Turning Global Shipping Green – Practical Transition.
Blain’s Morning Porridge 9th August 2024: Turning Global Shipping Green – Practical Transition.
“The planet cannot afford delays, excuses, or yet more greenwashing prevarication.”
Over the next 25 years the global shipping fleet will make a massive transition from dirty bunker fuels to new clean energies to achieve Net-Zero. The technologies are evolving, but are now coming on line. Methanol fuelled ships are now in operation – and they are investible!
Bill’s Pub to Club Swim:
Let me remind readers about Bill Blain’s Pub to Club Swim on September 14th Charity event in support of Wessex Heartbeat, the cardiac care charity.. You don’t have to anything except click the link – here – and make a donation. Without Heartbeat, well, you would not be reading the Morning Porridge this morning.
Greening the Oceans!
After a thunderous week in markets dealing with immediate problems of Japan, the carry-trade un-ravel, recession, rates, inflation, prospects for global trade and AI expectations deflation, (plus the riots in the UK), I thought it might be worth stepping back, deep breath and take a longer-term perspective on a potentially much bigger issue: the environment, climate change and global warming. I’ve always looked on the climate threat as an opportunity that than a reason to fear. I’m confident humanity’s inherent inventiveness will find solutions – but only after experimentation, trial and error, a multiple false-starts.
Today, I’d like to start with a deal I’m working on – an alternative, genuinely green, opportunity to invest in real assets critical to the kind of energy and fuel transition the global economy needs. (Let me make this clear this is only for institutional and sophisticated investors – not retail.)
Let me introduce you to the Stena Prosperous.
The Prosperous is a brand new, green-painted and green-powered 50k DWT bulk cargo carrier. She was formally named a couple of months ago in Singapore. The ship is owned by Proman Stena Bulk, a JV between Stena, the very well-known Swedish shipping company and leading tanker operator, and Proman, the leading gas producer.
The Prosperous, and her five sister ships, represent a revolution in global shipping. They run on methanol – a clean, energy-dense fuel that cuts greenhouse gas (“GHG”) emissions dramatically. Green methanol, made with renewable power, is a carbon-neutral fuel.
By way of contrast, just a few weeks after the Prosperous naming celebration, Singapore suffered a significant pollution event. Following a collision puncturing the fuel bunker of a moored tanker, the resort island of Sentosa was swamped in a tide of heavy fuel oil, turning the sand a sticky, smelly black. Oil washed into the mangrove swamps – creating a potential environmental disaster that could have killed the marine ecosystem. Teams of emergency workers laboured for weeks to clean up the toxic mess. If you spill methanol into the ocean – it breaks down into water and CO2.. nothing else.
Since the first steam-ship took to the waters some 220 years ago we’ve known fossil fuels are dirty and polluting – but they were the catalyst that powered the industrial revolution lifting humanity from subsistence poverty to wealth and prosperity. My hometown of Edinburgh was known as Auld Reekie because of the coal fired fug that enveloped it. Rampant pulmonary disease was the price residents paid for the prosperity the smoke represented.
As Singapore has discovered – fossil fuels come with environmental costs. One of my earliest memories was the wrecked tanker Torrey Canyon being bombed by the RAF to prevent an oil spill swamping Cornwall. Over my years sailing I’ve watched the yellow sulphur haze on the ocean horizon get thicker and deeper. If better, cleaner fuels exist – why would you not use them?
There are many modern luddites screaming we should continue to use Oil – their businesses and nations are motivated to do so – they have oil and want to keep selling it. What if better, cleaner alternatives are available? The course of economic history is the constant evolution of technologies and energy sources.
Notice, I hardly touched on global warming, climate change or net zero emissions. I go with the argument reducing greenhouse gas emissions will not only clean up the environment, but will allow us to survive to enjoy that environment. If you don’t believe the science – your call. Spend a few days down in the Med and tell me it’s not hot – hotter than it’s ever been.
We have to be pragmatic about a sensible transition from Oil and Gas to renewables and other non-polluting, non-GHG emitting, fuels. Transition won’t happen overnight – but given time, we can smoothly decarbonise by new and alternative technologies to replace oil and gas. There is no need to panic about unused resources; oil and gas will remain important commodities in the global economy as feedstock and petrochemicals.
Energy transition is underway is shipping.
Marine fuels contribute over 3-4% of GHG emissions – about the same as an economy the size of Germany. The global fleet of some 68000 vessels is the arterial system of the global economy. Without shipping global supply chains would cease to exist and we would revert to local barter – 90% of global trade goes by sea.
The complexity of new regulations designed to enforce 50% decarbonisation by 2023 have already significantly impacted the economics of shipping fuel and the reduced the usage of the low-quality high-emission bunker sludge that once fuelled the global shipping fleet. Even more significant changes and regulations are on the horizon.
The global value of shipping fuel is around $105 bln per annum. The next generation of ships ordered across the global shipping industry will be the last before zero emissions. That means there is a clear need today for new energy transition strategies to be in place ahead of that year. As 2050 approaches, ships using clean fuels will outperform older propulsion types in value and operating cost terms.
There are a number of clean fuel options to consider:
Batteries work for short-ferry hops and tug-boats, but many ports struggle to provide the grid power-connection required to keep these charged. Batteries won’t work for long ocean voyages. (Down where I live opposite the Isle of Wight, new ferries for the Red Funnel ferry-line will be diesel powered because they can’t guarantee charging capacity for battery powered ferries will be available in Southampton!)
Other clean options are hydrogen-based; liquid hydrogen, ammonia or methanol. All three fuels are processed from Natural Gas and come in “blue” form with emissions captured during production, and “green” form when renewable energy is used.
Hydrogen is the cleanest and most energy dense clean fuel – but has vastly higher costs due to pressurised storage and the hydrogen atoms seeping out even thick engine piping.
Ammonia poses a serious caustic threat when spilt and is the least energy dense.
Methanol is also high-energy density, easy to handle, easy to install, and a clean burning fuel, producing very low SOx and particulate emissions, 15% less CO2 and 80% less NOx emissions than conventional bunker fuels. Critically, it is biodegradable and non-acidic in water and not a threat to marine life or the ocean environment, unlike oil or ammonia. The technology is improving all the time to improve its security and efficiency.
The result is Methanol is increasingly considered by shipping fuel analysts to be the optimal clean fuel for the global shipping industry in its’ transition towards net zero. Global fleets like Stena and Maersk are ordering methanol vessels. A single Methanol powered 50k MT vessel can save over 30k tonnes of CO2 every year.
My chum and former colleague, Adam Forsyth of Longspur Research, reckons Methanol is set to play the major role in shipping decarbonisation – you can find his latest research note here – it’s well worth taking some time to read. The key thing is Methanol fuelled shipping works – as Forsyth told me: “Since the Stena Germanica was first retrofitted to use methanol in 2016, marine methanol engines have clocked up over 500,000 operational hours.”
While there are only some 100 methanol powered ships in service today, there are some 300 on order or in build around the globe. It is the leading contender to fuel the future fleet – says S&P. Many shipping lanes – like the Suez, ban any dirty sulphur fuels. When both Maersk and Stena favour methanol, it’s clear it’s got momentum.
Compare and contrast methane with hydrogen power – the other contender to power shipping. There has been plenty of talk of how the global economy will become “hydrogenised” – but precious few projects have been completed. Google “hydrogen delays” and the list is long. Innovating hydrogen based power systems has proved difficult from the engineering perspective, and vastly more expensive than originally thought. Looks good on paper – not so much in practice.
In terms of hydrogen shipping, there are a few larger vessels in planning and construction stage that will carry hydrogen to power fuel cell battery tech, but at present there are only smaller fuel-cell driven ferries and tugs. The problems of storage, cost, efficiency, purity and leakage means direct hydrogen powered engines are not yet proven for ocean-going commercial bulk transport. Neither is there much in the way of hydrogen infrastructure or bunkerage. Hydrogen is somewhat more efficient than methane, but that is more than compensated for in the higher costs.
Meanwhile, Proman and other producers have already built the fuel infrastructure to support and fuel methane vessels – which, compared to hydrogen are familiar and simple for current ports to handle.
The Stena Properous joins 5 of its sister vessels in the Proman-Stena fleet. The expectation is they will demonstrate how Methanol fuelled shipping is likely to become the key element of global economy’s transition to clean fuels in pursuit of net zero.
Together the six vessels comprise the assets of LEMSCO Fund 1, (Low Emission Methanol Shipping Company). The fund will own the six ships – and will add more as they are delivered. They are already in full operation and earning good long-term charter rates – they will produce a double digit return through a Luxemburg fund structure to investors.
The biggest risk in shipping finance is the notorious volatility of second hand ship prices. This occurs because of the feast/famine supply cycle of shipping supply spikes created because new build ships are typically ordered during trade expansions, but are invariably launched just as the economy slides into recession! The LEMSCO fund addresses these risks – the ships are being operated on long-terms leases by Proman-Stena directly, with guaranteed residual values after 10 and 15 years.
If you’d like to learn more about the LEMSCO deal – give me a shout and let’s discuss. (And yes, I can send a teaser..)
Out of time, back to the day job, and have a great weekend.
(The Morning Porridge is on holiday next week – but I will be checking emails… can’t help myself…)
Bill Blain
CEO and Founder,
Wind Shift Capital