A commercial reality check for autonomous shipping in 2018

In the first article of this two-part series international shipping lawyer Torgeir Willumsen takes a closer look at key commercial and legal obstacles to autonomous shipping.

Autonomous vessels are generating increasing interest in the shipping industry, both due to novelty and promising commercial benefits. However, despite all the buzz actual investments in projects involving autonomous vessels remain few and far between. This article will take a closer look at the commercial realities explaining why there is no imminent sea change in sight.

To the observer it is striking how much of the technology underpinning autonomous vessels has been in use for many years with several vessel designs already developed. Indeed, the “Yara Birkeland”, the world's first commercial autonomous vessel, shows us that the autonomous vessel is in fact already here.

The economic benefits of autonomous vessels are centered around lower operational costs due to reduced fuel consumption and crew costs. Most of the reduced fuel consumption is due to the removal of the accommodation structure, which according to studies can result in a 6% reduction of fuel due to a reduction in weight and air resistance. At the same time removal of the accommodation structure lowers construction costs by 5% and opens up for more cargo space and thus higher freight income.

From this it follows that the full benefit of the autonomous technology is only likely to be obtained if a vessel is completely unmanned. If an autonomous vessel is manned, but with a reduced crew, much of the benefit is lost as the vessel will still incur certain crew costs and, more importantly, needs a costly, heavy and bulky accommodation structure.

The cost reductions must in turn be balanced against higher capital expenditure when constructing autonomous ships. With no crew onboard there is much greater need for technical redundancy systems, such as twin screw rather than single screw propulsion, which drives up costs. According to one study a conservative estimate is that redundancy systems on board an autonomous bulker could be expected to increase construction cost by 10%.

Moreover, reduced fuel consumption may not necessarily translate into lower costs for an autonomous vessel. The reason is that the Heavy Fuel Oil (HFO) widely used today is cheap, but also dirty, greasy and maintenance intensive. Without humans to ensure the smooth operation of engines operating on such fuel, machinery breakdown is a likely outcome. Autonomous vessels must instead run on higher-grade fuel such as Marine Diesel Oil (MDO) or Marine Gas Oil (MGO). Such fuel is considerably more costly than HFO and estimations have shown that MDO/MGO would have to decrease about 12% in price to justify an investment in an autonomous bulker in the current market.

Interestingly, this may very well change with the new IMO emission rules scheduled to take effect from 2020. Fuel such as MDO or MGO emitting less sulphur will then become a much more viable alternative to HFO, which can only be used if expensive and space constraining scrubbers are installed instead.

Adding to an already complicated equation is the considerable amount of uncertainty surrounding investments into new technology. An overriding consideration is that return on an investment into new vessels must be calculated for 25 years, the generally accepted life-span of a vessel. This is a powerful disincentive for investments into a new and untried technology such as autonomous vessels.

One important variable is the cost of insurance. As around 80% of marine casualties are caused by human error, there is good reason to think that marine accidents are likely to be reduced due to autonomous vessels, with lower insurance premiums to follow. However, at the same time mitigating the effect of incidents will be challenging without the presence of humans. This casts some doubt on the insurance consequences of unmanned vessels. Insurers cannot easily model a new concept as there is no available data and are therefore likely to err on the side of caution when underwriting the risk.

Autonomous shipping will not be stopped by the various obstacles, but it is a good idea to take your eyes off the headline grabbing deepsea vessels and instead focus on the smaller coastal and inland waterway vessels. This is where disruption is likely to hit first. One reason for the feasibility of the “Yara Birkeland”, is that she is small in size, only 100 teu. Smaller vessels mean smaller investments and thus less risk. Being on a local trade also means the vessel is able to use an electric propulsion system not available to deepsea vessels. For similar reasons we are likely to see further smaller vessels being ordered and deployed before larger scale investments are undertaken. Such a gradual approach will provide proof of concept that provides reassurance to various stakeholders before committing capital to other larger projects.

In this regard, the 25-year lifespan of existing vessels will act as a highly efficient impediment to the deployment of autonomous vessels. It is unlikely that new technology will become so advantageous that it justifies scrapping last generation vessels before they approach the end of their lifecycle.

It is here useful to bear in mind the transition from sailing ships to steamships. Despite the superiority of steamships, the transition took more than 50 years, counting from the point at which there was a true pick-up in registration of new steam ships. This shows that a significant lag can be expected also for autonomous vessels. In other words, autonomous shipping is coming but we are not there yet.

Posted 06 March 2018

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Torgeir Willumsen, resident partner, Simonsen Vogt Wiig

Torgeir Willumsen, resident partner, Simonsen Vogt Wiig