Consultancy highlights that those in the industry who believe commitments to cut carbon emissions will be achieved need to prepare for a radical transition
The decarbonisation of global energy supplies to address climate change will have radical implications for the global shipping industry. If the Paris Agreement goals are met, the fossil fuel cargo base shipping serves will undergo an aggressive and prolonged transformation.
The consequences for shipping markets of a major shift in energy consumption away from hydrocarbons and towards renewables and biofuels is the subject of Carbon Carriers, a report prepared by Maritime Strategies International (MSI) on behalf of the European Climate Foundation.
“While some sectors of the shipping industry, such as container ships, would be virtually unscathed, those for which hydrocarbons comprise a significant proportion or all of the cargo mix would undergo decades of falling demand,” says MSI director Stuart Nicoll.
“The results, detailed in the report, would be multi-decade declines in fleet capacity, earnings and asset prices across the affected sectors. Shipowners would be forced to slash new ordering and scrap uneconomic vessels.”
MSI’s shipping market modelling systems enable analysis of how changes in energy demand would affect inter-regional commodity trade flows, the associated shift in required shipping capacity, industry earnings and asset prices across all segments of the shipping industry.
The analysis projects two demand frameworks – ’reduction’ and ’reference’ – designed to provide broad narrative and structure to long-term global energy demand.
Global energy consumption in the reduction scenario is largely based on projections made for pathways consistent with limiting warming to 1.5°C above pre-industrial levels, as described in the Intergovernmental Panel on Climate Change (IPCC) SR1.5 report. The reference scenario is designed to provide a comparison to reduction. Although it describes a more limited change in the global energy consumption profile, reference still incorporates substantial restraints on future energy consumption.
The more extreme reduction scenario is the focus of the report, under which fossil fuel demand sees radical decline over the next three decades. By 2050, world coal consumption falls by 80%, oil consumption halves, and gas demand drops by about a quarter.
Under the reduction scenario owners would need to re-assess investing in the next generation of tankers. The oil tanker market is most exposed to the low carbon transition as its entire cargo base is made up of fossil fuels. Overall, MSI’s models suggest that under the reduction scenario, tanker demand would fall by slightly more than a third.
The destruction of demand has significant ramifications for owners and financiers of vessels. It would hurt fleet utilisation, and the earning power of tankers and bulkers would collapse in the reduction scenario.
The report suggests that restraining fleet supply would be key. Tanker shipping has been guilty of speculative ordering warranted against historically low shipyard newbuilding prices without taking into account demand or long-term employment. In the past, a new ship would be first choice in the spot market due to lower fuel consumption. Under the reduction scenario, there may not be the depth of employment possibilities.
The report warns that “the prospects for successfully recouping a loan, never mind an equity investment, in a vessel heavily exposed to fossil fuel cargoes seem challenging under a reduction scenario.”
The report does not focus on the type of tankers required in the future but notes that efficiency would be a key feature. This could lead to a shortening of lifecycles and the risk of tankers becoming stranded assets – unable to trade due to their relative inefficiencies. This would have a knock-on effect on revenue.