Valuation of Early-Stage Decarbonisation Projects: A Case Study based on Maersk's Investments in Green Fleet

Abstract

The main purpose of this thesis is to investigate how the payoff from early-stage green transition projects in the shipping industry can be quantified and evaluated using different valuation methods to support a reasoned investment decision. The research presented in this thesis is based on a case study of Maersk’s investment in 12 dualfuel vessels that can operate on both carbon neutral methanol and conventional bunker fuel. The thesis contributes to the existing literature on the application of valuation methods to early-stage decarbonisation projects characterised by high uncertainty and managerial flexibility. Despite being a case study set out to formulate and apply a valuation methodology to the specific case of Maersk, it is argued that the methodology can be adjusted and applied to projects with similar characteristics in a broad We argue that Maersk’s continued efforts to decarbonise its fleet towards 2040 hold an option to gradually stage the investment, which can be analysed as a compound growth real option. The traditional DCF model is applied to Maersk’s initial investment to find a base case NPV based on the implied total cost of ownership delta between zero-carbon and fossil-based shipping. ROA is then applied to assess the value of the compound growth real option, which derives its value from the implied managerial flexibility to invest based on future cost reduction of carbon neutral methanol and volatility in the bunker fuel price. We find that the DCF model and ROA should be used as compliments to evaluate investment decisions to best capture the characteristics of early-stage decarbonisation projects. We find that Maersk’s initial 12 vessel investment has a negative expected NPV, however, dependent on the scenario of the different enablers of carbon neutral shipping applied, we find that the option value to grow the carbon natural fleet may be positive Lastly, the strategic implications for Maersk are discussed, supported by interviews conducted with key Maersk employees and industry experts, who have a defining role in the decarbonisation of the shipping industry. We find that the best evaluation methodology for making informed investment decisions should include a broader assessment of stakeholder interests, thus not limited to the shareholder financial returns. We argue that this is particularly relevant in the context of evaluating decarbonisation projects since factors such as environmental externalities and other ESG related factors are often difficult to fully capture in financial valuation methods. Therefore, we propose a constrained optimization view, where financial returns should be optimized within the boundaries of achieving key material ESG targets