Due to the price of oil and COVID-19, there are vessels in lay up all over the world.
Taking a vessel out of service can be both a short term and long term decision. The short-term call is usually the simple – it will cost more money to run than it will make. Then the harder call is shall it be “warm stacked” with a reduced crew and all major systems maintained, or “cold stacked” as a dead ship with possibly an area watchman for partial security, some vital systems prepped for disuse, and dehumidifier systems set up around expensive electrical and electronic equipment.
The daily difference in cost between the two is significant. But part of a long-term decision is what will be the cost to reactivate the vessel in cold lay up?
One of the first decisions is to where the vessel will be laid up. Internationally the huge harbor of Singapore is popular, among other economically favorable Asian sites. But vessels sitting in the tropics are more subject to deterioration from humidity and damage from possible typhoons. The problem of bottom growth is exacerbated in tropical water which is of concern with the growing number or countries/regions that are enacting biofouling regulations. A year or two of bottom growth will also cause a great deal of drag and increased fuel consumption with a resulting increase in engine emissions. There have been European owners who have chosen to lay their ships up in the cold waters of North Europe to greatly reduce deterioration due to heat, humidity, and biofouling even at the cost of higher daily layup charges.
In the U.S., operators of OSV’s have the reactivation puzzle to solve. There is a glut of equipment in almost all offshore oil sites in the world. Day rates are very low. As demand for some service vessels returns, decisions will have to be made.
What vessels will be placed back into service at a reactivation cost that, for modern high technology vessels requiring delayed Special Surveys, may be in the range of $3,000,000 to $5,000,000? And will the day rate cover both the cost of operation and the cost of that $3-5MM outlay?
DLS Marine surveyors and appraisers have always been current with what has been going on in the marine industry. As members of the National Association of Marine Surveyors (NAMS) and the American Society of Appraisers (ASA), it is necessary for all of us to learn and amass continuing education hours in order to renew our certifications.
As a member of both NAMS and SAMS, I too have to stay current. But I have also taken over the job as Lookout. What matters in our industry is not just what is happening now, but what will be happening in the marine industry in the future.
Those who have read my earlier offerings have noted my coverage of alternative fuels that are in use or will be in use in order to comply with IMO and individual country’s regulations on diesel engine exhaust emissions. While controlling emissions is and will continue to be a very significant factor in ship design, it will not be the only factor that owners and shipyards will be concerned about.
The last splurge in shipbuilding was 2008-2012 which puts the need for replacement tonnage in 2023-2035. For the oldest of these ships, owners, naval architects, suppliers, and shipyards need to know now what they want these future assets to look like. That is, what will go into the ships now to make them, or help make them compliant not only with the current IMO standards but with the individual standards that various countries like China, Singapore, the United States and the Euro Bloc are bringing into force.
I will be looking into some of these choices in future commentaries, but for now we’ll take a look at where some of the funding might be found.
An old slang term for money is long green. National and international regulations are forcing the marine industry to invest in green ships – assets that can have a useful life of 20-to-40-years. Money will be needed to fund these long-lived green ships. Long green for long lived green ships.
There is some help and incentive through international governments, NGO’s and lenders.
The first major “green” step, spurred by various international bodies, was the creation by lenders of the Equator Principles. This is a set of standards for due diligence in supporting lending on projects with environmental and social benefits, particularly in emerging markets. The principles were developed in 2003 with the first lender signing on in 2004. In 2019, there were 94 involved financial institutions from 37 countries. Those in the United States are Bank of America, Citi Group, The Export/Import Bank, JPMorgan Chase, and Wells Fargo.
While the Equator Principles are not directly involved with shipping they can be involved with pipelines, port facilities, and plants that are connected with water transportation.
With the advent of IMO 2020 and IMO 2050, lenders realized that they needed to work with owners and other interested parties to make it possible for shipping to move towards those emission reduction goals. The result is the Poseidon Principles.
These principles pertain to loans, mortgages, leases, etc., on vessel of 5000 or more Gross Tonnes that are in international trade. These are the vessels that fall under the IMO 2020/2050 regulations.
The system is complicated, but its basis is that the carbon intensity and climate alignment in a lender’s shipping portfolio will be measured annually. The metric is carbon intensity, which is the total operational emissions generated per a unit of transport work, i.e., grams of CO2 per tonne-nautical mile. This is derived by collecting information on the metric tonnes of each type of fuel used, the distance traveled, hours underway and the deadweight tonnage and technical characteristics of the specific vessel.
It was proposed that measurements could be done with one of two systems, both based on information that has to be collected for the IMO by owners. The first was through Energy Efficiency Operational Indicator (EEOI). This includes the items mentioned above (fuel used/distance/etc.) plus the amount of cargo carried on each voyage. The second was the Annual Efficiency Ratio (AER) which is like the EEOI but only considers the vessels deadweight capacity and not actual cargo carried per voyage. AER was chosen. While not as accurate as EEOI it was the less burdensome of the two systems.
The point of the Principles is for them to act as a framework to integrate climate considerations into lending decisions in order to promote international shipping de-carbonization.
Signing on to the Principles is obviously good PR. But an incentive is that lenders do not like to make short term decisions on long lived assets and end up with a “stranded asset”. By putting up funds for an ecologically sound ship and/or one that can be maintained or augmented to stay green all through its economic life of 15-to-25-years, depending on the type/service of the vessel, the lender is protecting their collateral. And it is not a situation where a lender has to just make “green” loans. The program is set up like the idea of carbon offsets in that a lender can lend to a good customer for an asset of any design as long as there are more monies put into eco designs as an offset.
As of now there are 18 banks involved representing around $120 billion USD in shipping finance. They are all Euro banks with the exception of Citi Group and Sumitomo Mitsui Trust Bank.
As a great deal of ship financing is now based in China it would be important to get more Asian banks involved.
The US Jones Act fleet is small and much of the tonnage does not fall under IMO rules, but environmental regulations will continue to grow in the United States. It is inevitable. U.S. based lenders will have to make the same kind of decisions about long lived green assets. As environmental rules continue to change domestic vessels that cannot comply risk loss of residual value through economic and technological obsolescence.
Things looked great in 2019. There was future demand. Then came COVID-19 and the portfolios of banks worldwide suffered, although probably more from land-based lending than marine. This has greatly affected bank’s ability to make loans. And there is no question that sectors like cruising and containers have been heavily affected in marine lending.
Banks without spare funds to lend may not be greatly interested in long term greening when current red ink has their attention. But some of the greening technology, such as high efficiency engines and better automation may also make for better profits for the owners which can make sense and cents for lenders. There is also the point that ESG (Environmental, Social & Governance) investment can be a plus for a publicly traded corporations stock value.
There will be recovery, but it may be that new green construction will be riding on state subsidies particularly in the areas of Europe, Asia and South America where short-sea shipping, which works well with alternative fuels, takes traffic off of highways. This can also be done in the United States with the growth of the American Marine Highway system.
Other funding for the new generation of ships will be Equity partners (and their high rates), and long-term charters backed by shippers whose interest includes both definitions of green.
One of the concerns in the marine industry be it S&P, class surveys, or damage and repair surveys is being able to carry out due diligence. DLS Marine has been able to maintain full staffing in both the office and in the field. Through the months of April, May and June our surveyors have piled up over 55,000 road miles. And, as necessary and when practical, air miles too. We were ready to undertake an appraisal project in Scotland and Scandinavia, but national COVID-19 regulations would not allow us to enter the countries involved.
In a previous offering I gave my opinion that there would be a V financial recovery. Having seen that actions and reactions of governments throughout the world and the economic effects, I am no longer that optimistic and believe a U shape recovery is much more likely.
METAIRIE, LA, July 2020 – DLS Marine is pleased to announce Kenneth “Kenner” Hendrix, NAMS-CMS has earned the Accredited Member (AM) credential in the American Society of Appraisers (ASA) under the Machinery & Technical Specialties discipline.
The American Society of Appraisers is an organization of professional appraisers that holds members to high standards of education, ethics, and experience. Obtaining an ASA credential in the Machinery and Technical Specialties (MTS) discipline requires an appraiser to first obtain two years of full-time appraisal experience while taking comprehensive valuation courses and exams. Within the MTS discipline, only 11 ASA members specialize in Commercial Marine Survey, and five of them, including Hendrix, are with DLS Marine.
“We are proud of Kenner for his hard work and dedication in achieving his AM designation with ASA. Kenner has been one of our top surveyors for many years, and he’s now a key player in the future of our appraisal team. Kenner and other ASA candidates to follow him will form the core of our industry-leading marine appraisal practice into the next decade,” said Harry Ward, President of DLS Marine.
Hendrix joined DLS Marine as a hull and machinery surveyor in 2008. He quickly became a Certified Marine Surveyor under the National Association of Marine Surveyors (NAMS) and is now proficient in all types of commercial marine surveys, ranging from towage approvals to incident investigations. In 2018, Hendrix began training in marine appraisal under the direction of DLS Marine’s ASA Senior Appraisers. Prior to joining DLS Marine, he was a Boatswains Mate First Class in the US Coast Guard and earned a degree in Project Management from Columbia Southern University.
“Having grown up on small island, I’ve become a person who cannot imagine living away from the ocean. I knew marine survey was a perfect fit for me after the Coast Guard. The opportunities I have had since joining DLS Marine in 2008 have far exceeded my expectations,” said Hendrix. “Some time ago I was asked by a relative if I enjoyed working as a marine surveyor. My answer was ‘If I have to work for a living, there is nothing else I would rather do.’ I am looking forward to the years to come as I work toward becoming an Accredited Senior Appraiser and carry on the torch of the DLS founders.”