 percent last year compared to 2016 according to figures from the Japan Ship Exporters’ Association. Output in 2017 was 195 vessels totaling 9.45 million gross tons compared to the historic 2016 low of 3.71 million gross tons. However, Japanese yards face continued competition from China and South Korea.
That’s a concern for Koji Okura, President of Mitsubishi Heavy Industries. Speaking at Sea Japan in March, he noted: “China is using European partners to drive tonnage and raise quality, so has no reluctance in making aggressive investments. The quality of ships built continues to rise, and the industry is supported by national policy.” South Korea’s shipbuilders are also supported by public policy. “They have taken money from the government and are being aggressive in order to repay the investment,” Okura adds.
Japan made a notable eco-delivery this year when Kawasaki Heavy Industries delivered the world's largest MOSS-type LNG carrier, Pacific Breeze, in March (MOSS refers to the distinctive spherical-shaped LNG tanks, designed by Norway’s MOSS Maritime). The 182,000-cubic-meter-capacity vessel was delivered to “K” Line for use on the INPEX-operated Ichthys LNG Project in Australia. She is equipped with a Tri-Fuel Diesel Propulsion System that offers fuel efficiency across a broad range of speeds and fuels.
LNG vessels are a hot commodity, and South Korea's Hyundai Heavy Industries delivered its own MOSS-type LNG carrier to MISC Group at the end of April. The Seri Cemara is designed for worldwide operation and for loading from FLNGs (floating LNG platforms). Unlike other LNG carriers, the vessel and her four sister ships are built with an integrated hull structure that encloses and shields four separate spherical tanks to provide additional protection for the temperature-sensitive cargoes and ensure a higher degree of operational flexibility.
The vessel has been specifically designed to minimize hull resistance, increase propulsion efficiency, reduce power requirements and lower CO2 emissions. A pre-swirl duct and Propeller Boss Cap Fin together provide around four percent energy savings at design draft. Additionally, Seri Cemara has a SCR system fitted to the diesel generator to comply with the latest IMO Tier III requirements. She is powered by an Ultra Steam Turbine plant and can operate on extended low-load gas mode, meaning she can operate entirely on LNG.
Analyst firm Douglas-Westwood expects more than 150 new orders for LNG carriers between now and 2022 in addition to the 265 already scheduled for delivery as record numbers of carriers will be required to meet the increased LNG output expected by then. Korean shipbuilders will continue to dominate the market, says Westwood, with Daewoo Shipbuilding and Marine Engineering, Samsung Heavy Industries and Hyundai Heavy Industries accounting for 60 percent of the current orderbook.
Traditionally, the market for cargo vessels such as bulk carriers, container vessels and tankers is the largest and most important driver for shipbuilding internationally. However, Patrick Janssens, CEO of De Hoop Shipyard, sees the market today as a collection of many different markets, each with its own distinctive drivers and trends.
“Many shipyards changed focus and started to target the offshore oil and gas and also the renewables market,” he explains, “but this market suddenly collapsed two years ago with some devastating effects in various places. The outlook in this market is that it will recover in 2019/2020, but the many laid-up vessels will delay newbuild demand. When the larger markets are weak, then the yards that usually build standard designs are forced to enter into niche markets. Our yard has always been a niche market player, designing and building specialized one-offs in many different markets.”
The comparatively small and highly specialized market for cruise vessels, for example, has remained very strong. “We have been building quite a few river cruise vessels and have just contracted a seagoing expedition cruise vessel, the Celebrity Flora. We see many attempts from other shipyards to change and also enter such markets.”
Celebrity Flora is designed to reduce hull resistance by 25 percent and fuel consumption by 15 percent. The bow features a straight, wave-piercing stem with an integrated bulb at the waterline. This reduces wave resistance when in transit and saves energy when staying in position due to the highly efficient short bow thruster tunnel.
To further reduce her environmental footprint, the vessel will have an enhanced sewage plant to improve the quality and reduce the amount of wastewater, an improved HVAC system leading to 50 percent less energy consumption, and improved thermal insulation as a result of energy-efficient glazing. The vessel will also feature LED lighting and solar panels.
“No” to LNG
Celebrity Flora will not run on LNG. For Lisa Lutoff-Perlo, President and CEO of Celebrity Cruises, LNG is not the answer to the eco argument, and she should know because she also runs the Global Marine Organization for parent company Royal Caribbean Cruises. GMO oversees fuel efficiency, technology and compliance for the group's entire fleet including Celebrity, Royal Caribbean and Azamara vessels – about $30 billion in assets.
“We looked at it. We talked about it a lot. Right now we don't see any reasonable way to put LNG on our ships,” she say. “The availability of that fuel is quite scarce, so it doesn't make sense for us. The advanced emissions purification systems we are putting on board the ships are all about reducing our sulfur emissions.” – MarEx