LNG-powered ship 'aground'? Shipping industry may face a huge loss of $850 billion

European customers prefer methanol, while Asian customers see ammonia as a long-term solution," said Klaus Heim, CEO of WinGD.

LNG power, as the current mainstream choice of alternative fuel in the shipping industry, will ultimately become a "stranded asset" because it is not "environmentally friendly." These expensive LNG-powered ships may cause hundreds of billions of dollars in losses for shipowners, while traditional ships compatible with zero-carbon fuels such as methanol and ammonia may become the "best choice."

$850 billion in losses? LNG-powered ships may become "stranded assets" in the shipping industry

The UCL Energy Institute recently released a new research report indicating that the rapidly growing global fleet of LNG-powered ships could face up to $850 billion in financial losses by 2030.

The study found that if policies incentivizing the shipping industry to decarbonize in accordance with the Paris Agreement are implemented by the late 2020s, the LNG-powered fleet will have to compete with zero-emission ships and will also be incentivized to abandon the use of fossil fuels. Although policies and competition will affect all ships using fossil fuels, the analysis shows that the value of more expensive LNG dual-fuel ships will be significantly reduced, comparable to the value of traditional fuel ships of similar age but lower cost.

The report also states that even if LNG-powered ships can be converted to be compatible with zero-emission fuels (such as hydrogen and ammonia-derived fuels), the potential losses are estimated to reach 15-25% of their value. If the LNG-powered fleet grows strongly in the 2020s, this loss is estimated to be approximately £113-185 billion (approximately $125-210 billion).

LNG has been considered a suitable transitional fuel for the shipping industry, but growing scientific evidence shows that considering the lifecycle emissions and greenhouse gas emission accounting, LNG fuel has limited or even negative environmental benefits compared to low-sulfur heavy fuel oil (LSHFO). The lowest-cost pathway for the shipping industry to transition from fossil fuels is the electrification of short-sea shipping, coupled with the large-scale use of hydrogen and hydrogen-derived fuels such as methanol and ammonia in deep-sea shipping.

This report is the first attempt to extend research on stranded power generation assets and unburnable fossil fuel reserves to the shipping sector. The findings highlight that the risk of stranded assets is also significant in the shipping industry, and the longer the LNG fuel transition period runs, the more painful the conversion will be. In this critical decade, technological lock-in will create more resistance to future changes.

The report shows that in recent years, new orders for LNG-powered ships have surged, with up to 65% of new ship deliveries being LNG-powered by 2025, compared to only 10% a few years ago. However, the proportion of LNG-powered ships in the currently operating fleet is still small, so there is still time to predict regulatory and technological developments and manage the risk exposure of this type of asset, which may be particularly susceptible to stranded value risk.

Stranded assets refer to assets that are unexpectedly or prematurely written down, depreciated, or converted into liabilities. Asset stranding can be caused by a variety of factors, usually due to the phenomenon of "creative destruction" brought about by economic growth and innovation transformation of the social environment. Stranded assets pose risks to individuals and businesses and can have systemic impacts. Due to increased social environmental awareness driving new government policies, stranded assets are most likely to occur in the fossil fuel industry.

The report concludes that shipowners and financial institutions should consider not ordering LNG-powered ships, but investing in traditional ships that can be retrofitted for zero-emission fuels. For existing LNG-powered ship investors, they should consider how to manage the risk of stranded value—for example, by considering the cost of retrofitting when building new ships, or by using a steeper depreciation curve than linear.

Further increase in alternative fuel vessel orders! Methanol and ammonia fuel will become the main choices

In recent years, under the trend of decarbonization in the shipping industry, orders for alternative fuel vessels, mainly LNG, have continued to grow. According to Clarkson's data, 31.7% of new ships ordered in 2021 used alternative fuels, totaling 459 ships, which is significantly higher than the 211 ships in 2020.

In 2022, orders for alternative fuel vessels further increased. Clarkson's data shows that in the first half of this year, the proportion of new orders for alternative fuel vessels calculated by corrected gross tonnage (GT) reached 61%. Even without LNG vessels, this proportion still reached 46%, setting a historical record. Among them, 59% of new ship orders used LNG dual fuel, totaling 226 ships with 21 million GT, and the new orders for LNG-powered ships have now increased to 272.

In the current global operating fleet, the proportion of alternative fuel vessels is still less than 10%, totaling 1231 ships with 73.4 million GT, accounting for 1.2% by number of ships and 4.8% by GT. However, among the backlog orders, 1064 ships with 76.3 million GT under construction are alternative fuel vessels, accounting for 23% by number of ships and a higher proportion of 43% by GT. In addition, there are 98 ships with 6.5 million GT under construction in the backlog orders with LNG-ready design, accounting for 2.2% and 3.7% respectively.

Obviously, LNG-powered ships have been the most widely used environmentally friendly ships so far. However, although nitrogen, sulfur, and dust are removed during the liquefaction of natural gas, and almost no harmful substances are produced during combustion, it cannot achieve zero carbon emissions, so the global maritime community needs more low-carbon environmentally friendly ships.

In addition, the high cost of LNG fuel is also a disadvantage. Research by the International Council on Clean Transportation (ICCT) indicates that the demand for LNG will increase to three times the current level between 2019 and 2030, and the cost of renewable LNG in 2030 will be more than seven times higher than that of fossil LNG. Renewable LNG may lack supply in the future and will not be able to meet future demand, and ship fuel costs will also increase significantly.