Editorial published in Marine Log 22 July 2022
Shipping’s role in the global supply chain is increasingly under the spotlight when it comes to ESG. Today, most large energy companies have formal environmental targets. Many of these targets are notable for their ambition, or the way that they underpin new branding and strategy. Most of these companies are already reporting their emissions to the public, to shareholders, and to regulators—and these targets and reports are now focusing on every aspect of the supply chain.
This is highly symbolic of the industry’s new decarbonization dynamic. Environmental issues are increasingly driving commercial decisions for cargo owners and their customers, which in turn means that the efficiency and emissions credentials of shipping represents tangible value for charterers and their stakeholders. Increasing demand-side pressure is neatly coinciding with a growing focus from regulators. The shipping industry faces a series of landmark regulations over the next few years, with every indication suggesting that there is more regulation to come.
Sadly, this dynamic is creating significant challenges for shipowners. At a fundamental level, zero-carbon ship technology and investments are still in their infancy and the sector is not going to be able to go green overnight—even if many of our stakeholders need green options today. This is where Tankers International’s VLCC pooling model is uniquely placed to help shipowners, charterers, and the wider industry today.
Meeting the regulatory challenge
The Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Indicator (CII) regulations will be shipping’s first global decarbonization rules when they enter into force on January 1 next year. Targeting a vessel’s design and measuring and benchmarking its carbon efficiency in operation, these rules will have a radical impact.
Ships that are not able to demonstrate EEXI or CII credentials may be restricted in their trading options. At the same time, they provide easily comparable benchmarked indicators for charterers—and thus make it easier to make decisions based on climate impact.
The dramatic potential impact of these regulations is making carbon efficiency a priority for even the most resistant shipowners. Yet, even the most progressive may find compliance a challenge.
Continual measurement and benchmarking will invariably occupy a shipowner’s operational resources, while planning for vessel efficiency improvements can in itself take up resource. For many, EEXI and CII rules will also require costly specialist software and new analysis techniques that cannot be learned overnight.
Shipping’s regulatory journey toward decarbonization is just beginning, and future rules will add more complex challenges. For example, the EU is now expected to add shipping to the EU Emissions Trading Scheme with the proposed legislation recently passing several hurdles. By explicitly tying carbon to costs, and by requiring the purchase of credits based on solid data, these rules will create even wider-reaching obligations.
Maximizing resource and sharing knowledge
The Tankers International Pooling model frees up operational resource for a shipowner. As a pool we will take over a significant amount of day-to-day commercial and operational responsibilities surrounding a vessel, which would otherwise need to be handled by an in-house team. With pooling, these staff can be redeployed as appropriate to focus on strategic priorities.
As new environmental regulations are creating more complex obligations for shipowners, the operational benefit of pooling will only increase. For example, the Tankers International VLCC Pool will assist participating shipowners in calculating and monitoring efficiency to help optimize ships for CII rules and will support in meeting future EU Emissions Trading Scheme requirements.
Cash-flow is another pivotal advantage, especially in the context of meeting ambitious environmental goals. High environmental standards represent clear value for charterers and will represent a growing premium for the highest rated VLCCs, yet landmark technology investments are naturally capital expenditure intensive.
Our model combats this challenge by providing shipowners with a regular and scheduled income, through revenue sharing between vessels. We provide transparent and equitable insights into how the revenue-sharing works with all our pool participants. This is based on zero-commission, no hidden fees or unexpected costs, leaving them with a clear understanding of their financial position.
Improving cash flow also boosts total earnings, allowing a vessel to take advantage of longer voyages that often represent better freight rates. As an example, bunkers must be purchased by the shipowner before the vessel embarks on a voyage, and freight is only paid after the voyage is completed. This leaves the owner with poor cash flow and can limit a tanker’s income potential. Our pool will leverage its scale and financial strength to take care of these expenses and maximize total earnings.
Participants can also benefit from enhanced technical support and information sharing that can help owners to identify and optimize any investments required to adhere to environmental regulation. For example, Tankers International offers regular technical forums to give insights on new technologies, which helps shape purchasing decisions and best practice.
Although charterers are seeking green solutions zero-carbon shipping will take time. In the meantime climate compensation can offer an immediate solution.
Tankers International’s Climate Compensation Voyage Programme was recently launched in partnership with specialists Vertree. The scheme uses scientifically recognized methodologies and proprietary data to calculate a specific VLCC’s emissions on a voyage, monthly, or per year basis. Charterers are then provided with the option to compensate their carbon emissions via a range of nature-based and community led solutions.
Climate compensation alone will not solve shipping’s decarbonization problems, however it can play an immediate and meaningful role in giving charterers the green tools they need to succeed today.
Decarbonization is set to be an era-defining issue for the entire shipping industry. Shipowners will need to dedicate huge operational, technical, and financial resources to meet the challenge—and many will see their bandwidth and cash-flow stretched to breaking point. It is critical that tanker owners maximize the support that is available to them as the pressure to deliver results intensifies. Pools are crucial tools that can help drive shipping’s sustainability revolution.
By Matthew Smith, Senior Vice President Commercial and Operations at Tankers International