Hunn: The time is rapidly approaching when Carnival would have to make a decision to go with whichever of the alternative new fuels shows the most promise of a lower-cost solution to the new emissions requirements."

Arison: We need to have sustainability reports, and access for customers to voice their concerns about our operations and the environment."

Hunn: The frustration is that we are waiting on the technology companies, who are waiting on us to make the decision; and the engine-makers are waiting in the middle. They do not want to commit until we do, and vice-versa."

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Spring 2011

The cost of compliance

By Tony Peisley

A refreshing – even surprising – level of unity has been shown by the cruise industry in the face of one of its greatest-ever challenges. But as the full cost implication of the emerging regulatory environment becomes clear, each individual company is searching out the best way to protect its own bottom line.
The viability of the smaller, less well-resourced lines will ultimately be most at risk. The fact remains, however, that in sheer numbers global market leader Carnival Corporation has the most to lose.
“We need to look for technical solutions based on sound science and engineering,” says Chairman and CEO Micky Arison. Finding them, though, is likely to be easier said than done.
Recently promoted to become the corporation’s Senior Vice President Maritime Policy and Compliance, Jim Hunn agrees that his area has become increasingly central to Carnival’s financial and strategic planning.
“There is no doubt that our management is very concerned about just how much extra cost is going to be created by new regulations, particularly those relating to air emissions,” he says.
“Although these regulations will affect all shipping companies, our marketing people point out that we are selling directly to customers – unlike freight lines which are delivering goods like Nike trainers to companies which then sell them on.”
It is relatively straightforward for freight lines to increase the delivery cost to the wholesaler, which can then either absorb them or pass them on to its customers. But if the cruise lines simply add the cost to the cruise fare they risk reducing demand, and stalling the growth upon which the health of this still-maturing sector is based.
This can be seen from the reluctance of many cruise companies to re-introduce fuel surcharges, despite the fact that oil prices have returned to more than $90 a barrel – a level which inspired surcharges in 2009. But cruise lines are acutely aware that surcharges are always unpopular with those making discretionary purchases.
Instead, therefore, they are trying to offset the extra costs through reductions in consumption.
“Our major efforts at the moment are all about efficiencies: building and installing better equipment, using more effective hull coatings, etc.,” Hunn says.
“We have an energy efficiency group within the company which has been tasked with achieving consumption reductions. Unfortunately alternative new technology is just not where we would want it to be right now for it to be able to offset the impact of the new regulations.
“In the past we have sat back and waited for such technology to be created and then presented to us. But more recently we have definitely become more proactively involved with, for example, the co-funding of installations to test promising new technology such as Krystallon on Holland America Line’s Zaandam.”
He also admits that the time is rapidly approaching when Carnival would have to make a decision to go with whichever of the alternative new fuels shows the most promise of a lower-cost solution to the new emissions requirements.
“With the North American Emissions Control Area (ECA) effective in 2012 and other ECAs and IMO regulations effective in 2015 and 2020,” he says, “we have to decide whether LNG (liquefied natural gas), fuel cells or even nuclear energy are going to be viable options.
“But – for now – it is all about improving efficiency. We are looking to cut pro rata consumption by 20% in the next couple of years. But we are fully aware that the cost of using marine gas oil (MGO) instead of heavy fuel oil (HFO) – currently 98% of our total fuel – is nearly double at current prices, so there is still a big gap.
“We could still find ways of reducing more than that 20%, but we have to look at other options, too.
“LNG, fuel cells and nuclear energy are all on our radar. NOx-efficient LNG engines are being designed; but whereas these would probably add an extra 10% on a newbuild, the cost is much larger on a retrofit as we would be paying the whole cost and then throwing away an engine. This would be a tough decision but, in the end, we would do what we had to do.
“With LNG, though, the main issue is supply. It is easier for ferries to be sure they can access a regular supply as they are on set schedules, usually daily between the same ports; ours is a global operation using hundreds of different ports – and we have cruises with long durations and consecutive days at sea, too.”
Chairman Arison has already pointed out that, the way LNG supply is currently set up, cruise ships would have to travel with a LNG supply ship alongside – clearly not a viable option. But Hunn does not rule out LNG altogether. “It remains an attractive option if the supply side can be sorted out,” he says, “as it does remove all emissions issues.”
Significantly, Michael Thamm – President of Carnival-owned AIDA Cruises – is on record as “wanting to be the first in the world to have fuel cells onboard” while already looking at using LNG. “Our objective is the zero-emission ship,” he has said.
Hunn points out that Wartsila is developing LNG engines, including a dual-fuel one which can use both oil and LNG. He is also generally positive about fuel cells, but is concerned about the rate of progress in certain areas of their development.
“I do believe that these will eventually transform ship propulsion but, whereas we all thought this could happen within 20 years, it is now looking more like 50 years.
“Development of the actual cell technology is now moving fairly rapidly, but that of the batteries to which the fuel cells will supply energy has been much slower. The Japanese are now concentrating on that area, so it should start moving faster to catch up.
“This is a solid-state technology, with no moving parts, so it is very attractive on an operating cost as well as an environmental compliance level.”
Fuel cells also avoid the safety issues and potential consumer resistance to travelling on ships powered by LNG. These issues are even greater for nuclear power, though Hunn points out that consumer resistance may be weaker than some predict because newer generations do not have the nuclear bomb and Three Mile Island associations of the ‘baby boomers’.
“Nuclear energy for commercial shipping was discussed at the GMEC conference in Hamburg last year, and it does have a lot more issues than just the economic ones,” says Hunn.
“But Lloyds of London are one of a couple of organisations looking closely at the potential of nuclear-powered passenger ships, and one of our own engineers has access to their ongoing studies.
“The only commercial nuclear vessels are some Russian icebreakers; otherwise it is a purely military option. That said, the military vessels do have a very good safety record.
“They have shown that it works, and the size of reactor they use is comparable with what we would need on a cruise vessel.
“Although we are not directly involved in any nuclear research and development – there is not going to be a Carnival reactor – it is something we have looked at.
“If we did go ahead, it would probably be a case of using an existing nuclear company to operate as well as supply the reactor. This would be preferable, at least initially, to trying to train up our own engineers to nuclear capacity.”
There is more certainty about other possible alternative energy sources. “I do not think we are going down the routes of wind/sail or solar power when we can read about buildings on land which are just 10% powered by [such alternatives],” says Hunn. “That is no good to us, as that would mean we need the same size (and cost) of plant to give us the other 90%.”
Carnival was the first cruise company to embrace cold ironing, helping fund Juneau’s investment in a shore power facility and investing in the corresponding equipment onboard several Princess and HAL ships – which can now also hook up at Los Angeles and San Francisco.
“A few years ago we considered putting the connections on all future newbuilds, but we were concerned about the standardisation issue,” says Hunn. “We did not want to invest in something which would not always connect to shore installations in different parts of the world.
“So we compromised and simply ensured we made allowance in each newbuild for the space where that connection installation could go.
“There is some talk of ports putting in an LNG installation which would provide the shore power. This would potentially resolve all the environmental issues, but at this stage it is just that: talk.”
Those issues are primarily about the source of the shore power. “It is hydro-electric for US West Coast ports, but in other parts of the world it would be fossil fuel. So there would be no environmental gain in using that instead of ship power.
“If there is not sufficient power locally to supply visiting ships, there is no real gain in building a new coal power station – despite the argument that port emissions are regional while CO2 emissions are global, thereby allowing you to weigh a regional gain against a global loss.”
Arison told the GMEC audience in Hamburg that it was important to set targets “so we have challenged ourselves to reduce GHG (greenhouse gases) 20% by 2015”.
Hunn continues: “We have produced a carbon footprint target (which is really a fuel efficiency target) for a 20% reduction in the five years to 2012. We may exceed this, though we must point out that, because of our expanding fleet, this is a pro-rata and not a net reduction for the company.”
Such clarity and transparency over these kind of targets is now a key part of Carnival’s corporate policy on the environment. As Arison said, “We need to have sustainability reports, and access for customers to voice their concerns about our operations and the environment.”
“My original appointment in 2002 followed a raft of US Department of Justice actions over a range of environmental breaches by cruise companies including Carnival,” says Hunn. “It heralded a more proactive stance on these issues by cruise companies.
“We now receive many enquiries on environmental performance from our stakeholders, and where once we might not have been so diligent we now answer them all, even if sometimes we are pointing out that their concerns are unjustified because of the strides we have taken in this area.”
Sustainability reports are one way for companies both to show more transparency and also to educate their stakeholders (including the consumers) about their increasing commitment to improved environmental performance.
“Costa Cruises and Aida were the first of our brands to go down this route, and last year all our operating companies produced reports.
“Some stakeholders prefer just one report from the corporation, while others want them from the individual operating companies. So – although a final decision has yet to be made – the likelihood is that we will have one corporate report in 2011 with the others given the option of repeating their individual ones.
“There appears to be more demand within Europe for these so I would expect Costa, Aida and Carnival UK to continue, but for some of the North American brands to leave it to the corporation. Either way, we will not back away from transparency.”
In his Hamburg address, Arison said: “Protecting the environment is the right thing to do… but making public pronouncements means nothing if they are not backed up by industry commitments – and long-term ones. Above all, when it comes to the environment, we need to be part of the solution, not part of the problem.”
“Our view is that all regulation should be science based, and we have issues with the 200-mile limit in the North America ECA for that reason,” says Hunn.
“We do not think that will be changed overall, but we are still negotiating over Hawaii and Alaska where studies have been contradictory.
“Through CLIA we were instrumental in persuading IMO to allow alternative compliance (e.g. scrubbers) in emissions rules. There is also a possibility that we will be allowed to offset by using much lower sulphur content than required in port or just offshore, and so be able to use sulphur content that is higher than prescribed when further out from shore.”
Equally, this kind of emissions trading could allow one ‘green’ ship to offset another not quite so ‘green’, so that both can be compliant.
But this is nibbling around the edges of the potential regulatory impact on cruise operations. “If we had to do all the compliance today,” says Hunn, “we would be in real trouble. But we do have a little time to find solutions.
“The frustration is that we are waiting on the technology companies, who are waiting on us to make the decision; and the engine-makers are waiting in the middle. They do not want to commit until we do, and vice-versa.
“We need to get everyone talking together so that we can make more progress.”