Incoming regulations for shipping could hit around two-thirds of the fleet as decarbonisation pressures intensify at a time when demand for vessels is also rising.

Panel moderator for the shipping session at the LNG World Summit & Awards Lloyd's Register gas technology segment manager Panayiotis Mitrou tackled the subject of the Carbon Intensity Indicator (CII) regulations. These come into force from 1 January 2023 and will measure the operational performance of vessels, becoming stricter over the years.

Whittling down the global LNG fleet of around 600 large vessels, Mitrou said some 250 are less efficient first-generation steam turbine ships and 150 are dual-fuel diesel-electric vessels that have worse methane emissions than their steamship cousins.

Of the remaining 200 vessels, he said Qatar's diesel-driven Q-ship fleet would have to slow down under the new regulations.

The incoming CII regulations could mean slow steaming for vessels like the 267,335-cbm Q-Max Al Dafna (built 2009) seen here in the foreground. Photo: Qatargas

Mitrou said this leaves the industry with around 180 LNG carriers in a market where there is a projected growth of around 350 ships for this decade.

On top of this, there are only four yards currently building large size LNG carriers with an aggregate production of around 300 ships in the last 10 years.

"The problem is that the mathematics seem not to work," he said.

Mitrou said CII sets a new regime where the charterer and operator will need to work together on the deployment of ships.

But he said LR data shows it will not be easy for even the best technology ships to comply with CII until 2030 if there is no consensus on the operation and performance of the ships.

Stuff of nightmares

Panellist, Mitsui OSK Lines head of chartering & business development Martin Baber said Mitrou's description sounds like "a horror story in shipping", thanking him for keeping everyone up all night.

He said there are two solutions — either owners bear the risk with the charterer or they shrink before they can grow again.

But if shipping is a bottleneck to the market does this exacerbate the problem of global LNG demand, he said, adding that more collaboration is needed between all players.

Maran Gas Maritime commercial director Mark Terzopoulos said he does not see how spot chartering and CII will work together.

"It almost sounds like they [regulators] have ignored how the market actually works and are trying to create a policy to define how it should work," he said.

"If we don't find something that can be implemented then it is going to be a disaster," he said.

Mark Terzopoulos, commercial director of Maran Gas Maritime. Photo: Contributed

Terzopoulos confided that Maran Gas has concluded between five and 10 mid-to-long-term charters this year with major players and during the negotiations on these decided to tackle the CII issue. He said while it is not yet on charterers' agendas yet, it was possible to discuss it and come up with some kind of framework to deal with this.

Oncoming truck

Baber said that over 60% of MOL's LNG fleet is steam turbine tonnage which is a "separate huge concern".

But he said there is a lack of transparency from policymakers.

"We know there is change coming, but we don't know how it will impact our fleet," he said, likening it to the approach of a truck. "You know it is going to hit you but don't know how hard.. and what damage is going to be done."

Methane monitoring

Asked if they were experiencing pressure over methane emissions, Terzopoulos said Maran Gas ordered vessels with ME-GI propulsion for its latest two newbuildings — which he revealed were contracted without charters — adding that a big part of that decision was methane levels. But added: "We took that on a punt."

He thinks charterers are not yet willing to pay for reductions as they cannot price this yet.

Baber said some of MOL's charterers are putting emission monitoring onboard our vessels but currently it is just a small number.

Mitrou cited newbuilding prices, regulations, geopolitics and transition financing risks as making the situation for LNG shipping stakeholders "unimaginable". He said, "the gas sector could be out of ships in its finest hour."

Panellists commented on the hike in LNG carrier newbuilding prices which have risen around $30m in 12 months.

Terzopoulos said this is adding almost 20% to the asset price when owners are now unsure about the lifespan of vessels and how long they will trade. He said this will eventually trickle down making ships more ships more expensive to charter and adding to the cost of LNG.