Decarbonisation and charterer contracts

Nov 25 2021

Denis Petropoulos, Chairman of the Baltic Exchange, and a non-executive director of Tsakos Energy Navigation, shared some interesting views about how decarbonisation could be considered in contracts with charterers, in a podcast by Ship.Energy.

The drive to decarbonise brings in many complexities to the contracts shipowners make with charterers.


In the charter party, you have the requirement for ‘due despatch’, which needs to be somehow reconciled against a requirement to minimise carbon emissions.


Then there is a need to find a way to reward shipowners for taking on the risk and expense of building lower carbon vessels. This may be easier done if the vessels are under a long-term contract.


“The cargo owner has a responsibility of ensuring the emissions from his mode of transport isn't damaging the world. If he chooses to find a vessel which is a high emitting vessel, he needs to contribute somewhere or another,” said Denis Petropoulos, Chairman of the Baltic Exchange, speaking in a Ship.Energy podcast published on June 3.


“If he chooses to find a ship which is a lower emitting vessel, the consumer is receiving a lower emission cargo. The consumer can be charged for that.”


Mr Petropoulos is a non-executive director of Tsakos Energy Navigation. He was also a founding partner of Braemar Tankers / Braemar Shipping Services from 1986 to 2018, and had a major role in growing the brand in Asia.


“If we slow down, emissions decrease dramatically, the CO2 is much reduced. [But] that slow speed brings in other questions - how long the cargo takes to get from A to B, how impatient the consumer is to receive it.”


“If you speed a ship up, is that the owner’s responsibility for emissions or is that the cargo owner’s responsibility because he wants a quicker cargo?”


On the other hand, some vessels could slow down without any costs. “I think about container vessels that will go across huge oceans at 18 to 20 knots, and then wait 2 weeks [for a berth],” he said. “There is no fine.”


The requirement for “due despatch” ends up as “rush and wait”.


“For the owner of those boxes, it is just free storage. But to the world, that’s a strong amount of emission and a lot of wastage. Someone's got to pay for that. I don't think it should be the shipowner.”


“A lot of very smart people, engineers, people who operate ships, are putting a lot of effort into trying to find a way where shipping can reduce its footprint,” Mr Petropoulos said.


Paying for low carbon ships

Another issue is how shipowners are incentivised by charterers to pay more money to build lower carbon ships. One pathway could be for charterers to take on long term charters, in effect paying for the ship themselves, and taking the risk on the investment. But this could be the end of the spot market.


“If cargo owners want to guarantee the availability of transportation, for a certain price, with a certain emission and fuel cost in the cargo, they may find it more worthwhile to build or acquire their own vessels. The spot market will then reduce to a smaller percentage of the market.”


“We will be going back in time, to the days when the Seven Sisters [the big oil companies] used to build ships to suit their trade. They would finance through a shipowner who knew how to manage, operate and work a ship,” he said.


“Oil companies understood the logistics but didn’t understand the mechanics of the ship.”


“That continued until there was a drop in the market, there was a surplus of ships on charter to oil companies. They were basically laid up and idled.”


The spot market was brought in as a means of finding customers for these surplus ships.


But then charterers found that they could get a better deal on the spot market. “They decided not to replenish with endless time charters. The spot market became their friend.”


The spot market could get very expensive, or very cheap, depending on what was available at the time. It also meant that the charterer did not have to actually manage the ship.


“When the spot market drops to 20 per cent of the whole market, it can be exceptionally volatile,” he said. “If spot market represents 50 per cent, which it does today, there's occasional volatilities.”


Something similar is seen in the LNG market, where the bulk of the vessels are owned or on long term charter, and the spot market is very small. “When there's an opportunity the markets spike and big prices need to be paid,” he said.


“I think the tanker market will be the one which experiences the greatest dizziness during the transition.”


Baltic Exchange indices

The Baltic Exchange may have a role in an era of decarbonisation, if it is able to add indices about emissions, to go with its indices for cargo prices for different products. These are used as benchmarks for trades.


It could also make indices for new fuels, to go with its existing indices for bunker fuels.


The Baltic Exchange has developed many new indices in the past, to support new market developments, such as for LNG and LPG cargoes, he said.


The indices are based on calculating an average from data from multiple real trades.


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