The shipping industry plays a vital role in global trade. Majority of goods is transported by sea and most shipping vessels currently rely on marine fuels such as Marine Diesel Oil (MDO), Marine Gas Oil (MGO), and Heavy Fuel Oil (HFO). One of the main reasons is that these fuels are cheaper and readily available, however, they are not environmentally-friendly. Shipping industry discharges a significant amount of carbon emissions, therefore, decarbonization and eventually reaching zero carbon emissions in this sector has become imperative. The United Nations agency responsible for regulating shipping, International Maritime Organization (IMO), aims to reduce ocean-vessel emissions to half by 2050. To meet the target, the shipping sector is looking to switch to alternative fuels, however, feasibility of this change still remains to be assessed.
Shipping industry accounts for vast proportion of global trade as a result of rapid growth in cargo transportation due to increased globalization and e-commerce. According to the International Chamber of Shipping, 90% of global trade is transported by sea, hence perpetuating carbon emissions in the shipping industry. According to a study published by the European Parliament, the shipping industry could be responsible for up to 17% of global carbon emissions by 2050. In comparison, in 2021, the sector contributed to about 3% of worldwide greenhouse gases. This significant increase in carbon emissions by the sector is resulting in increased pressure on the shipping industry to reduce its carbon footprint.
In an attempt to reduce emissions, IMO has adopted the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII) rating regulations. While the EEXI is a rating system that assesses the energy performance of existing ships based on speed, power, and engine size, the CII rating uses a ranking system to monitor the efficiency of individual ships. Under the CII rating system, each vessel will receive a ranking from A (good) to E (poor), starting from 2023. Ships receiving grade D for three years or Grade E for one year will have to put a corrective action plan in place. These new sets of regulations have been in effect since January 2023, and are a part of IMO’s Greenhouse Gas Strategy (GHG) that aim to reduce the carbon emissions from international shipping by 40% by 2030 and 70% by 2050 compared with 2008 levels.
Shipping is a highly capital-intensive industry with great dependence on fossil fuel. Most vessels are still dependent on traditional marine fuels and would require significant investment in infrastructure to transition to zero carbon emission fuels. A 2020 study by the University of Massachusetts estimated the total cost of decarbonization efforts would be about US$1.65 trillion by 2050 to create apt infrastructure to support zero carbon emission fuels. With shipping being the backbone of international trade, trade volumes are expected to grow continuously, resulting in increase in carbon emission, which will further push industry players to invest in alternative carbon-efficient fuel.
Alternative fuels have limited availability and cost restrictions
Currently, there are three primary fuels that are used in ships – MDO, MGO, and HFO. All three fuels are made from crude oil and emit carbon when burnt. Hence, the sector is actively looking for alternative fuels to replace these fuels with the introduction of IMO 2023 regulations.
Methanol could be a suitable alternative but availability could be a challenge
In pursuit of sustainable and greener fuel, the shipping industry is moving towards using other fuels – one of which is methanol. As per a Finland-based technology company Wärtsilä, methanol usage in ships, when compared to HFO, dramatically reduces carbon emissions and is easy to store. Considering this, the shipping giant, AP Moller-Maersk, headquartered in Denmark, has ordered 19 methanol-powered vessels. The company estimated that they would require about one million tons of green methanol per year to run these vessels, which will generate annual carbon emission savings of about 2.3 million tons. Another shipping company based in Beijing, China Ocean Shipping Company (COSCO), has ordered 12 container ships, worth US$2.87 billion, which use methanol as a fuel.
However, the availability of methanol is also to be considered while assessing it as an alternative fuel. As per the world’s largest methanol producer, Methanex, the shipping industry would require about three million tons of methanol annually to fuel vessels. Therefore, it is not enough to build vessels that run on methanol but also ensure its availability to fuel the vessels.
Keeping such requirements in mind, Maersk has partnered with six companies across the globe to source at least 730,000 tons of methanol annually by the end of 2025. The six companies are CIMC ENRIC (China), European Energy (Denmark), Green Technology Bank (China), Orsted (Denmark), Proman (Switzerland), and WasteFuel (USA). Additionally, in 2018, COSCO partnered with the US-based IGP Methanol and China-based and Jinguotou (Dalian) Development to construct two methanol plants in IGP Methanol’s Gulf Coast Methanol Park. The plants are planned to have a capacity of 1.8 million tons of methanol per year each. COSCO is ensured to fuel its 12 newly ordered vessels through these two partners
Most methanol produced today is derived from fossil fuels. There are primarily three kinds of methanol – grey or brown methanol derived from natural gas, green methanol made from biomass gasification, and blue methanol derived from natural gas combined with carbon capture and storage technology (CCS). With the help of CCS technology, the carbon emitted is captured and later transported and stored deep underground permanently, hence reducing carbon emissions.
Both green and blue methanol are considered to be the most environment-friendly. However, most methanol available and used currently is either grey or brown. The availability of blue and green methanol is estimated to be less than 0.5 million tons annually in 2022, which is considered to be severely inadequate to power current fleet of vessels. While Washington-based, Methanol Institute estimated that renewable methanol production might increase to over 8 million tons annually by 2027, it is still unlikely to be sufficient to replace diesel as the go-to fuel.
Methanol as a fuel also has its challenges in terms of cost. Depending on the type of methanol consumed, traditional bunker fuels can be up to 15 times more expensive. Assuming the limited availability of methanol the cost is likely to increase. Further, industry players need to ensure methanol availability and feasibility before switching away from traditional marine fuel.
LNG – most likely a transitional fuel
While some players are looking at methanol as an alternative fuel, other players are considering LNG. LNG is 20-25% less carbon intensive than HFO and emits fewer nitrogen oxides and sulfur oxides.
Rio Tinto, a mining company based in London, announced plans to add nine LNG dual-fueled Newcastlemax vessels in their fleet that transport bulk cargo, such as coal, iron ore, and grain, in 2023. The company started a one-year trial and is already seeing a reduction of about 25% in carbon emissions.
The main driver to convert to LNG fuel is the reduction in fuel costs. According to S&P Global, an energy company based in the UK, LNG prices vary from US$213-$353 as compared with MGO prices, which vary from US$550-$640. While LNG is cheaper, bunkering LNG to the vessel could be a challenging operation as there is lack of LNG bunkering infrastructure. Another significant drawback in the usage of LNG is methane slip, which is the discharge of unburned methane from an engine that could poison aquatic life.
As per World Bank, LNG as a marine fuel is most likely to play a limited role given its drawbacks. However, a combination of lower prices and the increasing number of LNG dual-fueled vessels might support bunkering demand in the future.
Ammonia at the nascent stage of adoption
Unlike LNG, ammonia is turning out to be a viable option as infrastructure is already taking shape. As per a 2020 report by Siemens, German industrial manufacturing company, 120 ports are already dealing with the import and export of ammonia worldwide. However, even with the infrastructure, only green ammonia is a zero-carbon fuel and it is not produced anywhere at the moment.
Looking at the fuel as an alternative option, Grieg Maritime and Wärtsilä (Norwegian and Finnish shipping companies, respectively), are jointly running a project to launch an ammonia-fueled tanker producing no greenhouse gas emissions by 2024. The project is also being supported by the Norwegian government with a funding of US$46.3 million. The partnership aims to build the world’s first green ammonia-fueled tanker. The partners plan to distribute green ammonia from a factory based in Norway to various locations and end-users along the coast.
There is a wide range of alternative fuels that are yet to be examined from the point of sustainability. Hydrogen is also one of the fuels that is considered as an option for shipping vessels. We wrote about it in our previous Perspective: Hydrogen: Future of Shipping Industry?
Other synthetic fuels combining hydrogen and carbon monoxide are also present and already used extensively in other industries such as agriculture. However, their viability is yet to be tested in the shipping industry. Moreover, transitioning to alternative fuels is not easy. Several factors are needed to be considered before switching. To be a practical replacement for diesel, it needs to be readily available and price competitive with traditional fuels.
The global shipping sector was already on its toes since the IMO’s 2020 sulfur regulation that limited sulfur content in a ships’ fuel oil to a maximum of 0.5% (from pervious 3.5%). After the IMO’s sulfur regulation, players started to gradually switch to other fuels and phased out high-sulfur fuel oil from their operations. The new 2023 regulation again brings the shipping industry to heel. The key challenge the marine industry faces in decarbonization is the limited availability and high cost of alternative fuels. Additionally, infrastructural changes are also required while adapting to these new fuels. Ships modifications require major capital investments, while construction of new vessels takes several years.
MGO is shipping’s primary fuel today and is hard to match in terms of existing scale and commercial attractiveness as it already is a well-established fuel and has been in use for decades. Other viable fuels, such as methanol, LNG, hydrogen, and ammonia, although present themselves to be better options for achieving IMO’s 2050 target, are likely to be costly and would require much higher supply to meet the demand to power the vessels. Future fuel scenarios are likely to be determined by both supply and demand side dynamics.
For now, the key question for the players remains the availability of cleaner fuels at a cost that is acceptable and has the potential to replace traditional fuels. This further opens up the scope for partnerships between the players and fuel producers to jointly build a roadmap to ascertain fuel availability and bunkering infrastructure. With the players already moving towards adopting cleaner fuels, it is safe to infer that more partnerships between the fuel producers and the players are likely be seen in the sector in the years leading towards meeting IMO’s 2050 target.