There are several types of ships that transport hydrocarbons. One of the largest is the Very Large Crude Carrier (VLCC), which is usually about 330 metres in length and carries between 200 and 319 thousand tonnes of crude oil. Given the global push from fossil fuels towards renewable energy sources, what could the future hold for this fleet of massive vessels? Part one of a two-part article.
VLCCs transport oil from areas of surplus like the Americas, Europe and the Middle East, to areas of deficit, mainly in Asia. According to shipping company Okeanis Eco Tankers, the Americas are forecast to have an oil surplus of 5.2 million barrels per day (mbpd) by 2023, whereas China is forecast to have a deficit of 2.2 mbpd in the same time frame.
This prevailing West to East trade flow adds up so that approximately 2 billion tonnes of crude oil is transported using oil tankers each year, as according to the United Nations Conference on Trade and Development's (UNCTAD) 2018 Annual Review of Maritime Transport. With world seaborne trade at around 10.7 billion tonnes, this means that shipping of crude oil makes up approximately 19% of world seaborne trade.
Recent media reports and regulatory scrutiny focus primarily on the environmental considerations surrounding the fuel consumption of these ships, rather than the nature of their cargoes.
VLCCs consume as much as 100 tonnes of fuel per day, leading to carbon dioxide, methane, nitrogen and sulphur oxide emissions as well as particulates. Recent regulatory changes have targeted these issues, for example, the International Maritime Organisation (IMO) requires all ships to reduce the level of sulphur in their emissions from 3.5% to 0.5% or less from January 2020.
There has been significant debate over whether these rules are too stringent, the majority of which focus on two problems which need to be solved in order for the shipping industry to meet these requirements.
The first is centred on the capacity of oil refineries to remove the excess sulphur from marine fuel during production. According to energy and chemicals company Wood Mackenzie, global refining capacity is at present capable of producing only 1.5 mbpd of low sulphur fuel oil, while global shipping currently consumes 3.5 mbpd of high sulphur fuel oil.
The second focuses on the technologies used to instead remove the sulphur from the exhaust on the boat, which would allow the continued use of conventional fuel. While fitting ship exhaust systems with scrubbers might remove the gaseous sulphur emissions, there is the risk that users might dump the collected liquid waste into the sea, instead of disposing of it properly.
In addition to its commitment to reducing sulphur emissions, the IMO adopted a strategy in April 2018 to reduce total annual greenhouse gas (GHG) emissions from global shipping by at least 50% from 2008 levels by 2050, with a decrease in carbon dioxide emissions of 40% by 2030.
Part of the plan to achieve this means improving the operational energy efficiency of both existing and new ships, encouraging the uptake of low-carbon and zero-carbon fuels, and incentivising first movers to develop and deploy new technologies.
Alongside these regulatory developments are various global initiatives designed to reduce GHGs and carbon emissions. One example is the EU-28 target to reduce GHG emissions by 40% of 1990 levels by 2030. According to the EU Energy Statistical Pocketbook 2019, the EU-28 was more than halfway there as of 2017, having achieved a reduction of approximately 22%.
Beyond Europe, the Paris Agreement aims to limit the global temperature increase during this century to 1.5 degrees Celsius over pre-industrial levels, a plan now ratified by 187 parties according to the United Nations Framework Convention on Climate Change (UNFCC).
According to the international shipping enterprise Euronav, there are around 750 VLCCs currently in service worldwide. This number is increasing, with IHS Markit, in their Shipping and Shipbuilding 2019 Outlook, predicting that in 2019, some 40 of these carriers will be scrapped and 75 will be built, resulting in a net increase in the world fleet.
However, given plans to reduce consumption of oil and gas-based fuels, it is debatable as to whether the planned increase to the fleet has been appropriately planned.
In its weekly market reports, Intermodal Shipbrokers Research & Valuations highlights that new-build VLCCs cost approximately $100 million. VLCCs are normally scrapped after 20 to 25 years, with IHS Markit confirming that a third of the current VLCC fleet is aged between five and ten years old. Fuel can often account for 50-60% of the total costs of operating the ships. Younger ships with more efficient engines are normally more economical to run than older vessels, and more likely to comply with increasingly restrictive emissions regulations.
This means that there is plenty of life left in many existing vessels and, with the new additions planned this year, the average age of the fleet will decrease.
If reductions in global GHG emissions bring about a reduction in global oil and gas consumption as planned, it could mean that these ships are scrapped at a younger age. Premature scrapping would go against current global sentiment to reduce waste and conserve resources.
However, it appears that seaborne oil demand is on the increase, at least for the next few years.
UNCTAD, in its 2018 Annual Review of Maritime Transport, forecasted that crude oil seaborne trade will grow by 1.7% annually until 2023, and 2.6% per year for trade of refined petroleum products and gas. In this case, VLCC owners should not have to worry about the short-term impacts of climate change initiatives on the usability of their fleet. However, they may wish to consider these factors in their long-term plans.
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