Strategic Pathways to Alternative Marine Fuels: Empirical Evidence from Shipping Practices in South Korea

In this section, the study discusses some challenging factors in the shift to eco-friendly marine fuels. First, from a ‘technical’ perspective, ship owners are seeking to comply with the IMO environmental regulations, not only to go after social value but also to ensure sustainability through the pursuit of profit. Therefore, the main challenge from a micro-perspective is that the cost of new buildings for the transition to LNG, methanol, ammonia, and hydrogen fuels increases by 30–40 percent compared to traditional HFO bunker-fueled ships, which increases the burden of capital expenditure (CAPEX) costs. In addition, complex equipment, such as boil-off gas reliquefaction, FGSS, fuel gas bunker tanks, gas combustion units, venting systems, etc., should be installed compared to traditional HFO bunker-fueled ships, requiring maintenance and experienced crew on board [43]. As the laminar burning speed of hydrocarbon-based fuels, such as diesel, LNG, and methanol, is around 40 cm/s, while hydrogen is 200 cm/s and ammonia 10 cm/s, it is necessary to solve the problem of how fast fuel and air are mixed in order to increase combustion speed by using the high-intensity turbulence generated by the high-pressure injection of ammonia into a combustion chamber in the same way as in existing diesel engines and diesel cycles [44]. Particularly for large shipping companies, with so many alternative ways of converting conventional fuels into eco-friendly marine fuels, it is not surprising that there is a path-dependency problem similar to that of the past. Path-dependent decisions are made to expand the use of very-low-sulfur fuel oil (VLSFO) and desulphurization units [45]. While there is a consensus that LNG, methanol, ammonia, and hydrogen are the most likely future green fuels to replace bunker fuel, most fuels have several issues that need to be resolved before they can be commercialized, including new infrastructure, global productivity, safety, and technical certainty [14]. In addition, South Korea still lacks much of the infrastructure to supply green fuels. For example, the way to supply LNG for marine fuel can be divided into ship-to-ship, truck-to-ship, and pipe-to-ship; however, South Korea still lacks LNG storage tanks and terminals at ports, and, as of January 2024, there are only three LNG bunkering vessels that can directly supply LNG fuel to LNG-fueled ships. Most importantly, LNG bunkering vessels must be able to reduce the time and cost of ship arrivals and departures through SIMOPs (simultaneous operations), where cargo unloading and bunkering take place simultaneously [46]. This transition to eco-friendly marine fuels cannot be left to private shipping companies alone but must be accompanied by the development of eco-friendly marine fuel bunkering infrastructure and legislation at the government level. If such cooperative governance is not possible, the transition to eco-friendly marine fuels will be an obstacle to the development of the industry. As a representative example, HMM, a large Korean shipping company, initially considered ordering LNG-fueled ships in response to the sulfur oxide regulation, but ultimately ordered 20 ships with scrubbers in 2020 [47]. In addition, HMM separately ordered nine 9000 TEU methanol-powered ships in February 2023 in preparation for the competition for capacity and routes among global liner shipping companies when the dissolution of the 2M (Maersk (Copenhagen, Denmark) + MSC (Geneva, Switzerland)) alliance occurred in February 2023 and ocean freight rates plummeted due to the global economic downturn and declining volumes [48]. In this real-life case, even global liner shipping companies face many challenges in establishing a long-term business strategy and transitioning to cleaner marine fuels in the face of excessive competition for vessels.

Second, from a ‘social’ perspective, the sharp rise in natural gas prices caused by the war between Ukraine and Russia that started in 2022 and the conflict between Israel and Hamas that started in 2023 has also affected the international shipping market, driving up the price of LNG. In response to these changes in the global situation, shipping companies are considering changing their vessel fuel systems to dual-fuel systems that can use LNG, methanol, ammonia, and hydrogen, either alone or in combination, along with traditional bunker-based fuel propulsion [49]. In the long term, shipping companies’ green ship fuel transition strategies should be prepared to respond to global political, economic, social, and environmental changes, and allow for a flexible choice of fuels appropriate to the route and type of ship [50]. As of 2023, the Eco-friendly Ship Conversion Support Project, supported by the Korean Ocean Business Corporation (Busan, Republic of Korea) under the Ministry of Oceans and Fisheries, has a fiscal policy to subsidize 10% of the new vessel price for 20-year-old national flag vessels, including bare boat charter hire purchases (BBCHPs) that are to be scrapped or sold (only if sold to a third country); however, the criteria for eligible vessels include both LNG-fueled newbuilding options and scrubber installation options, and the difference in scores is small [51]. Therefore, this fiscal policy is not an attractive incentive for shipping companies to actively promote the transition to eco-friendly marine fuels.

Third, from an ‘industrial environment’ perspective, small shipping companies cite the increasing maintenance costs of managing their shipping fleets in response to internal and external demands for green marine fuel conversion as the biggest challenge. As mentioned above, compared to large shipping companies such as HMM, small shipping companies are at a comparative disadvantage in terms of their ability to develop their own green marine fuel bunkering infrastructure, networking, and contractual arrangements, which limits their ability to transition to the use of eco-friendly marine fuels. Despite the need to attract quality seafarers by offering high wages, benefits, and training, the reality is that wages are relatively low compared to those of large shipping companies, which limits their ability to build or charter new ships and operate ships powered by green fuels such as LNG, methanol, ammonia, and hydrogen. Smaller shipping companies face many challenges in adopting cutting-edge technologies, such as fuel switching, due to their small size and inability to operate all of the departments required to manage a single vessel, such as operations, public affairs, human resources, health and safety, and financial accounting [52]. For example, a typical LNG-fueled vessel requires qualified and experienced seafarers, as it has additional facilities, such as on-deck LNG storage tanks, gas supply and combustion package units, and safety systems, compared to conventional vessels. However, it is difficult to gather and train a lot of seafarers as there is a shortage of qualified seafarers to work on LNG carriers both domestically and internationally. Finally, while most small shipping companies agree with the conceptual review of green fuel ships, there are economic and technical limitations to building and operating new types of green fuel ships because of the strengthening of regulations by the IMO on the way forward, as well as the financial support policies of the government. In particular, small shipping companies are not strongly encouraged by big shippers to include the use of green fuels in their charter contracts from an ESG perspective, which limits their ability to voluntarily operate ships with high additional ship management costs [53]. This is because small shipping companies are highly sensitive to fluctuations in the price of green marine fuels. In particular, small shipping companies have a relatively small fleet compared to large shipping companies, which makes it difficult for them to obtain volume discounts for large quantities of green marine fuels such as LNG, methanol, ammonia, and hydrogen, all of which are imported in South Korea [54].

Fourth, from an ESG-based ‘corporate culture’ perspective, the issue of sustainability in the shipping industry has been raised as a key issue for major stakeholders, such as shippers, shipyards, shipping companies, port authorities, etc., due to the increasingly serious problem of air pollution from ships. In particular, the reason that sustainable technologies related to eco-friendly ships have not been installed on ships or applied to new ships as quickly as the IMO had hoped is that shipyards and ship owners have to invest large amounts of money and bear high uncertainty as well as risk [55]. These challenges have resulted in high prices in the shipbuilding and chartering markets, which have discouraged charterers and shippers from actively choosing eco-friendly ships [56]. The conservative culture of the shipping industry is a significant challenge to ESG-based corporate culture changes. Therefore, shipping companies still prefer to use conventional HFO fuel propulsion, and resistance to new green marine fuel technologies poses a challenge to the innovation and development of an eco-centric corporate culture based on ESG principles.

Aiming to achieve zero emissions across its operations and product range by 2040, AP Moller—Maersk has signed an agreement with the Chinese clean energy company Goldwind to supply 500,000 tons of green methanol per year from 2026. At the same time, Maersk ordered a new fleet of 172 m, 2100 TEU, and twin-engine container ships that can run on methanol or traditional ultra-low-sulfur fuels, and has committed to carrying 25 percent of all seaborne cargo on green-fueled vessels. In response to Maersk’s efforts, global shippers have expressed positive support for Maersk’s green policies, and most of them are optimistic about the long-term mutual benefits and increased competitiveness of the shipping market [57]. It is worth exploring the emerging opportunities in this situation so that shipping companies can play an important role in effectively implementing the transition to green marine fuels and achieving long-term environmental goals through policy support from governments and win–win governance between ship owners and shippers.

In this section, the study discusses some opportunity factors in the shift to eco-friendly marine fuels. First, from a ‘technical’ perspective, there is a tendency to focus on large ships and medium-sized container ships in the domestic shipping industry; indeed, 79% of the new ship orders of domestic shipping companies in the past three years in terms of the number of ships are for large container ships [58]. Hence, the new ship orders of small- and medium-sized shipping companies, other than container ships, are still insufficient. In addition to the technical uncertainties, it is necessary to prepare new opportunity factors for the problem of insufficient financial resources [58]. Opportunities from both technical and economic perspectives can play an important role in the shipping industry’s transition to green marine fuels. Furthermore, governments and industry need to support shipping companies to actively exploit these opportunities to enhance their sustainable and green competitiveness [59]. This includes long-term R&D of new technologies and the construction of multi-test bed ships to remove technical uncertainties to encourage shipping companies to participate. Shipping companies should take advantage of these opportunities by applying new technologies that have been verified on existing ships gradually, and by returning relevant maritime data to researchers after demonstration to enhance the opportunities [60].

Second, from a ‘social’ perspective, the government must introduce long-term incentive policies to mitigate financial risks, such as high shipping and maintenance costs, for shipping companies arising from the transition to green ship fuels, by extending the duration of the contract of affreightment (COA) promoted by energy utilities, such as the Korea Gas Corporation (Daegu, Republic of Korea), Korea National Oil Corporation (Ulsan, Republic of Korea), and Korea Electric Power Corporation (Naju-si, Republic of Korea), from 3–5 years to 5–10 years [61]. In addition, there is a need for a track record and government guarantee for coastal routes in which small shipping companies can participate. First, governments and shippers should actively participate in discussions on the revision of the IGF Code (International Code of Safety for Ships Using Gases or Other Low-flashpoint Fuels) and the IMO safety standard for LNG-fueled ships, to help small- and medium-sized shipping companies meet the IMO safety standards. Efforts should also be made to maintain governance through public–private partnerships (governments, classification societies, universities, companies, etc.). Second, track records are particularly important when applying unfamiliar technologies to ships. An example is the support for high-manganese steel, a new material for LNG fuel tanks developed by a domestic company (POSCO), to be included in the IMO safety standard (IGF Code). In addition, efforts have been made to establish a truck-to-ship (TTS) LNG bunkering system [62], including the installation of LNG facilities, for the smooth operation of the ‘Green Iris’ at Donghae Port. The Green Iris is a 50,000 dwt bulk carrier operating on the Donghae–Kwangyang route.

Third, from an ‘industrial environmental’ perspective, extending the duration of long-term contracts of affreightment (COA) can help shipping companies mitigate the burden of higher freight rates and maintenance costs associated with switching to cleaner marine fuels, while ensuring stable revenues over a longer period, enabling long-term business planning and building trusted partnerships from a shared governance angle between ship owners and shippers [63]. This virtuous cycle allows shipping companies to secure the time and resources needed to respond to various environmental regulations and invest in green technologies of the IMO to meet carbon emission reduction targets. In addition, it enhances their competitiveness in the global shipping market and seizes the opportunity to contribute to promoting green technology innovation and development [64]. Therefore, the government should diversify the monopoly on LNG supply in the Korea Gas Corporation to ensure price competitiveness and expand opportunities for shipping companies to promote the transition to green marine fuels by sustaining LNG prices in the green fuel market at reasonable levels.

Fourth, from an ESG-based ‘corporate culture’ perspective, shipping companies need to go through the steps of transitioning to eco-friendly fuels to realize their ESG goals by establishing a green corporate identity and adopting behaviors that meet global standards for a sustainable marine environment. Korean shipping companies should have an attitude to transfer their values towards sustainability within their corporate cultures for the transition to green marine fuels. This transition will act as an opportunity for the development and implementation of internal policies that encourage shipping companies to adopt behaviors that are in line with global standards for protecting a sustainable marine environment and promote conscious efforts towards green innovation among onshore and offshore employees [65]. Therefore, expanding ESG-principle-based practices will play a key role in helping Korean shipping companies successfully achieve the transition to green marine fuels, which will contribute to enhancing their brand value and market competitiveness in the long run.

This study examines the challenges and opportunities that negatively impact the innovation activities of shipping companies and the strategic implications for a sociotechnical system shift towards an eco-friendly shipping industry. Figure 6 shows the synthesis results of the niche innovations strategy. During this shift in the shipping industry, we need to consider which strategic niche innovations can lead to decarbonization. We need to overcome the challenges identified above and strengthen the opportunities to successfully make an eco-friendly shipping industry; niche innovations will provide strategic opportunities with which to overcome these challenges and move towards in a new direction. Our proposed niche innovation strategy is as follows: