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A HOLISTIC ASSESSMENT APPROACH FOR CLEAN SHIPPING
INVESTMENTS
Christopher Meyer*, Eunice O. Olaniyi*, Robert Philipp*, Gunnar Prause*
* Wismar University of Applied Sciences, Germany
* Tallinn University of Technology, Estonia.
Abstract
Since the introduction of the amended Sulphur Emission Control Areas (SECA)
regulations in 2015, the Baltic Sea has witnessed high compliance rate. However, a closer
look to the experiences in the Baltic Sea reveals that the currently preferred compliance
strategies depend on low oil price, where ship owners shun investments in abatement and
maritime energy efficiency technologies, which may lead into an economic trap in the
event of oil price increase.
The research considers incentive provisions for maritime investors who make investment
decisions related to clean shipping and maritime energy management against the
background of the Global Sulphur Cap, which just entered into force at the beginning of
this year 2020. Traditionally, the financial assessments of these decisions are based on
capital budgeting methods comprising cash flow analyses and net present value
calculations. The findings reveal that a Real Option approach represents a more realistic,
reliable and promising method for the evaluation of abatement and energy efficiency
projects, especially under uncertainty and high volatility in material resource markets. The
results can be applied to the assessment of all types of projects in the maritime industry
that depends on the price variation of the underlying asset during a specific period.
Introduction
Green and environmentally friendly shipping have received much attention based on
concerns for its local and global contribution to air pollution and environmental problems.
Therefore, the International Maritime Organization (IMO) implemented stricter Emission
Control Areas (ECA) from 2015 in order to realize a reduction of emissions from shipping
and to ensure a greener and more sustainable maritime transportation system. The first
measure within the ECAs was dedicated to the restricted use of marine fuels with a lower
amount than 0.1% of sulphur content so that the ECAs became Sulphur Emission Control
Areas (SECA) due to their focus on sulphur (IMO, 2015, 2016).
There are three primary SECA regulations compliance options for the ship owners. First,
to switch from the use of the marine heavy fuel oil (HFO) to the cleaner low-sulphur fuel
such as Marine Gas Oil (MGO) and Marine Diesel Oil (MDO). The second alternative is
to continue with the high-sulphur fuel (i.e. HFO) and installing an exhaust gas treatment
system, an abatement technology called the scrubber, which gives room for the continuous
use of the HFO. The third option is to switch to other alternative sources of fuel such as
Liquefied Natural Gas (LNG), methanol or hydrogen cells. These alternative fuels are
being considered for future solutions to meet the SECA requirements (Gerlitz et al., 2017;
Henesey & Philipp, 2019; Madjidian et al., 2017; Philipp et al., 2018). The investigations
of Olaniyi, Atari and Prause (2018) in the Baltic Sea Region (BSR) revealed that most of
the ships are switching to the use of low sulphur fuel because it removes the hassles of
capital compliance investments. Moreover, fuel costs represent one of the most critical
factors in shipping industry so that the optimisation of fuel consummation as well as the
choice of the best options for abatement and energy efficiency technologies are not only
important for environmental reasons but are also crucial for the maritime industry due to
economic conditional.
Options trading is a major part of investments in the capital market and its use in the
evaluation of investment appraisals is popular. It is important to emphasize that the real
option valuation method of investment projects is the extension of financial options theory
on real property. Black and Schools (1973) introduced options trading approach into
investment appraisal by using the option pricing to evaluate an investment from the zero
points of the project. By incorporating a constant price variation of the asset, the money
value of the time, the option's exercise price and the option's expiration value, the Black
and Schools model calculates the price of a call option and put option in general. A newer
option valuation approach is based on Monte Carlo Simulation (MCS) where the options
traders generate random variables to get the pricing value. With this approach, a simplified
simulation is to generate an optional quantity of random variables. However, it has been
less acceptable than other approaches for the evaluation of an option price.
Maritime investors, especially in the shipping industry, appreciate investment decisions,
which allow reaction and adaption on price movements for energy commodities since there
is no reliable method to predict future price trends. Thus, the authors propose that it might
be of a higher value to obtain a scrubber or install engines that allow them to switch
between energy sources to be able to use the most economical fuel. Atari et al. (2019)
suggested such an abatement technology installation model for maritime industry and used
the model to determine the optimal time for deferrals of investments and to evaluate
investments at the present or in the future. This investment model was empirically tested
and validated with an abatement project on a handy size vessel and the approach can be
applied to the assessment of a large number of clean shipping investments comprising
maritime energy efficiency concepts. Hence, the presented methodology bears the
potential of a holistic assessment approach for a variety of clean shipping investments.
Keywords: SECA regulations; global cap; clean shipping investments, real-options,
Monte Carlo simulation
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