The Great Fuel Switch

REMI ERIKSEN

Welcome to Trust and transformations - leaders navigating change, a DNV podcast. I'm Remi Eriksen, DNV’s group president and CEO.   

In this series, myself and our business area CEOs sit down with other global leaders to talk about how they tackle transformations, build trust in their business and people, and what they think is coming next for their industry. Right now, they are experiencing a series of historically significant transformations, making trust more important than ever. 

Andreas Sohmen-Pao is the chairman of BW Group, delivering energy for the world today and finding solutions for tomorrow. Rooted in shipping, best on water, BW Group is a leading global maritime company involved in shipping, floating infrastructure, deep water oil and gas production and new sustainable technologies.  

In the renewable space, the Group has investments in solar, wind, batteries, biofuels and water treatment. As the top man of BW Group, you have a particular attention to the maritime industry's great fuel switch. Welcome to Trust and transformations, Andreas. 

ANDREAS SOHMEN-PAO  

Thank you very much, Remi, for the kind introduction. It's very nice to be here with you. 

REMI ERIKSEN

Before we get into the heart of this podcast, as the chair of a company with many different interests, how do you spend the first two hours of your day? 

 ANDREAS SOHMEN-PAO

Well, it's not very exciting. I clear my emails, I eat breakfast and I try to exercise. And that leaves the rest of the day for meeting people, reading and thinking. I'm amazed how easily one can spend the whole day doing emails. And a friend of mine once told me that emails are a to-do list that others make for you. After reflecting on that, I changed my habit to clear as much as possible in the first hour of the day. I think it's so much more productive to channel your time towards your own goals and priorities.

 REMI ERIKSEN

The job you have, it must be important to set aside time for reflections and yeah, looking into what's next. Do you book time with yourself to do that, Andreas?

 ANDREAS SOHMEN-PAO

Yes, I don't do it sort of formally in terms of my calendar, but I definitely set aside time in the day mentally to be able to really think deeply and to read. It's something that I enjoy doing, but it's also very helpful for the business not to get swept up too much in the noise of the day and to be able to do reflection.

REMI ERIKSEN

Very good. The maritime industry is facing a historical challenge as it considers alternatives to the marine fuels it has used for generations. As a leader, what has been your strategy? Have you just been following the targets set by the International Maritime Organization or have you been looking for a competitive edge in this space?

ANDREAS SOHMEN-PAO

Well, you mentioned a competitive edge, Remy, and as we all know, there's a leading edge and there's a bleeding edge. And it's not always easy to know upfront which is which.

Our approach has been to stay up to date with developments without becoming detached from reality, so I like to think of it as leading without the bleeding. That means in practical terms, building some methanol fuel tankers against customer contracts. It means increasing the number of ships we have transporting ammonia and offering ships for ammonia bunkering pilots. It means engaging in numerous studies and dialogues about carbon capture and transportation.

And I think philosophically, it's important for us all to keep moving forwards, but to recognize that shipping doesn't always reward the first movers. Unlike technology forms, you don't typically get scale and network effects working for you. So to avoid the bleeding edge, we're calibrating how much capital we put in, e look for risk sharing with customers, e participate in collaborative efforts like the Global Center for Maritime Decarbonization, which we're partners in with DNV. And then we're also building some great businesses in solar, wind, batteries, the ones you mentioned, circular economy, based on their own merits. So we're trying to do as much as we can, but also trying to stay grounded in reality.

REMI ERIKSEN

And as a leader, what have you done to align and persuade your people and companies that lowering carbon intensity is a good thing and vital for the future.

ANDREAS SOHMEN-PAO

So, you know, in terms of persuading our people that decarbonization matters, I think there's enough news and societal pressure now that people don't need a lot of persuading. What's important is actually actions to demonstrate intent. And that's where I think, you know, participating in trials and pilots and investing in decarbonization, both in the core shipping business but also in adjacent areas, is sort of a demonstration of where we want to go.

REMI ERIKSEN

When it comes to the great maritime fuels that I mentioned earlier, firstly, do financiers and charters push you in this context to reduce emissions and to have low emission fuels?

ANDREAS SOHMEN-PAO

Yes, certainly, especially some of the European banks and now, you know, global banks also with Poseidon principles and other sort of encouragement to make the switch. I do wonder whether we always get the balance right between ambition and realism, but I like it that we have some people pushing hard forwards.

Others may be pulling back a little bit so that we can actually find the best path between the two extremes. And by the way, I think climate change is a real global emergency, which requires urgent action but embracing unrealistic solutions or committing kind of corporate suicide by doing the wrong thing is not going to fix the emergency. So I think we really need to do something, but we need to do it in a sort of thoughtful way.

REMI ERIKSEN

What about the customers, you know, the charters and so how do you see any changes there?

ANDREAS SOHMEN-PAO

Well, it's a spectrum and, you know, as you would expect, some are pushing and actually putting their money where their mouth is. So I think the ultimate test actually is will they give a charter with some premium for, you know, new technology? And I think we do see that in some cases. In other cases, I think there's good rhetoric but it's not always backed up with action.

And again, I don't think we can wish it otherwise because companies will move at a different pace and they'll have different appetite for embracing new technologies. The good news is that there are players both on the customer side and within the industry on the shipping side who are willing to do things and take the plunge.

REMI ERIKSEN

Building the ships is only part of the problem as we have discussed in the board of the Global Center for Maritime Decarbonization. But what is holding back alternative fuels? Is it the onboard ship technology? Is it the availability of the new fuels? Is it infrastructure? Is it incentives or is it something else?

ANDREAS SOHMEN-PAO

So I think it's everything. I mean, all these things that you mentioned are challenges that need to be overcome.

If I was to point to one being particularly important, it is incentives and policies. You know, I'm a great believer in Adam Smith's invisible hand. In other words, that there are millions of decisions and transactions that take place, which lead you to a certain end state. And what's more important than a single directing force or a silver bullet is that the right incentives exist to allow the market to find good solutions. So individuals working in their individual self-interest, but directed towards outcomes that society needs.

REMI ERIKSEN

BW Group operates all over the world. How different are the attitudes towards the green shift and green fuels in the different regions? And are green corridors a good way to make sure solutions are aligned across countries and regions?

ANDREAS SOHMEN-PAO  

Well, as you would expect, there are some regions that are more forward leaning, maybe because they are wealthier and can afford to pay extra. And there are others who are less enthusiastic. In the end, I think everyone is reasonably rational and so then it really depends who you're talking to. I mean, if you're talking to a consumer of fuel, like a shipping company, they are going to be asking, where do I get the fuels and how much is it going to cost?

And if you're a producer of fuels, you're going to be thinking about how much can you sell and at what price point. If you're a port, you're thinking about infrastructure and safety and so on and so forth. Green corridors are a nice way to bring all of these interests together by testing what is possible on focused routes before expecting that it's going to be everywhere all at once. So I like the concept of pilots and corridors and so on.

One other interesting dimension here to mention is that we're going to see countries which have mixed feelings because they worry about higher costs from new fuels, but they also see potential where they can be a producer of new fuels. For instance, if they now have access to renewable energy in a way that they didn't have access to natural resources in the past.

REMI ERIKSEN

I'm aware that BW Group has been exploring some initiative on building green ammonia floating productions that use offshore wind turbines for power. Do you think that producing your own green ammonia is the way to go to secure a supply for your fleet or could this also be a more strategic move for your company where you're also providing the wider maritime industry with green fuels?

ANDREAS SOHMEN-PAO

Well, we're pretty humble about the idea of us being big enough or smart enough to produce our own fuel. When we look at projects like this and we're investing in numerous green projects around the world, our thought is not so much let's produce fuel for ourselves, but rather let's produce clean energy for the world in a way that also makes financial sense for us. Most energy, as you know, is a fungible resource. So we don't need to produce molecules or electrons for ourselves, we're better off actually selling what we make and then buying what we need.

But I would say it is a nice financial hedge. If you're producing something that you're consuming, that's actually provides you with a hedge, but it's not a primary driver. And I think one has to be careful not to think that one can do everything oneself. My grandfather actually had apparently liked this saying that if you want to eat well, you don't have to own a restaurant. You don't have to vertically integrate on everything you do, but it does so happen that we are producing clean energy in certain areas.

REMI ERIKSEN

Last year, the International Maritime Organization significantly enhanced the greenhouse gas strategy targets and set some very challenging emission reduction targets for the industry. The goal, as we all know, is now for shipping to achieve net zero emissions by around 2050. New things now is that there are important milestones along the way. How optimistic are you that the industry can meet these ambitious targets?

ANDREAS SOHMEN-PAO

So I think I'd start by sort of saying it depends. I mean, I'll answer for myself in a moment, but I think it depends on how imaginative you are or one is. I mean, if you look at the facts as they stand today - how long it takes to build ships, how much new fuel is required, what steps are needed to make that fuel safe and available and affordable, it's quite hard to believe we can get there.

But that's a bit like someone sitting in 1900 talking about whether people would be flying around in planes 30 years later. Or in 1970, talking about whether people would be sending photos to each other through thin air on a handheld supercomputer. You know, what seems impossible now can become real because humans have this ability to achieve unthinkable things over reasonable periods of time. So if you ask me based on what we have available to us today, I really can't sit here and say it's going to be easy. In fact, it looks almost impossible to achieve net zero by 2050, but I'm a great believer in human ingenuity.

REMI ERIKSEN

So if you were to kind of direct the industry, if you were the leader and could make decisions, what would you ask the shipping industry to pay attention to reach those targets?

ANDREAS SOHMEN-PAO

Yeah, so maybe this one links back to this earlier idea, you know, because that to me then sounds a bit like a visible hand that is able to direct people in a certain way. And I just think that solutions come from such a myriad of different actions and activities coming together. So I would maybe just repeat the thought that, you know, incentives and policies are probably the single biggest lever because then you can allow the free market to do its magic and to do its own work.

Trying to sort of expect that people will do things against their own interest for a sustained period of time, you know, because it's too expensive or they're going to, you know, push their company to losses or whatever, I think that that's just unrealistic. So if we can fix the incentives. And the real problem, of course, is if you're a believer in free markets, you sort of say, well, why don't we just let everybody figure this out and solve the climate change problem? And the answer, as we know, is because we're not pricing the externalities. And we haven't, the free market hasn't actually put a proper price on carbon, and therefore we cannot allow the free market to find the solutions because we haven't created the right incentives.

The moment we crack that code and there is this price on carbon, I think one starts to then see the market doing its magic.

REMI ERIKSEN

Yeah, we were together writing with someone else, a white paper five / six years ago on exactly that. So do you think still that is a good idea? That the carbon levy, the carbon tax to make sure it's a level playing field, that there is visibility into the future so that you know, as an investor, you know what you're investing against or with?

ANDREAS SOHMEN-PAO

Yes, I really like the idea. I mean, I think that the starting point is that we know that there's a cost to carbon and therefore we need to set a price on it in order for action to happen. So that's the starting point. Then we have this superpower in the maritime industry, which is the ability to set global legislation through IMO. And so because emissions are a global commons problem and you can't, it doesn't respect national borders. To be able to do something on a global basis is really a very special position that we have.

And then you just have to address the challenge of what do you do with the proceeds? And I do like, you mentioned sort of the visibility and predictability of a flat levy as opposed to a trading scheme. And I like that, but you have to then figure out what you do with the proceeds. But to me, that's a bit of a luxury problem because it would be, you know, a pot of funds that could be used for good causes and take care of also smaller states, which are maybe disadvantaged. And so I think that just requires good system design, but I like the idea.

REMI ERIKSEN

But even with a quite high level levy or a tax, it will not be kind of compensating for the extra cost of the new fuels, whether it's green methanol or green ammonia or some other synthetic fuels where we might see, I don't know, four to maybe eight times the cost of the fuel we are used to, diesel.

ANDREAS SOHMEN-PAO

Yes, yes, it's a good point. And I think that we would have to think about it as a journey, because if one tries to go from A to Z in one jump, and imposes a $300 per ton tax or whatever on CO2 tomorrow, I just think that that becomes impossible to put into effect, because there would be too much resistance and there would be too much money, frankly, that needs redistribution and so on.

But I think if one can think of it as a journey and start with some number that starts the nudge and starts the signal. And actually people are pretty good at projecting, you know, if you start with a tax of $30 per ton, let's pick a number. Yes, that's not nearly enough to compensate for the difference, but it doesn't take a genius to figure out that that 30 can go to 60, it can go to 100, it can go to 200. And to start taking action to prepare for a future where the number is much higher. So I think nudges are sometimes enough to get the journey started.

REMI ERIKSEN

I just want to move on to the topic of trust and you mentioned particularly safety and trusting, you know, new technologies and new fuels, etc, which is core to DNV's purpose. From your point of view, are safe practices around the handling of alternative fuels developing at the same pace as the technology and the incentives?

ANDREAS SOHMEN-PAO

So my high level answer is I think so because if you look at how long it will take to build the systems around alternative fuels, I think we do have time to figure out the safety systems to go alongside that. But we certainly shouldn't be passive on this front. The topic definitely needs a lot of attention and it's great to see players like DNV and centers like GCMD, the Global Center for Maritime Decarbonization, working alongside regulators and industry players to figure out solutions. So it definitely needs attention, but it's, you know, we do have some time because these systems come slowly.

REMI ERIKSEN

At DNV, we talk about the two Ds, decarbonization and digitalization, and they sometimes goes hand in hand here. And you can say digitalization has an opportunity where when the asset becomes more connected, you have the backside of that medal, namely cybersecurity or staying cyber resilient in a digitalization journey. How are you at BW Group working on this across, I counted 15 companies, to ensure that you are future fit when it comes to cyber resilience?

ANDREAS SOHMEN-PAO

Hmm. So this is a multi -headed beast and I think one needs a multi-pronged approach to it. You know, we are of course very focused on cyber security at the core. You need to make sure systems are safe. But we're also developing technology with sensors and performance management software to improve how we run the fleet. We're developing now an AI neural network that really understands shipping to improve processes and efficiency. And what's nice about our group of multiple companies is, you know, we have sort of ideas bubbling up from lots of different corners. So it's sort of let a hundred flowers bloom type of approach that, you know, we get innovations coming in different areas from different companies. And then we try to share the best learnings across the group.

We also have a company, BW Digital, which owns subsea internet cable and cable landing stations across the Pacific. Although I won't claim that this has a very direct connection to our shipping activities, but we try to stay plugged in on the digital front.

REMI ERIKSEN

What's your view on IT versus OT? We see that cyber attacks are typically IT related where the consequences are purely financial and reputational. While if you are hacked on the OT side, operational technology side, the consequences could very well be, you know, safety related or environmentally related, impacting people and the environment in terms of releases and so on. So what's your take on this? Is it a hypothetical, theoretical risk or is this something you think could be a real threat?  

ANDREAS SOHMEN-PAO

Well, it's a good question and it's something we think about and debate a lot because we are conscious that if you look at the spectrum of security and how to protect yourself, there are businesses where it's immediately existential and life-threatening. If you're a bank and your systems go down, it really can affect whether you can survive as a business. In shipping, you know, we've had actually incidents in the past. So a few years back we had a major attack and it took our systems down for a while. And it was at one level, it was very humbling and we understood sort of where some of the vulnerabilities were and where we needed to improve. At another level, it was quite reassuring that the business could continue to function because we are very much in the analogue world. We have captains and teams on board ships that are out on the oceans that operate the vessels.

Of course, as they become more technologically enabled, there is a risk that one could do something to attack them. But I suppose our conclusion is we're not going to be able to build Fort Knox. We're not going to be able to get up to kind of military defence standard or even kind of financial institution standards. But we need to be as far along that process as we can within our means and, you know, with our assessment of our own risk profile. So we definitely don't take it lightly, but we're sort of realistic about, you know, how analogue our business is at the end of the day also.

REMI ERIKSEN

We're coming to an end of our podcast, Andreas. We have discussed some large global challenges and this might be overwhelming for some, especially for our younger listeners. If you were to give some guidance to a young person who's beginning their career, what would you say?

ANDREAS SOHMEN-PAO

So I think I'd say find somewhere interesting to make a start. Focus more on finding good people to work with than finding the perfect job description. And then work hard, stay curious, and you'll have a fun and interesting journey. I mean, I would caution against overthinking things or worrying too much. There are definitely a lot of issues in the world to solve, but when it comes to one's own life, I'm not sure one should expect the perfect job or the perfect answer to everything. You know, I like this saying by Soren Kierkegaard, which watchers of Dune, the movie Dune may recognize. He said, life is not a problem to be solved. It is a reality to be experienced.

REMI ERIKSEN

That's a good one. Andreas Sohmen-Pao, chairman of BW Group. Thank you for joining me for this podcast.

ANDREAS SOHMEN-PAO

Thank you very much.

REMI ERIKSON

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