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Following the sulfur regulation implemented in 2020, the
International Maritime Organization (IMO) has introduced additional
measures to reduce the carbon intensity of international shipping.
Specific energy efficiency and carbon emission targets are set. The
global Very Large Gas Carrier (VLGC) fleet is expected to reach 339
by the end of 2021, and to be profoundly impacted by the IMO
regulations. The compliance situation varies from one ship to
another, but several ramifications should be expected, ranging from
drydock services in the near term, to potentially new marine fuels
over the longer term.
Acronyms, technical jargon, and real issues for the LPG
fleet
As part of the initial IMO Greenhouse Gas (GHG) Strategy, which
aims to reduce the carbon intensity of international shipping by
40% by 2030, and by 70% by 2050 compared with a 2008 baseline
level, IMO's Marine Environment Protection Committee (MEPC) has
adopted amendments to the International Convention for the
Prevention of Pollution from Ships (MARPOL) Annex VI. The latest
regulations take on the technical and operational approaches.
To improve energy efficiency for new buildings, IMO has
implemented the Energy Efficiency Design Index (EEDI) promoting
energy efficient equipment and engines since January 1, 2013, and
this is poised to be expanded into existing ships based on a
required reduction factor to the EEDI baseline, bringing the
standard of energy efficiency level of existing ships to current
new buildings.
Under the new measures, all ships of 400 gross tonnage (GT) and
above will be required to have their Energy Efficiency Existing
Ship Index (EEXI) calculated with certain requirement of
improvement in energy efficiency varying by the size and type of
ships. For gas carriers, ships of 10,000 deadweight tons (DWT) and
above are required to have improved their technical energy
efficiency by 30% versus a 2013 reference line and each ship is
required to have achieved the required efficiency level to get
their one-off International Energy Efficiency Certificate re-issued
at their first ship survey on or after January 1, 2023. Failure to
meet the required standard would lead to the vessels unable to be
used for international trade.
IMO's latest amendments also include ships' annual operational
carbon intensity indicator (CII), based on actual fuel consumption,
amount of CO2 emitted over distance travelled. The CII determines
the annual reduction factor needed to ensure continuous improvement
of the ship's operational carbon intensity within a specific rating
level.
Each ship will get the operational carbon intensity rating on a
scale - A, B, C, D, E with A indicating a major superior, and the
remaining grades indicating minor superior, moderate, minor
inferior, or inferior performance level. A ship rated D for three
consecutive years or E for a year is required to submit a
corrective action plan to show how the required rating - C or above
- would be achieved.
In simple terms, a ship running on a low carbon fuel clearly
gets a higher rating than one running on high carbon fuel. The
first rating will be given to each ship in 2024, based on the CII
of the ships recorded in 2023, with a 5% improvement required
versus the 2019 baseline figure. In practical terms, the race is
already on. After 2023, ship owners must seek ways to improve CII
of their ships constantly, as a 2% incremental improvement is
required each year through 2026 to meet the 11% carbon intensity
reduction target for international shipping for 2026, versus 2019.
According to the IMO, this is aligned with the sector-wide carbon
intensity reduction of 40% between 2008 and 2030, on its way to a
70% cut by 2050.
What does this mean to the VLGC fleet?
The question is how many VLGCs are currently compliant with the
new regulation that is to come into force on 1January 2023.
Unfortunately, this is not clear as each ship's EEXI will need to
be individually calculated by ship owners. Overall, older ships
will have harder time complying with the stringent new
regulations.
Increased shipyard services
The reduction factor described above, 30% under the EEXI amendment,
could be even higher for the vessels built before 2013. The number
of VLGCs currently in operation that were built before the timeline
is 134. The year 2020 ended with 312 VLGCs (including
ethane-carrying ships) with capacity of 73,000 cubic meters and
above. When the regulation comes into force in less than two years,
many VLGCs will rush into shipyards to make improvements to their
energy efficiency. Most common modifications will be installation
of energy saving devices, or to install Engine Shaft Power
Limitation (ShaPoli) and/or Engine Power Limitation (EPL) system,
which is used to lower the maximum speed of the vessels.
A division in the VLGC fleet
Operating vessels at such low speed could hamper economics of the
vessels, especially on a chartering basis, as the vessels will make
a smaller number of voyages during the duration of chartering
contacts than when the vessels could be operated at faster speed.
This could lead to a flurry of sales of older VLGCs in near term,
instead of expending capital to improve their vessels' energy
efficiency.
Alternatively, this could also trigger vessels with lower speed
to be placed in the East of Suez, mainly in the Middle East-India
market, a route on which faster speed is less likely required than
in West of Suez, which is mainly supplied by US LPG exports.
Another impact of the potential deterioration in vessel
operating economics could include a steep decline in chartering
rates of the less-ideal ships and could even drive them towards
earlier-than-expected retirements, which could make the pool of
VLGCs smaller.
Currently, the number of VLGCs (including ethane-carrying ships)
with capacity of 73,000 cubic meters and above is expected to hit
339 by the end of this year and will be topping the 400 mark as
2023 closes out, if no scrapping of the vessels occurs by then.
Potential new low-carbon fuel to the rescue over longer
term
There is a clear shift toward dual-fuel engines in the LPG shipping
market to comply with IMO's strengthening environmental
regulations, as the number of VLGCs using LPG as a fuel continues
to increase (see Figure 1).
Figure 1
The questions remain: how far into the future will vessels with
dual-fuel engines stay compliant? What happens after 2026? The
shipping industry is expected to continue to face more stringent
regulations from IMO. Potential candidates for long term policy
changes include introduction of a hefty carbon tax to encourage
greener alternatives such as hydrogen and ammonia.
Active research is being conducted for the use of ammonia -
combination of nitrogen and hydrogen -- as marine fuel. Ammonia is
liquefied at -33°C, so it can already be transported on
LPG-carrying vessels, while hydrogen requires -253°C for
liquefaction. However, product availability of ammonia remains a
concern, as production is also needed for agricultural
fertilizer.
Annual fuel consumption in sea transportation sector is
estimated at about 300 million metric tons (MMt). To replace 1
metric ton of marine gasoil, 3.3 tons of liquid ammonia is required
owing to its lower energy density, meaning that replacement of 25%
of marine fuel demand at current level with ammonia requires 240
MMt of ammonia. Total 2019 global ammonia demand stood at 187 MMt,
according to IHS Markit data.
The speed of advancement in technology will need to keep pace
with tighter regulations by IMO going forward. With rapid
tightening of regulations expected to continue over the coming
decades, research efforts will need to remain robust. IHS Markit
expects that the global shipping industry will continue to fund
these efforts, which could accelerate a technological breakthrough
in the shipping industry and lead to a global marine sector that
looks very different from that of today.
Gain greater insight into global and regional ethane and NGL
markets with IHS Markit Midstream Oil and NGLs research. Learn more here.
Posted 02 September 2021 by Charles Kim, Senior Journalist, OPIS by IHS Markit and
Yanyu He, Ph.D, Executive Director, Natural Gas Liquids (NGL) Research and Consulting, IHS Markit
