Northern Lights illuminates CO2 shipping, but Europe could get left behind

Chris Wright - Societe Generale

While Europe has been at the forefront of CO2 shipping and terminal developments, progress must accelerate, particularly given the slowdown seen over the last 12 months and rapid advances in Asia.

Currently, Northern Lights is spearheading a fully operational shipping-led CO2 model. Its first vessel has been named and delivered, and operations are poised to begin. Captured carbon from Heidelberg Cement’s project will be transported to storage facilities in Norway. This process will involve shipping the CO2 to a reception terminal, where it will be further transported via pipelines for permanent storage beneath the North Sea.

The UK is also making significant progress, with government support and the final investment decision for the Northern Endurance Partnership and HYNET projects finalised in 2024. These initiatives are well-suited to leverage coastal terminal facilities, which in turn opens up opportunities for future non-pipeline transport. This could also pave the way for a viable business model focused on non-pipeline carbon capture transport.

Despite this progress, Societe Generale corporate and investment banking head of advisory – EMEA and Americas Chris Wright cautions Europe risks “being left behind if we don’t act soon”. He observes projects in Singapore, Malaysia and Indonesia are gaining momentum. “Driven by both national and international oil companies, these initiatives are beginning to close the gap in the region’s carbon capture and storage efforts,” he says.

One of the primary obstacles [in Europe] is the need for substantial government support, he says. While a fully functional carbon market is the ideal long-term solution, current carbon prices, which are in the €60-€70 (US$60-$70) range per metric tonne of CO2 in the European Union’s Emissions Trading System and somewhat lower in the UK, are inadequate to drive CO2 businesses commercially.

Governments need to step in by providing supportive business models or direct investments to propel projects forward, he says. The Norwegian government’s significant stake in Northern Lights, with 70-80% ownership, exemplifies this direct investment approach.

“The UK government has offered valuable backstops and protections within Track 1 business models, where my colleagues have been advising on structuring for several years,” says Mr Wright.  “While non-pipeline transport models may not require the same degree of protection, it is crucial for governments to provide adequate support - something that is not yet fully recognised. At the same time, the industry must align itself with government strategies. Relying solely on a traditional shipping model is unlikely to propel the development of this industry forward.”

It is also imperative the London Protocol and streamlining the process for cross-border CO2 movement is fully addressed, he adds. This could unlock Mediterranean volumes, as southern European countries often lack suitable geological storage sites.

Mr Wright also suggests that the industry, particularly shipowners, should embrace operational risks and foster partnerships. “Potentially, this could mean accepting slightly more risk in areas like asset redeployment. LPG carriers often operate in this manner. When combined with government-provided financial security, this model could help overcome any existing impasse,” he says.

Governments also play a crucial role in establishing a suitable investment framework, particularly one that enables bank financing, he notes. Although some conservative investors may remain cautious, governments should work to create an "investable and bankable framework" that encourages investment in these projects.

Maintaining the integrity of carbon credits is also vital. Mr Wright praises the European framework as “good, clear, transparent, [and] cleared credit-based”.

"However, the extent to which host governments can sustain support for large industries may significantly impact the pricing effectiveness of the carbon market."

When it comes to investment opportunities, Mr Wright believes that close to 100 vessels will be required over the next decade. Despite competition for newbuild slots from other sectors, shipyard capacity is not expected to be a constraint, with sufficient capacity anticipated around 2030-2032. However, he believes that plans for 48 new terminals are overly ambitious. According to Societe Generale’s internal analysis, a minimum throughput of approximately 500,000 tonnes of emissions per site is necessary to ensure economic viability.

Mr Wright adds the FuelEU Maritime mandate is not expected to significantly impact CO2 shipping infrastructure development in the short term. This is because CO2 ship operators can design new vessels to comply with Best Available Technology standards, allowing them to meet FuelEU requirements with minimal economic impact. "The most pressing challenge for the CO2 shipping and storage industry is pace. It would be a disaster if the industry remains primarily focused on Northern Lights by 2030.”

He remains positive on the prospects for future success. “Shipping will play a fundamental role in achieving global net-zero goals by providing essential interconnectivity, particularly to remote producers,” he says, adding CO2 shipping is expected to follow the scaling patterns observed in other commodity sectors.

He acknowledges ongoing concerns about industrial emitters’ commitment to decarbonisation, particularly in the steel sector, where high emissions reduction costs have met resistance. "While steel producers are justified in seeking investable frameworks from governments, a collaborative approach is likely to be more effective than vocal opposition," he says adding other sectors, such as cement, have demonstrated a more co-operative stance.

Despite these challenges, Mr Wright emphasises global momentum towards decarbonisation continues. He cites the Stegra Green Steel Project in Sweden, which his colleagues advised on, as an example of a successful business case for sustainable practices in the industry.

source: riviera news