Episode 8: Alexander Varvarenko

Chapter 1

Intro

Welcome into another episode of Maritime Means, a podcast by Spire Maritime dedicated to building a community of innovators. I'm your host Blythe Brumleve and I'm happy to welcome in Alexander Varvarenko. He is the CEO of SHIPNEXT to talk about emissions in the maritime industry, how their ratings are calculated, and SHIPNEXT's proposal on how these ratings should be calculated and quantified. Alexander, welcome into the show.

Thank you very much. Happy to see you and pleasure to be on the show.

Chapter 2

SHIPNEXT and Machine Learning

Alexander talks about his history in the transportation industry and how SHIPNEXT came to be. He also mentions how SHIPNEXT is a precursor in the usage of Natural Language Processing.

Sure. I've been in the shipping, well, transport industry for the last 23 years. Before that, I was a software developer. So when I came to a point when I started my own shipping company in 2009, and then it still exists up to date, and it's an international shipping company, I came across numerous problems of the industry. In fact, from the mid 90s, when the shift to internet and email happened, and companies moved from telex and fax onto email, the shipping industry has been nothing else but millions of emails circulated around the world with data, freight and literally, up to date, shipping market is only or most mostly about email and message communication the whole day. So, what we did is we patented the transition from the email based to a platform-based industry. And we launched a platform, and for that platform to operate, we were up to date and then we still do. We use AI in broad sense. So it's NLP, natural language processing, machine learning, to actually decrypt email and message communication for the purpose of instant freight search. So think of more like uberization of the industry. So we use algorithms to help you find the best solution for whatever cargo you wanted to ship, regardless of its size, shape, type or destination instantly. So maybe within a year or so, you can literally pick up a phone, call a number, ask what's the best way to deliver your cargo, no matter what it could be, it could be bulk, break bulk, heavy, oversized cargo, and you would get an instant solution for that. So that's basically where we are heading. The platforms already operate, it works with dry bulk, wet bulk, heavy, oversized cargo and also containers. And we are on that path.

Oh, wow. So you were actually very early, especially with this industry is concerned, very early to algorithms and AI language models that now have since dominated every other industry, especially marketing and with the introduction of ChatGPT into Bing, and it seems like you guys were well ahead of the game.

Yes. In fact, we started off the minute, or say the year this technology became broadly accessible, and we started off with a patent and went all this long to get where we are, for sure.

Chapter 3

The challenges of the Shipping industry

Alex intros the discussion around emissions on the subject of the challenges that the industry faces regarding modernisation and standardisation.

Well, before we dig into that, I would just like you to understand, let's say, the usual way how things work in shipping. You as a shipper, every time you want to ship your cargo overseas, still up to date, usually you start by sending, and still that's the main way of looking for shipping solutions, sending emails to a couple of companies that you know, brokers or forwarders. They in turn start circulating it around the markets for ship owners or carriers that have the fleet in position. And at some point, three days later, and that's the usual average statistics, possibly they come back telling you what ship they found. Out of 87,000 ships, they may go through some of them or half of them, or maybe all of them up to date with platforms available more or less at this moment. But anyway, it takes them quite some time. They get some limited information and finally they come up with a solution to ship this cargo. And usually, in some cases, it may be a ship very, very far away, partly because they probably didn't find the right ship, partly because the cargo was not really described, or maybe the ship owner may not be looking at those emails. Because on the other hand, you have ship owners and they also sometimes they just don't understand the cargo that's received by them. Sometimes they never carried the cargo like that. So there's a lot of problems because of the way still this industry is not really standardized. Not all cargos are containers by far, and a lot of cargo simply are not matching that kind of interest of all the owners. Think of taxi service, for example. Not everybody is driving a pickup truck that can take several people. Sometimes it's a small car. And so there's just that complexity. So what happens is there is a lot of pre-ballast. And so the ship that you may find, for example, to carry commodity from Brazil to USA, for example, may come all the way from Australia or from China or Europe. And that ballast may take sometimes up to 30 or more days, really, depending on the size of the ship. So that today is one of the bigger problems that brings additional consumption, additional fuel burned, additional emission to the whole maritime sector. I don't want to say the transport industry, but the maritime sector, the shipping sector as such. If you skip that, shipping is quite efficient, fuel efficient, cost efficient. There's just too much cargo carried on one vessel in comparison to trucks, for example. So trucks are much more emitting and they are more polluting in terms of their emissions. But the vessels, they are quite efficient as long as they don't have to travel that extra ballasting period. So that part of the ballast is not really taken into consideration. And there are attempts on the one hand to try and look into operational index, into kind of operational data. But that brings another problem of actually reporting. So every time before you start looking for a ship, you have to gather those vessels, the details, make a report, additional calculation on each ship. And when you quote and negotiate, you have to always compare what is the freight will be like in terms of the total cost, including the emission charges or indexes and so on. And finally, when you finish carrying your cargo, you have to make another report. So there's just a lot of reporting that needs to be done on that hand. On the emission that is linked to the vessel itself, there is just a lot like the ballasting runs and all the other data that is not taken into consideration. So the industry is sitting in between these two problems where one is not really giving a right picture. So in other words, like, you know, if the ship is very close to the loading port and does not have to do that long ballast, it's not necessarily a more polluting vessel, even if it burns more fuel, it just burns less carrying that cargo. And that's something to be that has to be taken into consideration. And in 10 years or 15 or 20 years, when every ship is electric or non-polluting or zero emission vessel, maybe the situation will change. But we have to get there. And that transition period of 10 to 15 years needs definitely some kind of approach. Now, what we propose, for example, is a platform based approach where you don't have to do reporting. The platform does solve a lot of emission problems like Uber solves that problem of emissions of taxis. The taxi doesn't have to come all the way through the whole city to pick you up. The algorithm helps you find that taxi, which is just a minute away from you. And that's exactly what we proposed and we offered and we brought to the industry is a platform that Uberizes shipping, removing a lot of these ballast runs in the optimum scenario, and also bringing a lot of efficiency. And that is one of the ways to reduce emission.

And so it sounds like historically within the maritime industry that there has been not necessarily a baseline for how each ship is measured and how each of the emissions from each of these vessels is both gathered and calculated. Is that a safe assumption?

Yeah. In fact, you know, every ship has several speed and consumption ratios. So there is a laden speed and consumption, there is a ballast speed and consumption, and then there is also, you know, that speed and consumption may also change on case to case because the ship gets rusty, it gets over-aged, and then the consumption increases with time.

Chapter 4

Measuring emissions in the Maritime industry

We deep dive into the nitty gritty of Indexes and how Emissions are measured in the maritime industry.

The speed and consumption ratios can be different, and some ships are much more consuming than others. In fact, we are talking about huge consumption of 20, 30 tons per day in some cases or more. And that's quite a lot of consumption. But everybody wants ships to be zero emission, which at some point maybe it will happen. Until then, they want this process to happen earlier than later. And that may take time. And then CII is that kind of an index that shows you how in general the ship is polluting, you know, in comparison to the so-called more or less standard or greener types. But the problem is that so far the industry is not united on the approach to the different fuels that will be used in the future. That also relates to the availability of these fuels. You know, if you choose for ammonia, for example, or hydrogen or gas, will they be available in those ports that you call like African ports or South American ports or islands in, you know, Indonesia, for example? And that poses that kind of a threat to the industry. And at the end, the consumers, because actually the consumers will have to pay for it. So before we actually get to a point where the whole industry chooses one common or two or three common fuels, fuel types, and creates a zero emission engine and changes the whole fleet of 87-plus thousand ships, we have to have a transition period and another, you know, solution. And that's why IMO, the International Maritime Organization, came up with another way to measure it, which is EEOI, the operational emission index. And that is that kind of a, you know, operational or voyage based or operational based emission index that makes much more sense. However, coming back to how you measure it, again, you have to measure it by measuring the ballast run and the voyage. That's because the voyage is starting just like, again, like you call a taxi, the taxi is never just at your address. It needs to come to your address, pick you up and then go to the final destination. And with shipping, the voyage starts from wherever you take up the ship, bring it to the loading port, and then all the way to the discharge port. And this whole duration is the voyage. So we think and we profit this approach of uberizing the industry for the sake of burning less fuel, for the sake of optimizing capacity intake and operational processes in the industry.

And so with these different, I guess, regulations that are being put onto the industry, can we take a step back a little bit and sort of, I guess, lay out for the listeners of how these regulations are, how these standards are being created? Are they being created by industry executives or maybe some board members? How does that process get started to where someone says or an industry says, OK, now we're going to adopt this CII index and now the entire industry has to adopt this without consulting really with the other folks that are going to be affected? How did these regulations and rules come to fruition?

Well, I think that's a good question. And I don't think I can pinpoint some particular name, but I think that's the problem of almost all legislation where practitioners and business people, they're just too busy minding their own business and working in the industry. They don't have that much time to really sit and draw these regulations and write these rules. And it's moreover to come to a consensus because every such rule adds more problems to the industry and brings more costs. Therefore, I think that, as with all the other legislation, there are theoretics that come together with maybe some practical knowledge for sure, not necessarily business minded, but regulation minded that come together and sit and write these suggestions and that are later on turned into these roadmaps.

Chapter 5

Industry adoption and criticisms

Alexander explains why there has been so much criticism around the CII and other similar indexes, exposing the shortcomings of how it calculates ship activity. He also goes into the need of standard platforms for these type of indexes to work.

Well, because it all adds to the overall costs and makes, after all, these emission index forces may not be adopted by the entire world. There are countries that simply don't follow these and it may be that they will not be calling countries that adopt these regulations. But after all, that's what everybody fears, may make some industries more or countries less competitive, some trades less competitive, and finally create that border between the two worlds, so to say.

And one of the, I guess, more egregious examples that I've heard you give in one of your SHIPNEXT webinars is that a vessel sitting at the port and due to no fault of the ship or the cargo owner is actually penalized or benefiting from how fast or slow the port can unload the vessel. Can you give us an indication of some of the other criticisms behind this CII calculation?

Well, the CII calculation is a complex formula, so I wouldn't be able to just verbally interpret it now. It's not that straightforward, so it needs to take into consideration a lot of factors, technical factors and condition of the ship. So this is why every ship will get its CII index at some point and will have to try and over time reduce it by implementing new fuels, implementing new technology. But of course, that will make it at some point more costly, create a larger cost to the transportation cost of the commodity it carries.

Chapter 6

Emission indexes

The topic of formulas for calculating these emissions is one that SHIPNEXT has tackled as well, and Alexander explains the specifics of their approach.

Well, we didn't come up with any particular unique formula. We actually took the same formula that the IMO proposes, which is the operational index. But because it's platform-based, it's instantly shown for every cargo and the ships that are matched to that cargo. If you do it manually, it just includes a lot of reports. What that formula is all about is the amount of fuel that the ship consumes carrying the certain cargo divided by the quantity of cargo it carries. What the only slight difference there is is that our formula divides the total CO2 emission by the volume of cargo, whereas in the IMO, it also divides it by the distance. But then we come to a very, very small number, which includes multiple zeros after the decimal points. And ours is much easier to comprehend. But it's a question of an hour change to display both figures, for example. It's not a big difference after all.

Have you received any kind of pushback or maybe some criticisms or suggestions for improvement for the formula that you're proposing?

Well, there is no criticism. For sure, we are offering a solution. And the industry will adopt some ways to calculate it much easier and efficiently at some point, because nobody will hire whole new departments of people doing all this calculation for their fleet. And bear in mind, there are companies with 300, 400 ships in their fleet, 700 ships in their fleet. So there is that complexity. So our solution is feasible. It's just a question of adopting the solution by the industry players. And that's happening today.

Chapter 7

Next steps for the industry

We discuss how the next years might look like.

There are companies that are looking for ways how they could come around this index. It's definitely a question of the next couple of years. So some even think that this index will not be eventually finalized and taken to some – some are looking at emission index trading. So really buying their futures and limiting their exposure to that additional cost. But others, they are just waiting and then seeing how – to see how the industry reacts. For sure, there are companies that are at all not concerned because they just feel that they sit in a totally different trade or different segment. So that's the complexity of the industry, because it's too international, very much about, you know, segmentation, geopolitical segmentation in some cases. And so, you know, at the moment, those companies that are really forward-looking and capable of investing additional costs, they are pioneering this transition at their own risk.

Once the industry sees these kinds of formulas and adopts them, then what does that next step, I guess, look like for decarbonization within the maritime industry? Is it going to be greater transparency, greater maybe visibility on the original booking end where you can actually see these calculations up front and be able to make smarter shipping choices that already have a reduced amount of emissions? What does that, I guess, that hopeful strategy look like?

Well, unless it's on a platform, I don't see how this could actually benefit – these emission indexes can benefit the industry in the short run. In the long run, yes, everybody will try to make themselves efficient anyway. And to make themselves efficient, they need to burn less fuel. This is just economies of, you know, economic formula that exists with or without these emission indexes. Everybody's trying to look for a more efficient fuel or make vessels completely zero emission. But it takes time. And until then, implementation of indexes, in my opinion, will not bring additional value. It will put a lot of stress, will make some companies pay more, some trades disappear, others, you know, appear and really disrupt the industry. Unless it's on the platform. So it's like rating. I think of rating, rating hotels, for example. Can you actually rate hotels if there is no platform? Can you look at how they are rated each time you choose a hotel? Same with cars. You know, they can only be really measured if you really see it on the platform and it's as easy as booking an Uber. So you can see the rating, you can see if you're choosing a green car or another green car. But if it's not on a platform, there is just a lot of ambiguity. You still need to do those exercises. I mean, IMO is trying to come up with another platform, which they reported, but it's now empty. It's basically like a one register of all the ships with their emission indexes. But again, as I told you, it's not going to solve the problem of actual emissions in the next 10 years.

Outside of fuel, what would solve the optimization of emissions?

They will show you that this ship is greener because it burns less fuel, but this ship may be used today on trades where it has to do 20, 30 days ballast because somebody is ready to pay for a much greener ship. But going to these 20, 30 days in ballast may at the end consume much more fuel than it would be consumed with that company choose a standard conventional ship today just with less ballasting period.

And so with the IMO in particular, are they receptive to some of these criticisms and open to adjusting their formula on how they calculate these different ratings and just the overall data collection?

Well, IMO itself is not an organization which is run by a couple of people. So we are talking about countries coming together, organizations coming together into larger meetings or having conferences on certain topics and every decision takes time to take or to change. Therefore I think it's all about the industry players today. They have to come up to a certain common tool to use, be it our platform or another platform. After all, there is a platform that will be used by the industry to figure this out. The question is which platform draws bigger attention and bigger adoption. 

With all of that being said and our discussion around emissions, especially within the maritime industry, what do you think, what do those next steps look like in order to make for just an overall better experience for not only the ship owners but also the cargo owners and then just the overall emissions process in general? What does that greater solution for the greater good look like in the coming years?

There is a solution being implemented by everybody in the industry. Everybody is trying to reduce their emissions. Everybody is trying to adopt new technology and our aim is to draw more users to our platform, more media and get together. Actually every technology needs interconnectivity today in order to gain worldwide adoption. In transport, where you are talking about 100 plus countries and thousands of ship owners, there is certainly, at the end, I think a question of maybe two or three solutions to this emission, two or three platforms like the same like you have with, again, sorry to bring this example up, but it's like you have with taxis today and eventually find ways how you can prove that you have consumed less fuel to trade or to bring this cargo. If it's proven, it's in line with the IMO regulations, it's an operational index. If you prove that with your higher consuming vessel, you just do much lesser ballasting and you are always optimizing your intake, for example. That's another very important issue is optimizing your intake using, and we've seen a lot of progress there as well, like bulker vessels carrying deck cargo and greater intake of the tankers, for example, which do parceling as well. All those steps towards consuming less per ton of cargo ship can be proven and they are all part of the solution.

It sounds like it's just going to be a greater, the bigger challenge right now is just creating that, I guess, greater awareness around these issues of what data points to contextualize and what does that baseline look like. It sounds like a lot of those debates are still going on and probably will go on for the foreseeable future. Alexander, I appreciate you sharing your perspective and sharing your insight onto this important topic. For folks who may want to follow you, maybe want to connect with SHIPNEXT, what does that process look like? Where can they find your work?

Well, SHIPNEXT is easily found on shipnext.com. The way it runs is, it's basically a freemium platform, so most of it is free of charge. Of course, we are now onboarding - just today we signed up an African Shipowners Association that tried to onboard all their members onto that platform. That process is there and we see more and more companies grouping around solutions like ours to try and be much more efficient. Those that do adopt new technology, one way or another, they will become more efficient. Of course, it's only time that will show who wins this race. 

Absolutely. It's all about making better educated decisions, especially with how you transport your goods all across the world. Alexander, we appreciate your time today and thank you so much for joining Maritime Means.

Thank you, Blythe.