The Value of Flexibility in a Time of Uncertainty

The maritime industry is facing a testing time ahead of it due to a plethora of new environmental regulations that are being introduced within a relatively short time period. This will oblige shipping companies to make the most of every animate and inanimate asset available to them. The most notable environmental regulations being introduced include concerns about ballast water, energy efficiency, and emissions. Each of these topics are deserving of research and investigation in order to assist shipping companies to develop methods of evaluating compliance to these new environmental regulations. In addition, these environmental regulations are being introduced in a time where the maritime industry finds itself in a trough within the shipping cycles, making the task of facing a multitude of new regulations even more challenging. This research paper has focused on the issue of compliance with emissions, more precisely, the issue that shipping companies face when complying with MARPOL Annex VI Regulation 14, which has introduced more stringent limits regarding the emissions of sulphur from vessels. This is because compliance with MARPOL Annex VI Regulation 14 is likely to be the most expensive regulation for shipping companies to comply with, and because MARPOL Annex VI Regulation 14 is likely to transform the maritime industry as we know it. This research presents the various options a shipping company has in order to comply with MARPOL Annex VI Regulation 14, and continues by thoroughly examining how dual fuel propulsion systems can provide a shipping company with a means of compliance. A valuation model has been developed in this research paper that allows the incorporation of uncertainties, and that can be easily adapted, and used by shipping companies to evaluate investments towards dual fuel propulsion systems. The incorporation of uncertainties was facilitated by the use of a binomial pricing model in order to conduct a real options analysis valuation of the option to switch. The incorporation of uncertainties in this model was paramount, due to the many uncertainties a shipping company must take into account when making investments towards a dual fuel propulsion system. The model demonstrates that the decisive factor driving the adoption of a dual fuel propulsion systems in general is fuel price differentials. The model also demonstrates that depending on the characteristics, and operational parameters of the vessel in question, other uncertainties such as the availability of LNG bunkering facilities, and the enforcement date of the global sulphur cap can have a sizable impact on how much a shipping company should invest in a dual fuel propulsion system. The author believes that the uptake of dual fuel propulsion systems is likely to not only allow shipping companies to comply with the upcoming regulations and minimise their fuel costs, but will also facilitate the development of the new paradigm of low emissions shipping.