Gibson Shipbrokers is warning of potentially unintended consequences from the IMO’s new pending carbon intensity indexing system that could in the near term create more CO2 emissions instead of the goal of reducing emissions. In their new analysis of the tanker market, Gibson points to circumstances that could create friction between owners and charterers and a potentially negative effect on the market leading to the scrapping of older vessels.
The new IMO regulations that become effective at the first of the year include both the Energy Efficiency Existing Ship Design Index (EEXI) and the Carbon Intensity Indicator (CII). Gibson points out that the EEXI is straightforward placing the responsibility for the technical and design elements that impact the vessel’s performance on the owner. They can choose to make modifications to the vessel to improve its ranking or accept the consequences of lowered desirability and rates for vessels that do not perform as well.
The challenge they point out with the CII rating is that they are retrospective on a ship’s operations. A key part of the calculation will be the CO2 emitted, cargo transported, and the distance sailed, which Gibson highlights can be managed through trading patterns. Other factors including the design of the vessel, maintenance, and warranted fuel consumption will be solely the vessel owner’s but according to Gibson, a dispute could arise if a vessel is not properly described and does not fulfill the description in a charter contract.
A vessel’s CII rating can be manipulated through its trading pattern primarily by assigning the vessel to longer distances to average down the factors over mileage. This is where Gibson sees the greater probability of unintended consequences and potential for conflict between owners and charterers.
New, more efficient vessels which traditionally would be employed on longer voyages Gibson points out can be operated on shorter haul voyages because of the greater efficiency of their design. Less efficient ships that would likely have the lowest CII ranking could improve their performance by operating longer distances, which, according to Gibson, could result in higher CO2 emissions than historically because these vessels are now sailing longer trips to average down their CII scoring.
Also, because the CII is retrospective, Gibson highlights that a charterer could trade the vessel less efficiently and return the vessel to the owner with an inferior rating. Owners will have to guard against this potential or they could be put at a commercial disadvantage following the charter. The vessel could be returned with a lower rating which would reduce future earnings potential based on operations on a prior charter.
While the short-term unintended consequence could be higher CO2 emissions, Gibson also highlights that older, less efficient vessels will also be less economically desirable on longer routes. They expect that this will result in reduced trading opportunities and may eventually create pressure to scrap older vessels.
Any measures to reduce tonnage and the resulting capacity could have a positive effect on the tanker market but an adverse impact on the global oil market with further increased transportation costs. Orders of new tankers have fallen to a modern low. Lars Barstad, Chief Executive Officer of Frontline, for example, last month in the company’s financial report pointed out that “Supply and demand for oil and product transportation has gradually been tightening as the world recovers from the COVID-19 pandemic… With the lowest orderbook as a percentage of the fleet seen in decades, and oil supply and demand normalizing,” he forecasted a tightening marketing with rising charter rates.
Gibson is calling on regulators to avoid further unintended consequences and be sensitive to industry practices in future regulations. They warn that the industry takes time to evolve and by distorting trading patterns to achieve CII rankings the result could be more CO2 than less in the near term while the industry works to maintain its economic viability.