How the energy transition could create a fleet of ghost ships

Picking up pennies in front of a steamroller. That’s an analogy sometimes used to describe companies and investors trying to squeeze value out of fossil fuel assets, in the face of a burgeoning energy transition.

The analogy can sometimes feel a little strained — not least in the business of shipping fossil fuels, where geopolitical upheaval has brought a bounce in demand and sent valuations soaring. But even in that sector, those who ignore the steamroller’s approach may eventually come to a sticky end.

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The Energy transition

Assessing the threats facing fossil fuel shipping

When you think of “stranded assets” — investments that will be rendered worthless by the global energy transition — what comes to mind? Probably something big and static like an oilfield or a coal-fired power station. But this fate could await a large proportion of the world’s shipping fleet — ghost ships in the making, even if their owners don’t yet realise it.

That, at least, is the argument of a paper published today by researchers at University College London and Switzerland’s Kühne Foundation.

It notes that more than a third of the world’s commercial shipping capacity carries fossil fuels, including around 13,000 oil tankers, roughly 3,000 tankers carrying liquefied natural or petroleum gas, and 2,500 bulk carriers transporting coal. The total value of these ships, including new vessels ordered but not yet delivered, amounts to about $596bn.

The new paper looks at what would happen to this sector if the world gets on track to limit global warming to 1.5C above preindustrial levels, a target that governments agreed to strive towards in the 2015 Paris agreement. To assess this, it uses a scenario set out by the International Energy Agency, in which global energy emissions are reduced to net zero by 2050, with an attendant slump in fossil fuel demand.

Under that scenario, as much as $286bn in value could be destroyed, according to the new study. This figure amounts to about 37 per cent of the profits that would have been expected from fossil fuel-carrying vessels under a business-as-usual scenario, over the next 25 years.

There are some important caveats to mention here. For one thing, the authors make clear that their estimates indicate a “maximum risk” of loss, and don’t take account of the potential to repurpose the vessels to carry other commodities. This would be pretty straightforward for bulk carriers bearing coal, which are able to carry other bulk loads — including minerals needed to power low-carbon energy systems, for which demand is set to boom over the next few decades.

Such repurposing will be much more complicated for LNG tankers, which are expensively kitted out to carry their load at extremely low temperatures. Oil tankers can in principle be refitted to carry methanol and other biofuels, though the growth outlook for these fuels remains uncertain.

Moreover, while many might consider the IEA’s 2050 net zero scenario a desirable one, it’s now very hard to see it as probable. Certainly, investors in tanker operators are showing no sign of panic at the prospect.

Shares in Norway’s Frontline, one of the biggest oil tanker operators, have risen 159 per cent in the past two years. Rivals Hafnia and Scorpio Tankers have also much more than doubled in value over the same period.

One big driver of activity in this sector has been Russia’s invasion of Ukraine, which has disrupted the global oil and gas trade, driving an increase in seaborne deliveries. Another has been the security crisis in the Red Sea, which has forced tankers to take longer routes, increasing capacity utilisation for the sector.

“The long-run view for oil demand is not necessarily the same as the view for the international oil trade,” points out Tim Smith, who leads research on oil and tanker markets at consultancy Maritime Strategies International.

Still, only the most starry-eyed oilman would refuse to acknowledge the dramatic long-term demand slide that lies in store for the fossil fuel industry, as the world gradually shifts towards cleaner forms of energy.

A way forward

The UCL-Kühne authors argue that shipping companies should manage their risks “by tempering investment in segments with uncertain future transport demand” and building other options for their businesses.

Some tanker companies have started diversifying in this way. Belgium-based Euronav in recent months sold 24 large-scale oil tankers to rival Frontline, while acquiring CMB.Tech, a developer of clean hydrogen and low-carbon shipping technology.

Further pressure may come from the industry’s financiers, Smith warns. Stockholm-based Swedbank went further than most of its peers in 2022 when it said it would no longer provide direct finance for new oil tankers, citing sustainability concerns.

Perhaps a more worrying sign for tanker owners came late last year when the head of shipping at Hamburg Commercial Bank, a significant German financier for the sector, said it was getting nervous about crude carriers’ long-term financial health.

“In the long term we may not be the ones to give loans for crude tankers,” Jan-Philipp Rohr told Shipping Watch, noting that such vessels typically earn an investment return over the course of about 20 years. “The question is for how long the tanker market will remain good, and do shipowners have the possibility to repay loans over that period of time?”

Such questions will be faced by all bankers to this sector in the years ahead. The tanker business is booming for now, but a massive decline — assuming the energy transition doesn’t simply halt — is only a matter of time. The question for these companies, and their bankers and shareholders, is how long the good times can last.

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