SUBSIDIES & ELECTROLYSER SPREADS HIT METHANOL PLANS

Any notion of meeting global emissions targets by running ships on alternative marine fuels could be heavily affected by the Biden Administration’s Inflation Reduction Act (IRA), if European policy makers fail to implement fiscal measures to support European shipping’s energy transition, writes

Patrik Wheater

While the introduction this week of the European Commission’s Net-Zero Industry Act aims to scale up manufacturing of clean technologies to facilitate the bloc’s move to cleaner fuels, the current cost and availability of alternative marine fuels – LNG, green methanol, green ammonia, hydrogen – could make it difficult for shipowners to reach emissions targets without financial aid.

What’s more, since the US$369 billion in subsidies offered under the IRA could see European clean energy producers up sticks for the US, European shipowners may then be faced with the prospect of buying cheaper US fuel shipped to European bunker suppliers.

Many ship operators are privately expressing concern that uncertainty about fuel availability and volumes in five years or so could raise the risks associated with investments in methanol-fuelled engines. Financial risks for alternative fuels in general are exacerbated by the current market uncertainty and current power pricing.

Given the market infancy, buyers need to be confident that alternative fuel suppliers can deliver on their promises and deliver thousands of tonnes a year at a cost that makes economic sense.

Siem Offshore’s ESG Director, Jon August Houge, says soaring energy costs are already pushing liquefied natural gas (LNG) out of the alternative fuel market, and the “business case for green methanol or green ammonia is challenging”.

While the company operates a fleet of 28 specialised offshore vessels and is committed to ordering only zero emission vessels from 2030 and operating a climate neutral fleet from 2050, he said the LNG price is so high that charterers prefer low sulphur diesel.

“We have been looking at future fuels. But right now, it’s a big step to retrofit an existing vessel. When there isn’t a business case, we will need that collaboration with our charterers to make it happen. Ammonia, methanol and hydrogen will definitely be more expensive than diesel. So, in the transition period, I think you need some funding or subsidies to offset the cost,” he said.

For offshore vessel operators, the sustainability race is likely to be dictated by charterers who will have to accept an uplift in rates for chartering ships with the best emissions reduction technology. However, for operators that have to foot the fuel bill themselves, it’s a different story.

According to one European ferry operator, there are hundreds of potential methanol and ammonia suppliers out there looking for off takers, but few are in a position to guarantee long term supply commitments in the quantities and time frames required. The cost and volume of fuel available can be dramatic with tenfold differences depending on the location.

“We see [methanol and ammonia] projects in the US that are 50 times the size of projects in Scandinavia. Of course, this has to do with the fact that they receive lots of subsidies in the US. So, they are at a competitive advantage and know they will be selling and exporting a lot unless something happens in the EU. No one knows where the supply demand curve is going to cross,” said the operator. “You need to create partnerships where you can invest in the future together.”

Ostensibly, the issue facing European shipowners is that the prices green energy suppliers are quoting is not what the shipping industry is capable of paying.

The impact of inflationary pressures since early 2022 means that prices quoted a year ago have risen to such an extent that it doesn’t make much economic sense to invest in cleaner fuels.

One of the consequences is that the price differential between US clean fuels and European clean fuels have widened so much that imports are equivalent to the cost of sourcing fuels from local European suppliers. “It’s a terrible scenario, it is totally nonsense,” said the ferry owner.

“We are very worried about this because we are actually in a position to really get started and speed up this green transition. But if you're facing a price increase, that is so substantial, then you're in a situation where you can't move forward. It is another roadblock that needs to be resolved. I think it's highly problematic that such a difference between the US and the EU approach to this transition makes it even more complicated.”

8 Other European ferry operators note that uncertainties around alternative fuel supply availability and prices raise financial risks, noting that production cost differentials between North American and European supplies are close to the freight cost at the moment