Executive Summary

The Paris Agreement’s goal of limiting the average annual temperature increase above pre-industrial levels to 1.5˚C demands that fossil fuel production and consumption declines rapidly and immediately. Both the IPCC and the IEA make it clear the world cannot afford to dig up new fossil fuels, nor build new fossil fuel infrastructure.  

In this report we have analysed the outlook for LNG carrier and oil tanker shipbuilding under a suite of future energy consumption and production scenarios, covering a range of global emissions levels and associated long term temperature rises.  

Given the expected future decline in fossil fuel use, as the world moves to limit warming to 1.5˚C, it is inevitable that oil tanker and gas carrier shipbuilding will also experience a decline. Moreover, as we show here, a decline in this shipbuilding sector would occur even under policies and actions that limit to warming to 1.7˚C or 2.5˚C.

These ship types accounted for 27% and 10% of new ship builds globally over the period 2016 to 2020. Any decline in the market for these ships will have a significant effect on the sector as a whole.

The objective of this study is to examine the risks faced by the global, and particularly the Korean, shipbuilding industry, in the face of a decarbonising world.

Korea has one of the largest ship building industries in the world, capturing 37% of total global orders in 2022, and holding a dominant position in the industry building both LNG carriers and very large crude oil carriers (VLCC). Korean shipbuilders won 70% of the global orders for large LNG carriers in 2022. In terms of compensated gross tonnage (cgt), LNG carriers accounted for 65% of all the orders won by Korean shipbuilders in 2022.

Korea’s shipbuilding sector is heavily dependent on the manufacturing of oil tankers and LNG carriers, and is therefore likely to face a fundamental crisis. As ships have consistently ranked among the country’s top ten exports in terms of value, a crisis in shipbuilding will have adverse effects on the country’s wider economy.

Globally, LNG carriers have played an increasingly important role in the natural gas export market. The share of natural gas traded via LNG carriers increased from 27% in 2000 to 51% in 2021. LNG trade accounted for 76% of the growth in total natural gas trade over the period. It is therefore likely that any future growth in natural gas trade, and consequently consumption, will depend critically on the building of new LNG carriers. Conversely, a decline in natural gas consumption will likely be particularly detrimental to the LNG carrier shipbuilding industry. 

Findings

• Our analysis of the IEA’s NZE, a scenario consistent with the Paris Agreement’s long term temperature goal, shows that limiting global temperature increase to 1.5°C requires that no new oil tankers and LNG carriers be built. There is a serious risk of stranded assets for the hundreds of LNG carriers currently on order.
  
  
• The IEA’s scenarios based on government policies (STEPS) and adopted pledges (APS), while leading to global warming of 2.5°C and 1.7°C respectively, and therefore inconsistent with the 1.5°C long term temperature goal, also see a large decline in demand for global LNG carrier and oil tanker shipbuilding.
  
  
• As the world moves to implement the Paris Agreement, countries with large LNG carrier and oil tanker shipbuilding sectors, namely Korea, China, and Japan, but other countries as well, face significant risk if they fail to respond to and plan for the global energy transition.
  
  
• Not only do the shipbuilders face economic risks, but so do the owners. Investors and governments who subsidize new gas projects should consider the longer-term outlook for fossil fuels and the implications for stranded asset risk.
  
  
• Given their vast resources and expertise, Korea, and other large public financiers of fossil fuels, are well placed to be leaders in this renewable energy transition. Emerging opportunities in offshore wind development and green hydrogen are particularly relevant for the transition of the shipbuilding industry.
  
  
• To take advantage of these opportunities, Korea and other shipbuilding countries could redirect public finance currently subsidising fossil fuels, including shipbuilding activities, towards renewable energy. Doing so would allow them to avoid stranded asset risk and deliver a just transition for its shipbuilding industry.