SCF: Making energy shipping greener
Russia’s SCF is one of the world’s largest shipping companies. Its drive to enhance economic sustainability by moving into higher margin businesses is matched by a commitment to ecological sustainability, which was recently bolstered by the launch of the world’s first LNG-fuelled large-capacity oil tankers.
Shipping - one of the world’s oldest industries - is the unsung hero of our global economy. Its efficiency and competitiveness mean that the cost of carrying a container has scarcely changed in 35 years, facilitating globalisation and, at a more mundane level, getting a new 4K TV from China to your doorstep for next to nothing. No less important is the role that shipping plays in transporting the energy that powers our industries, homes and vehicles.
“Shipping is essential to international trade and the global economy. However, it is underappreciated by the public as fleets are usually at sea - they are invisible compared to airlines,” says Nikolai Kolesnikov, CFO of Russia’s Sovcomflot (SCF), one of the world’s largest energy shipping companies with 144 vessels - its ships call at more than 100 ports on five continents daily. The company is also a major marine services provider for the upstream oil and gas industry.
While seaborne transport is by far the most CO2-efficient form of commercial transport, the industry has a significant impact on the environment. CO2 emissions from international shipping account for more than 2% of the world’s total, while low-grade ship bunker fuel (or fuel oil) has up to 2,000 times the sulphur content of diesel fuel used in European cars.
Enhancing economic stability
SCF’s business is different to mainstream container shipping, where the capacity to carry a container over a given route is essentially generic and competition is solely based on price. “In contrast, energy shipping is a wholesale-type business,” explains Kolesnikov. “We have around a dozen core clients in the oil and gas sector and relationships are important.”
Energy shipping has higher barriers to entry than container shipping as the cargoes are hazardous and the operational side of the business - essentially quality of service - is an important differentiator. “Clients are very selective given the safety and environmental requirements associated with energy, especially in the challenging environments in which we operate,” says Kolesnikov. “Consequently, our clients tend to have high credit quality, which is beneficial for us as a business in terms of risk.”
In search of higher margins and stronger long-term relationships, SCF is growing its long-term fixed-income project-based charter business, which includes offshore operations and transportation of liquefied natural gas (LNG), according to Igor Tonkovidov, executive vice president, chief operation officer and chief technical officer at SCF. In 2017, these units accounted for some 51% of total revenues, enabling SCF to consistently outperform its tanker market peers and deliver throughout the shipping cycle.
“LNG transportation is a growing industry as a result of changes in the world’s energy mix; gas is taking a more prominent role as it is a cleaner fuel than some alternatives,” says Kolesnikov. “But discrepancies in the geographies of supply and demand for LNG mean there is a natural need for transportation.” SCF is a proven innovator in LNG transportation: the Christophe de Margerie was the world’s first icebreaking LNG carrier when it was delivered in March 2017 after almost 10 years of planning and accumulating experience of operating large-capacity tankers in challenging ice environments.
Similarly, as a service provider to the oil and gas sector, SCF is an integral part of the industry, ensuring greater financial stability. “Operators of upstream projects outsource a key component of their business to us,” says Kolesnikov. “Rather than compete in a crowded conventional market, we identify niches where we can add value for our customers, achieve better margins and earnings visibility, and generate more sustainable cash flow from long-term contracts.”
Leading the way on emissions
Despite ships looking largely the same as they did decades ago, new emission standards and safety requirements have transformed the sector in recent years as companies’ responsibilities are intensified. “Like many public-minded businesses across the globe, we firmly believe that it is paramount to avoid compromising the ability of future generations to meet their needs when we meet today’s needs,” says Tonkovidov. “We define sustainability through four principles: environment, safety, quality, and people. Thus defined, it truly permeates through almost every aspect of our activities.”
As a company, SCF seeks to be ahead of regulators and adopt latest technologies as they come to market. Two decades ago, SCF was one of the first companies to build double-hulled tankers, well before they became a regulatory requirement. “We innovate to help our customers address their logistical needs,” says Tonkovidov. “We do this by consistently providing them with advanced and efficient modern vessels that are designed and built to meet the specific needs of a particular project or market. Systematically renewing our fleet in this way also allows us to significantly improve its environmental performance.”
SCF decided to look for opportunities to reduce emissions well in advance of new International Maritime Organization rules on sulphur regulations, which come into effect in 2020. SCF’s analysis identified LNG as the best long-term clean fuel in terms of environmental benefits, as well as cost-efficiency and regulatory compliance. “Given the global scale of our operations, full compliance with the most stringent international emission regulations is a must, however we go beyond that and try hard to exceed rather than merely comply with these regulations,” says Tonkovidov.
Collaborating to make LNG-fuelled tankers a reality
In 2015, SCF partnered with Shell to drive down tanker industry emissions and improve the industry’s environmental sustainability. In 2018, this collaboration culminated in the delivery of the Gagarin Prospect, the world’s first Aframax crude oil tanker purpose-designed to use LNG as her primary fuel. Since then, two more tankers in this Green Funnel series have been delivered to SCF; five more are under construction and Tonkovidov says that SCF plans to develop the use of LNG fuel throughout its entire fleet.
Compared with tankers using standard marine diesel oil, LNG has 100% fewer sulphur oxides and particulate emissions, 76% less nitrogen oxides emissions and 27% fewer carbon dioxide emissions. “This makes it an optimal solution for larger industrial shipping in certain sensitive geographies, such as the North Sea and Baltic,” says Tonkovidov.
One of the greatest challenges associated with the use of LNG as a fuel is the availability of bunkering infrastructure. To overcome it, SCF cooperated with one of its core customers. “Royal Dutch Shell has committed to roll-out facilities in geographies where our fleet operates,” says Kolesnikov. “Our interests are aligned as they want to encourage the uptake of LNG. We are also chartering out some vessels we are building on a long-term basis, which shares the cost, risk and opportunities with our customers."
Financing the future
The design and construction of LNG tankers entails an incremental upfront capital expenditure compared to conventional tankers that SCF needs to recoup, explains Kolesnikov. “But we anticipate reduced operating costs, and overall we expect the ships to be competitive with conventional fuels over their lifetime - we will share any savings with our customers.
The financing of shipping tends to be relationship-driven, given the volatility of the assets and the shipping cycle. “You need to be confident that banks, or indeed customers, will stand by you in times that are good or bad,” says Kolesnikov. “It’s therefore important that the banks we work with have shipping expertise and appreciate the dynamics of the industry and the pressures we face.”
The first six of SCF’s LNG-fuelled Aframax tankers were financed through a credit facility provided by a bank consortium led by ING. “The technological innovation and environmental aspects of our LNG-powered Aframax tankers were clearly attractive to the banks that participated in their financing, and we believe they will be attractive for our customers,” says Kolesnikov. “We are proud of the tankers’ environmental benefits - that’s why the vessels are painted green.”
SCF’s forward-looking approach has enabled it to thrive for 30 years despite the volatility of the industry, according to Kolesnikov. “Our group philosophy is that we are not just investors in shipping assets but operators. That’s because we want to build skills, systems, and procedures and do the project management in-house to ensure quality of service. Ultimately, our aim is to deepen our relationship with customers. Sustainability will be an increasingly important part of that relationship in the future.”