Regulatory Update Part 2: EEXI/EEDI Analysis
Feb. 17, 2023
EEXI/EEDI (Energy Efficiency Existing/NB Ship Index) was included in the MARPOL Annex VI 2020 revision and formally adopted in June 2021. It requires ships to reduce greenhouse gas emissions by combining technical and operational methods. Technically it’s measured as grams of CO2 emitted per capacity (dwt) tom-mile under reference conditions for each vessel class.
From January 1, 2023 it is mandatory for all ships to calculate their Energy Efficiency Existing Ship Index (EEXI). As mentioned previously for the CII at this point it’s a fact-finding mission. Shipowners are tasked with data collection of their fleet’s emissions through CII and EEXI.
Out of 25 VLCCs on order, all of them are equipped with eco engines while 12 of them are dual-fueled, and five tankers with scrubbers. These numbers indicate that shipowners are not waiting around for regulations to come into play; they are mitigating the IMO carbon emissions mandate. With 2022 being the year of the tanker (akin to 2021 being the year of the container) there is not only the incentive but also money to invest in environmentally positive technology.
Ironically, if the EEXI formulas are put to the test, the best way to mitigate being compliant is to slow down, which would impact the majority of younger more efficient fleet compared to the older fleet (Figure 1). Taking the VLCC fleet as an example, preliminary findings show a large percentage of VLCC tankers will be subject to engine power limitations, with older tonnages potentially facing lower benchmarks than modern ships (Figure 1). Compared to other technical solutions which may incur drydocking activity, slow steaming is likely to be the most common solution to meet the MCR% target.
However, when we compared the maximum speed allowed (following the propeller law) under the EEXI standards for each vessel with the actual vessel speed under a laden condition since 2019, we observed that less than 70 VLCCs would have been in violation of the rules (Figure 1). What is perhaps counter-intuitive is that the modern tonnage would be required to slow down the most and not as much for the older, less efficient ships as many other analysts have concluded.
One potential explanation could be that modern ships were designed and built to sail at a much faster speed compared to the older tonnages, and thus likely to have been operated faster than the MCR% allowed. Unlike the efficient tonnages, fuel consumptions for disadvantaged tankers (15y+) are usually at the higher tier and thus sensitive to the bunker price volatility, preventing them to speed-up unless backed with favorable freight commitment. In the meantime, these older tankers are constantly deployed for short-haul trades such as AG/India, which do not involve with high sailing speed.
Once the MARPOL Annex VI comes into full effect, we expect to find upward support on ton-day demand; however, marginal - if compared to other market factors. We expect VLCC ton-day demand to increase approximately 500,000 MT. We forecast the net effect to be positive for VLCCs, adding $2,000/day in earnings for the next 3 years.
Figure 1: VLCC Average MCR% for Each Age Group
Source: IMO, HIS Markit, McQuilling Services, AIS Data Provider
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