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The shipping industry is riding the waves of regulatory change, as the International Maritime Organization (IMO) continues to emphasise sustainability in its decision-making. Many shipping companies have opted to keep their ageing fleets owing to the uncertainty of future fuels, taking on the risk of having to sail slower to keep up with changing environmental rules. Questions raised over the ability to meet fast-approaching 2023 emissions regulations have prompted many to undertake an analysis on how the Energy Efficient Existing Ship (EEXI) and Carbon Intensity Indicator (CII) will affect the dynamics of the world's existing fleet. Several emission data studies have warned that with the lack of energy efficient newbuilds entering the market, the vast majority of existing ships will not comply with the implementation of new IMO environmental regulations, unless energy-saving measures, such as reducing speed, are implemented. Ageing fleet The average age of the global tanker fleet is currently around 11.6 years, bulkers some 11.4 years, while containerships average 14.1 years, according to Clarksons Research data. This means that owners will most likely have to upgrade most of these ships to prolong their lifespan while waiting for the winning newbuild strategy, which is currently mostly liquefied natural gas (LNG) and battery hybrid oriented, with the exceptions of methanol and hydrogen/ammonia pilots. The EEXI is the first hurdle many shipowners will have to jump next year. This compliance mechanism relies heavily on engine power limitation (EPL) for older tonnage, finds Kris Fumberger, head of sustainability and environment at shipping risk management organisation RightShip. An estimated 10% speed drop cuts fuel usage by 27% over the distance travelled, with a similar reduction in carbon emissions. Vessels with poor carbon efficiency may need to slowsteam, earn less, and lose value For Fumberger, the reliance on EPLs essentially sets a speed limit for older tonnage, impacting the ability of those vessels to meet charterer requirements and risk diverting attention away from the true innovation that is required to decarbonise the industry. Fumberger says that while a limitation of engine power may reduce power consumption, speed and emissions, it is a once only solution with a defined and limited emissions reduction outcome. "Vessels opting for an EPL may find themselves excluded from cargo that needs a speed higher than what the reduced engine power can produce, and hence might produce fewer revenue-generating voyages over a defined time period compared with other vessels that obtain their optimal emissions by investing in retrofitting energy saving equipment," he warns. CII’s delayed impact The CII should provide the market with a more robust metric which will lead to greater transparency of operational emissions, but its impact on the freight market is expected in 2024, as throughout next year, shipowners will aggregate a track for each of their ships that will set the basis for the first A-E CII rating. Geir Olafsen, CDO of the Norwegian platform for measuring, reporting, and estimating shipping emissions, Siglar Carbon, expects owners to be more reluctant to compete for cargoes that would have an expected negative contribution to their annual CII. "Hence, freight rates for such voyages might see an upward pressure due to less interest from owners," he reckons. Olafsen argues that from the charterers' point of view, 2023 might be a “black box” when it comes to CII. "No CII rating will be available, yet their cargoes will be judged by owners on the contribution to the annual CII. Thus, unless charterers have access to CII calculation tools, they would be blindfolded," he says. Slowsteaming subtraction According to analysts at Singapore's Eastport Research, EEXI regulations are likely to put upward pressure on freight in 2023. Eastport reckons that cargo growth will outstrip tonnage gains by 2 percentage points in 2022 and by 3.4 points in 2023, but it notes that this assessment must be adjusted for slowsteaming due to EEXI. Eastport assumes two-thirds of chemical and chemical/product tonnage is not in compliance with EEXI standards and needs to cut carbon intensity by about 27% to 30% to meet the new regulations. In a scenario where the speed of the fleet is 13 knots, around 67% of tonnage will need to reduce speed by about 10% (1.3 knots) from 2023. Under such conditions, the aggregate tonnage supply (in ton miles) would be reduced by around 7%, leading to cargo growth outstripping tonnage gains by about 10 percentage points. Digital analytics analysis by shipbroker Simpson Spence Young (SSY) suggests that 4,218 tankers out of 5,545 and 7,771 out of 10,592 on the bulk carrier side over 27,000 dwt are unlikely to meet EEXI requirements in the first instance, though, paradoxically, the actual supply loss and effect on vessel operations are likely to be small. "This occurs because the engine limitations to attain EEXI compliance rarely impede operational speeds," claim analysts at SSY, noting, however, that on occasion, being constrained by EEXI compliant engine limits could mean a missed laycan and potentially fewer vessels available to the spot market - factors that historically can result in spiking spot prices. "The dry side, on average, is really only looking at perhaps changes of a magnitude of less than 1%, perhaps as little as 0.3% on average. For the tankers, this is maybe just a little bit under 1% – that reflects different design parameters," said Alastair Stevenson, head of digital analytics at SSY at a webinar hosted by the Baltic Exchange and Institute of Chartered Shipbrokers on what level the power of the engine would need to be reduced to for compliance with EEXI. As for CII, SSY says its brokering desks are seeing CII contract clauses requiring charterers to ensure minimum CII grades are maintained. "For charterers, this can be empowering if a potential long haul, CII-reducing voyage charter can improve the vessel's annual CII rating, potentially inducing more favourable rates from owners.” Annual efficiency ratios Focusing on the annual efficiency ratio (AER) of three sectors: VLCCs, handymax bulkers and panamax containers, data provided to Splash Extra by VesselsValue shows VLCCs have the lowest AERs of the three ship types, as vessels with the largest capacity tend to be the most carbon efficient. The highest AER is attributed to panamaxes "because hot markets usually mean high speeds, and owners looking to capitalise on soaring container rates will be operating their vessels at close to maximum speed". Handymax bulkers perform at a level in between these two ship types. According to the London-based valuation platform, the majority of panamax containerships will need to reduce speeds by up to 10%. VLCCs and handymax bulkers are looking at a much smaller speed reduction, usually below 5%. "We know that a vessel's earnings are directly related to speed, and what’s more, vessel earnings have a direct impact on vessel values. This research confirms what many already suspected – vessels with poor carbon efficiency may need to slowsteam, earn less, and lose value," VesselsValue points out. Much has been written about the IMO’s efforts at carbon intensity reduction. Despite this, a great deal of uncertainty remains around both their implementation and the potential impact they will have in both the short- and longer-term. Pretty much all the most recent reports on EEXI compliance are in agreement, predicting around 75% of the current fleet currently stands to fail the necessary requirements and that in car terms, a speed limiter or foot off the pedal will be required. On the positive side, the requisite technical modifications for compliance with EEXI requirements is unlikely to be too onerous, says UK-based consultancy Maritime Strategies International (MSI). MSI believes that in most cases, owners will opt for either EPL or shaft power limitation (ShaPoLi). "It is understood to be a cost-effective, quick, and unobtrusive process that should not impede a vessel’s usual maintenance schedule and therefore will not absorb tonnage for the installation process over the coming months." It is important to recognise that in almost all cases fitting such a device will not have any effect on the typical at-sea speed of a ship in either laden or ballast condition, MSI notes, adding that ships are sometimes required to speed up beyond the typical level in case of a delay, and EPLs will limit the extent to which vessels can speed up to compensate. "The ramifications of this are two-fold. First, the average speed through the water will be reduced (even if the typical ‘trading speed’ is unchanged). Second, the limited ability to speed up in case of bad weather could be disruptive to schedules and lead to higher port congestion," the consultancy explains. MSI warns that a significant portion of the overage tonnage currently in service will require more drastic EPL than the younger segments of the fleet, resulting in a limited speed range between the lower safety limit and the higher EPL-induced limit, which may impact ship operation to the point where the older tonnage should be scrapped. Furthermore, it may even encourage the scrapping of younger, non-eco vessels as it could reduce their competitiveness and, therefore, the economic life of these ships. Technical details Essentially, the IMO's Marine Environment Protection Committee (MEPC) 78 in June finalised and adopted technical guidelines supporting the implementation of the EEXI and CII. In conjunction with this, the committee also adopted resolutions relating to the updated guidelines for the development, verification and implementation of the affected vessels’ Ship Energy Efficiency Management Plan (SEEMP). The EEXI technical file needs to be approved before the first annual, intermediate, or renewal International Air Pollution Prevention (IAPP) survey or the initial International Energy Efficiency (IEE) survey on or after January 1, 2023. The first report of the CII based on 2023 data is due no later than March 31, 2024. The maritime industry faces an unprecedented challenge in complying with the IMO’s targets for decarbonisation. Owners and charterers will need to demonstrate that the vessels they buy and operate are high performers and that less efficient ships are subject to performance improvements. Grieg Shipping-controlled ship inspection firm Idwal suggests that given the potential costs to owners and operators, as well as the likely surge in demand for the installation of energy efficiency technologies, calculating the EEXI for each vessel is advisable as soon as possible to allow for planning and budgeting. When it comes to CII SSY believes that going forward, it will be important for owners and charterers alike to monitor both historical and year-to-date CII values, as well as understand how the CII rating will be affected by prospective voyages.

How global fleet dynamics will change with EEXI and CII

More greenbacks for green regs?

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