Global shipping industry at risk of asset stranding as fossil fuels phased out

Many vessels could be worth little more than scrap if countries adopt ambitious goal to reduce coal, oil and gas use by mid-century

global shipping industry, shipping industry, stranded assets, asset stranding

The threat of vessels that transport fossil fuels becoming stranded assets is a major risk to the global shipping industry. (Image: Thinkstock)

Keeping the global average temperature within a 1.5C increase will have a profound effect on the shipping industry, forcing ship owners to scrap unprofitable vessels and slash new orders, claims a new study. Coal, oil and gas make up 40% of maritime trade but by 2050 consumption of coal would fall by 80%, oil by 50% and gas by a quarter, with limited scope for other commodities, such as biofuels, to fill the gap.

The study by Maritime Strategies International (MSI), a research and consultancy firm, on behalf of the European Climate Foundation, argues that shipping will experience an “aggressive and prolonged transformation” as energy consumption shifts from fossil fuels towards renewables and biofuels. The report warns of “multi-decade declines in fleet capacity, earnings and asset prices across the affected sectors”.

In many countries, onshore wind and solar PV are already cheaper than established fossil-fuel technologies, even without the help of subsidies. Indeed, wind and solar power aren’t just a threat to new fossil-fuel energy projects, they will increasingly undercut operational ones such as coal plants. Similarly, electric vehicles and improvements in road transport efficiency will curb long-term demand for oil.

Such trends could drastically reduce the need for transporting coal, oil and gas. The report finds that if countries can keep global warming under 1.5C, coal would meet less than 5% of global energy demand by 2050, down from a quarter. Oil would decline from a third to less than 20%, and natural gas from a quarter to 15%. Under a 2C scenario the changes would be less pronounced; coal consumption would fall, oil remain steady, and natural gas would increase. Overall, fossil fuels would decline from more than 80% of global energy supply currently to about 70% by 2050.

The Intergovernmental Panel on Climate Change said last year that “rapid, far-reaching and unprecedented changes in all aspects of society” are needed if the world is to keep global warming within 1.5C. It warned that an average increase of 2C will result in further sea level rise of 10 centimetres and the decimation of coral reefs. It will also worsen heat waves and glacier retreat, and lead to more severe storms, floods and droughts.

Asset stranding

Experts have warned for a while that fossil-fuel projects, such as coal-fired power plants, could become “stranded assets” if countries accelerate action on climate to meet the Paris Agreement goals. The term commonly refers to assets that are devalued or become liabilities unexpectedly or prematurely.

This new study shows that the shipping industry also faces asset stranding if renewables expand quickly and polluting technologies face increased regulatory and financial barriers.

“Ship financiers would also find themselves caught in a vice, with earnings unable to cover debt repayments and falling life expectancy reducing the runway to recover a loan before the vessel is scrapped,” says the report.

Despite “tumultuous market conditions” in the shipping industry that have resulted in periods of boom and bust for vessel orders and shipping demand, there has been an underlying trend toward positive growth in the sector. However, the report warns that this will be “reversed as a result of a massive restructuring of global energy demand”.

Almost half of all crude oil is first shipped to refineries to be processed and a quarter of oil consumption is made up of refined products shipped from refineries. About 15% of global coal production is transported by ship.

Under a 1.5C scenario, dry bulk shipping would lose half its value by 2030 before returning to growth. Tanker shipping would lose 20% of its value by 2045. Not all types of ship would be negatively affected though. Demand for containerships would grow because they carry manufactured goods and not energy commodities.

The minimum lifespan for most vessels is 20 years so the shipping sector must act quickly if it is to avoid asset stranding resulting from overexposure to trade in energy commodities. The report recommends reduced ordering of tankers and bulkers, and vessel selection focused on smaller bulk carriers that can better adapt to alternative cargoes as coal transport declines.

“This report highlights an obvious but so far seemingly underestimated risk in the financing and ownership of ships that transport fossil fuels,” said Tristan Smith, reader in energy and shipping at University College London.

Smith added that shipping not only faces cargo-related risk but also risks associated with the regulation of shipping emissions, which will result in the phase-out of fossil fuels and associated machinery starting in 2030. “There is currently a high likelihood that these risks will create unnecessary turbulence in shipbuilding, ship owning, ship financing and world trade. Companies that do start to factor these risks in and work to spot opportunities will undoubtedly be in a better position to weather that turbulence.”