Slow Speed Ahead!

Several reports by both national and international bodies have indicated various measures that could be introduced in order to reduce CO2 emissions from shipping. These include, amongst others, improved hull forms, improved anti-fouling paints, improved propulsion systems, the introduction of bulbous bows (sic!), and, finally, reduced service speed. As billions of dollars have already been invested in research and development of shipping technology during the past century, it is surprising to see that some pundits believe there is a substantial potential in reducing fuel consumption, and subsequently emissions, through technological advances. We appreciate that there is always a further potential, albeit more in the field of novel energy technologies utilising the sun, wind, and waves for propulsion rather than there would be a great potential in hull form optimization. Still - new commercially acceptable technology is not "just around the corner" and in the short term we can only see one action reducing emissions from shipping: reduced service speed. As an example, if the service speed of a VLCC is reduced by 10% from 15 knots to 13.5 knots, the daily fuel consumption is reduced by about 25% to about 75 mt. Such reduction in speed will reduce CO2 emissions by about 80 mt per day (at sea). Furthermore, it will reduce fuel costs as well as bring about an opportunity to sell CO2 quotas when, and if, shipping is included in an emissions trading scheme. Fuel costs at USD 450 per mt and a (theoretical) value of USD 40 per mt for CO2 could bring annual savings of around USD 3.3 million, or about USD 9000 per day.

Now, a 10% reduction in average speed will have a tremendous effect on the supply of transportation capacity as well as reducing the roundvoyage results for the individual VLCC. The latter will naturally vary according to the strength of the markets. In a low freight environment slow-steaming is attractive, but as market conditions improve, higher speed becomes more attractive. As an example, the time charter equivalent for a modern VLCC trading AGKorea is about 7,600 USD/day at ws 50 given current fuel prices. By reducing the speed from 15 knots to 13.5 knots the result is increased by more than 70%. Had an emission trading scheme been in place the result could possibly have been increased by more than 100%. In a WS 75 market the benefits of slow speed are all gone (even taking quotas into consideration) and above that level "full speed ahead" is the most profitable approach.

A 10% reduction in service speed would also reduce the transportation capacity of the entire fleet. On the basis of the 1Q07 trading pattern for VLCCs we have estimated that a total of about 412 VLCCs are needed as long as they have a service speed of 15 knots. Naturally, there are always vessels tied up in storage operations, at repair yards, or in other ways delayed. Furthermore wind, waves, and currents reduce speed, and as such, an average fleet speed of 15 knots is improbable. Still, the chart below shows the impact on transportation capacity given various speed alternatives. As can be observed, a 10% reduction in speed will increase the required number of VLCCs by an amount similar to the scheduled deliveries in 2008. If marine transportation is included in a new emissions reduction scheme we do not see any other solution than to reduce speed. However, this will have a substantial impact on the supply of transportation capacity. Provided that no major changes in demand take place, freight will increase and the costs of emissions will become small in comparison to the potential freight earnings.

This could result in a situation whereby the actions taken to reduce emissions actually impact the market balance in a manner that removes all incentives to do so. We believe that marine transportation (and aviation) will be included in climate regimes in the near future. But the rather simplified analysis in this article will be known to the regulators and one can only assume that the regime will be designed to result in real emission cuts. Unless the shipping industry takes a firm grip on the steering wheel, or at least has a finger on it, we believe the end result could be something that will hurt everybody.