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The Business Times – Green fuel transition presents retrofitting opportunity for shipyards, with some caveats

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3 June 2024

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First featured on The Business Times

The business case for switching older vessels to methanol and ammonia is complicated

MORE ships could be retrofitted to run on near zero-carbon fuels such as methanol and ammonia in the coming years, maritime players told The Business Times. The overall market opportunity may, however, be constrained by cost and design challenges.

The market for methanol retrofits has been growing since the retrofitting of the first vessel with a methanol engine in 2015. Among the recent announcements in this space came from Hapag-Lloyd and Seaspan Corp, which intend to retrofit five container ships with engines that can run on methanol.

Retrofits for ammonia, meanwhile, are nascent but progressing. Miner Fortescue in March recorded a world first in the use of ammonia combined with diesel as a marine fuel. The trial was on the Fortescue Green Pioneer, a Singapore-flagged vessel with retrofitted engines, and involved Singapore-listed Seatrium and the local port authority.

Zahid Osman, chief executive of maritime logistics company AET, expects the market for such retrofits to see “substantial growth over the next few years”. With the long life cycle of existing ships, retrofitting “allows operators to extend the operational life of their assets” while complying with new green regulations, he said.

Seatrium, which owns and operates shipyards, is eyeing an opportunity in “high-end green retrofits”. Aziz Merchant, executive vice-president for engineering, technology and new product development, said: “We see a robust global market with growing shipping demand.”

The shipping industry has set its target for net-zero emissions “by or around” 2050. By then, maritime classification company Lloyd’s Register estimates about 20 per cent of the current global fleet that runs on fossil fuels – around 20,000 merchant vessels – will still be in service.

Lloyd’s Register also identified a maximum addressable market of 12,900 large merchant vessels that could be retrofitted up to 2030.

“Retrofitting these vessels to use zero-carbon fuels will be a crucial part of the maritime industry’s transition to cleaner energy,” said James Forsdyke, managing director of the Lloyd’s Register Maritime Decarbonisation Hub.

Cost and design challenges

Investors and shipyard owners may need to temper any enthusiasm for this market opportunity, however, as many industry players are unlikely to retrofit vessels older than 10 years to use green fuels.

A report by the Global Centre for Maritime Decarbonisation (GCMD) and the Boston Consulting Group (BCG) estimated that about 63 per cent of existing vessels will likely never use alternatives such as methanol, ammonia, hydrogen or even the fossil fuel liquefied natural gas (LNG), which is cleaner than other marine fuels.

“The actual proportion will likely be higher due to constraints, such as engine technology, shipyard capacity, the willingness to invest and absorb opportunity costs, and the supply availability of these fuels,” said the report.

Lynn Loo, chief executive of the GCMD, likened retrofitting a vessel to “taking a house and gutting it, and then trying to fit it around your requirements”. It is easier to start from scratch, she said.

Forsdyke of Lloyd’s Register said design challenges may also require yards to add new capabilities. He also noted that the cost of retrofitting must make financial sense for shipowners – which means taking into account the cost of new fuels as well as various other operational costs.

“Many of those elements remain uncertain” while green fuels are scaled up and as new regulations come in, he said.

Given these challenges, the GCMD-BCG report said lower-hanging fruit might lie in interim decarbonisation solutions. These include the use of “drop-in fuels” such as biofuels – so-called because ship engines need no modifications for their use – as well as the installation of onboard carbon capture technologies.

Need to decarbonise

It is nevertheless clear that the maritime industry is under pressure to transition to green fuels. This year, the European Union extended its Emissions Trading System (ETS) to include the maritime sector. The ETS requires polluters to pay for their greenhouse gas emissions.

Tougher regulations will, over time, make it necessary for shipowners to adopt new energy solutions. Although LNG is gaining traction as a cleaner alternative, there is a growing push to transition to near-zero carbon fuels, such as methanol and ammonia.

Methanol is relatively easier to adopt as it is liquid at room temperature and requires fewer adjustments to existing infrastructure. There are 25 methanol dual-fuel vessels in operation, with another 160 in the order book, said the GCMD-BCG report, which was published in September 2023.

Ammonia is more challenging to work with as it has to be liquefied at -33 degrees Celsius, requiring ports to develop new bunkering guidelines.

Ammonia is likely to be cheaper to produce than methanol, however, because green methanol production requires carbon dioxide that is extracted from the air or produced by other sustainable means, which can be expensive.

There are some expectations that both methanol and ammonia will develop alongside each other. Whether that turns out to be the case, or one fuel source reigns supreme, industry players will be looking for maturity of technology that leads to economies of scale.

AET’s Zahid is also confident that there will eventually be “higher market differentiation for owners of low-carbon assets”.

GCMD’s Loo noted that the world took about a century to transition from mostly coal-based energy to oil. “In the next transition, we want to go from oil to something else… in a few decades,” she said. That represents a major time crunch that is creating both risk and opportunity.

Source: The Business Times © SPH Media Limited. Permission required for reproduction

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