A rapid transition could lead to premature scrapping of over a third of the global fleet, valued at over $400 billion, unless the vessels undergo costly retrofits to remain competitive, according to a new report from UCL’s Energy Institute Shipping and Oceans Research Group.
The report assesses the financial risks to the shipping industry from stranded assets due to stricter GHG regulations, due for adoption at IMO this year, in combination with the ongoing global transition to a low-carbon energy system. It finds the shipping sector faces substantial supply-side risks linked to carbon intensive vessels becoming obsolete and demand-side risks linked to decreased fossil fuel demand.
The report finds that over 40% of ships globally transport fossil fuels, and nearly all ships are fossil-fuelled. To align with shipping’s estimated share of the carbon budget of 9.6 giga tonnes, ships representing over one third of the existing and ordered fleet value would need to quickly transition to zero-emission technologies or face premature scrapping.
The transition away from fossil-fuels in the wider economy creates further risks of oversupply for fossil fuel carrying ships. In particular, liquefied gas tankers look likely to face the highest exposure to this risk, with 26–32% of fleet value at risk around 2030.
Marie Fricaudet, PhD Student at the UCL Energy Institute, said: “If existing ships can be retrofitted to competitive zero/near-zero technologies, much of the fleet at risk of being stranded could be saved, and this is a strong incentive for investors to invest in retrofittable ships. However, even those retrofits would come at a cost, so we expect some asset devaluation as the mid-term measures become more material.”
Dr Nishatabbas Rehmatulla, Principal Research Fellow at the UCL Energy Institute, said: “Our research to date consistently shows that the majority of the shipping stakeholders, particularly investors including shipowners and financiers, are not anticipating an ambitious transition. This research shows that an investment strategy that is based on ‘watch and wait’ is a risky strategy, it could lead to rapid unanticipated write-downs and losses from forces within and outside the sector.”
Shipowners and financiers could manage or account for demand-side risks by avoiding investment in segments with uncertain future transport demand, investing in optionality for repurposing to other cargoes and by factoring this risk into expected returns.
Retrofitting and repurposing ships would reduce the amount of stranded assets but can still be a costly alternative. Uncertainty in future technology mix complicates planning but proactive management through optionality for example through dual fuelled vessels (where at least one fuel is a scalable zero emission fuel), of the supply-side risks of stranded assets remains necessary.
Investing in energy efficiency provides a degree of resilience in all scenarios by enabling fossil-fuel-powered ships to comply with climate regulations and lower emissions for an extended period, allowing time for the fuel mix to stabilise and reducing the size requirements for tanks and engines while maintaining the same level of transport capacity.