Seaspan Corp. (NYSE:SSW) is adjusting course to deal with a looming low-sulphur fuel future that promises to add costs and complications throughout the multitrillion-dollar marine cargo sector.
The Vancouver-based company is the world’s largest independent charter owner and manager of container ships. Its fleet has grown to 112 from the 10 it had at its initial public offering on the New York Stock Exchange in August 2005.
Seaspan’s customers include Hapag-Lloyd (ETR:HLAG), Maersk (CPH:MAERSK-B), Yang Ming (TPE:2609) and other top international container shipping lines.
Each will be wrestling with International Maritime Organization (IMO) Sulphur 2020 regulations that will cut the allowable sulphur content of marine vessel fuel to 0.5% from the current 3.5%.
That new sulphur cap comes into effect in January. It will have significant cost implications for ship owners and operators, especially those with container cargo, bulk carrier and energy tanker fleets, which account for 85% of the industry’s overall greenhouse gas emissions. Those added costs will also migrate along the goods movement chain and onto consumers’ shopping bills.
Fuel is a major expense for deep-sea shipping lines.
It accounts for roughly 46% of a ship’s operating costs. The new low-sulphur rules will increase those costs as the shipping industry, which generates an estimated 15% of the world’s nitrogen oxides, 8% of global sulphur gas and 2.6% of global carbon dioxide (CO2) emissions, struggles with requirements to cut pollution while trying to service demand for ocean-borne freight that is projected to increase 240% by 2050. Energy research consultancy Wood Mackenzie estimates that annual global bunker fuel costs could rise by up to US$60 billion after the low-sulphur cap kicks in.
According to DNV GL, carbon-neutral fuels will have to supply between 30% and 40% of the global shipping fleet’s total energy by 2050 if it is to meet IMO greenhouse gas emission goals.
The maritime industry risk-management company’s Assessment of Selected Alternative Fuels and Technologies report notes that heavy fuel oil (HFO) and marine gas oil (MGO) consumed by the global shipping fleet account for about 25% of global diesel and gas production.
But cost is only one of several challenges ocean carriers face. Others include fragmented regulation, multiple arrangements between owners and operators over ship responsibility, limited availability of new fuels and overall ship safety.
For example, the International Association of Dry Cargo Shipowners pointed out earlier this year that supply constraints limit practical testing of new fuels and opportunities to train crews in how to handle those fuels and operate different ship propulsion systems.
Seaspan and other ship owners are therefore weighing their options.
They include switching ships to low-sulphur fuel or installing exhaust gas cleaning systems (scrubbers). An estimated 1% to 1.2% of the global container shipping fleet will be refitted with scrubbers in 2019 and 2020.
Both scrubber and low-sulphur fuel options have pros and cons; both will add expense and neither will address other cargo ship air pollution issues.
DNV GL’s report points out that, with the IMO aiming to cut greenhouse gas emissions 50% by 2050, a global push is also on to cut emissions of nitrogen oxides, sulphur dioxides and exhaust particulates.
So the global shipping industry is scrambling to find viable HFO and MGO fuel options.
They include liquefied natural gas (LNG), methanol, biofuel, hydrogen, ammonia, fuel cells, batteries and wind-assisted propulsion. (See sidebar below for a list of their pros and cons.)
Lars Jensen, CEO of SeaIntelligence Consulting, told Business in Vancouver that most major carriers are installing scrubbers on their larger vessels, “which makes sense because this is where they will get the largest effect. But that still leaves the vast majority of container vessels in a position where they have to use low-sulphur fuel.”
Jensen added that depressed demand is keeping container shipping rates low.
That lower demand will also make it harder for container ship owners to levy low-sulphur fuel surcharges.
Major shipping lines have no control over demand or fuel prices. However, they can control supply by cancelling sailings. Jensen noted that prior to recent ocean shipping mergers and consolidation, the sector was fragmented with a wide range of shipping lines.
“Hence, any single carrier could not materially impact the supply side by cancelling a sailing. But we now have a level of industry consolidation where this is a more feasible approach, and we are seeing the lines increasingly use this tool.”
So Jensen said more sailing cancellations are likely if ship owners are to meet bottom-line numbers.
For Seaspan, LNG has become a leading alternative fuel candidate.
In October 2018, it invested US$200 million in Swiber Holdings Ltd. As part of the Swiber deal, Seaspan will invest US$190 million in the Singaporean offshore engineering company’s LNG-to-power project in Vietnam.
During Seaspan’s second-quarter earnings call in late August, Peter Curtis, the company’s executive vice-president and chief commercial and technical officer, said discussions with liner customers over refitting ships to meet the IMO’s lower sulphur limits are ongoing, and that 10 Seaspan ships are being refitted with scrubbers.
Worldwide, DNV GL estimates that around 2,800 ships have installed or have ordered scrubbers for installation before 2020 and that 4,000 will operate with scrubbers by 2020.
Using data gathered through the global Automatic Identification System, which tracked approximately 86,000 ships in 2018, DNV GL noted that 6% of the largest ships generated 30% of the fleet’s total CO2 emissions.
Responding to analysts’ questions about fuel cost increases resulting from lower-sulphur fuel and other factors, Seaspan CEO Bing Chen said the company considered the push to improve fuel standards in the deep-sea shipping sector to be a “great opportunity” that included scrubber installations and “looking at new LNG-powered solutions” for new ships.
The LNG option appears to be the leading candidate for alternative power propulsion for deepwater ocean liners.
LNG-powered ships have been operating since 2000. The DNV GL alternative fuels report noted that, as of December 2018, 137 LNG-fuelled ships were in operation and 136 have been ordered from shipyards.
The LNG option, it pointed out, would become more appealing once “an adequate bunkering infrastructure is available globally.”
The Energy Transitions Commission has estimated that LNG ships can produce between 9% and 12% fewer emissions than those powered by HFO “but only if upstream methane leakages are under control.”
Meanwhile, DNV GL’s 2019 energy transition outlook forecasts that gas will account for 30% of the world’s energy supply by 2050 and that it and renewables will be the only energy sources in higher demand at that time.
Chen declined to provide updated details about Seaspan’s Swiber deal, which he said “is a traditional managed process in Singapore, which is quite a lengthy and complicated process.… You could appreciate that we would not be able to disclose anything other than what’s been disclosed by them.” •
Ocean-going fuel options
Pros and cons of alternative fuels for deep-sea container ships using information from the Delft University of Technology and DNV GL’s Assessment of Selected Alternative Fuels and Technologies report:
Pros: Can be combined with marine diesel in an internal combustion engine to lower greenhouse gas (GHG) emissions; power density and technical performance similar to straight marine diesel; ammonia is already produced in large quantities around the world, so it would be readily available as a bunker fuel for deep-sea vessels
Cons: An estimated 3.2 times more expensive than conventional marine diesel; highly toxic to humans and the environment, so storing and handling require specialized precautions; use in solid oxide fuel cells not yet ready for prime time
Pros: Low environmental impact; advancements in technology are lowering cost and increasing efficiency of batteries to store electrical energy for propulsion; but battery costs will remain expensive relative to other power sources for the foreseeable future; limited storage capacity makes batteries better suited for short-sea shipping than for ocean-going cargo ships
Cons: Can’t store enough energy required to power large ocean-going ships; battery production is energy intensive and system integration costs can be significant; operating costs are driven by widely fluctuating electricity prices in different regions
Pros: Considered one of the few options for deepwater carriers that can meet the International Maritime Organization’s target of reducing 2008 GHG emissions 50% by 2050; biofuels can be blended with conventional fossil fuels
Cons: Worldwide shortage of biofuel bunkering and other infrastructure; current production would have to triple to reach United Nations’ sustainability development goals; biofuel combustion adds CO2 to the atmosphere; currently more expensive than conventional marine fuels; operational costs could also be higher
Pros: High electrical efficiencies, lower noise and vibrations compared with conventional ship engines; fuel cell technology can cut air emissions significantly; combined with batteries, they offer a more promising option; fuel cells would require less maintenance than conventional combustion engines and turbines
Cons: Fuel cell technology is currently available from very few manufacturers; lifetime/durability of fuel cell systems still considered to be unsatisfactory for widespread commercial use
Pros: Hydrogen produces no carbon if generated from renewable energy, nuclear power or natural gas with carbon capture and storage; combined with batteries it delivers a complementary energy production and storage equation
Cons: Hydrogen is highly flammable, and its storage and handling requirements are very demanding; it also has low energy density so it requires storage space twice that of LNG and five times that of liquid fuels; the carbon footprint when hydrogen is produced from natural gas is larger than that of heavy fuel oil (HFO) or marine gas oil; hydrogen is an energy carrier that must be produced from other primary energy sources; 95% of it is currently generated from fossil fuels, mainly (65%) from natural gas; hydrogen-fuelled internal combustion engines are less efficient than their diesel counterparts
Liquefied natural gas
Pros: The cleanest fossil fuel currently available; no production limitations that could squeeze supply; limited need for extra ship infrastructure; operating costs comparable with oil-fuelled systems without scrubber technology; similar efficiency as HFO-fuelled systems; maintenance could be cheaper than for oil-fuelled systems
Cons: Global bunkering infrastructure still limited; LNG tanks required would be three to four times the size of conventional fuel tanks
Liquefied petroleum gas
Pros: Using LPG virtually eliminates sulphur emissions; cost to install an LPG system roughly half that of an LNG system; operational costs comparable with those of oil-fuelled vessels without scrubber systems
Cons: Significant greenhouse gas emissions; must be stored under pressure or refrigerated, which requires special equipment and ship design
Pros: Has the lowest carbon content and highest hydrogen content of any liquid fuel; can be produced from various sources, including natural gas and coal, black liquor from pulp and paper mills or agricultural waste; production from renewable energy makes it a green ship fuel; reduces CO2 emissions by approximately 10% in an internal combustion engine; additional costs of installing methanol systems on ships are roughly one-third those of installing LNG systems on ships; operational costs would be comparable to oil-fuelled systems without scrubber technology
Cons: Corrosive and, while its price is similar to that of conventional fuel, its low energy content means that users would need double the fuel consumption to achieve the same results; currently limited availability of engines to handle methanol
Pros: No fuel costs; no infrastructure required to use wind energy; wind power is unlimited
Cons: Some wind systems could slow ship loading and unloading; intermittent power source