How are brokers helping to drive the fuelling transition?
It is undisputable that we need to drive a lower-carbon future and meet the IMO's 2050 net-zero target, but the procrastination we’re witnessing around fuel choice is delaying progress. Informed brokers can help to drive momentum and influence the direction of travel towards a more sustainable future, while also meeting commercial objectives.
Two years ago, we questioned the sustainability of a rapid e-fuels pathway for shipping. Our position hasn’t changed, but we’ve watched the industry yo-yo between fossil-based alternative fuels and e-fuels. Anchored in energy economics (using renewable energy most efficiently) and our pragmatic view, we argued that LNG has an important role to play in the fuel transition short to medium term, while e-fuel is likely to be part of a longer-term solution. In this piece we will focus more on the commercial development needed to successfully transition to these low carbon molecules, rather than the physical characteristics and arguments.
“Fast forward two years, there has been a lot of development and, as many will argue, a lot of missing development.”
Let’s begin with methanol. The strong growth in methanol dual-fuel (DF) vessel contracting, first led by Maersk in 2021, continued well into 2023, emerging as one of the leading DF options. It represented 12%1 of contracted gross tonnage (GT) over 5,000 GT in 2023. This growth has been supported by a relatively low capex premium on DF engines, along with a promising supply-side outlook, as new projects continue to be announced. As a result, methanol DF vessel contracting grew in prominence.
While we do not intend to fuel the “LNG vs Methanol vs Ammonia” debate – since, as brokers we remain fuel-agnostic and believe that all fuels will play a role in the future – it’s clear that LNG and methanol have been competing closely across principals’ desks over the past couple of years. This is evident in the sharp decline in LNG dual-fuel vessel contracting in 2023 dropping from 28% in 2022 to 14.7% of contracted GT above 5,000 GT, largely due to methanol’s growing popularity. Some of this decline, however, can also be attributed to a surge in gas prices following the sanctions on Russian gas.
But in late 2023, we saw the first sign of LNG regaining momentum when liner giant CMA CGM changed an order of eight 9,200 TEU vessels from methanol DF to LNG DF2. While this news passed somewhat quietly, a similar move by Danish competitor Maersk did not. Maersk surprised the industry by revealing plans to invest in LNG DF vessels3. This diversification from previous commitments was justified with the rationale that betting on just one fuel would be risky. Instead their portfolio mix would include the methane molecule, although emphasising that focus is on bio-LNG and not on fossil LNG. Our 2022 argument supports the shift, and like Maersk, points out a more fundamental challenge in the fuel transition: the limited availability of green methanol. They
emphasised the need to achieve their decarbonisation goals in a commercially competitive way. In other words, while several e-methanol projects are approaching final investment decisions (FIDs), there remains a shortage of green methanol at acceptable prices.
This highlights a key issue in the fuel transition: the need for more movement in green e-fuel project developments.
The high cost of low-carbon fuels is a challenge for all fuel alternatives, but we stand by our original position and emphasise our concern for the outlook for methanol. LNG (though a fossil fuel, it still offers clear reductions in GHG emissions) and bio-LNG (a, potentially, carbon-neutral variant) are largely driven by demand from sectors outside shipping. Similarly, we expect the first large-scale demand for low-carbon ammonia to come from industries like coal-fired power plants (for co-firing) or as a hydrogen carrier. This means that shipping, as an offtake sector, doesn’t have to be the primary driver of demand for LNG or ammonia, which is crucial given the industry’s longstanding preference for the cheapest product cracked from crude oil, on the spot market.
In contrast, most e-methanol project developers are counting on shipping to be their main offtakers. For these projects to reach FID, shipping companies will need to commit to long-term offtake agreements at prices multiple times higher than conventional fuels, with first volumes expected in 3 to 4 years (the typical production facility lead time). This presents a significant challenge—especially considering that even Maersk, a champion of methanol and leader in decarbonisation, has not been able to make this model commercially viable.
Regulations like FuelEU Maritime, and hopefully the IMO's upcoming Global Fuel Intensity Requirement, will play a crucial role in making low-carbon fuels, including e-methanol, commercially viable. The challenge, however, lies in the fact that many of these fuels depend on long-term shipping offtake agreements to get production projects off the ground. This is complicated by the gradual phase-in of these regulations and the lead time between FIDs and actual fuel production.
By the time these regulations start to have a real impact—likely around 2030 to 2035—when fuel prices might become more competitive and willingness to pay increases, the necessary fuel volumes may not yet be available. This timing mismatch presents a major hurdle for the adoption of low-carbon fuels in shipping, and in particular e-methanol (as we argue the other fuels may come with or without us).
In the long term, we believe e-fuels like ammonia, which unlike e-methanol and e-LNG, doesn’t rely on biogenic CO2 as a feedstock, will play a significant role in shipping’s fuel mix. A recent study by the Maersk McKinney Møller Centre for Zero Carbon Shipping (MMMZCS) estimated that the global availability of biogenic CO2 is around 370 million tons4—enough to produce around 43% of the e-fuels required to meet shipping’s current energy demand. However, it’s unlikely that shipping will be able to secure all of this, given competition from other sectors. In other words, biogenic CO2 could become a major constraint if shipping focuses solely on e-methanol and e-LNG for large-scale decarbonisation.
Ammonia offers a promising alternative, but its main challenge lies in engine technology development. While the progress made by key engine manufacturers like MAN and WinGD is encouraging, and initiatives like the recent ship-to-ship5 transfer of ammonia fuel demonstrate its
potential, we are still years away from seeing a significant number of ammonia dual-fuel vessels in operation.
So, where do we go from here?
As shipping emissions continue to rise, we stress the point, again, that waiting for a perfect end-game solution could hinder shipping’s green transition.
We have vocalised concerns about the availability of low-carbon methanol for the methanol dual-fuel vessels set to enter operation in the coming years. While we view ammonia as an appealing long-term solution, we cannot afford to wait for it, as emissions keep accumulating. In the meantime, LNG presents a well-to-wake (WTW) GHG reduction of approximately 17% compared to conventional fuels when burned in a high-pressure two-stroke engine, according to the FuelEU Maritime regulation. Whilst there are valid concerns about upstream methane leakages, several initiatives and regulations (e.g., the Global Methane Pledge)6 are working to ensure these issues are effectively addressed and reduced. Bio-LNG is a very attractive low-carbon fuel for shipping, with the potential to be blended with LNG up to 100%.
In conclusion, while the industry grapples with the availability of essential fuels like e-methanol and ammonia, the continued use of LNG and bio-LNG as transitional solutions is vital. In the past, we’ve been challenged on our position of championing fossil-based alternative fuels, but we maintain that not only does it offer immediate reductions in greenhouse gas emissions but also provides a pathway for scaling up low-carbon fuel adoption whilst ensuring that renewable energy resources are deployed for global benefit. We’re pleased to see that these challengers and indeed the data is now starting to align with our stance so that greater progress can be recognised.
As we look ahead, collaboration between stakeholders, including brokers, shipowners, and fuel developers, will be essential to overcome hurdles and ensure a smooth transition. The journey may be complex, but with informed guidance and strategic planning, the path forward can lead to a more sustainable future for shipping.
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1Clarksons
4Global Availability of Biogenic Carbon Dioxide and Implications for Maritime Decarbonization, Maersk McKinney Moller Centre for Zero Carbon Shipping (2024)
5https://www.offshore-energy.biz/navigator-gas-completes-its-first-ship-to-ship-ammonia-transfer/
6https://www.iea.org/reports/global-methane-tracker-2022/the-global-methane-pledge