Green Shipping: Good or Bad for the Bottom Line?

E.U. companies struggle to meet tough new emissions standards.

While diesel engines remain the norm in shipping, competitors like LNG are becoming both more feasible and more available. Part of the reason is the rapid expansion of Sulfur Emission Control Areas (SECAs) across North America and Europe. So the critical question becomes: Does "green” propulsion allow the merging of economic efficiency with environmental benefits, or is it just another compliance cost for the shipping trade?

In a business where cost-control spells the difference between insolvency and survival, every euro (or dollar) leaving the books must be scrutinized. And meeting regulatory requirements is generally a pure financial drag. This is especially the case when it comes to environmental requirements – chiefly because, right now, traditional bunkers are so cheap. This means an economic benefit to shipowners who use these fuels while the negative benefits (i.e., pollution) are socialized. Being compelled away from high-sulfur fuel oil is, in cost terms, bad.

Unlike a year and a half ago, when LNG prices were low and oil prices high, many regarded the move away from fuel oil as a cost-cutting measure. For a brief, magical moment, environmental protection and economic gain were aligned. This is no longer the case. The "carrot" of cost-savings has been replaced by the "stick" of E.U. regulation. Shipowners must retrofit and comply with low-emissions requirements if they intend to sail in E.U. waters.

The Driving Force

So what is the background of these regulatory rules affecting shipowners?

The major impetus for stricter standards for ship emissions in the E.U. is the Trans-European Transport Networks (TEN-T) policy white paper. Originally planned to address the need for a Europe-wide network of air, water, road and rail systems in 1996, TEN-T has seen modifications and expansion of its goals in the years since. TEN-T is now the umbrella term for hundreds of projects of the European Commission with the goal of ensuring “the cohesion, interconnection and interoperability of the trans-European transport network, as well as access to it.”

Among the objectives of TEN-T is "environmental sustainability." Tugs, specialized vessels, ice breakers and pilot boats are among those ships specifically called out as playing a vital role in the E.U. shipping network. As such, these vessels are more likely than others to obtain assistance in meeting SECA standards.  Short-sea shipping is also singled out as a sector requiring investment. All of these have in common the fact that they share, in theory at least, a "significant European interest."

Where Will the Money Come From?

Direct loans, intermediated loans and project financing loans are available for such investments, sometimes covering up to 50 percent of the eligible costs and typically facilitated through the European Investment Bank (EIB). But shipping has, unfortunately, not benefited from the EIB in proportion to its relevance. In fact, from 2010 to 2014 only four percent of the 70 billion euros of E.U. transport lending went to shipping industry projects.

It is counterintuitive that so little money has gone to shipping since the money is so urgently needed there. In the words of Mark Clintworth of the EIB: "Owners are mortgaged up to their eyeballs." Clintworth was speaking at the Hamburg Chamber of Commerce’s Annual Shipping Dialogue in April.  As Head of Shipping at the EIB, he discussed the bank’s response to lackluster lending statistics in the context of its “Green Shipping Product Concept,” which was created with two goals in mind: financing LNG newbuilds and financing scrubber retrofits.

Primarily operating through bank guarantees, the goal is not to actually bridge the financing gap for newbuilds and retrofits but rather have the EIB guarantee act as a backstop to commercial bank lending, incentivizing them to take on projects with a perceived heightened risk of default. Even so, thanks to low oil prices, uptake on this program has been low.

An EIB guarantee can cover 80 percent of commercial financing for an LNG newbuild up to a maximum of 25 million euros, or 100 percent of a scrubber retrofit with a maximum of 10 million euros. Thus, one has the choice between a bigger LNG project with more risk or a smaller scrubber retrofit with less risk. If the ship should end up liquidated, the extra money the commercial lender put forward, up to 25 million euros or 10 million euros, respectively, will be reimbursed by the EIB.

Combating the “Dirty Ships” Stigma

From the shipowner's perspective, however, the "dirty ships" narrative can be quite frustrating. Shipowners do not seek out the dirtiest fuels and intentionally avoid using cleaner propulsion systems out of spite toward the environment. Indeed, the fuel chosen is a result of shipper preferences and cost sensitivity to freight rates. Shipowners who have invested in green ships complain that cargo interests are happy to use them – except when they are asked to pay extra for freight.

The stigma of dirty ships was another hot topic at the Hamburg Shipping Dialogue with shipowners and industry representatives weighing in from various angles. Rörd Braren of the eponymous Reederei Braren believes it is cheaper to build a new vessel than to take, for example, a 50-year-old vessel and have it retrofitted and extensively modified. Why? Because today’s newbuild prices are so low that it pays to invest in newer vessels.

In terms of whether or not the green aspect of the investment will pay off, his benchmark for calculations is to compare apples to apples. If LNG is still more expensive than heavy sulfur fuel oil plus a scrubber plus a catalytic converter, then it is a bad deal. But comparing LNG to heavy sulfur fuel oil on its own is an unfair comparison. The economic calculations only make sense when oil costs 70-80 percent of LNG. Any cheaper and LNG is not cost-competitive in spite of the other benefits.

Braren's frustration with the overall situation broke through his usual Hanseatic reserve as he noted: "We have a banking crisis, a financing crisis, a difficult shipping market, new environmental regulations (SECAs), ballast water rules, and so forth. The shipowners are faced with a mammoth challenge going forward."

Mahinde Abeynaike from Bomin Linde LNG argued that, rather than the commercial fleet, Hamburg's city-owned HADAG and other public ferry companies are candidates for LNG bunkering. For these customers, environmental impact is more important than profitability.

Christian Peter Hoepfner of Wessels Reederei noted that, unfortunately, the financing for green projects is no longer available due to the significant monetary losses in shipping in previous years, which have eliminated many of the industry's reserves. However, the German federal government's liquidity and propulsion subsidies made it possible for Wessels Reederei to nevertheless successfully complete a partial LNG conversion of its fleet. The company obtained significant assistance and was able to obtain the necessary financing.

The process was quite unbureaucratic. A major consideration of the government planners was the existence of 23 sister ships of the vessel that was converted to LNG, which is why the project was able to be presented to the government as a "pilot" project. The idea was that further conversions downstream would copy the initial "model" conversion.

Even with public financing, however, Hoepfner noted that it was still a struggle to close the financing gap with commercial lenders. Nonetheless, in the end, Bremer Landesbank, the state-owned bank of the Free Hanseatic City of Bremen, supported Wessels Reederei's endeavor and made it possible for the LNG pilot project to proceed. Even with cheap oil, they remain committed to LNG.

LNG-Ready

Dr. Hans Gätjens of Bureau Veritas noted that many of the modern, large container ships are "LNG-ready," meaning they are easy to convert if the time comes, i.e., when it becomes economically feasible. They have extra space in the holds for tanks and have spaces set aside in the correct segments of the hull for the necessary LNG propulsion equipment.

As much as 600,000-700,000 cubic meters of LNG are required merely for the bunkers of the large liner services between Europe and Asia, indicating the scope of facilities necessary on board. This is not an easy pill to swallow given current rock-bottom freight rates. Just like airlines cutting legroom out of economy class, carriers need to squeeze in every ton of cargo they can, and those six-figure cubic meters of lost space will hurt.

Knut Gerdes of AG EMS, the parent company of Reederei Cassen Eils, the pioneers of LNG technology in Germany with the LNG-powered MS Helgoland, stated that the company has some issues with LNG primarily related to customer service. The delivery network, contractual conditions and reliability of delivery need to be improved, he says, but even so LNG works and makes sense. LNG advocates would certainly agree that both the onboard technology and availability of service must improve. – MarEx