Efficiency gains shipping is missing out on

Giulio Gennaro
Giulio Gennaro

Shipping is unaware that it could reap large savings by investing in technical efficiency, Giulio Gennaro, CEO of Singapore-based engineering consultant, 1888 Gennaro Consulting, has told IHS Markit.

While poor market conditions have made shipowners wary of incurring additional expenses, he said, this is not a good excuse.

“The prolonged downturn is an issue, however, it is also an easy scapegoat. During market upturns, all too often capital investments were made to get a few more ‘average’ vessels instead of ‘better’ vessels. This is one of the capital sins of shipping, as it leads to overcapacity of mediocre ships, conjuring even deadlier effects during downturns.”

Shipping is a cyclical industry and investments must be made during downturns to reap better profits during upturns, Gennaro said, echoing the view of stronger players.

“Even in case of no upturns, investments in efficiency pay themselves many times [over] during the lifetime of the vessel.”

Compared with other modes of transport, shipping is very efficient because of the law of physics governing movement over water, but it appears to suffer from ‘the tragedy of the commons’. This means “the shipping industry is a labyrinth of fragmented and often conflicting interests. Each player tends to maximise its own gains, which almost inevitably happens at the expense of other players in the same service or supply chain.”

Taking an integrated approach would allow greater optimisation in the medium term. Most industry players would also be able to reduce total lifecycle costs, increase efficiency, and therefore improve margins.

The concept of total lifecycle cost, also known as ‘cradle to grave’, considers the cost of ownership over the entire lifespan of an asset. This includes tangible financial costs, as well as environmental and social costs, which are harder to quantify.

The concept is well-applied in most industries, Gennaro said, but often shunned in shipping.

He considers an example of a shipowner placing an order for a new vessel. The primary concern is often to keep capital expenditure as low as possible, with an eye on operating expenses. In response to this, the shipyard is happy to build a cheap vessel. The technology applied is older, thus cheaper and presents lower risks to the yard.

Under such circumstances, the issue of fuel efficiency is not a key consideration. What this mean is that charterers, who foot the bill for fuel, do not have a say on the vessel’s fuel efficiency and thus ends up paying more than they need to.

In shipping, regulations have always been the main driver of efficiency gains, and this is likely to remain the case. The industry has never felt the urge for greater technical efficiency. It is less innovative than other industries, and even the newest green and environment-friendly vessels are not up to scratch in terms of energy efficiency.

“Some might say that IMO regulations are half-hearted attempts, but they definitely go in the right direction. European Union MRV [monitoring, reporting, verification] regulation, on the contrary, is just useless added bureaucracy.”

Examples of IMO regulation Gennaro cited include the Energy Efficiency Design Index (EEDI), Energy Efficiency Operational Indicator (EEOI), Ship Energy Efficiency Management Plan (SEEMP), and the upcoming global sulphur cap on marine fuels. EEDI, EEOI, and SEEMP are a series of technical measures and monitoring tools for tracking energy efficiency of ships and fleets.

The EU MRV regulation came into force in 2015 and requires shipowners and operators to monitor, report, and verify CO2 emissions for vessels above 5,000 gt calling at relevant European ports.

“In my opinion the IMO should avoid piecemeal regulations regarding single emissions [such as the respective caps on SOx and NOx emissions] and adopt a comprehensive regulation based on total energy expenditure plus the total cost of externalities generated by the vessel, against the nominal cargo capacity.”

This should also tie in with the concept of total lifecycle cost, Gennaro said.

As an example, LNG is considered an ideal fossil fuel: one that is clean and fuel-efficient. Compared with high-sulphur fuel oil, SOx emissions from burning liquefied natural gas (LNG) are much lower, and it is slightly less in CO2 emissions.

LNG is predominantly methane gas, cooled to liquid form; emissions of unburnt methane is an inevitable consequence of using LNG, an issue known as the methane slip. Methane is, in fact, a much worse greenhouse gas than CO2. And so, LNG appears to be a good solution if shipping were to consider only CO2 emissions. But if all emissions, including methane, were taken into consideration, LNG would appear less attractive and liquefied petroleum gas seems to be a better option.

Finally, safety is an integral part of efficiency. While shipping is increasingly aware of safety issues, this link to efficiency is often not clearly understood.

“Not being safe means betting on short-term gains against longer-term costs. And since in the long term accidents will [probably] happen, their costs will be high, so not being safe is a losing and inefficient proposition.”

In the background, unfair treatment of seafarers and harsh working conditions are a reality, he said, adding that some seafarers were almost comparable with prison inmates on board the ships they work on. As such, Gennaro considers the fair treatment of seafarers the most pressing issue in the shipping industry today.

“This makes the job unattractive and we risk hiring crew with low skill and motivation levels. Shipping needs to get its humanity back … and other [issues will fall into place].”