CGM CGM Champs Elysees

Study: Shipowners opting for LNG risk $850 bln loss in stranded assets by 2030

The world’s rapidly growing fleet of ships that can burn liquefied natural gas (LNG) is at risk of financial losses of $850bn by 2030, according to a new study by UCL Energy Institute researchers.

Illustration; LNG powred CGM CGM Champs Elysees; Courtesy of CMA CGM

Namely, 65% of the newbuilding deliveries by 2025 is capable of running on LNG as a marine fuel, up from only 10% a couple of years ago.

However, the exponential growth in interest may come with a massive cost as the new study points out.

Namely, the LNG-capable fleet runs the risk of loss in value if the global policies that incentivise shipping to decarbonize in line with the Paris Agreement are passed by the end of the decade as the LNG-powered fleet would end up competing against zero-emission shipping.

The report further says that the write-down of the full $850bn value at risk would not be not realised if LNG-capable vessels were retrofitted to run on scalable zero-emission fuels such as hydrogen and hydrogen-derived ammonia. Under these circumstances, the potential loss is estimated at approximately 15-25% of their value (£113bn-£185bn if the LNG-capable fleet grows strongly this decade).

That being said, the shipping industry’s regulator, the IMO, has been rather slow and cautious in imposing stricter decarbonisation targets as it attempts to create a level-playing field for its members. As a result, the industry is faced with impending regionalization of regulations as the EU and the U.S. push forward with stricter policies.

This report is a first attempt to extend the research on stranded power generation assets and unburnable fossil fuel reserves to the shipping sector. The findings highlight that the risk of stranded assets is also very material in the shipping sector.  The longer we leave the LNG transition running and then switch, the more painful it will be and technology lock-in during this crucial decade will create more resistance to change later,” Marie Fricaudet, lead author and PhD student at UCL Energy Institute, said.

“As this decade proceeds, we will continue to experience more and more severe impacts from climate change. This will further grow pressure both in markets and policy negotiations to align assets to a rapid shift to zero emissions. Anticipating this pressure is straightforward, and whilst the best solutions for zero emissions international shipping are still emerging, it is already clear that LNG-capable shipping is not well positioned and faces a higher risk of stranded value during the transition,” Co-author Dr Tristan Smith, Reader in Energy and Shipping at UCL Energy Institute, added.

The size of the LNG-capable fleet by deadweight tonnagecargo carrying capacity and number of ships is currently small, therefore there is still time to anticipate regulatory and technology developments and manage exposure to a class of assets that may be particularly exposed to stranded value risk, the study further adds.
Public funding has played a major role in financing LNG vessels through various government run schemes, directives and export credit agencies, such as the NOx Fund in Norway, the European Union’s directive on the deployment of alternative fuels infrastructure, the European Investment Bank and the Japanese and Korean Export Credit Agencies.  

The study argues that governments should not use public funding to exacerbate the creation of stranded value.  
As explained, shipowners and financiers should consider not ordering LNG-capable ships and investing in conventionally fuelled ships that are designed for retrofit to zero-emission fuels. For existing LNG-capable ships, investors should consider ways to manage the risk of stranded value – e.g. factoring in the cost of retrofit (or other actions to remain compliant) at the point of newbuild or using a steeper than linear depreciation curve.  
For policymakers the report asks for urgency and clarity of future regulations, especially around when and how methane emissions will be considered, to help investors in both existing ships and newbuilds consider and anticipate the potential impact of regulation. 

LNG as a bridging solution

LNG has been portrayed as a transitional fuel for the shipping sector. However, there is a heated debate on its actual environmental benefits from a well-to-wake perspective, when compared to low sulphur heavy fuel oil.

A recent report by the International Council on Clean Transportation (ICCT) predicts a tripling demand for LNG as marine fuel between 2019 and 2030, and it estimates that renewable LNG will cost seven times more than fossil LNG in 2030.

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The major selling point of LNG as a climate-friendly marine fuel is that ships running on it would be able to switch to bio and e-LNG (renewable LNG) once more widely available. The Council insists that for renewable LNG to contribute to achieving climate goals, methane slip from marine engines needs to be eliminated and methane leaks upstream need to be slashed.

Commenting on the ICCT study, UK-based industry foundation SEA-LNG said that the report fails to take into account the latest data on the technology available to LNG-fuelled vessels, adding that it uses historic vessel fleet data dominated by obsolete 4-stroke low-pressure diesel engine technologies.

“The ICCT view on methane slip fails to account for engine technology development. LNG engine technology has reduced methane slip by over 75% since the fuel was first introduced at the turn of the century. The Sphera study forecasts that methane slip will have been virtually eliminated for all engine types by 2030 due to engine manufacturer innovations and other methane abatement initiatives,” the organization noted.
“The ICCT significantly understates the potential availability of bioLNG for shipping in Europe and overstates its costs. It estimates a maximum of 700 PJ (Peta Joules) of bioLNG could be available in 2030 if shipowners, operators, and charterers are willing to pay up to €216/GJ. This is implausible when current volumes of European biomethane production are 690 PJ – from anaerobic digestion, only – at a cost of €14-25/GJ – according to the European Biogas Association,” SEA LNG said.
Moving forward, the industry agrees that waiting is not an option. However, uncertainties around the availability and cost of future, zero-emission fuels continue to hamper the decision-making process for shipowners on how to future-proof their investments.