Shipwrecked? Experts warn tankers could become stranded assets in low carbon transition

Investors in oil tankers and 'dry bulk' vessels could be left financially adrift if efforts to limit global temperature rises to under 1.5C succeed, according to a new report released today by shipping analysts Maritime Strategies International (MSI).

If the world manages to avert dangerous levels of climate change the global trade in fossil fuels and other carbon-intensive commodities is likely to slow dramatically, the report highlights, warning that such a drastic shift in key global markets could slash the value of global shipping operators.

The report, prepared on behalf of the European Climate Foundation, suggests oil tankers and 'dry bulk' ships which carry coal, iron ore, and grains, could become "stranded assets" in the low-carbon transition.

Echoing the 'carbon bubble' analysis of how fossil fuel extraction projects, refineries, and power stations could see their value drop dramatically if the world transitions to a lower emissions future, the report finds the value of the world's dry bulk ships could more than halve from $195bn today to just $90bn by 2030. Oil tankers built today could be worth little more than scrap metal in a decades' time, the report warns, if as suggested by some models electric vehicles and other clean technologies lead to sharp reductions in oil demand.

Today's paper used shipping market modelling systems to analyse how a global reduction in fossil fuel demand would alter commodity flows around the world. Under a demand scenario that is compatible with emissions reductions to achieve a 1.5C temperature trajectory, the model predicts "massive reductions" in the use of hydrocarbons that would be only marginally offset by an "explosion" in the use of biomass and biofuels.

According to the paper, the shift to renewable energy and electric vehicles worldwide could fundamentally change the shape of the global shipping industry. "The key point is that currently it is the energy that is being shipped in the form of coal/oil/gas, not the infrastructure used to harness it (powerplants, refineries etc)," the paper's executive summary points out. "Mass renewable energy and vehicle electrification may require significant shipping of infrastructure materials and metals for batteries, etc, but this would be a one-off event in the energy chain, as these are components not feedstocks."

A rapid transformation of the energy industry would have "radical implications" for large swathes of the shipping sector. Although cargo ships would escape relatively unscathed, overall demand for bulk carriers would fall by 14 per cent between 2020 and 2035, while tanker demand would collapse by 39 per cent, the report projects.

The paper recommends that affected shipping companies should immediately cut back on their order book, so the vessels which do take to the seas can continue working as the low-carbon transition starts to bite. Shipping companies should also opt for smaller bulk carriers that are not designed specifically to carry coal, for example, while more efficient vessels are likely to be kept in use for longer.

The report should act as an "early warning signal for investors" according to Kingsmill Bond, new energy strategist at Carbon Tracker, the analyst house which pioneered the 'carbon bubble' hypothesis. He said today's report is an "important new angle" to the debate on the climate-related risks faced by investors and businesses.

There are signs some investors are already starting to respond to the risks highlighted by the report. Banks in particular are starting to take action to align their shipping portfolios with global climate targets, but recently introduced investment guidelines only apply to emissions from ships, not the goods they are carrying. 

Earlier this year investor activist group ShareAction recommended that banks should stop lending to shipping companies that earn more than 30 per cent of their revenues from coal transportation - a threshold that would include most of the world's largest listed shipping companies. The climate NGO Seas at Risk, meanwhile, is calling for complete divestment from all shipping companies which carry coal.

Christian Wilson, senior research officer for climate change at ShareAction, said the long life of ships means the low carbon transition poses a "very real threat" to shipping companies. He urged investors and banks to protect their capital by demanding better disclosure from shipping firms on the environmental performance of their vessels.

"To manage these headwinds, investors and banks need to incorporate climate-related risks into financial analysis," he said. "Banks must ensure that they are not inadvertently undermining their own energy policies by financing the transportation of coal."

MSI warns that if its timelines prove accurate shipping firms and investors must take action immediately to mitigate rapidy evolving risks. "Most owners would assume a minimum vessel lifespan of 20 years when evaluating an investment, which means that investing in anything other than the oldest vessels today implies significant exposure to this transition," it says. However, the discussion of these "potentially disastrous demand-side dynamics" is "almost totally absent" from the shipping industry, the paper laments.

The shipping sector has faced plenty of criticism from green groups in the past for lobbying against more demanding global climate policies and, with some notable exceptions, failing to invest enough in emerging clean technologies. But regardless of how the policy landscape for the sector develops, it looks as if rapid changes in the industries shipping serves could yet force it to address its out-sized environmental impacts. The core message from the report is stark: if the shipping sector does not heed the warnings and change course, it could find itself shipwrecked in a low carbon future.