Trading firm Trafigura's head of fuel decarbonisation Rasmus Bach Nielsen spoke with Argus about the challenges of decarbonising the shipping sector and why regulations are critically needed for the sector to close the competitiveness gap for green fuels to reduce emissions. The following is edited for length.
Looking back at Cop 26 and the establishment of the First Movers Coalition (FMC), do you think the group's commitments were ambitious enough?
I think the FMC commitments are ambitious, and ambitious enough at the point in time they were taken. Targets must be realistic. There is a goal to have 5pc of the deep-sea shipping done with zero-emissions fuels by 2030, but the challenge that the whole industry has now, and for the future, is the lack of availability of green fuels. Trafigura and others are doing a lot in political circles to make sure that a regulatory framework, where production of zero-emissions fuels becomes financially feasible, exists. It does not today.
Trafigura has proposed a carbon levy to support the shipping sector's transition, do you still see that as the most effective tool to encourage the uptake of zero-emissions fuels?
Yes, and it's a very difficult topic. You have greener developments, such as with the EU, and you have global developments, or discussions, through the International Maritime Organisation (IMO). There are a lot of different views, that needs to reach a certain consensus level, particularly at the IMO. But if we don't get a price on carbon — i.e., a penalty for polluting — it's not realistic to expect that companies will be able to initiate green fuel projects at the scale needed.
Do you see the IMO having to strengthen its own policies in response to the strides forward that the EU is making in shipping regulations?
The IMO must run faster than it has ever done before. Without clarity on regulation, we can't expect companies to invest in scale and within the lead time for green fuel projects — whether it's green methanol or green ammonia. I mention these two because we believe they have the brightest future from a zero-emissions perspective. From origination to production, it can easily take 6-7 years. We are not capable of bringing the fuels to market because they're financially uneconomical, as we speak, which is why we need regulation. We need to close the competitiveness gap, and when that happens you will see a wave of green fuel projects materialise globally. It is important that IMO runs with this historical, and I will call it a historical, opportunity to decarbonise shipping.
On alternative marine fuels, say by 2030, what percentage of marine fuel demand will be for alternatives?
There are different scenarios. The first one is if the IMO doesn't manage to act and fails to agree on a significant way to fight carbon emissions — which I don't think is likely. You will then have an absolute maximum of 5pc of the global fleet powered by zero-emissions fuels, or ‘low-emissions' fuels. This is an absolute maximum, and it will be probably less because people will not be able to initiate green fuel projects, simply because there is no certainty of a future market.
Scenario two, the IMO manages to bring a significant penalty on the fuels we have today and then I think the green fuels percentage could be higher.
What do you think is needed most? Regulation, infrastructure, financing?
Regulation will drive the rest, but the rest will not drive regulation. If you have bunkering infrastructure, it doesn't mean that you will have zero-emissions fuels produced because they will only be produced if you have offtakers. To get banks to finance scalable $500mn-1bn green fuel projects, you need long-term offtakes. Without this, there will be no investors and no banks. Who can absorb the risk for a fuel that is costing twice what current fuels are today? And this is just an approximate estimate, as they are variables including the electricity cost. Electricity is the biggest operating cost for green fuels production.
The shipping industry should not underestimate — this is why it needs to push forward sooner rather than later — that if other industries mature faster on the demand side for green derived fuels such as green hydrogen, it might not be competitive enough to be able to afford them. This could delay the transition for shipping, which is not what we want.
Trafigura is investing in a hydrogen infrastructure company in Switzerland called H2Energy, and we are looking to build a hydrogen production facility in Denmark and to invest over €1bn into the production of over 90,000 t/yr of hydrogen for industrial use. In this business we are also spending time with regulators on the need for pipeline infrastructure to be able to transport the hydrogen to market. I am an active board member of the Danish entity of H2 Energy. H2 Energy is also actively building up a hydrogen refuelling network in Europe with Phillips 66 with the target to establish 250 refuelling stations in Austria, Denmark and Germany.
Going back to Cop 26 and the commitments that Trafigura made to convert six of its own vessels to run on zero-emissions fuels, you are teaming up with German engineering company MAN Energy Solutions on green ammonia. How are these projects developing?
We are the co-sponsor of the technology development of MAN's green ammonia engine. We are confident that the engine will be ready for delivery by 2025. That's the first step. Very few owners have signed agreements with shipyards for ammonia engines. We have not yet done so and we are waiting for MAN to bring it to one further technology development level. You are asking about our plans, and I can say they are on track. The engine is on track and our organisation is, and we will be ready to deliver on our FMC commitment.
What also makes me say that is our commitment to the production of green fuels. We have invested a significant amount into a Feed study with our equity partners in a Norwegian green ammonia project. That's money invested without knowing if the project will materialise. This is the cost to bringing the project to a final investment decision. We don't expect that the whole industry can deliver and invest this kind of money to bring enough fuels to the market without having certainty there will be a market for these fuels. And this depends on whether green fuels are being cost neutralised by penalising the polluting ships.
Trafigura is looking into more green fuel projects, which we're hoping will become concrete in the next six months, it is a focus area. But how many times can you invest significant amounts without knowing if there is a market. All depends on the politicians' ability to close the cost-competitiveness gap and that is out of our control, beyond our core push for a change in regulation and, again, in this space we have invested many hours.
Looking ahead to Cop 27, does Trafigura have any specific goals or changes that it would like to see made?
Cop is important, as it can participate in influencing transport ministries, IMO delegations, national delegations. But for the shipping industry, it is the IMO that must move forward, because this is where our regulation is made. Cop can highlight the need for an equitable transition. And there are several countries — developing or developed — that have a huge green fuel production potential which can't be underestimated, such as Chile or Argentina, Peru, southern African countries, countries in the Middle East or Australia. There's value for these countries and they ought to be positive on this shipping transition because there will be a lot of investments made. Cop can participate in highlighting these potentials.
