A Real Options Framework for Investments in Marine Scrubbers under Uncertainty: Valuing the Managerial Flexibility of Investment Decisions towards IMO 2020 Compliance in the Maritime Sector

Brage Morgan Øvreås

Student thesis: Master thesis


The IMO 2020 global sulphur cap is considered to be the most disruptive event in the modern era of shipping. The investment decision, incited by this regulatory development, is one that will have great implications for shipping companies. There are primarily two applicable alternatives for the existing fleet of vessels to comply with the regulation: (i) opt to run on a compliant low-sulphur bunker fuel;(ii) or retrofit vessels with an exhaust gas cleaning system, commonly referred to as a marine scrubber, and continue to operate using high-sulphur fuel oil. The objective of this thesis is to provide a real options framework for the analysis of the investment decision concerning marine scrubbers, related to the newly implemented amendments to MARPOL Annex VI.
Applying a real options methodology can aid decision-makers in the valuation of abatement technology by incorporating and valuing the managerial flexibility present in these investment opportunities, in response to the changing and uncertain market conditions. In this thesis, the real options approach is applied to a reference case in order to provide evidence for the value of the option to defer the scrubber retrofit investment. The reference vessel chosen for the analysis is the49,699DWTMRproduct tanker M/T Hafnia Lise. The standard NPV approach is used to determine the value of the underlying asset, which in this instance is the marine scrubber system. The price difference between compliant and non-compliant bunker fuels is here the main source of uncertainty. The single-path model is expanded to include different scenarios for the percentage of operation in Emission Control Areas (ECAs) and the level of fuel oil consumption. The volatilities of the cash flows associated with the scrubber investment are thereafter estimated by the use of Monte Carlo simulations. The resulting aggregate volatility factors represent the standard deviation of the investment returns in each of the scenarios. The static NPV model is modified to take into account the strategic value of managerial flexibility, valuing the option to defer the abatement investment. The Real Options Analysis (ROA) provides the decision-maker with additional information, compared to the static NPV calculation, related to the issue of timing the investment. The results of the ROA show that the option to defer the investment in a marine scrubber system holds significant value for the firm. In fact, management should, in all but a few of the scenarios, hold off the abatement investment and wait for more information to become available as the uncertainty resolves.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2020
Number of pages71
SupervisorsLiping Jiang