In July 1990 the US Congress passed OPA (90). Its intention was to phase out single hull tankers over 20 years; require ships to have oil spill response plans; and make shipowners responsible for oil spills. This controversial legislation was picked up by the IMO and, 20 years later, single hull tankers have gone and oil spills are massively reduced. So, regulations do work.
Greenhouse Gas
Now there is a new challenge. Last week, the IMO agreed a package (in MARPOL Annex VI) to ensure that new ships are more energy efficient and cut greenhouse gas emissions. For each ship ordered after 1st January 2013, an Energy Efficiency Design Index (EEDI) will be calculated based on efficiency data generated during sea trials. Over time the acceptable level of the index will be cut, ensuring that each generation of new ships is more energy efficient. In addition, to drive operational efficiency improvements, a Ship Energy Efficiency Management Plan (SEEMP) is required to demonstrate operational improvements.
Breaking with Convention
Luckily, a recent revolution in ship cost economics will be pushing in the same direction. In 2008 the annual capital cost of a new Panamax bulker was around $6m, and the annual bunker cost $3.3m. Today, the capital cost has dropped to $2m but bunker costs are $5.5m (see graph).
This revolution will impact on ship design and the obvious target is speed. The economics work, but for investors it is a nightmare decision. Many remember the underpowered tankers ordered when bunkers were expensive in the early 1980s, but which soon became white elephants when oil prices fell. So, ordering a slow, efficient ship can be a big risk. But if everyone has to do it to meet a regulatory target, the risk is greatly reduced.
Market Forces at Work
But could this cost revolution be just a blip? In 1980, the cost of operating a Panamax bulk carrier was about $10m, of which $2m was bunkers and $5.6m was capital (see cost definition in graph). At the time oil was expensive ($40/bbl), but capital costs were outrageous (14% interest). Since then the long-term trend in capital costs has been downwards, but, over the last decade, the long-term trend in fuel costs has been upwards. As a result, in the last three years for the first time, fuel costs are well above capital costs, inverting the importance of fuel and capital costs. Capital now costs only $2m a year, but fuel $5.5m a year. That is certainly starting to look like a revolution.
The all Energy Agenda
So, there you have it. Today regulatory requirements and economic necessity seem to be working in tandem. Shipyards, facing a tough market, are sharpening their energy efficiency models, and shipowners are debating the same issue (when they can get their minds off the appalling bunker bills). Have a nice day.