Professor Gunnar S. Eskeland Research Director, Energy and Environment

Norwegian School of Economics

Maritime Shipping: the last frontier?

An economy / environment outlook

AGENDA

Mare libre: unruly frontiersman or well behaved servant?

How we operate our ships is of utmost importance

An outlook that is uncertain but with certain implications

Sector defends role, delivers on

evnvironment

An old problem: Find better means of

transporting yourself between meaningful places…

Stretch a keel and go where it is flat…

Today, these facts prevail:

• Maritime transport is the cheapest – Most efficient

– Including energy efficient, emission efficient

• After Malthus, Limits to growth, Exxon Valdez and compelling climate change, maritime transport is – Still competitive,

– requires the same skills,

– capital, technology,

– incentive systems

– Well, hear me out…

Outlook: World economy 2013 to 14: from 3 to 3 3/4 % p a

Where are we? Drybulk shipping • Large expansion of coal/iron

ore mines underway – 10-12% p.a. export growth

possible – China running out of high-

grade, low-cost iron ore – Domestic Chinese production

replaced by imports

• Renewed optimism – Has generated substantial

new ordering in 2013 – Orderbook back to 18% of

fleet – May cap upside in light of still

substantial overcapacity of ships (approx 25%)

Current: Weak Expected: Improving

Where are we? Product tankers • US exports of refined oil

products strong – Increasing domestic crude

production, decreasing consumption of products

– Surplus exported

• New refining capacity in the Middle East – Refined products exports

rather than crude (added value)

• But modern refineries are more flexible – Can adapt faster to local

demand

Current: Below average Expected: Stronger

Where are we? Crude oil tankers • Changes in the US

– Increasing domestic production

– Decreasing domestic consumption

– Lower imports, particularly long haul – bad for tankers

• OECD consumption back at 1995 levels – Only (European) economic

conditions or a more fundamental shift in energy mix?

• Demand growth only from emerging economies – Increasing risk

Current: Weak Expected: Weak

General theme

• Macro-economic outlook globally not especially bright

• Two possible ‘locomotives’, China and US, uncertain both with respect to growth and bulk trade generation potential (structure)

• Newbuilding despite fleet capacity reflects yard capacity more than long term substantial need

• = > tech revolution will not come fast

Our studies: Reducing speed and emissions

• Easiest way to lower fuel consumption is to reduce speed

• Hull & propulsion system is designed for a particular speed & loading condition – Actual operating profile may be

very different – suboptimal operation

• External limits on speed – Engine limitations (Maximum

Continuous Rating, MCR) – Minimum steering speed – Engine fouling at continuous low

engine ratings – Charter party clauses

Optimal speed vs. market conditions

• Goal: Maximise $/day profit (owners) or minimise $/tonne cost (charterers) – both give same result

• Key assumption: No expected change in rates and fuel prices • What matters is the ratio between the fuel price and the $/tonne

freight rate – not absolute levels

Bunkers/ spot rate price ratio

Starting point: Map the status quo

• In order to assess operational efficiency we need to know what ships are actually doing over time

• Example: trans-Atlantic Capesize bulker speeds since mid-2011

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Actual TA speed

Theoretical optimumOwners stick to slow-steaming also when it would be optimal to speed up Are there organisational and contractual issues that prevent efficient operation?

Unusual: Low freight markets, high bunker (energy) prices. Get used to it?

Our study of speeds: AG VLCC

• What we expected:

We found: Speed optimization ‘missing in action’

Future work remains but

• Slower speeds can reduce emissions, without new regulations, engines, hulls, prop’n technologies

• Example:

– reduce speeds by 20% (from around 12 to 10 knots)

– Bunker consumption &emissions per day down by 50%

– Output per day (tonmiles) down by 20%

– So emissions per unit of output down by 30!

Innovation for the future

• “Ultra-low carbon”/“ultra-low cost” shipping

-Will probably require revolutionary changes in design rather than the

evolution over the last 100 years

- Needed to open up new markets (e.g. water transportation)

Big picture: an ideal climate policy can be

envisaged as high fuel prices:

• Takes transport from air to surface

• From road to rail

• From rail to sea

• Slows speed

• Maritime transport is an energy intensive activity, but

is also energy and emission efficient, with great

potential to improve further. More, in fact, and at

moderate costs, than most other sectors.

Energy-efficient ship operation

• MAROFF application: “Green

shipping under uncertainty,

GREENSHIPRISK”

• Broad consortium across sectors

and engineering/ economics

• Center for Sustainable Energy

Studies

• Goal: - Model uncertainty in shipping (markets,

regulatory) - Develop tools for more efficient use of

existing assets under uncertainty - E.g. more intelligent routing, speed choice,

terminal use

NHH, Norwegian School of Economics in

Bergen

• Strandenes, Ådland, Assmann, Wallace (Eskeland),

Andersson (thanks!)

• Master in Energy, Natural Resources and

Environment

• Trying to understand the industry, its opportunities,

resources, challenges, workings…

Any questions?