Latest MARPOL Emissions Requirements Will Be Traumatic for LNG

Significant changes will impact all shipping operations in the coming years with the introduction of the Energy Efficiency Existing Vessel Index (EEXI) from January 2023 as the industry moves forward to implement substantial carbon dioxide emissions reduction targets by 2030 and 2050. LNG carriers will be included in this and the impact on LNG shipping will affect all LNG projects and LNG trading.

What Happened

Following on from the requirement to reduce sulphur emissions by limiting the sulphur content in marine fuel oil from 1st January 2020, the latest proposed amendments to the International Convention for the Prevention of Pollution from Ships (MARPOL) Convention will require ships to combine a technical and an operational approach to reduce their carbon intensity emissions. This is in line with the ambition of the Initial International Maritime Organization (IMO) Green House Gas (GHG) Strategy, which aims to reduce carbon intensity of international shipping by 40% by 2030, compared to 2008. Further targets are to meet a 70% or greater reduction in carbon intensity by 2050 and a 50% reduction in GHG emissions also by 2050. The EEXI technical requirements are to be discussed at the next IMO Marine Environmental Protection Committee (MEPC) meeting on 10th – 17th June 2021 when further details of what is finally agreed will be available. Implementation is likely to take place no less than 16 months after adoption of the requirements. Since 2015, new ships are required to comply with the Energy Efficiency Design Index (EEDI), which means they have to be built and designed to be more energy efficient than the baseline; and must have a mandatory Ship Energy Efficiency Management Plan (SEEMP). The SEEMP provides for ship operators to have in place a plan to improve energy efficiency through a variety of ship specific measures such as speed reduction, avoidance of bad weather, hull cleaning and any other measures that increase the ship’s efficiency and/or optimise on‐board operations. The EEDI requirements came into effect in 2013 for ship deliveries from January 2015 onwards, at which time a 10% improvement in ship efficiency was required over the 2008 baseline level. EEXI requirements now extend the energy efficiency requirements to existing ships, i.e., those built and delivered prior to 2015, and at a time before some of the recent advances in technology were available or implemented. They will also impact ships delivered from 2015 that complied with the initial EEDI requirements through required continuous improvement (i.e. reduction) in carbon emissions over time.

Key Details

EEXI presents significant challenges to the commercial, technical and safety of all vessel operations, including LNG carriers.

• The main option available to owners to comply with EEXI targets will likely be to reduce propulsive power, known as Engine Power Limitation (EPL) or, in the case of steam turbine ships, Shaft Power Limitation. The reduced power in turn will result in slower ship speeds. For older ships in particular the reduction in speed may be significant.
• EPL may have to be supplemented by retrofits of energy efficiency technologies (EETs) if EPL alone is insufficient to reach the required efficiency level. Retrofitting will create additional costs and result in vessel unavailability during the retrofitting.
• The CO2 reduction level (grams of CO2 per tonne mile) from the introduction of EEDI was set to 10% and is to be tightened every five years to keep pace with technological developments of new efficiency and reduction measures, impacting both existing and new vessels. Reduction rates have been established until the period 2025 and Starting in 2025 a 30% reduction is mandated for applicable ship types calculated from a reference line representing the average efficiency for ships built between 2000 and 2010.
• Reduced speed operation of existing vessels may result in vessels not being able to comply with existing charter party warranties/terms relating to vessel performance. Shipowners may need to assess the EEXI impact on each vessel individually. Charter party performance warranties will need to be renegotiated to ensure that the owner is not unduly penalized by the restrictions
• Existing (relatively modern) vessels may find it difficult to compete with newbuilds which are more efficient and able to operate at higher speeds. In all cases where reduction in speed is required of existing ships, utilisation and earnings potential will be reduced.
• Older vessels will likely be scrapped rather than being in a position where they can’t be traded profitably and/or can’t comply with the new legislative requirements. The impact of this would be a requirement for whole fleet regeneration through new builds (if yard capacity can accommodate this) and a collapse of the ship breaking market scrap values due to excessive
• Reduction in engine power can result in unsafe operational conditions, particular in heavy weather when additional engine power is required to maintain control and manoeuvrability of the vessel. Any deviation from the required EPL to meet the EEXI requirements has to be monitored and reported to the vessel’s class society and Flag Administration, together with verification of returning to the required EPL when the situation has eased. Similarly, the EPL cannot be over‐ridden for convenience to meet the requirements of a charterer or charter party,
• Following on from EEXI vessel certification requirements, the IMO will adopt a Carbon Intensity Indicator (CII) tool. Ships will be required to demonstrate a continual reduction of carbon emissions over time (i.e., year on year reduction) to EPL may be insufficient to achieve this alone, requiring greater consideration of EETs to meet reduction targets.
• Owners need to ensure that compliance with EEXI does not jeopardise the safety of the vessel. The chosen combination of EPL and EETs must enable a compliant vessel to be traded while meeting both commercial and safety considerations.

Specific Implications for LNG Carriers

The reference line used as the basis for determination of attainment of the EEXI is based on all LNGCs and is not segregated or separated for different propulsion types. It is therefore based on a combination of steam turbine, DFDE, TDFE, slow speed diesel (QFlex/QMax vessels), UST, RHST, STaGE, ME‐GI and X‐DF, all of which have different engine efficiencies. With limited spot market availability of LNG carriers, the impact of EEXI may result in a significant shortfall in LNGC capacity. Projects operating a significant percentage of old steam turbine vessels may see a reduction of about 30% in their fleet’s ability to carry cargoes brought about by reduction in Engine Power Limitation to meet energy efficiency targets. With about 40% of the current LNGC fleet being steam turbine, the impact is likely to be far reaching. Steam turbine vessels are likely required to achieve a 50% improvement in energy efficiency, made up from a combination of engine power limitation (EPL) and adoption of energy efficiency technologies (EETs). The EETs are identified in three separate categories.

• Category A technologies are mainly hull appendages, propeller optimisation and hull coatings (note, changing/optimising a propellor on a vessel can result in significant hull vibration issues for LNGCs).
• Category B technologies are mainly measures such as air lubrication of the hull and wind
• Category C technologies are additional power sources such as solar power and waste heat

It is not currently clear how these requirements will apply to FSRUs, which are static – or to an FSRU that may spend part of its life static and part as a trading vessel. In addition, there is recognition that introducing an engine power limitation may result in natural boil off levels in excess of the required fuel consumption at the reduced power level. The impact of engine power limitation (and lower speed) could also result in the vessel experiencing greater rolling/pitching motions which would lead to a further increase in generated boil off gas, further compounding the problem of excess BOG (and causing the vessel to exceed BOG warranties). The IMO is looking at whether any allowances or exclusions need to be made for this situation to ensure the most efficient use of boil off. Such allowances or exclusions may result in lower EPL and consequently faster speeds for steam turbine vessels, but also may increase requirements for adoption of EETs. LNG Carriers are normally built for a 40‐year fatigue life and a depreciation life of about 35 years. Future LNG carrier construction may have a considerably shorter design life due to earlier obsolescence which will result in ship owners looking for higher daily charter rates. The EEXI will inevitably trigger negotiations under LNG Sale and Purchase Agreements as the higher transportation costs roll through. Global trade flows and the marketing, timing and commercial viability of new LNG ventures on both the supply and demand side will ultimately be affected.

Ways We Can Help

Poten can assist suppliers, projects, buyers, portfolio players, traders, and ship‐owners in assessing the EEXI implications for an existing DES fleet. We can help you to determine how EEXI will affect delivery of annual contracted LNG quantities and whether additional shipping capacity is required.

• The effects of EEXI are potentially complex. If a project has a mixed fleet of LNGCs, it may have to operate LNGCs at a range of operating speeds that are permissible under the EEXI requirements for each ship or ship type based on its efficiency/carbon dioxide
• Compliance requirements will be stringent. A project is unlikely to be able to operate vessels at their full service speed or have the ability to catch‐up where a ship is delayed by port delays or bad

Poten can also assess EEXI’s longer‐term impact on LNG carrier replacement and timing. This will consider not only the available shipyard capacity but also the need for immediate action, taking into account that not only LNGCs but all sectors of the shipping industry will be severely impacted by the EEXI requirements from 2023 onwards. We can assist existing and proposed ventures in assessing the overall impact of EEXI on their business and developing and implementing a strategy to manage it. Finally, we can support companies involved in LNG trading in assessing the threats and opportunities of the EEXI requirements.

How To Reach Us

Please do not hesitate to contact us if you believe we can be of assistance in helping you understand the implications EEXI will have on LNG shipping in future. We will be happy to discuss the best way we can advise, including timing, scope of work and any specific areas of focus. In addition to the advice we can provide, our LNG Commercial Team can offer practical solutions, introductions and chartering advice to address any shipping shortfall you may have.