What price innovation?

Now that ‘eco’ can no longer conveniently conflate the notions of ‘ecological’ and ‘economical’ design with one short prefix, what kind of innovation picture are we facing overall?

This is a decoupling that has been prompted by the rocky oil prices. The lows have taken the figures to something not seen in a decade and, while there’s a general belief that the prices will recover, it is also accepted they will fall short of a complete comeback, at least for now. When pushed, David Bull of RHDV said his ‘gut feeling’ is for a price around $80 for the medium term – well short of the huge spike of recent years but still respectable enough for much of the US fracking sector to keep going. This is despite what some see as Saudi efforts to keep US gas out of the market by artificially keeping the price too low to make it worthwhile.

So, how will it affect innovation? First, closely entwined with the oil production itself is the very high-tech North Sea offshore support sector. The demands of the region with its harsh but comparatively shallow waters has been driving development forward for the last four decades, especially in Norway, where some of the costs were met by the Norwegian NOx fund: this did a great deal to put environmentally-friendly offshore support craft on the agenda.

However, Mr Bull is honest: “Many chartering companies want to have a poster-build that catches the headlines while still operating older, less technically-advanced vessels.” He added that for these relatively few, high-tech designs to filter throughout the main body of the offshore fleet would in normal circumstances take a decade or two as these are not generally particularly old vessels – unless governments start putting up cash to spur it on.

However, this trend has slowed even more with the need to cut back and Clarksons, for example, has pointed out that worldwide, the number of new offshore support construction contracts dropped dramatically last year, with fewer than 300 vessels across the sector being ordered by the final quarter. More bad news followed as Island Offshore dramatically slowed its newbuilding programme and recently two PSVs presently under build at one of Vard’s yards were orphaned when affiliates of ER Offshore filed for insolvency.

Even so, it’s far from an even effect and other segments are differentiated by their own drivers. “For example there’s been a growing split in the tanker market since the breakup of the Prestige in the Bay of Biscay. Top charterers don’t want a vessel over five or ten years old, as they are seen as inherently more problematic,” he explained. “It’s not so much about an appraisal of fitness for purpose, but more about the charterers knowing they simply can’t risk bad publicity.”

Despite this, a report from Oil & Gas UK pointed to both steep falls in investment in the North Sea and rising costs which reached a record £18.50 per barrel last year: some have claimed that these costs needs to be dropped by around 40 per cent to make it worthwhile to take this market forward. Which means a certain amount of cutting back on the prototypes and making the most of the innovation investment already put into the region.

At the same time the Norwegian industry is faced with a scaling back of the NOx fund: it was never supposed to be an infinite source of support, explained David Bull, but rather an initiative tailored to ‘spur on’ development until such time as the builds were commercially viable. Now that it is being lowered it could further impact Norway’s research and devlopment hothouse.

Unfortunately the raison d’ etre of Norwegian and, to a lesser extent, other North European offshore vessel designs is high-tech innovation, not cheap economies of scale. You can take any one of a number of support ships to see this in action: from the undisputed queen of progress, the test-bed ship Viking Lady to the more recent, battery hybrid Havyard 833 WE ICE, without forgetting the huge (and hugely expensive) Well Intervention Vessels that have been built to help squeeze the last drops out of older, harder-to-work oilfields.

Changing drivers

But, said Mr Bull, “it’s not all about the oil price anymore.” He pointed out we haven’t had consistency in this particular market since 2005, as it ramped up all the way to 2008, then fell, then rose again “which has done a lot of damage to the global economy,” he concluded.

“If we get more stability, then that will do a lot to allow the entry of cutting edge technology,” he said. “Shipowners tend to be very conservative, but if the charterers want an environmental message to get out there, the owners will build a ship to suit – if, and only if, there are long enough charter contracts to support it.” As these long-term contracts only blossom in a predictable environment, a less heated, more sustainable oil market will be a good thing according to Mr Bull.

Luis Benito of Lloyd’s Register added that the oil price is “largely to do with geopolitics rather than directly only supply and demand,” but beyond the energy sector itself, “the pace of innovation is not affected so much by the dip in oil revenue as research tends to work with much longer horizons”. For example, gas fuel research is still ongoing as some clients “are still pushing the boundaries on elements such as the cryogenics, location of the gas tanks and containment systems,” asserted Mr Benito.

Both Mr Bull and Mr Benito agree that the environmental agenda is playing an ever-increasing part. Mr Benito explained that if this round of regulations on the oil trade between Venezuela and the US (that spend most of their time in ECAs and if the Caribbean) follows suit, then this trade will be totally encompassed by the regulations. “Then again,” he said, “we are all watching to see if China will make a move toward emission control areas: there are always rumours but if it was to happen, it would be a game changer and affect a large proportion of the global fleet.”

Looking over the narrow margins suffered by worldwide shipping in general leaves, the question of competition inevitably springs to mind. The fall in oil price may be carrying the cost of LNG down with it – at present – but bulk, box and tanker vessels are still seeing around 40 per cent of their running costs eaten up by fuel said Mr Bull. Given that the difference in upfront investment between LNG and traditional builds will probably close up once more people start ordering them and economies of scale kick in, “then if LNG prices remain competitive, even a few per cent on the OPEX savings might look attractive enough to spur on traditional vessels’ take up of LNG as fuel,” he concluded. That, however, is quite a big ‘if’.

There are, he said, a number of factors playing to an extremely dynamic situation, not least of which is the US frack gas bonanza. He explained that, while America is getting ready to take advantage of the cheap, low-emission fuel source, it remains to be seen what will happen when the gas enters the open market – if it’s bought up on long term contracts by Japanese and South Korean or Brazilian companies to fulfil a domestic supply, then it might force the price up. “The only way for the bunker market to compete against these much larger interests is to get underway with bunkering vessels that can put in for a reasonably-sized contract themselves,” said Mr Bull.

Mr Benito added that, until there’s more certainty about the price of gas, then we may see more ‘LNG-Ready’ ship designs than fully-fledged gas engine installations: ships future-proofed against the time when perhaps the balance tips and running on LNG makes solid commercial sense.

Further, “there is no real clarity yet whether the total costs of running LNG will get to parity with the new generation of low-sulphur fuels - which will make a difference inside the ECAs – or whether it could eventually compete with HFO for deep sea routes,” said Mr Benito.

This lack of clarity itself may, in turn, generate an interesting picture with some unanticipated implications for the future. “We are now looking at a mixed scenario. There are already ships adopting gas propulsion, but equally some vessels are now looking at switching to ultra-low sulphur fuels – and there’s strong interest in producing these as an alternative to MGO,” said Mr Benito.

He added: “The more time that passes with these twin scenarios running in parallel, the more time the industry will simply get used to adapting to both, and the less we will see a wholesale changeover one way or another.”

As both have their challenges – gas is still not widely available for example and isn’t traded at a standard price while low sulphur fuels won’t answer the full emissions picture - innovation then will settle down and start to make the most of the differences, potentially broadening the gap further while divergent business cases develop around them. MP