August 20, 2025 • 44 mins
The IMO's draft net zero framework's implications for new marine fuels and technologies as well as the top challenges for shipowners and fuel producers are explored in the latest ESG Currents episode. Strong demand will develop for hydrogen-derived fuels, with ammonia likely to be the "scalable solution," Tristan Smith, Professor of Energy and Transport at UCL Energy Institute tells Conrad Tan, Bloomberg Intelligence ESG integration analyst. Smith, whose institute is known for its research guiding international shipping decarbonization, also explains why liquid natural gas could be a dead end for the shipping industry.
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Episode Transcript
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Speaker 1 (00:09):
ESG is constantly evolving. Over the years, it has shifted
from socially responsible investing to impact to sustainable finance, with
terminology changing once again. What isn't changing is the underlying science,
market pressures and tangible physical and financial impacts from the
climate crisis, regulatory pressures and consumer expectations. We aim to
(00:30):
filter out the noise by speaking of industry experts to
identify what is really driving value. Welcome to ESG Currents.
I'm Conrad Dunn, ESG integration analyst for APEC at Bloomberg Intelligence,
and I'm your host for today's episode. Now, today we're
talking about international shipping and a new framework to get
the net zero that was recently announced by the International
(00:51):
Maritime Organization or IMO, and I'm delighted to have as
our guest doctor Tristan Smith, Professor of Energy and Transport
at University College London, where he leads a shipping research
group at UCL Energy Institute, known globally for its work
guiding the shipping industries the carbonization, including modeling and analyzing
shipping's efficiency and emissions. Tristan has worked on the science
(01:15):
of marine shipping emissions for well over a decade. He
led an international consortium responsible for the IMO's third Greenhouse
GAEST study in twenty fourteen, and as the lead author
of the IMO's fourth Greenhouse GAEST study in twenty twenty,
helping to shape the IMO's decisions on shipping decarbonization. In
twenty twenty two, Tristan was named in the Lloyd's List
(01:36):
Top one hundred list of the shipping industry's most influential
people as the shipping industries leading energy transition academic. So
today I'm delighted to have Tristan joining us from London. Tristan,
thank you again for coming on our podcast.
Speaker 2 (01:50):
Thanks very much Cord for inviting.
Speaker 1 (01:52):
Me now, Tristan. International shipping forms the backbone of global
trade and the supply chains and downstream distribution networks of
many industries. In April, the IMO approved a set of
draft regulations known as the iomore Net Zero Framework that
would require ships to switch to cleaner fuels or pay
penalties for excess emissions to meet new emissions targets. These
(02:12):
draft regulations were approved by a majority vote and are
set to be formally adopted by the IMO in October
this year, before entering into force in twenty twenty seven
before we dive into the net zero framework and its implications,
could you help our listeners better understand the state of
energy use in international shipping today and what the current
science tells us is necessary to get to net zero
emissions by or around twenty fifty.
Speaker 2 (02:35):
Sure, so, international shipping, like almost the transport, has a
significant greenhouse gas emissions responsibility. So as we move goods
around the world or people, the vessels that do that
burn oil, and that burning of the oil produces greenhouse
gas emissions predominantly carbon dark side, but to some extent
also see methane and ento. And in total, we have
(02:58):
about a gigaton of the missions coming from the international
shipping activity, and those emissions primarily occur on the high sea,
so they happen outside of the jurisdiction of countries, and
so they are outside of the nationally determined contribution reduction
responsibilities that countries have, and they've been the responsibility of
the IMO to consider and address since the Kyoto Protocol
(03:21):
first making statement to that effect. And the scale of
the emissions puts international shipping on a par with the
country the size of for example, Japan or Germany, so
it's a very significant source of greenhouse gas emissions. We
can do something about that by improving the efficiency of ships,
and the IMO has been regulating to improve efficiency for
(03:42):
a good period of time now. But efficiency only gets
us so far in a sector which is primarily growing
because we're increasing our wealth and the global population is increasing,
and with wealth and population we drive a growth in
global trade. And so if we do nothing, we can
expect the sector's emissions to continue to grow, even taking
into account impressive efficiency improvements which we could do more on,
(04:04):
but which in themselves will solve the issue of dangerous
climate change that the growing emissions will risk. And the
sector generally is accepted to need an energy transition away
from the fossil fuels that it currently uses to a
source of energy which is renewable and would come with
zero or near zero greenhouse gas emissions.
Speaker 1 (04:25):
That's really interesting, and how does the io Moost net
zero framework aim to achieve this energy transition?
Speaker 2 (04:32):
So the net zero framework is is this new framework
which has come about to try and incentivize the energy transition, which,
in combination with efficiency, should reach net zero around twenty fifty,
which is a very short period of time for a
sector the scale of international shipping, so twenty five years
to completely remove the use of fossil fuels. The way
(04:54):
it's been designed to do that is to basically set
a series of limits on the greenhouse gas intensity of
the energy used on board ships, and those limits then
have different penalty fees associated with them in order to
discourage ships from a certain minimum amount of greenhouse gas emissions,
but also incentivized vessels who are early adopters who go
(05:17):
a bit further to use the zero emission solutions that
the sector expects to need in the long run. So
the energy transition itself is expected to be quite complicated
because there are different types of vessels operating in different
locations around the world, which will likely have different access
to different types of fuels, and there are a range
of different fuels and solutions that the sector might use.
(05:38):
There will be some vessels that will be able to
use batteries and fully electrify their activity and not need
any liquid fuel at all, for example, those that are
over traveling over relatively short distances, and there are good
examples of battery electric ferries starting to interoperation today. And
then there are some areas in the world where we
might see early adoption of a hydrogen derived fuel, that's
(05:58):
a fuel produced using green hydrogen or even blue hydrogen,
where that the source has significantly reduced greenhouse gas emissions intensity,
and that can be used to make a number of
molecules ammonia and methanol, even synthetic versions of the hydrocarbons
that we use today. And then there are other locations
of the world where we expect there to be significan
(06:19):
volumes of biofuels available, and chips would need to be
designed to be compatible with all of these different types
of fuels, and so we can expect quite a range
of different solutions initially, and the policy has to enable
all of these to be used so that we can
see which of them is going to be the scalable,
long lasting solution. We have our own theories within the
(06:43):
work that we've been doing for several years. We believe
that hydrogen derived fuels will be required in very large volumes,
and in particular that ammonia will be the scalable solution
for the sector, as it's significantly lower cost to produce
than any of the other e fuels or fuels made
from synthetic hydrogen. And synthetic sources of other elements that
(07:05):
you need to manufacture a molecule that you can store
safely on the border ship you can use at relatively
low cost compared to the competitors.
Speaker 1 (07:14):
Thanks for that. I'd really like to dive a bit
deeper into that, but before we do that, I didn't
want to ask. The new zero framework introduces not one,
but two sets of greenhouse gas fuel intensity targets for
ships and two tiers of charges for emissions that exceed
those targets. Could you help our listeners understand what's the
thinking behind this?
Speaker 2 (07:35):
Yeah, So a few different reasons why we've ended up
with this multi tier system. So one of them has
to do with the complexity of the transition and the
fact that different ships in different countries may move at
different speeds down the reduction in greenhouse gas intensity. So
there's a base target line, so known as the base GFI,
(07:56):
which sets a minimum reduction of greenhouse gas intensity in
ships that exceed this face of very high penalty, a
very severe penalty, which is set at a level to
make it strongly disincentivized, so you can't completely force everyone
to do something. Weaker set set of competitive disadvantage of
operating above this threshold, and that may mix much easier
(08:18):
for business cases to be formed to operate at or
below that threshold, So that base DFI is gradually reducing
over time. It's set to hit a sixty five percent
reduction in twenty forty, So even though it's a basic trajectory,
it's a pretty steep curve all the way over the
next fifteen years. Sixty five percent emissions intensity reduction means
a fundamentally different fuel source to the ones that we
(08:41):
use today in that period of time, and that threshold
is incentivized by a penalty fee of three hundred and
eighty dollars a ton, So if you admit above that level,
you're paying these quite high fines which will increase the
cost of energy used on ships very quickly if you
continue to use the fossil fuels that we have on
ships today below that this band at which you pay
(09:02):
one hundred dollars a ton of carbon price essentially, and
that is a price which, according to most of the analysis,
including our own, is too low to incentivize people to
exceed because most of the alternative greenhouse gas intensity fuels
are more expensive in equivalent terms than that one hundred
dollars per ton fee. So most of the sector are
(09:25):
expected to pay that one hundred dollars per ton, and
that creates a certain amount of revenue, and the revenue
is important for at least a couple of reasons. One
is that this is a transition that will affect low
income countries particularly severely, so it's a regressive impact. It
creates economic risks, especially to those with the lowest income,
(09:49):
and in order to help to address that, there is
a fund that's available for the purpose of just an
equitable transition. We can talk about a bit more in
a bit perhaps, but there is also a fund available
from that revenue to help to assist the incentivization of
these zero emission solutions, which are currently particularly expensive. So
maybe to put this in context, we have fuels available today,
(10:11):
the oil fuels that sell at about five hundred dollars
per ton. We have another set of fuels that you
can use today, buyo fuels which are produced from first
generation and second generation feedstocks, and those fuels are available
around fifteen hundred dollars per ton, equivalent to the fuel
are that we use today. So they're more expensive, but
they should be competitive under the three hundred and eighty
(10:33):
dollars per ton higher penalty fee. And then we have
a set of fuels which we expect to be the
key fuels in the long run, the E fuels which
are selling for two thousand dollars or above depending on
the project, so they're much more expensive than the kind
of interim fuels that might be used in small volumes
initially to help to reduce emissions, but are unlikely to
be scalable. The fuels which are below this third threshold,
(10:56):
which is a definition of something called a zero or
a near zinner emission fuel. So the IMO recognize that
there are these long run solutions, or rather midterm solutions,
because these are the fuels we're going to be needing
to use increasingly already in the twenty thirties, but going
to need to dominate the sector's view use by the
time we get to the twenty forties, and we therefore
need to make sure that they have this early adoption
(11:16):
business case so that they can be adopted in growing
volumes over the twenty thirties. And we can be confident
that the supply chains and mature and the fleet is
ready to use them by the time we get to
the twenty forties. And so there's this third threshold and
vessels that operate below that qualify for a reward or
should qualify for a reward which will be funded by
(11:38):
the IO net zero Fund. So this is a sector
which doesn't have a national government. It's regulated by the IMO.
So the incentive scheme to manage the energy transition has
to also be funded by the IMO itself. It's a
closed circuit if you like, in that respect, and that's
why we have this sort of multi tiered but also
(12:00):
to the needs of low income countries or built into
a single regulation that must generate funds but also set
a minimum requirement and incentivize overperformance.
Speaker 1 (12:08):
Fascinating, I'd like to dive a bit deeper into what
you think the implications of the net zero framework might
be for the development of neo marine fuels or technologies
and whether you think some of these already emerging might
seek greater interest. I know you mentioned ammonia for example,
and also what this might imply for some of the
(12:31):
so called transition fuels like LNG.
Speaker 2 (12:35):
Yeah, so the sector's already had quite a lot of activity.
Shipping is generally quite an innovative sector. And it does
that because a lot of vessels are almost bespoke. I
mean they're almost built for a given purpose, and they're
built under rules that allow the use of a range
of different technologies. So we have classification societies that oversee
(12:57):
the construction and the classification, the approval if you like,
of a design and then its construction, and that system, Unlike,
for example, the aviation sector, which needs to have very
long periods of time to have safety conformation on a
new technology, that system has enabled the shipping industries to
actually make some steps already, and one of those steps
(13:20):
is the one that you just mentioned. This use of
liquid natural gas, which is obviously another hydrocarbon, but it's
something that ships move around in large volumes and energy carriers,
and so for the last few decades there's been a
significant amount of experimentation, first by the vessels that move
that as a cargo starting to consume it, because a
certain amount boils off during a voyage. So if you
(13:41):
could use that boil off in the engines, it's potentially
a good value use of an energy commodity rather than
burning a separate oil. And so those vessels started to
consume boil off within machinery, initially steam turbines, but more
recently internal busting engines, and that developed fuel handling orage
machinery solutions, which then started to be used in other
(14:03):
ships because people pointed out that there was this potential
to use a lower cost energy commodity with lower environmental
harm than the fuel oil that the sector current uses.
An LERG when you burn it has very low SOXTS emission,
sulfur oxide emissions, and very low particular matter emissions, which
solves some of the environmental damage that ships do. But unfortunately,
(14:24):
when you burn energy, you produce more or less the
same amount of greenhouse gas emission that when you burn
an oil, and the reason for that is partly because
it's a hydrocarbon, so you burn it you get about
three tons of carbon, but also because you get methane
emissions both in the upstream and the production of the LNG,
but also from the vessel as it consumes LNG, from
(14:44):
a series of fugitive emissions that occur both from the
storage but also from the combustion process. And so when
we put all of that together, all of the effort
that has gone into promoting LNG as a fuel is
a bit of a dead end for a shipping industry
which is on this mission to reduce its submissions by
an absolute amount of seventy striving for eighty percent reduction
(15:06):
by twenty forty, and that emission in combination with that
baseline threshold of sixty five percent, that's slightly lower than
the seventy eighty because of the energy efficiency improvements that
I've expected, But that sixty five percent green ascas intensity
reduction is nothing as far in excess of anything that
even with the most methane controlled supply chain, you could
(15:28):
ever get to with liquid natural gas. So liquid natural
gas as a solution is actually strongly disincentivized through the
net zero framework. It's not as strongly disincentivized as groups
like ourselves might have recommended, but it will not be
eligible for credits, So there is a credit trading scheme
built into this system of threshold. It will not be
eligible for credits from the initiation of the scheme, and
(15:52):
it will be strongly penalized by the three hundred and
eighty dollars per ton fee from about twenty thirty two
twenty thirty three. So already we have the numbers locked
in the regulation for those who are in ownership of
an energy fueled asset that they will be paying three
hundred and eighty dollars a ton for the portion of
their emissions under that technology from twenty thirty two to
(16:13):
twenty thirty three onwards. So there's a disincentive built in
for those emerging transition technologies which were never really transition technologies,
but were claimed to be important for the sector by
some of the vested interests who were either producing and
retailing the fuel, or producing machinery or operating vessels with
that technology on board. There's another set of purchasing of
(16:36):
both ships and fuel production methanol, which has been evident
over the last few years. From about twenty twenty one,
mask Line, one of the biggest container lines, started to
order methanol dual fuel ships, and these vessels are able
to consume a combination of heavy fuel oil or low
self eversions of that fuel oil or methanol fuel, which
(17:00):
can be sourced from a number of different production processes.
So we can make biomethanol from biomass feedstock, or we
can make synthetic methanol from renewable hydrogen and a sustainable
source of carbon dioxide. You can manufacture the molecule methanol
if you take the constituent parts and you substitute them
for renewable sources. Obviously, today we make it primarily from
(17:23):
fossil fuels as the cheapest source of the constituent elements
that you need to manufacture the methanol molecule, and so
various ship owners, not just mask Line because many others
copied them, started to order methanol dual fuel vessels. But
the methanol that we would need to make to reach
these very high greenhouse gas intensity reductions is significantly a
(17:47):
more expensive product than green ammonia, and so we don't
expect that to be a pathway that sees significant further
expansion beyond the next few years, because we expect which
is in chemical form NH three, so with combination of
nitrogen and hydrogen, and doesn't have the disadvantage of needing
(18:08):
a carbon atom. Ironically, in a transition which is all
about avoiding carbon emissions, the source of sustainable carbon is
the limiting factor on the ability to competitively produce some
of these other molecules, whether that's synthetic methane. Because We
can obviously replace the LNG with a synthetic molecule if
we wanted to synthetic methanol. Both of them are going
(18:30):
to be, by our estimation, forty or fifty percent more
expensive to synthesize to make as a molecule than a
green ammonia, which only needs to have nitrogen which is
separated from the air used in combination with green hydrogen
and the separation of nitrogen from the air. It's eighty
percent of our atmosphere. It's an incredibly abundant and relatively
(18:50):
low to a low cost to obtain element, and so
it's a much cheaper production process. The challenge with ammonia
is that it's a toxic fuel and it has a
lot of safety issues associated with its storage and use
on board ships. But those are all processes that we've
seen significant work going on over the last few years
(19:10):
since it's become apparent that the IMO is imminently going
to regulate, and the sector has been doing a lot
of experiments. It's been using a lot of its existing
infrastructure because we store and move ammonia on ships about
fifteen million tons per annum at the moment, so there
are lots of ports that have experience of handling this
fuel and they've done trials that have helped to de
(19:30):
risk that particular pathway, whilst the engine manufacturers optimize the
machinery solutions or the storage solutions that will need to
be installing on vessels. So we've seen these four different
technologies essentially, the conventional fossil fuel vessels, the dual fuel
LNG vessels, the jube fuel methanol vessels are now the
dual fuel ammonia vessels, all being produced and ordered over
(19:53):
the last few years. Ammonia are the smallest fleet at
this point because they're the last kid on the block
in this wave of innovation, and this is all alongside
the development of battery electric vessels for some of the
smaller distances, and a range of other technologies including wind assistance,
which has got a huge role to play across a
(20:14):
number of ships that are very amenable to using some
sort of sale device to reduce the amount of energy
needed from any liquid fuel stored on board. So there's
quite a broad range of technologies that the sector has
been very innovatively pursuing, but we think are actually going
to sort into a very small group once the costs
(20:34):
and the maturity fully clarify.
Speaker 1 (20:38):
Thank you. So I guess potentially an acceleration of interest
in newer generation fuelds like green Aneumonia, but also in
parallel a lot more work on de risking, as you
mentioned that the transport, storage and distribution of the new fields.
Speaker 2 (20:58):
De risking and scaling up because this is significantly about
economies of scale and availability. I think one of the
challenges for shipping, which is probably a common challenge for
a lot of sectors of transport, but a large number
of ships operate a bit like taxis, so they travel
on a voyage or a sequence of voyages, which is
very unpredictable. They go wherever the cargo needs to be loaded,
(21:19):
and as a consequence, if you build a new ship
that has a new technology on board, you need to
be confident that that technology will be supported and will
find available fuel in a very large number of different locations.
Now there's a subset of ships which are operating on
a shuttle voyage. I either go backwards and forwards between
the small number of ports on a regular basis, and
(21:40):
actually some of those vessels include sectors like the bulk sector,
so we move a lot of iron ore between Australia
and China, for example, and those are some of the
vessels which are being explored as early adopters of some
of these new fuels because you would only need this
new fuel infrastructure in two locations, China and Australia, unlike
for many other ships where you would need it in
(22:01):
almost every continent before you could be confident. And we've
been through this with the LNG transition. The LNG transition
was significantly enabled for the vessels that went down that
technology pathway because we've increasingly used LNG as and energy
commodity globally and so it was available in both import
and export terminals around the world, and that could supply
a number of ports around those hub locations. And we
(22:24):
will need to see the scaling up of the solutions
for shipping's future energy commodity energy molecule before we will
get a very large sort of movement towards towards that fuel. Already, though,
we can do these on more control voyages where there's
a more greater coherency, of greater consistency of the infrastructure
(22:45):
and the vessel.
Speaker 1 (22:47):
Right, so not just what happens on the ship, but
also all the supporting infrastructure in the parts of core
and the infrastructure that they in turn depend on as
well within the respective destinations.
Speaker 2 (22:58):
Exactly wonderful.
Speaker 1 (23:00):
And I'd like to also ask a different question, which
is that the net zero Framework sets out targets for
ships greenhouse guests fuel intensity starting in twenty twenty eight,
but it also leaves multiple unknowns, for example, and a
greed methodology for how the greenhouse guests fuel intensity would
(23:20):
be calculated. I'm curious could you share your views on
how significant these areknns are and net zero Framework as
it stands, and how these might impact the response of
the shipping industry to the garganization plan.
Speaker 2 (23:35):
Sure. Yeah, And I think this is a really fascinating
interaction with the ESD subject because we're talking primarily here
about regulation and a lot of the sector is waiting
for final text which is crystal clear about exactly what
the regulation says and therefore enables them to make an
investment which is as de risk as possible. I mean,
(23:57):
that will come, but it's it's happening gradually. What we
proved in April will need to go through adoption in October,
and there's a process of writing a series of guidelines
which then define in the small print exactly how certain
calculations will be performed, exactly how the reward will be calculated.
So I talked already about this subset of fuels which
(24:18):
have a very low greenhouse gas intensity below nineteen grams
of CO two per megadule of energy, and those fuels
Z and Z zero and zero fuels qualify for reward.
But the actual fine print of that guideline, how will
that be calculated, how will it be distributed, is incomplete,
and so we don't know for certain what that will
(24:40):
constitute and therefore exactly what business case will be made
out of it. Similarly, there are LCA guidelines life cycle
Analysis guidelines that need to be finalized, and those will
set the maths or the equations behind the calculations of
the SCA of different fuels, and those are due for
adoption over the next eighteen months. So we will see
(25:02):
these that materialize quite rapidly, but for now they constitute uncertainties.
And alongside some of the other uncertainties like when will
this view be available at this volume at this price,
there are political uncertainties, and they're sort of technoeconomic uncertainties.
This is the environment within which people have to make
decisions in at this point in time. So I'm not
(25:23):
saying that they're insignificant, because no one wants to take
more risk than they should have to. But this is
a sector which has an abundantly clear mid term but
a slightly uncertain short term, and the abundantly clear mid
term in our analysis, puts you in this no brainer
(25:44):
space for a molecule of green amumonia, But exactly how
strongly the business case of that molecule is made in
the next five to ten years is not abundantly clear
until we get through the next two three years. So
we'd think that there's actually a situation here where the
private sector can do some maths and figure out what
its investment pathway needs to look like quite clearly in
(26:06):
order to manage its risks in the mid thirties, but
exactly what it optimizes in the near term is quite hard.
For the people ordering ships, this is a relatively easy
decision because the nice thing about the vessels is that
they represent a lot of optionality. So a dual fuel
ammonia vessel can run on conventional fuel, so you can
run on conventional fuel and pay the penalty. If that's
(26:27):
the winning strategy, you can run on all of the
biofuels that we have on all of them, but all
the oil type biofuels, because it's still capable of consuming
a conventional fuel. So hbos and fames, which are specific
types of bio energy that you can turn into a
liquid oil equivalent, those are all compatible with that particular technology.
(26:48):
You can run that type of vessel on a blue
ammonia fuel, so you can run it on a fuel
produced from natural gas. So if you think that the
next five years are going to see particularly low gas prices,
then you can hedge that particular risk your investment by
exposing yourself to a blue ammonia opportunity. And then you
can also hedge the mid term the point at which
(27:08):
the green ammonia becomes by far the least cost energy
commodity for a low greenhouse gas intensity fuel, because that's
compatible with the vessel as well. Now, for those who
aren't ready to make that decision, you can order an
ammonia ready ship, so that's a lower cost ship that
has the design consideration of what you would need to
retrofit the vessel already taken into account. So there's a
(27:30):
there's kind of an optionality space which is quite robust,
even though the precise timing of exactly what fuel will
be the optimal way to comply over the next over
the near term of the regulation will remain unclear for
the next couple of years. But these are long life assets.
I mean, these are vessels which should be at sea
for thirty years. So if you're only looking at the
next two or three years, you're probably not factoring in
(27:53):
your residual value risks as you get to whatever point
that you take your investment decision towards. So if you
expect to own something five to seven years, you need
to be thinking about what will an LNGST be worth
in seven years, eg. Twenty thirty two, which is exactly
the point when the three hundred and eighty dollars per
ton hits you. So there are some clarities that we
have in this regulation that really tell you LNG is
(28:16):
a bad idea and green ammonia or ammonia deal fuel
vessels that expose you to both a range of opportunities
are a good idea and more resilient solution. The problem
is much harder for the fuel producers, I think, because
they have to make this huge capital investment for something
for which they don't know the exact timing of when
they will have large volume off take or any certainty
(28:37):
on price, and so they might have to take quite
a big risk hoping that that reward mechanism and the
Z and Z price is going to make their commodity
competitive or is going to enable them to sell without
being lost, making for a number of years before the
price movements in the sector or the regulatory strengths comes
in to enable their market to really take off. We've
(29:00):
got a bit of a headache for the fuel producers
to solve. Fortunately, their opportunities come from more than one
off take sector, so it's not just shipping. There are
other places where you can use green hydrogen or green ammonia,
and those other sectors are also where Obviously they then
look to diversify some of their risk and manage some
(29:20):
of their opportunity. So we've got something to manage. The
iMOS clarity can't come soon enough because it'll reduce risk
for everyone, and the clearer that we get some language
into this set of guidelines, that easier it'll be for
people to make some of the some of the very
strong investment decisions that are needed if the sector's going
to have the massive volumes of these new energy commodities
(29:41):
available in time to hit its twenty forty objectives.
Speaker 1 (29:46):
That's great, thank you, and maybe just shifting gears a bit.
The IOMAL draft regulations also make multiple mentions of a
just transition. And I know you touched on this very
briefly earlier, but this may see curious to a casual
observer given the other ways rather technical nature of the
rules still laid on in the document. And could you
(30:09):
provide our listeners some context for this and why so
many mentions of a just transition occurs in the draft regulations?
Speaker 2 (30:16):
Sure? So, the IMO is a UN agency, as a
specialized UN agency, so it has to has to find
solutions that work for its member countries one hundred and
seventy six countries that make up the IMO. And as
I mentioned already, the consequence of a generalized increase in
transport cost is recognized to be regressive, so it'll effect
(30:37):
of those one hundred and seventy six member states, it
will affect certain countries much more negatively. They'll see a
more significant GDP reduction than others and when this was quantified,
because that was a key part of the negotiation process
over the last couple of years. So UN Trade and
Development an DAD undertook analysis to look at how much
economic negative economic impact occurred as a conquents of regulation
(31:02):
that reduces greenhouse gas emissions. And we can see that
on broad average values that the transport costs or the
cost of moving goods around the world from a ship
owner's perspective, might go up eighty percent. The costs for
trade might go up thirty percent, So the maritime logistics
costs that include things like port jews so dilute that
(31:24):
transport cost associated particularly with the ship, and that cost
increase will then affect imports in some countries. That will
increase the cost of imports and it could also undermine
some of the export competitiveness of countries, especially countries that
are far from their markets and poorly served by logistics
supply chains at this point in time, and those economic
(31:48):
impacts need some The member States agreed that those economic
impacts need to be recognized and we need to address them,
and they also recognize that there was this particularly daunting
task of an energy transition that needed to be global
and inclusive. So it's one thing to have an energy
transition that can take place in a small number of
countries that we've already advanced technology and are well suited
(32:12):
to capitalize on a major shift in reconfiguration of the
sector's supply chains and fleet. But there's another thing for
that to be something that all countries feel that they
can be part of, and we can maximize the likelihood
that these fuels will be available globally at the speed
we need them to be available globally to enable that transition.
If go back to that point I made about many
(32:34):
ships being like taxis that operate at an unknown sequence
support calls, and therefore we need these fuels to be
very globally available very quickly. So a lot of that
embodies itself in this expression just an equitable transition and
the IMO's revenue generation. So this goes back to the
design of these penalty fees, of which the one hundred dollars,
(32:55):
if it is paid by most of the ships, will
generate around twelve to thirteen billion US do as paranum,
some portion of which we'll go towards the reward mechanism.
We don't know exactly how much at this point, and
some portion of which goes towards just an equable transition,
including helping countries who are economically impacted, helping to address
some of the climate impacts created by all of the
(33:15):
fossil fuels that the sector has consumed so far and
all of the climate impacts that that has caused, and
then a certain amount of the revenue also towards enabling
a more inclusive transition that makes fuels available or technology
transfer or other opportunities in countries that would need some assistance,
and we can see that that assistance is incredibly important for,
(33:37):
for example, countries in Africa who have huge potential to
be fuel producers for these green ammonia molecules, but have
much higher costs associated with some of that, particularly the
cost of capital. So there's a potential for this all
to work in a mutually reinforces reinforcing way in which
we have a progressive energy transition which is also increasing
(33:58):
of the equitable or equity within the member states. But
that requires that the design of what happens next is
as effective as possible. So there's a lot of work
to do, but there's a lot of potential an opportunity
as well.
Speaker 1 (34:14):
I know you've covered some of this in our earlier discussion,
but how do you think the shipping industry is likely
to respond to this new and that zero framework, And
in particular, do you think shipowners are prepared for the
transition the hit what would you say needs to be
prioritized and what do you think would be the more
difficult challenges you would expect the companies and shipowners to face.
Speaker 2 (34:37):
So we track this in our research group. We've been
producing in collaboration with U and Foundation and high level
Climate champions and Getting to Zero, an annual report that goes,
what are the things that would need to be in
place for the energy transition, particularly a sort of near
term target that five percent of the energy used in
international shipping is scalable zero MA mission fuel like a
(35:01):
green hydrogen derived fuel. So what would need to happen
for us to have just five percent of the energy
mix to be that type of fuel by twenty thirty
And we break down a lot of the indicators into
what needs to happen on the supply side and the
technology and the cost of hydrogen in the evolution of
the supply chains. But also the fleet readiness, so how
many ships are being ordered which are dual fuel specified
(35:24):
and therefore able to use these fuels, Because if we
can't see that ordering signal coming through in the mid
twenties already in twenty twenty five, then we're not going
to be able to expect there to be a very
significant portion of the fleet in twenty thirty that will
be capable of using these fuels. And on the supply side,
so on both supply and demand, so both the production
(35:44):
of the fuel and the ability to use it. In
our kind of central estimate, we're a little bit below
the five percent threshold, so it's really not going to
be easy to get to that kind of tipping point
by twenty thirty from where we are in twenty twenty five.
But in particular, it's the demand side, it's the fleet
readiness which is the most challenging. And we count within
(36:07):
the fleet readiness both in methanol dual fuel and the
ammonia deal fuel. So even though I've indicated that we
think that the ammonia der fuel is by far more
likely to be the most cost competitive solution, we're also
looking at how many methanol dual fuel vessels are being
built and looking at the numbers of those and even
when we add those in, we don't have the new
build ordering. That looks like it would help the sector
(36:29):
to reach its lowest cost trajectory. Now, what that might
mean what you can kind of chase that through would
then be a situation where in the thirties, as a
molecule green ammonia becomes abundantly obviously a lower cost molecule.
There's then a rapid shift in the valuation of the fleet.
(36:51):
So there are vessels that are capable of using ammonia
as a molecule that become prized because they have operating
costs which are thirty forty fifth twy percent lower than
the vessels that they're competing against. And then there's a
very large majority of the fleet which become significantly downgraded
in value because they either need a very expensive retrofit.
(37:11):
So you take the vessel out of service and you
do some major surgery on it to fit at pneumonia
tank and modify the machinery so that it can use ammonia.
And that sort of effort is possible, but obviously if
tens of thousands of ships want to do that, operation
at the same time. Then that doesn't that's not compatible
with the infrastructure and the yard capacity that we have
(37:34):
in the fleet. So we need this to be a
more managed transition in order to reduce the risk that
those with those incompatible assets have distress. You have kind
of value right downs because they're all significantly recognizing the
shift in valuation at the same point in time, and
there's a significant risk that this happens around twenty thirty,
(37:55):
so actually quite soon and quite soon in the exposures
that many ship owners have either on their balance sheet
because they own quite a lot of the equity in
the assets themselves, or that the finance sector has because
they also own very significant shares. And we're doing a
lot of work in our groups try and understand how
these risks might flow through to the different actors. Is
it the owners, is it the financiers? Like who is
(38:16):
it who carries some of this stranded asset risk that
will result from a strong regulatory driven regime hitting a
sector of assets which is quite hard to turn over
to a new technology very fast, and that therefore face
a lot of risks of either being scrapped prematurely or
having these very expensive modifications. Now there are steps that
(38:40):
many can take an hour taking to kind of prepare
themselves for this and align themselves, including through ESG initiatives.
That the sector has good examples of private sector action
where they've tried to measure how exposed they might be
to these types of risks, and I think we'll see
increasing use of that as stakeholders want to kind of
understand what might happen under various different scenarios, including the
(39:04):
likely scenario that this happens quite fast and in quite
a brutal way.
Speaker 1 (39:09):
Fascinating insights and maybe as a sort of preview again,
I know you've touched on this briefly as well, but
could you show some of the areas of research you
and your team are currently focused on.
Speaker 2 (39:19):
Sure, So, I guess a lot of how big this
stranded asset problem depends on how complicated and expensive are
retrofit costs. So we again a bit like the innovation
that we've seen already, it's a sector where retrofits are possible.
What we've seen in the past. For example, when sulfur
regulation came into the sector in twenty twenty, the IMO's
(39:40):
certainty of regulating became clear in twenty eighteen and pretty
much between twenty eighteen and twenty twenty four, thousand ships
got retrofitted with selfur scrubbers, which was at the time
the lowest cost solution for compliance and enabled the ships
to continue to burn the heavy fuel oil that and
the higher cost of a desulfurized oil product. So we
know that this is a sector which, when it has
(40:01):
a compelling business case, can retrofit thousands of ships in
very short periods of time.
Speaker 1 (40:06):
And.
Speaker 2 (40:07):
In a lot of our initial calculations, we found that
that looks like the most likely response to a sudden
clarification of a grew pneumonia pathway that we'll see a
lot of vessels coming in for retrofit, especially the sort
of five year old vessels that are maybe five year
old LNG dual fueld vessels that the owners are starting
to face very significant cost or very poor competitiveness on,
(40:31):
but with only five years of their life spent and
needing another twenty or twenty five years, those vessels might
well be attractive for retrofit. So we want to really
make sure we understand the cost and complexity of retrofit,
and we're doing some work to look at that in
a bit more detail. We want to understand the financial
exposures and the financial responsibilities. Who has the liability in
(40:55):
the event of a devaluation of assets, because that will
be important to how that kind of flows through, even
with an additional cost for which some companies are already preparing,
like there will be companies that don't have that capital
to do a midlife multimillion dollar injection into the asset,
and therefore where does that fall. And we're kind of
(41:16):
really interested in this fuel landscape, particularly in response to
some of the finer detail within the iMOS guidelines. So
one of the headaches for the sector is how does
it estimate the future price of BUI fuel. What we
have at the moment is a market where you can
look at the prices today and you can say, I
can see what the price is in Singapore or Rotterdam
(41:37):
or for Gyre for a used cooking oil derived marine fuel,
But what the price of that used cooking oil drive
marine fuel will be in five years is very hard
to estimate, but is the crucial factor for determining when
some of the synthetic fuels will become cost competitive. So
we have an IMO regulation which is trying to be
(41:58):
as technology agnostic as possible. It doesn't say green ammonia
is the answer. It leads that to the market. Great
to find the point at which the buyer of your
price will exceed the falling cost of green ammonia as
economies of scale and learnings in the cost of production
effect and mature the technology and reduce the costs and
improve the supply chains of that particular commodity. But that
(42:21):
getting into the detail of that is very difficult for
a lot of the shipping industry. But it's also difficult
for the energy sector generally, given how biofuelds are currently
traded in liquidities, and so we're really interested to understand
how those might mature and how they'll interact with these
penalty fees from the IMO and the obviously the reward
mechanism which has this explicit objective of incentivizing early adoption.
(42:43):
So will we see early adoption and what will it take?
What would the parameters need to be set as what
are the mechanisms that can offer the greatest certainty, especially
for the fuel producers, who, as we previously mentioned, have
got this particular headache of when do I make my
multi billion dollar investment given time scales for how long
it will take for that to be in production and
when the business case for the product that I'm making
(43:05):
will be strong enough that I can get returns to
my investors in a decent timescale. So there's a lot
of interaction of that with the complexity of these different
fuel production processes and other stimulus. They're not only demanded
by shipping, We'll see them being significantly increasingly demanded by
aviation under various staff man dates that exist. And how
(43:27):
the competition not just with aviation shipping, but all the
other sectors that need that biomass as a feedstock. How
that plays out will be crucial to this sector's energy
transition and risks.
Speaker 1 (43:40):
Great I look forward to reading more of these insights
and your team's future research. Thank you again so much
for your time and also generously sharing your insights with
our listeners.
Speaker 2 (43:49):
Thank you very much, and to all our.
Speaker 1 (43:51):
Listeners, I hope you enjoyed the conversation with Tristan as
much as I have. You can find out more information
about how companies and industries globally. I respond to ESG
related risks and opportunities by going to Bispace ESG goal
on any Bloomberg terminal, and if you have an ESG
quandary or burning question you would like to ask bi's
(44:12):
expert analysts, please do send us an email at ESG
Currents at bloomberg dot net. Thank you for tuning in
and to join us again next time
ESG is constantly evolving. Over the years, it has shifted
from socially responsible investing to impact to sustainable finance, with
terminology changing once again. What isn't changing is the underlying science,
market pressures and tangible physical and financial impacts from the
climate crisis, regulatory pressures and consumer expectations. We aim to
(00:30):
filter out the noise by speaking of industry experts to
identify what is really driving value. Welcome to ESG Currents.
I'm Conrad Dunn, ESG integration analyst for APEC at Bloomberg Intelligence,
and I'm your host for today's episode. Now, today we're
talking about international shipping and a new framework to get
the net zero that was recently announced by the International
(00:51):
Maritime Organization or IMO, and I'm delighted to have as
our guest doctor Tristan Smith, Professor of Energy and Transport
at University College London, where he leads a shipping research
group at UCL Energy Institute, known globally for its work
guiding the shipping industries the carbonization, including modeling and analyzing
shipping's efficiency and emissions. Tristan has worked on the science
(01:15):
of marine shipping emissions for well over a decade. He
led an international consortium responsible for the IMO's third Greenhouse
GAEST study in twenty fourteen, and as the lead author
of the IMO's fourth Greenhouse GAEST study in twenty twenty,
helping to shape the IMO's decisions on shipping decarbonization. In
twenty twenty two, Tristan was named in the Lloyd's List
(01:36):
Top one hundred list of the shipping industry's most influential
people as the shipping industries leading energy transition academic. So
today I'm delighted to have Tristan joining us from London. Tristan,
thank you again for coming on our podcast.
Speaker 2 (01:50):
Thanks very much Cord for inviting.
Speaker 1 (01:52):
Me now, Tristan. International shipping forms the backbone of global
trade and the supply chains and downstream distribution networks of
many industries. In April, the IMO approved a set of
draft regulations known as the iomore Net Zero Framework that
would require ships to switch to cleaner fuels or pay
penalties for excess emissions to meet new emissions targets. These
(02:12):
draft regulations were approved by a majority vote and are
set to be formally adopted by the IMO in October
this year, before entering into force in twenty twenty seven
before we dive into the net zero framework and its implications,
could you help our listeners better understand the state of
energy use in international shipping today and what the current
science tells us is necessary to get to net zero
emissions by or around twenty fifty.
Speaker 2 (02:35):
Sure, so, international shipping, like almost the transport, has a
significant greenhouse gas emissions responsibility. So as we move goods
around the world or people, the vessels that do that
burn oil, and that burning of the oil produces greenhouse
gas emissions predominantly carbon dark side, but to some extent
also see methane and ento. And in total, we have
(02:58):
about a gigaton of the missions coming from the international
shipping activity, and those emissions primarily occur on the high sea,
so they happen outside of the jurisdiction of countries, and
so they are outside of the nationally determined contribution reduction
responsibilities that countries have, and they've been the responsibility of
the IMO to consider and address since the Kyoto Protocol
(03:21):
first making statement to that effect. And the scale of
the emissions puts international shipping on a par with the
country the size of for example, Japan or Germany, so
it's a very significant source of greenhouse gas emissions. We
can do something about that by improving the efficiency of ships,
and the IMO has been regulating to improve efficiency for
(03:42):
a good period of time now. But efficiency only gets
us so far in a sector which is primarily growing
because we're increasing our wealth and the global population is increasing,
and with wealth and population we drive a growth in
global trade. And so if we do nothing, we can
expect the sector's emissions to continue to grow, even taking
into account impressive efficiency improvements which we could do more on,
(04:04):
but which in themselves will solve the issue of dangerous
climate change that the growing emissions will risk. And the
sector generally is accepted to need an energy transition away
from the fossil fuels that it currently uses to a
source of energy which is renewable and would come with
zero or near zero greenhouse gas emissions.
Speaker 1 (04:25):
That's really interesting, and how does the io Moost net
zero framework aim to achieve this energy transition?
Speaker 2 (04:32):
So the net zero framework is is this new framework
which has come about to try and incentivize the energy transition, which,
in combination with efficiency, should reach net zero around twenty fifty,
which is a very short period of time for a
sector the scale of international shipping, so twenty five years
to completely remove the use of fossil fuels. The way
(04:54):
it's been designed to do that is to basically set
a series of limits on the greenhouse gas intensity of
the energy used on board ships, and those limits then
have different penalty fees associated with them in order to
discourage ships from a certain minimum amount of greenhouse gas emissions,
but also incentivized vessels who are early adopters who go
(05:17):
a bit further to use the zero emission solutions that
the sector expects to need in the long run. So
the energy transition itself is expected to be quite complicated
because there are different types of vessels operating in different
locations around the world, which will likely have different access
to different types of fuels, and there are a range
of different fuels and solutions that the sector might use.
(05:38):
There will be some vessels that will be able to
use batteries and fully electrify their activity and not need
any liquid fuel at all, for example, those that are
over traveling over relatively short distances, and there are good
examples of battery electric ferries starting to interoperation today. And
then there are some areas in the world where we
might see early adoption of a hydrogen derived fuel, that's
(05:58):
a fuel produced using green hydrogen or even blue hydrogen,
where that the source has significantly reduced greenhouse gas emissions intensity,
and that can be used to make a number of
molecules ammonia and methanol, even synthetic versions of the hydrocarbons
that we use today. And then there are other locations
of the world where we expect there to be significan
(06:19):
volumes of biofuels available, and chips would need to be
designed to be compatible with all of these different types
of fuels, and so we can expect quite a range
of different solutions initially, and the policy has to enable
all of these to be used so that we can
see which of them is going to be the scalable,
long lasting solution. We have our own theories within the
(06:43):
work that we've been doing for several years. We believe
that hydrogen derived fuels will be required in very large volumes,
and in particular that ammonia will be the scalable solution
for the sector, as it's significantly lower cost to produce
than any of the other e fuels or fuels made
from synthetic hydrogen. And synthetic sources of other elements that
(07:05):
you need to manufacture a molecule that you can store
safely on the border ship you can use at relatively
low cost compared to the competitors.
Speaker 1 (07:14):
Thanks for that. I'd really like to dive a bit
deeper into that, but before we do that, I didn't
want to ask. The new zero framework introduces not one,
but two sets of greenhouse gas fuel intensity targets for
ships and two tiers of charges for emissions that exceed
those targets. Could you help our listeners understand what's the
thinking behind this?
Speaker 2 (07:35):
Yeah, So a few different reasons why we've ended up
with this multi tier system. So one of them has
to do with the complexity of the transition and the
fact that different ships in different countries may move at
different speeds down the reduction in greenhouse gas intensity. So
there's a base target line, so known as the base GFI,
(07:56):
which sets a minimum reduction of greenhouse gas intensity in
ships that exceed this face of very high penalty, a
very severe penalty, which is set at a level to
make it strongly disincentivized, so you can't completely force everyone
to do something. Weaker set set of competitive disadvantage of
operating above this threshold, and that may mix much easier
(08:18):
for business cases to be formed to operate at or
below that threshold, So that base DFI is gradually reducing
over time. It's set to hit a sixty five percent
reduction in twenty forty, So even though it's a basic trajectory,
it's a pretty steep curve all the way over the
next fifteen years. Sixty five percent emissions intensity reduction means
a fundamentally different fuel source to the ones that we
(08:41):
use today in that period of time, and that threshold
is incentivized by a penalty fee of three hundred and
eighty dollars a ton, So if you admit above that level,
you're paying these quite high fines which will increase the
cost of energy used on ships very quickly if you
continue to use the fossil fuels that we have on
ships today below that this band at which you pay
(09:02):
one hundred dollars a ton of carbon price essentially, and
that is a price which, according to most of the analysis,
including our own, is too low to incentivize people to
exceed because most of the alternative greenhouse gas intensity fuels
are more expensive in equivalent terms than that one hundred
dollars per ton fee. So most of the sector are
(09:25):
expected to pay that one hundred dollars per ton, and
that creates a certain amount of revenue, and the revenue
is important for at least a couple of reasons. One
is that this is a transition that will affect low
income countries particularly severely, so it's a regressive impact. It
creates economic risks, especially to those with the lowest income,
(09:49):
and in order to help to address that, there is
a fund that's available for the purpose of just an
equitable transition. We can talk about a bit more in
a bit perhaps, but there is also a fund available
from that revenue to help to assist the incentivization of
these zero emission solutions, which are currently particularly expensive. So
maybe to put this in context, we have fuels available today,
(10:11):
the oil fuels that sell at about five hundred dollars
per ton. We have another set of fuels that you
can use today, buyo fuels which are produced from first
generation and second generation feedstocks, and those fuels are available
around fifteen hundred dollars per ton, equivalent to the fuel
are that we use today. So they're more expensive, but
they should be competitive under the three hundred and eighty
(10:33):
dollars per ton higher penalty fee. And then we have
a set of fuels which we expect to be the
key fuels in the long run, the E fuels which
are selling for two thousand dollars or above depending on
the project, so they're much more expensive than the kind
of interim fuels that might be used in small volumes
initially to help to reduce emissions, but are unlikely to
be scalable. The fuels which are below this third threshold,
(10:56):
which is a definition of something called a zero or
a near zinner emission fuel. So the IMO recognize that
there are these long run solutions, or rather midterm solutions,
because these are the fuels we're going to be needing
to use increasingly already in the twenty thirties, but going
to need to dominate the sector's view use by the
time we get to the twenty forties, and we therefore
need to make sure that they have this early adoption
(11:16):
business case so that they can be adopted in growing
volumes over the twenty thirties. And we can be confident
that the supply chains and mature and the fleet is
ready to use them by the time we get to
the twenty forties. And so there's this third threshold and
vessels that operate below that qualify for a reward or
should qualify for a reward which will be funded by
(11:38):
the IO net zero Fund. So this is a sector
which doesn't have a national government. It's regulated by the IMO.
So the incentive scheme to manage the energy transition has
to also be funded by the IMO itself. It's a
closed circuit if you like, in that respect, and that's
why we have this sort of multi tiered but also
(12:00):
to the needs of low income countries or built into
a single regulation that must generate funds but also set
a minimum requirement and incentivize overperformance.
Speaker 1 (12:08):
Fascinating, I'd like to dive a bit deeper into what
you think the implications of the net zero framework might
be for the development of neo marine fuels or technologies
and whether you think some of these already emerging might
seek greater interest. I know you mentioned ammonia for example,
and also what this might imply for some of the
(12:31):
so called transition fuels like LNG.
Speaker 2 (12:35):
Yeah, so the sector's already had quite a lot of activity.
Shipping is generally quite an innovative sector. And it does
that because a lot of vessels are almost bespoke. I
mean they're almost built for a given purpose, and they're
built under rules that allow the use of a range
of different technologies. So we have classification societies that oversee
(12:57):
the construction and the classification, the approval if you like,
of a design and then its construction, and that system, Unlike,
for example, the aviation sector, which needs to have very
long periods of time to have safety conformation on a
new technology, that system has enabled the shipping industries to
actually make some steps already, and one of those steps
(13:20):
is the one that you just mentioned. This use of
liquid natural gas, which is obviously another hydrocarbon, but it's
something that ships move around in large volumes and energy carriers,
and so for the last few decades there's been a
significant amount of experimentation, first by the vessels that move
that as a cargo starting to consume it, because a
certain amount boils off during a voyage. So if you
(13:41):
could use that boil off in the engines, it's potentially
a good value use of an energy commodity rather than
burning a separate oil. And so those vessels started to
consume boil off within machinery, initially steam turbines, but more
recently internal busting engines, and that developed fuel handling orage
machinery solutions, which then started to be used in other
(14:03):
ships because people pointed out that there was this potential
to use a lower cost energy commodity with lower environmental
harm than the fuel oil that the sector current uses.
An LERG when you burn it has very low SOXTS emission,
sulfur oxide emissions, and very low particular matter emissions, which
solves some of the environmental damage that ships do. But unfortunately,
(14:24):
when you burn energy, you produce more or less the
same amount of greenhouse gas emission that when you burn
an oil, and the reason for that is partly because
it's a hydrocarbon, so you burn it you get about
three tons of carbon, but also because you get methane
emissions both in the upstream and the production of the LNG,
but also from the vessel as it consumes LNG, from
(14:44):
a series of fugitive emissions that occur both from the
storage but also from the combustion process. And so when
we put all of that together, all of the effort
that has gone into promoting LNG as a fuel is
a bit of a dead end for a shipping industry
which is on this mission to reduce its submissions by
an absolute amount of seventy striving for eighty percent reduction
(15:06):
by twenty forty, and that emission in combination with that
baseline threshold of sixty five percent, that's slightly lower than
the seventy eighty because of the energy efficiency improvements that
I've expected, But that sixty five percent green ascas intensity
reduction is nothing as far in excess of anything that
even with the most methane controlled supply chain, you could
(15:28):
ever get to with liquid natural gas. So liquid natural
gas as a solution is actually strongly disincentivized through the
net zero framework. It's not as strongly disincentivized as groups
like ourselves might have recommended, but it will not be
eligible for credits, So there is a credit trading scheme
built into this system of threshold. It will not be
eligible for credits from the initiation of the scheme, and
(15:52):
it will be strongly penalized by the three hundred and
eighty dollars per ton fee from about twenty thirty two
twenty thirty three. So already we have the numbers locked
in the regulation for those who are in ownership of
an energy fueled asset that they will be paying three
hundred and eighty dollars a ton for the portion of
their emissions under that technology from twenty thirty two to
(16:13):
twenty thirty three onwards. So there's a disincentive built in
for those emerging transition technologies which were never really transition technologies,
but were claimed to be important for the sector by
some of the vested interests who were either producing and
retailing the fuel, or producing machinery or operating vessels with
that technology on board. There's another set of purchasing of
(16:36):
both ships and fuel production methanol, which has been evident
over the last few years. From about twenty twenty one,
mask Line, one of the biggest container lines, started to
order methanol dual fuel ships, and these vessels are able
to consume a combination of heavy fuel oil or low
self eversions of that fuel oil or methanol fuel, which
(17:00):
can be sourced from a number of different production processes.
So we can make biomethanol from biomass feedstock, or we
can make synthetic methanol from renewable hydrogen and a sustainable
source of carbon dioxide. You can manufacture the molecule methanol
if you take the constituent parts and you substitute them
for renewable sources. Obviously, today we make it primarily from
(17:23):
fossil fuels as the cheapest source of the constituent elements
that you need to manufacture the methanol molecule, and so
various ship owners, not just mask Line because many others
copied them, started to order methanol dual fuel vessels. But
the methanol that we would need to make to reach
these very high greenhouse gas intensity reductions is significantly a
(17:47):
more expensive product than green ammonia, and so we don't
expect that to be a pathway that sees significant further
expansion beyond the next few years, because we expect which
is in chemical form NH three, so with combination of
nitrogen and hydrogen, and doesn't have the disadvantage of needing
(18:08):
a carbon atom. Ironically, in a transition which is all
about avoiding carbon emissions, the source of sustainable carbon is
the limiting factor on the ability to competitively produce some
of these other molecules, whether that's synthetic methane. Because We
can obviously replace the LNG with a synthetic molecule if
we wanted to synthetic methanol. Both of them are going
(18:30):
to be, by our estimation, forty or fifty percent more
expensive to synthesize to make as a molecule than a
green ammonia, which only needs to have nitrogen which is
separated from the air used in combination with green hydrogen
and the separation of nitrogen from the air. It's eighty
percent of our atmosphere. It's an incredibly abundant and relatively
(18:50):
low to a low cost to obtain element, and so
it's a much cheaper production process. The challenge with ammonia
is that it's a toxic fuel and it has a
lot of safety issues associated with its storage and use
on board ships. But those are all processes that we've
seen significant work going on over the last few years
(19:10):
since it's become apparent that the IMO is imminently going
to regulate, and the sector has been doing a lot
of experiments. It's been using a lot of its existing
infrastructure because we store and move ammonia on ships about
fifteen million tons per annum at the moment, so there
are lots of ports that have experience of handling this
fuel and they've done trials that have helped to de
(19:30):
risk that particular pathway, whilst the engine manufacturers optimize the
machinery solutions or the storage solutions that will need to
be installing on vessels. So we've seen these four different
technologies essentially, the conventional fossil fuel vessels, the dual fuel
LNG vessels, the jube fuel methanol vessels are now the
dual fuel ammonia vessels, all being produced and ordered over
(19:53):
the last few years. Ammonia are the smallest fleet at
this point because they're the last kid on the block
in this wave of innovation, and this is all alongside
the development of battery electric vessels for some of the
smaller distances, and a range of other technologies including wind assistance,
which has got a huge role to play across a
(20:14):
number of ships that are very amenable to using some
sort of sale device to reduce the amount of energy
needed from any liquid fuel stored on board. So there's
quite a broad range of technologies that the sector has
been very innovatively pursuing, but we think are actually going
to sort into a very small group once the costs
(20:34):
and the maturity fully clarify.
Speaker 1 (20:38):
Thank you. So I guess potentially an acceleration of interest
in newer generation fuelds like green Aneumonia, but also in
parallel a lot more work on de risking, as you
mentioned that the transport, storage and distribution of the new fields.
Speaker 2 (20:58):
De risking and scaling up because this is significantly about
economies of scale and availability. I think one of the
challenges for shipping, which is probably a common challenge for
a lot of sectors of transport, but a large number
of ships operate a bit like taxis, so they travel
on a voyage or a sequence of voyages, which is
very unpredictable. They go wherever the cargo needs to be loaded,
(21:19):
and as a consequence, if you build a new ship
that has a new technology on board, you need to
be confident that that technology will be supported and will
find available fuel in a very large number of different locations.
Now there's a subset of ships which are operating on
a shuttle voyage. I either go backwards and forwards between
the small number of ports on a regular basis, and
(21:40):
actually some of those vessels include sectors like the bulk sector,
so we move a lot of iron ore between Australia
and China, for example, and those are some of the
vessels which are being explored as early adopters of some
of these new fuels because you would only need this
new fuel infrastructure in two locations, China and Australia, unlike
for many other ships where you would need it in
(22:01):
almost every continent before you could be confident. And we've
been through this with the LNG transition. The LNG transition
was significantly enabled for the vessels that went down that
technology pathway because we've increasingly used LNG as and energy
commodity globally and so it was available in both import
and export terminals around the world, and that could supply
a number of ports around those hub locations. And we
(22:24):
will need to see the scaling up of the solutions
for shipping's future energy commodity energy molecule before we will
get a very large sort of movement towards towards that fuel. Already, though,
we can do these on more control voyages where there's
a more greater coherency, of greater consistency of the infrastructure
(22:45):
and the vessel.
Speaker 1 (22:47):
Right, so not just what happens on the ship, but
also all the supporting infrastructure in the parts of core
and the infrastructure that they in turn depend on as
well within the respective destinations.
Speaker 2 (22:58):
Exactly wonderful.
Speaker 1 (23:00):
And I'd like to also ask a different question, which
is that the net zero Framework sets out targets for
ships greenhouse guests fuel intensity starting in twenty twenty eight,
but it also leaves multiple unknowns, for example, and a
greed methodology for how the greenhouse guests fuel intensity would
(23:20):
be calculated. I'm curious could you share your views on
how significant these areknns are and net zero Framework as
it stands, and how these might impact the response of
the shipping industry to the garganization plan.
Speaker 2 (23:35):
Sure. Yeah, And I think this is a really fascinating
interaction with the ESD subject because we're talking primarily here
about regulation and a lot of the sector is waiting
for final text which is crystal clear about exactly what
the regulation says and therefore enables them to make an
investment which is as de risk as possible. I mean,
(23:57):
that will come, but it's it's happening gradually. What we
proved in April will need to go through adoption in October,
and there's a process of writing a series of guidelines
which then define in the small print exactly how certain
calculations will be performed, exactly how the reward will be calculated.
So I talked already about this subset of fuels which
(24:18):
have a very low greenhouse gas intensity below nineteen grams
of CO two per megadule of energy, and those fuels
Z and Z zero and zero fuels qualify for reward.
But the actual fine print of that guideline, how will
that be calculated, how will it be distributed, is incomplete,
and so we don't know for certain what that will
(24:40):
constitute and therefore exactly what business case will be made
out of it. Similarly, there are LCA guidelines life cycle
Analysis guidelines that need to be finalized, and those will
set the maths or the equations behind the calculations of
the SCA of different fuels, and those are due for
adoption over the next eighteen months. So we will see
(25:02):
these that materialize quite rapidly, but for now they constitute uncertainties.
And alongside some of the other uncertainties like when will
this view be available at this volume at this price,
there are political uncertainties, and they're sort of technoeconomic uncertainties.
This is the environment within which people have to make
decisions in at this point in time. So I'm not
(25:23):
saying that they're insignificant, because no one wants to take
more risk than they should have to. But this is
a sector which has an abundantly clear mid term but
a slightly uncertain short term, and the abundantly clear mid
term in our analysis, puts you in this no brainer
(25:44):
space for a molecule of green amumonia, But exactly how
strongly the business case of that molecule is made in
the next five to ten years is not abundantly clear
until we get through the next two three years. So
we'd think that there's actually a situation here where the
private sector can do some maths and figure out what
its investment pathway needs to look like quite clearly in
(26:06):
order to manage its risks in the mid thirties, but
exactly what it optimizes in the near term is quite hard.
For the people ordering ships, this is a relatively easy
decision because the nice thing about the vessels is that
they represent a lot of optionality. So a dual fuel
ammonia vessel can run on conventional fuel, so you can
run on conventional fuel and pay the penalty. If that's
(26:27):
the winning strategy, you can run on all of the
biofuels that we have on all of them, but all
the oil type biofuels, because it's still capable of consuming
a conventional fuel. So hbos and fames, which are specific
types of bio energy that you can turn into a
liquid oil equivalent, those are all compatible with that particular technology.
(26:48):
You can run that type of vessel on a blue
ammonia fuel, so you can run it on a fuel
produced from natural gas. So if you think that the
next five years are going to see particularly low gas prices,
then you can hedge that particular risk your investment by
exposing yourself to a blue ammonia opportunity. And then you
can also hedge the mid term the point at which
(27:08):
the green ammonia becomes by far the least cost energy
commodity for a low greenhouse gas intensity fuel, because that's
compatible with the vessel as well. Now, for those who
aren't ready to make that decision, you can order an
ammonia ready ship, so that's a lower cost ship that
has the design consideration of what you would need to
retrofit the vessel already taken into account. So there's a
(27:30):
there's kind of an optionality space which is quite robust,
even though the precise timing of exactly what fuel will
be the optimal way to comply over the next over
the near term of the regulation will remain unclear for
the next couple of years. But these are long life assets.
I mean, these are vessels which should be at sea
for thirty years. So if you're only looking at the
next two or three years, you're probably not factoring in
(27:53):
your residual value risks as you get to whatever point
that you take your investment decision towards. So if you
expect to own something five to seven years, you need
to be thinking about what will an LNGST be worth
in seven years, eg. Twenty thirty two, which is exactly
the point when the three hundred and eighty dollars per
ton hits you. So there are some clarities that we
have in this regulation that really tell you LNG is
(28:16):
a bad idea and green ammonia or ammonia deal fuel
vessels that expose you to both a range of opportunities
are a good idea and more resilient solution. The problem
is much harder for the fuel producers, I think, because
they have to make this huge capital investment for something
for which they don't know the exact timing of when
they will have large volume off take or any certainty
(28:37):
on price, and so they might have to take quite
a big risk hoping that that reward mechanism and the
Z and Z price is going to make their commodity
competitive or is going to enable them to sell without
being lost, making for a number of years before the
price movements in the sector or the regulatory strengths comes
in to enable their market to really take off. We've
(29:00):
got a bit of a headache for the fuel producers
to solve. Fortunately, their opportunities come from more than one
off take sector, so it's not just shipping. There are
other places where you can use green hydrogen or green ammonia,
and those other sectors are also where Obviously they then
look to diversify some of their risk and manage some
(29:20):
of their opportunity. So we've got something to manage. The
iMOS clarity can't come soon enough because it'll reduce risk
for everyone, and the clearer that we get some language
into this set of guidelines, that easier it'll be for
people to make some of the some of the very
strong investment decisions that are needed if the sector's going
to have the massive volumes of these new energy commodities
(29:41):
available in time to hit its twenty forty objectives.
Speaker 1 (29:46):
That's great, thank you, and maybe just shifting gears a bit.
The IOMAL draft regulations also make multiple mentions of a
just transition. And I know you touched on this very
briefly earlier, but this may see curious to a casual
observer given the other ways rather technical nature of the
rules still laid on in the document. And could you
(30:09):
provide our listeners some context for this and why so
many mentions of a just transition occurs in the draft regulations?
Speaker 2 (30:16):
Sure? So, the IMO is a UN agency, as a
specialized UN agency, so it has to has to find
solutions that work for its member countries one hundred and
seventy six countries that make up the IMO. And as
I mentioned already, the consequence of a generalized increase in
transport cost is recognized to be regressive, so it'll effect
(30:37):
of those one hundred and seventy six member states, it
will affect certain countries much more negatively. They'll see a
more significant GDP reduction than others and when this was quantified,
because that was a key part of the negotiation process
over the last couple of years. So UN Trade and
Development an DAD undertook analysis to look at how much
economic negative economic impact occurred as a conquents of regulation
(31:02):
that reduces greenhouse gas emissions. And we can see that
on broad average values that the transport costs or the
cost of moving goods around the world from a ship
owner's perspective, might go up eighty percent. The costs for
trade might go up thirty percent, So the maritime logistics
costs that include things like port jews so dilute that
(31:24):
transport cost associated particularly with the ship, and that cost
increase will then affect imports in some countries. That will
increase the cost of imports and it could also undermine
some of the export competitiveness of countries, especially countries that
are far from their markets and poorly served by logistics
supply chains at this point in time, and those economic
(31:48):
impacts need some The member States agreed that those economic
impacts need to be recognized and we need to address them,
and they also recognize that there was this particularly daunting
task of an energy transition that needed to be global
and inclusive. So it's one thing to have an energy
transition that can take place in a small number of
countries that we've already advanced technology and are well suited
(32:12):
to capitalize on a major shift in reconfiguration of the
sector's supply chains and fleet. But there's another thing for
that to be something that all countries feel that they
can be part of, and we can maximize the likelihood
that these fuels will be available globally at the speed
we need them to be available globally to enable that transition.
If go back to that point I made about many
(32:34):
ships being like taxis that operate at an unknown sequence
support calls, and therefore we need these fuels to be
very globally available very quickly. So a lot of that
embodies itself in this expression just an equitable transition and
the IMO's revenue generation. So this goes back to the
design of these penalty fees, of which the one hundred dollars,
(32:55):
if it is paid by most of the ships, will
generate around twelve to thirteen billion US do as paranum,
some portion of which we'll go towards the reward mechanism.
We don't know exactly how much at this point, and
some portion of which goes towards just an equable transition,
including helping countries who are economically impacted, helping to address
some of the climate impacts created by all of the
(33:15):
fossil fuels that the sector has consumed so far and
all of the climate impacts that that has caused, and
then a certain amount of the revenue also towards enabling
a more inclusive transition that makes fuels available or technology
transfer or other opportunities in countries that would need some assistance,
and we can see that that assistance is incredibly important for,
(33:37):
for example, countries in Africa who have huge potential to
be fuel producers for these green ammonia molecules, but have
much higher costs associated with some of that, particularly the
cost of capital. So there's a potential for this all
to work in a mutually reinforces reinforcing way in which
we have a progressive energy transition which is also increasing
(33:58):
of the equitable or equity within the member states. But
that requires that the design of what happens next is
as effective as possible. So there's a lot of work
to do, but there's a lot of potential an opportunity
as well.
Speaker 1 (34:14):
I know you've covered some of this in our earlier discussion,
but how do you think the shipping industry is likely
to respond to this new and that zero framework, And
in particular, do you think shipowners are prepared for the
transition the hit what would you say needs to be
prioritized and what do you think would be the more
difficult challenges you would expect the companies and shipowners to face.
Speaker 2 (34:37):
So we track this in our research group. We've been
producing in collaboration with U and Foundation and high level
Climate champions and Getting to Zero, an annual report that goes,
what are the things that would need to be in
place for the energy transition, particularly a sort of near
term target that five percent of the energy used in
international shipping is scalable zero MA mission fuel like a
(35:01):
green hydrogen derived fuel. So what would need to happen
for us to have just five percent of the energy
mix to be that type of fuel by twenty thirty
And we break down a lot of the indicators into
what needs to happen on the supply side and the
technology and the cost of hydrogen in the evolution of
the supply chains. But also the fleet readiness, so how
many ships are being ordered which are dual fuel specified
(35:24):
and therefore able to use these fuels, Because if we
can't see that ordering signal coming through in the mid
twenties already in twenty twenty five, then we're not going
to be able to expect there to be a very
significant portion of the fleet in twenty thirty that will
be capable of using these fuels. And on the supply side,
so on both supply and demand, so both the production
(35:44):
of the fuel and the ability to use it. In
our kind of central estimate, we're a little bit below
the five percent threshold, so it's really not going to
be easy to get to that kind of tipping point
by twenty thirty from where we are in twenty twenty five.
But in particular, it's the demand side, it's the fleet
readiness which is the most challenging. And we count within
(36:07):
the fleet readiness both in methanol dual fuel and the
ammonia deal fuel. So even though I've indicated that we
think that the ammonia der fuel is by far more
likely to be the most cost competitive solution, we're also
looking at how many methanol dual fuel vessels are being
built and looking at the numbers of those and even
when we add those in, we don't have the new
build ordering. That looks like it would help the sector
(36:29):
to reach its lowest cost trajectory. Now, what that might
mean what you can kind of chase that through would
then be a situation where in the thirties, as a
molecule green ammonia becomes abundantly obviously a lower cost molecule.
There's then a rapid shift in the valuation of the fleet.
(36:51):
So there are vessels that are capable of using ammonia
as a molecule that become prized because they have operating
costs which are thirty forty fifth twy percent lower than
the vessels that they're competing against. And then there's a
very large majority of the fleet which become significantly downgraded
in value because they either need a very expensive retrofit.
(37:11):
So you take the vessel out of service and you
do some major surgery on it to fit at pneumonia
tank and modify the machinery so that it can use ammonia.
And that sort of effort is possible, but obviously if
tens of thousands of ships want to do that, operation
at the same time. Then that doesn't that's not compatible
with the infrastructure and the yard capacity that we have
(37:34):
in the fleet. So we need this to be a
more managed transition in order to reduce the risk that
those with those incompatible assets have distress. You have kind
of value right downs because they're all significantly recognizing the
shift in valuation at the same point in time, and
there's a significant risk that this happens around twenty thirty,
(37:55):
so actually quite soon and quite soon in the exposures
that many ship owners have either on their balance sheet
because they own quite a lot of the equity in
the assets themselves, or that the finance sector has because
they also own very significant shares. And we're doing a
lot of work in our groups try and understand how
these risks might flow through to the different actors. Is
it the owners, is it the financiers? Like who is
(38:16):
it who carries some of this stranded asset risk that
will result from a strong regulatory driven regime hitting a
sector of assets which is quite hard to turn over
to a new technology very fast, and that therefore face
a lot of risks of either being scrapped prematurely or
having these very expensive modifications. Now there are steps that
(38:40):
many can take an hour taking to kind of prepare
themselves for this and align themselves, including through ESG initiatives.
That the sector has good examples of private sector action
where they've tried to measure how exposed they might be
to these types of risks, and I think we'll see
increasing use of that as stakeholders want to kind of
understand what might happen under various different scenarios, including the
(39:04):
likely scenario that this happens quite fast and in quite
a brutal way.
Speaker 1 (39:09):
Fascinating insights and maybe as a sort of preview again,
I know you've touched on this briefly as well, but
could you show some of the areas of research you
and your team are currently focused on.
Speaker 2 (39:19):
Sure, So, I guess a lot of how big this
stranded asset problem depends on how complicated and expensive are
retrofit costs. So we again a bit like the innovation
that we've seen already, it's a sector where retrofits are possible.
What we've seen in the past. For example, when sulfur
regulation came into the sector in twenty twenty, the IMO's
(39:40):
certainty of regulating became clear in twenty eighteen and pretty
much between twenty eighteen and twenty twenty four, thousand ships
got retrofitted with selfur scrubbers, which was at the time
the lowest cost solution for compliance and enabled the ships
to continue to burn the heavy fuel oil that and
the higher cost of a desulfurized oil product. So we
know that this is a sector which, when it has
(40:01):
a compelling business case, can retrofit thousands of ships in
very short periods of time.
Speaker 1 (40:06):
And.
Speaker 2 (40:07):
In a lot of our initial calculations, we found that
that looks like the most likely response to a sudden
clarification of a grew pneumonia pathway that we'll see a
lot of vessels coming in for retrofit, especially the sort
of five year old vessels that are maybe five year
old LNG dual fueld vessels that the owners are starting
to face very significant cost or very poor competitiveness on,
(40:31):
but with only five years of their life spent and
needing another twenty or twenty five years, those vessels might
well be attractive for retrofit. So we want to really
make sure we understand the cost and complexity of retrofit,
and we're doing some work to look at that in
a bit more detail. We want to understand the financial
exposures and the financial responsibilities. Who has the liability in
(40:55):
the event of a devaluation of assets, because that will
be important to how that kind of flows through, even
with an additional cost for which some companies are already preparing,
like there will be companies that don't have that capital
to do a midlife multimillion dollar injection into the asset,
and therefore where does that fall. And we're kind of
(41:16):
really interested in this fuel landscape, particularly in response to
some of the finer detail within the iMOS guidelines. So
one of the headaches for the sector is how does
it estimate the future price of BUI fuel. What we
have at the moment is a market where you can
look at the prices today and you can say, I
can see what the price is in Singapore or Rotterdam
(41:37):
or for Gyre for a used cooking oil derived marine fuel,
But what the price of that used cooking oil drive
marine fuel will be in five years is very hard
to estimate, but is the crucial factor for determining when
some of the synthetic fuels will become cost competitive. So
we have an IMO regulation which is trying to be
(41:58):
as technology agnostic as possible. It doesn't say green ammonia
is the answer. It leads that to the market. Great
to find the point at which the buyer of your
price will exceed the falling cost of green ammonia as
economies of scale and learnings in the cost of production
effect and mature the technology and reduce the costs and
improve the supply chains of that particular commodity. But that
(42:21):
getting into the detail of that is very difficult for
a lot of the shipping industry. But it's also difficult
for the energy sector generally, given how biofuelds are currently
traded in liquidities, and so we're really interested to understand
how those might mature and how they'll interact with these
penalty fees from the IMO and the obviously the reward
mechanism which has this explicit objective of incentivizing early adoption.
(42:43):
So will we see early adoption and what will it take?
What would the parameters need to be set as what
are the mechanisms that can offer the greatest certainty, especially
for the fuel producers, who, as we previously mentioned, have
got this particular headache of when do I make my
multi billion dollar investment given time scales for how long
it will take for that to be in production and
when the business case for the product that I'm making
(43:05):
will be strong enough that I can get returns to
my investors in a decent timescale. So there's a lot
of interaction of that with the complexity of these different
fuel production processes and other stimulus. They're not only demanded
by shipping, We'll see them being significantly increasingly demanded by
aviation under various staff man dates that exist. And how
(43:27):
the competition not just with aviation shipping, but all the
other sectors that need that biomass as a feedstock. How
that plays out will be crucial to this sector's energy
transition and risks.
Speaker 1 (43:40):
Great I look forward to reading more of these insights
and your team's future research. Thank you again so much
for your time and also generously sharing your insights with
our listeners.
Speaker 2 (43:49):
Thank you very much, and to all our.
Speaker 1 (43:51):
Listeners, I hope you enjoyed the conversation with Tristan as
much as I have. You can find out more information
about how companies and industries globally. I respond to ESG
related risks and opportunities by going to Bispace ESG goal
on any Bloomberg terminal, and if you have an ESG
quandary or burning question you would like to ask bi's
(44:12):
expert analysts, please do send us an email at ESG
Currents at bloomberg dot net. Thank you for tuning in
and to join us again next time
Host
Eric Kane
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