Crude Tankers May Have Fewer Options for The Upcoming EEXI

The Efficiency Existing Ship Index or EEXI will come into effect in 2023. At its core, the EEXI represents the application of the Energy Efficiency Design Index or EEDI to existing ships as they had been applied to newbuildings since 2013.

The EEXI describes a vessel’s CO2 emissions, determining standardized CO2 emissions related to installed engine power, transport capacity and ship speed. Emissions are calculated based on the installed power of the main engine, fuel oil consumption, and a conversion factor between fuel and the corresponding CO2 mass.

However, since 70% of current global tanker fleet was contracted prior to January 2013 and delivered prior to July 2015 this impacts a vast majority of vessels on the water.

As this mandate looms, crude tankers could be among the most impacted due to the sheer number of vessels affected (percentage basis) coupled with the current state of this specific shipping market.

Even after an active few months on the demolition front, the VLCC class, which currently numbers 840 vessels on the water, has 492 vessels built before 2013, representing 59% of the total fleet.

Out of the 604 suezmax crude tankers on the water, 376 of them were built prior to 2013, representing 62% of the total fleet.

Finally, the aframax class looks poised for the largest impact, with 75% of the 688 vessels on the water being built before 2013.

Source: Data Courtesy of VesselsValue – Chart by VIE

It should be noted that for a few years leading up to 2013, owners were aware of the EEDI and the likelihood of its extension to the entire fleet at a later date, now known as the EEXI.

Some owners took practical steps in their design applications for vessels launched just before 2013, leaving them with very work to do to gain compliance. Others, however, were not filled with such foresight.

Therefore, the impact of the EEXI is diminished to a degree for build years 2012 and 2011. This is simply worth mentioning as a point of fact and should not divert attention away from what is likely to be a very significant market impact.

Poor market conditions leading up to, and during the implementation of the mandate, will likely give crude tanker owners the least amount of options (we’ll call it wiggle room), which is another reason the impact may be more pronounced in this segment.

In other segments, containers and dry bulk for example, companies are currently flush with cash as their assets generate ample returns. This will likely be the case into 2022 and 2023. Meaning, they can afford the investment and downtime possibly required for the best long-term business strategy.

However, the tanker segment doesn’t have that luxury, nor that optimistic of a forecast backed by the same degree of conviction. This changes the equation and the strategies with which to address the EEXI and the Carbon Intensity Indicator (CII), the later requiring possibly even further investment.

For the segments doing well, it seems far more likely that middle aged assets will benefit from investment required for optimal returns over its expected life. For the segments doing poorly, we see maximizing the option of a cost savings route (bunker fuel savings) coupled with a compliance route (EEXI) being the superior short-term option – which is speed reduction.

This would translate into that former scenario seeing a short-term partial fleet supply reduction for retrofitting, while the latter scenario would witness a long-term reduction in speed, thereby curtailing supply indefinitely.

Speed reduction would likely present some stickiness until the time at which rates and the forecast dictate the collective market shift to fleet retrofitting.

Why is speed reduction a big deal? Of all the available options, reducing speed presents the greatest possible shift to current supply/demand dynamics over the greatest possible timeframe, creating the most profound impact on the market once initiated.

In economic terms: In its most simplistic form it represents a supply side shift where supply is restricted due to these speed limitations. If demand in this scenario remains constant, this will lead to higher prices, which in this case is spot/charter rates.

The fact that crude tankers may be forced into this speed reduction route due to this poor market may be a blessing in disguise and will likely contribute mightily to a recovery effort in 2023.