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EnergiesNet.com 07 25 2022

In this episode, Søren Skou, C.E.O. of Maersk, and Charles Haskell, decarbonization program manager for the shipping consultancy Lloyd’s Register, discuss how the industry is rising to the challenge of decarbonizing at scale.

Episode Transcription

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[00:00:06] Linda Yueh

Welcome to the “Energy Trilemma,” a podcast brought to you by bp. I’m Linda Yueh. And throughout the series, I’ll be speaking to some of the leading figures on the front line of the Trilemma. Industry experts and global C.E.O.s are looking to meet the challenge of energy that’s reliable, affordable and low carbon. In today’s episode, we’re focusing on shipping, a sector that’s vital to the smooth operation of vast global supply chains. Joining me to discuss this is Soren Skou, C.E.O. of Maersk, one of the largest container shipping line and vessel operators in the world.

[00:00:42] Soren Skou

Thanks for having me, Linda.

[00:00:44] Linda Yueh

And Charles Haskell, the decarbonization program manager from shipping consultancy firm Lloyd’s Register. Lloyd’s Register serves clients in 182 countries and is committed to decarbonizing shipping.

[00:00:57] Charles Haskell

Hello, and thank you very much for having me here today.

[00:01:04] Linda Yueh

We’ve seen significant turmoil in global markets over the past few years, and the war in Ukraine has provoked new discussions around energy security and affordability due to the related impact on rising costs. So I’d like to ask you, Soren, given that in 2018, Maersk committed to be net zero across its own business and its value chain by 2040, how are these challenges impacting your ability to transition to net zero?

[00:01:33] Soren Skou

Well, at the time, we didn’t actually have any idea of how that was going to be achieved. We certainly did not have any business case for decarbonization. We were very much in doubt whether we could get our customers to join us on the journey. Now, four years later, we have actually adapted our target because we had boosted up from 2015 to 2040. More importantly, we have also set a 2030 target in line with a one-and-a-half degree pathway. So every decision we take today is with the targets — we have already 2030 in mind. So today we actually have a technical pathway. We have emerging customer demand for carbon-neutral logistics services. So that’s super helpful. And our attention has actually turned much more to the fuel pathway. How do we actually get the fuels that we need and also, increasingly, through the regulatory pathway?

[00:02:30] Linda Yueh

That’s so fascinating. You’ve shifted your targets up by a decade, two decades, and now you have, I think — I’m sure we’ll get into it a bit more — now you have a number of drivers to try and get you to that 2030 target, which is absolutely wonderful to hear. But before we do that, Charles, similarly, can I just also ask you, what do you see the impact being for the sector? Do you think it could slow the process? Or is net zero the solution to the global challenges we’re currently experiencing?

[00:03:04] Charles Haskell

I don’t see it slowing the progress. If anything, it will accelerate the progress, and Soren has articulated as well, the price is a major differentiator between the fuels which we may use in the future compared to the fuels we’re using today. In some of the analysis which Lloyd’s Register and others have done is shown that this price differential could be two to four times more expensive for the fuel use in 2030, 2040 for renewable fuels. So when the price of fuel goes up, it actually narrows this gap and begins to make more business sense to move across. But there’s still a sort of gap to be made up. And secondly, countries are beginning to shift their energy chains. In the short term, we’re seeing countries shifting their energy from elsewhere, and it’s showing the flexibility. And again, shipping is moving into that and being able to provide the solution for countries to move energy from one area, geographical area, to another. And in the medium to long term, we’re seeing investing more into renewable energy. So not so much for their green credentials, but to give more energy security. And therefore, with this investment, we should see a further decrease in price of the hydrogen-derived fuels which will power tomorrow’s shipping from the renewable sources. So that’s on the country level, and that’s all good. I think the challenges, though, in the future will still remain. If we look at where the renewable energy will come from, it may be different geographical locations, but they are in different geographies where we may have conflicts in the future as well. So I think what it shows is, we need to diversify our energy chain and also diversify where we’re getting the energy from, and ensuring our energy security as well in the future.

[00:04:55] Linda Yueh

Rising prices raises this issue about affordability. So this is really a question for both of you. What can the shipping industry do to help during a time when the cost-of-living pressures are affecting so many households and the cost of products that they’re buying has just risen so significantly? Soren, you first.

[00:05:16] Soren Skou

The starting point will be that there will be an extra cost. With that being said, I think certainly for container shipping, this would be quite a manageable situation. Before the war, before the oil price top, we were spending around $400 per container we ship on fuel. A doubling of that or even the tripling of that would make that $1,200 — so an increase of $800, which, you know, percentage wise is a lot. But obviously inside the container, there’s a lot of products. And one of the examples I typically use is that in a 40-foot container, you have 8,000 pairs of sneakers. So an $800 increase in the cost for fuel is 10 cents per pair of sneakers. So if you look at this over a 20-year horizon, I’m actually sure that we will be able to manage the inflationary pressures, especially if you believe that over time the cost difference will come down. And then, of course, the big question is also, what are we comparing with? Because the oil price has come up, and it may stay up or may even increase as the oil sector, if you’ve underinvested for quite a number of years now, it seems like there will not be an abundance of oil supply in the world.

[00:06:36] Linda Yueh

Charles, in question to you. Do you see this price pressure on affordability? Is there anything the shipping industry can do?

[00:06:43] Charles Haskell

I think the prime focus is to keep delivering the goods we need, from our daily coffee, our weekly food shop, the monthly fuel which we are topping up in the car to our annual vaccinations. All of these are delivered by ships. And when goods stop moving, prices also rise — but, as we also saw through Covid, is under the most extreme pressure, shipping continued, and that is a very positive message. And it wasn’t seen, because they’re not flying over above us in the sky. They’re out of sight and out of mind. But it kept going. It was only when we had an incident such as the grounding of the Ever Given in the Suez Canal that people actually came to appreciate shipping’s role in our everyday lives. And, as Soren says, shipping already delivers the lowest cost per mile from an emissions perspective. And to sort of put that into perspective, air freight is 435 grams per ton per kilometer, and a large container ship is now below three grams per ton per kilometer. So shipping is a low-cost mechanism. And the main thing at the moment is that it keeps moving in order to ensure that prices don’t rise.

[00:08:00] Linda Yueh

Well, that’s a massive differential — that’s so important, I think, to highlight and to point out. And you’re right, I think shipping got a lot of notice when that ship got stuck in the Suez Canal. And I think it brought some, I think in many ways some welcome attention to the importance of this as a mode of transport. I’d be remiss not to bring in the other significant aspect, which is energy security. Given the terrible conflict in Ukraine, what is the shipping industry’s role in ensuring that energy is delivered to those that need it at the right time? So, Soren, why don’t I ask you first? How does Maersk keep the world moving?

[00:08:40] Soren Skou

Obviously, as a container carrier, we’re not directly involved in the movement of fuels around the world, but we see our role of keeping global supply chains running under all circumstances. And I think, frankly, we’ve been able to do a reasonable, good job of that during the pandemic. Then the world has kept moving despite all these challenges. So I think it’s showed that global shipping is actually quite a resilient industry.

[00:09:06] Linda Yueh

Same question to you, Charles. What about the broader shipping industry’s role in energy security?

[00:09:10] Charles Haskell

Shipping offers that flexibility. When we look at Russian exportation of gas to mainland Europe, this is mainly via pipeline. And in order to shift this is, pipelines take a long time to build; repurposing ships can — are a lot quicker. So already we’ve seen differences in the LNG — in the liquefied natural gas — transportation globally, but also we’ve seen sort of other areas stepping in. So, for example, the German energy company RWE, they signed a charter for two floating regasification and storage units at the beginning of May, because they didn’t have the port infrastructure within the port to import gas, because it’s currently coming from pipeline. But they’ve used repurposed ships with the infrastructure onboard in order that they can just come along more alongside at the ports and then allow that gas to be transferred from a ship to this other floating offshore platform and then into the distribution lines in Germany.

[00:10:19] Linda Yueh

Soren, I want to just ask you, what impact are you able to have as a large global company on the wider sector as you reduce your emissions?

[00:10:29] Soren Skou

The most important thing that we can do — are doing — is to take a leading role in decarbonization. Global shipping burns around 300 million tons of fuels every year, and we have 12 million tons of fuel out of that. So it’s actually significant. We are part of the problem, but we also want to be part of the solution. And we have done quite a number of things since 2018 in order to figure out what the pathway is. And we already offer a carbon-neutral product to our customers, which is based on biofuel. It’s growing quite rapidly from, of course, almost a zero base. But we are showing a way, we have started to invest. We have ordered 12 large container ships that can use green fuels, and we have pledged to — that every ship that we order from now on will be able to run on green fuels. So the next leg of our journey is really around getting the fuels. We have decided this year to focus ourselves on green methanol — so, methanol that is produced from renewable power. And today there is around 30,000 tons of green methanol produced in the world. We need just for the first 12 ships around 500,000 tons a year. So what we are doing is sending a signal that we are there to buy green fuels. You know, before we started this, it was a bit of a chicken and egg situation. You know, there were no green fuels available because no ships use green fuels and there were no ships using green fuels because there were no fuels available. So with these steps, we know we are creating a market for green fuels. And we certainly hope that many other, probably initially container carriers, will follow so that we can be helpful in developing a whole new industry to provide fuels for shipping.

[00:12:15] Linda Yueh

Really fascinating to hear about some of these technical aspects of how you’re going to achieve your net-zero goal. But just also tell me about how you work with the wider supply chain and all your stakeholders, from customers to ship operators, to accelerate this progress. And also, can it be done in a way that brings down costs for you, too, Soren?

[00:12:36] Soren Skou

So what we have done so far is, we have signed what is letters of intent with now six different companies for providing green methanol by 2025. Of course, those letters of intents have to convert into real business agreements, but we are confident that we can get there. So what we are doing is, we’re saying, look, we are prepared to sign long-term offtake contracts. That makes it possible for people to invest in green fuel production. And that’s how we are going to get going. It’s also how we, in the long run, can get costs down, because we need to scale, and we need to scale as fast as we possibly can. So we see that emerging customer demand, and that will help us pay for the costs initially. And some of our customers before COP26 in Glasgow pledged that by 2040 they would only buy carbon-neutral shipping services. And that’s of course also helping drive this market forward.

[00:13:36] Linda Yueh

Yeah, that’s hugely helpful, and that’s really such an interesting way to think about, you know, the demand and the supply side. Your customers are demanding it, and it is pushing forward the supply. So I think the fact that you as an industry actually have sight of this end-to-end process is going to be very helpful for decarbonization. And actually, Charles, let me come to you on the kind of the sector generally — we’ve heard about Maersk. I mean, what is the transition pathway for the sector overall to reach net zero? And just also, please mention what the role of biofuels is in all of this.

[00:14:13] Charles Haskell

I think it’s good to look at previous energy transitions as well. So if we look at shipping and the movement from coal to oil, the reasons we moved from coal to oil — because we had a safer fuel, a more abundant fuel, it was becoming increasingly cheaper. It’s easier to store and is more energy-dense than coal. So all of those led to an energy transition. And that energy transition took about 50 years from beginning to end. There’s no other sort of easy substitute for oil. And this makes it sort of difficult in the decision making about which sort of pathway to take, because there’s a number of end goals which we may want to look at, from a zero-carbon fuel, whether that be pure hydrogen, ammonia, methanol or synthetic fuels. So fuels being generated from hydrogen created by electrolysis and then blending it with other particles. So it’s a number of sort of different parts. And this is one of the reasons in Lloyd’s Register why we created the Zero-Carbon Fuel Monitor, where we looked at all of these fuels across the whole supply chain. We separated them as well between technology readiness, investment readiness and community readiness, because it is a myriad of options, and we need to address them all. If we look at ammonia, for example, if 30% of shipping switch to ammonia as a fuel, we would have to double the current production, which is about 180 million tons per year, and most of that is used on the agricultural side and is also not of a low-carbon footprint. It’s sourced at the moment from natural gas or coal, or oil. So we need a change of production there. But shipping’s well placed. It has a — one of the positive parts of shipping, if it’s adopting something as a fuel, it’s most likely carried it as a cargo in the past and therefore can take learnings within the industry. But from a biofuel perspective, biofuels are available. The — we need to see what the demand and supply is, because the scaling up of biofuel to meet shipping’s challenge could constrain the issue. So it’s not just about a technology solution. It’s also about what the price of the fuel is going to be and the availability of that fuel.

[00:16:45] Linda Yueh

Yeah, now you hear quite a lot about the green premium and there’s this hope that non fossil fuels in terms of price could begin to come down sufficiently. Can I just get you to elaborate on this transition pathway to net zero? Just in really simple terms, what are the key steps to get us from where we are today to net zero? Soren, just your views on that.

[00:17:12] Soren Skou

We already today offer a product that is based on biofuel. It is gaining a lot of customer acceptance, even though there is a significant premium for our customers to pay for the product. But, obviously, biofuel will not be able to scale all the way to net zero because there would be a lot of competition for biofuel and certainly from aviation, but also from other sectors. The next step for us is by 2025, we would have the first sets of ships that can run on green fuels, and by that we mean methanol. So we would use renewable power to split water into the parts of H2 — so hydrogen — and O, oxygen. We would use the hydrogen to make methanol, which is basically alcohol. And the ships will run on this kind of alcohol. And then we’ll see toward the end of this decade, we also expect that ammonia produced in the same way could be a factor or a possibility. There are some safety issues that need to be dealt with, but we expect that those engineering problems will be solved. I don’t think we are talking about developing new technology, but solving engineering problems instead. So ammonia could play a big role in the 2030s.

[00:18:31] Linda Yueh

I mean, Charles, is there anything which is available today which could meet all the criteria that you mentioned, which the shipping industry could be switching to?

[00:18:41] Charles Haskell

There are a number of energy measures, energy-efficiency measures, which can be adopted. And generally, as we see fuel prices increase, we see these technologies being adopted by the shipping industry. The first and immediate one could move in slower, being more efficient, but as we’d see, if we need to shift x amount of cargo from A to B in a certain amount of time, if we’re slow steaming, we would need more vessels on that route in order to deliver that cargo. But we also see changes to bulbous bows. We’ve changed the front of the vessel — more hydrodynamic. We could be adopting sails, air lubrications, among others. So there’s some hardware which can be adopted, but there’s still improvements that can be made on the operational side. If we reflect on the aviation industry, reduction in holding patterns by initiating just-in-time arrival have had savings of 10%. And we can see — we could see — the same in shipping, particularly with port congestion as well. So there’s other areas which can be adopted on operational changes. And these changes could also have other benefits as well as greenhouse gas emission reductions. We could see less pollutants near coastal cities, as ships blow steam further away from the ports. Another interesting area is also behavioral change and how we adopt this on vessels. And, again, reflecting back to the aviation industry, Virgin Atlantic Airways, they adopted behavioral changes a few years ago and this saved $6 million in eight months. And that’s a fantastic saving. But this also cuts 24,000 tons of CO2 from the emissions perspective. So saving fuel is good for the company, but it’s also good for the environment. What did they do? Having spoken to some of the companies involved, it was about behavioral changes, from the leadership down. So from the captain taxiing out to the runway, thinking about the approach to the airports, all these lots of little cumulative parts coming together from a human behavioral point leading to savings.

[00:21:00] Linda Yueh

Hmm. I think, Soren, there might be some behavioral impact here for the shipping industry, perhaps, to look at as well.

[00:21:09] Soren Skou

Well, as we go through this transition, we should not forget the potential of energy efficiency. It’s still there. In Maersk, we have reduced the amount of fuel we use per container we ship by more than 40% since 2008, and it means for us that we have been able to, if you will, disconnect our business growth from our CO2 emissions growth. So we have grown our business by 50% in volume terms since 2008, but our CO2 emissions are the same as they were in 2008, and that is really energy efficiency. And I think there’s still a lot to be achieved there, as Charles also highlighted, over the next — over this decade. So we should not forget energy efficiency as part of the solution.

[00:21:54] Linda Yueh

Absolutely. It’s been such a fascinating discussion, but we are running out of time. So I’m just going to finish off by asking you both a question around government policy support. So, Soren, you first. We’ve talked about all of the interesting things that you’re doing as a company. We talked about the broader sector. And I think the last discussion around, really, innovation, energy efficiency, even behavioral changes, all of this have, just say, they all have such an important role to play. But how do you see the role of government, Soren? What policy support is required?

[00:22:31] Soren Skou

So shipping has one huge advantage compared to many other industries, and that is that it is governed by a global body, IMO, under the United Nations. And whatever they decide at IMO is applied globally, and that makes sure that — that ensures a level playing field for all. The problem with IMO is, of course, it’s the United Nations, so do not really work at fast speeds, but if we can get something agreed at IMO, then it will be very good and implemented. I think the first thing governments or IMO needs to do is to continue to support energy efficiency by setting tougher and tougher targets. And that discussion is ongoing right now in IMO. The second thing we need from regulators is a net-zero target for the industry. Today, the target for shipping is to reduce by half its emissions by 2050. In my book, that’s not a very ambitious target. We need to get to a net-zero target. Then, the third thing, we need to set a price on carbon in order to, if you will, support the use of more expensive green fuels. And hopefully IMO will be able to agree on that during this decade and be implemented toward the end of the decade. And then, finally, I think at some point, shipping has to have a ban on building new fossil fuel ships, just like some countries are thinking about banning fossil fuel cars from 2035. At some point, we have to do the same in shipping in order to make sure that we do not continue to compound the problem. That’s my little wish list.

[00:24:20] Linda Yueh

It’s a great wish list. Charles, final word to you. How can government policy best support the industry to deliver net-zero commitments?

[00:24:31] Charles Haskell

In terms of governments, as we saw in COP26, we really saw the industry coming together. We saw industry push more than regulatory push. As Soren said, we have the coZEV initiative of some very large market consumers coming together. And whilst the industry standard for — from the International Maritime Organization is saying a 50% reduction by 2050, they were asking for 100% reduction, but by 2040. And it’s fantastic to see the likes of Maersk stepping up to that challenge as well. The other part from the governments during COP26 is, they signed up to the Clydebank Declaration, which is all about enabling green corridors between countries and how to facilitate the land infrastructure and the shipping infrastructure. That’s the sort of the first movers going forward, and it’s to facilitate and deliver to those commitments they have made.

[00:25:35] Linda Yueh

I want to give a huge thanks to Soren Skou, C.E.O. of Maersk, and Charles Haskell, decarbonization program manager from Lloyd’s Register. It’s been absolutely wonderful to speak with you both. I think it’s clear from our discussion that there’s a real shift underway toward cleaner energy in the shipping industry. It was also really fascinating to hear about some of the different solutions and pathways we could use to get there.

nytimes.com 07 20 2022