LNG Bunker Fuel: Price Lends Support To Long-Term Development

BMI View : Liquefied natural gas (LNG) has been promoted as an alternative to sulphur-heavy bunker oil for the shipping sector as environmental pressure to increase carbon emissions grow s . The lower price of LNG vis-à-vis traditional oil-based bunker fuel, complemented by policy and regulatory measures penalising the use of more pollutive bunker oil, has made an increasingly compelling argument for the switch to gas. Efforts are also being made to build up the necessary infrastructure to facilitate t he use of LNG as a bunker fuel that lends further momentum to this switch. However, technological limitations and the time needed for the LNG bunker market to mature will restrict the adoption of LNG as fuel in the short- to medium-term, particularly for deepsea and long distance shipping.

Alternative fuels have been promoted as a means to control emissions as environmental concerns grow. The shipp ing sector, with its use of heavy bunker oil, has been a big target in the quest to reduce the world's carbon footprint. L iquefied natural gas (LNG), with its lower carbon diox ide and nitrogen oxide content, is one such alternative for the shipping sector, particularly as rising interest in shale gas exploration and massive offshore gas discoveries in frontier markets promise to unlock a large pool of gas resources globally. It is this growing supply of gas - and associated assumption that prices will fall - that has increased optimism regarding the commercial viability of LNG as a fuel to power the shipping industry.

Gas Price Lends Support

The push towards alternative fuels for bunkering is getting stronger as the cost of traditional oil-based bunker fuels soars alongside perceived supply tightness in the crude oil market from 2010. This has made the prospect of LNG as bunker fuel increasingly attractive. As highlighted by the chart below, 180 and 380 centigrade oil bunker fuel prices have consistently traded above US Henry Hub and UK National Balancing Point (NBP) gas prices. Even after the costs of liquefaction and shipping have been taken into account, at an average of US$10.73 per mn British Thermal Units (mnBTU) global LNG prices were still 35% cheaper than the average price of bunker fuel 380 in 2012.

Gas - Increasingly Attractive Vis-à-vis Oil
Price Movements Of Bunker Fuel 180, 380, Henry Hub & National Balancing Point (US$/mnBTU)

Economics Meet Policy

The growing interest in LNG as bunker fuel is also supported by environmental policies and regulations:

  • UN International Convention for the Prevention of Pollution from ships (MARPOL) : limits sulphur content in bunker fuel to less than 2.5% from 2012 and no more than 0.5% from 202 0 ;

  • Emission Control Area (ECAs) : In North America and northern Europe (comprising the Baltic Sea, North Sea and English Channel), strict sulphur standards on bunker fuel have been imposed that will come into effect in 2015. By 2020, the European Union (EU) will impose a strict 0.1% limit on sulphur content of all vessels entering the EU ECA.

  • Energy Efficiency Design Index (EEDI) : The International Maritime Organisation (IMO)'s EEDI will require new ships to cut its carbon dioxide emissions per dry weight tonnage capacity by 10% in 2015, 20% by 2020 and 30% by 2025.

Assuming no relaxation of these policies, the shipping industry will have to meet these requirements either by retrofitting their vessels wi th scrubbers to reduce emissions , switching to the more expensive marine gasoil or turn ing to LNG as an alternative fuel. Price economics has thus lent credence to the environmental argument to move towards LNG in shipping . In the long-term, stringent environmental standards and the cost of compliance would make LNG a more economical fuel.

Although we forecast a fall in bunker fuel prices from the peak experienced in 2011 , by 2017 we still expect the average price for bunker fuel 180 and 380 to come in at about US$15.19/mnBTU. In comparison, US Henry Hub gas prices are projected to average at US$6.00/mnBTU in the same year.

Assuming a flat LNG liq uefaction and distribution cost of US$8.00/mnBTU to be added to base gas prices (based on current liquefaction cost) , LNG fuel would still cost less than the sulphur-heavy bunker fuel 180 and 380, wh ose use would have to be complemented by expensive scrubbing measures (if feasible depending on the vessel type) to meet emission requirements , thereb y adding to the overall cost s . Shippers would also have to pay a significant premium over LNG if they choose to use less sulphur-heavy marine gasoil instead; we forecast global gasoil to average at about US$20.52/mnBTU in 2017 - 45.6% higher than our LNG price forecast.

Cost Advantage To LNG
Forecast - Bunker Fuel, LNG* And Gasoil (US$/mnBTU), 2013-2017

Shipping To LNG

According to a May 2013 research paper by the International Council on Clean Transportation, there are only 30 LNG-fuelled ships in the world today. This could increase to about 55 in 2014 and Det Norske Veritas sees this rising to nearly 75 by 2016. Many newbuild orders are increasingly turning to LNG-fuelled or dual fuel vessels that utilise both LNG and diesel oil. The growth of LNG-fuelled vessels would support demand for bunker fuel.

However, the fleet of LNG-powered vessels in existence is dominated by passenger ships that travel relatively short distances. Newbuild orders are also bound for short trips. For instance, Totem Ocean Trailer Express is to bring the first LNG-powered container sh ips online by 2015/2016 but these vessels are limited to the Washington-Alaska route.

While economics may seem supportive, there are several short-term challenges that will have to be overcome for the adoption of LNG as a bunker fuel especially for deepsea trades:

  • Maturity of LNG technology;

  • Availability of LNG supplies and bun kerin g infrastructure to handle LNG bunkering;

Ship Supply: Standards And Technology

While the economics of LNG bunker fuel may have improved, enabling a vessel to run o n LNG is expensive. According to Total, a LNG-powered ship could cost 20% more than a traditional vessel. Neither can this be easily achieved by simple retrofitting. New engine s will have to be installed and fuel tank s modified to accept LNG that has to be ke pt chilled at low temperatures and pressure , thereby raising time and costs .

More significantly for deepsea ships that that seek to minimise costs with scale, LNG's lower energy density means that storage tanks have to be bigger to accommodate the energy equivalent of oil-based fuels. This eats into precious storage space and costs. LNG-powered deepsea and long-distance container shipping is likely to remain a distant reality until these technological challenges are overcome.

LNG Supply Availability

Although global LNG supplies are set to grow, the existing LNG market is one that is still dominated by direct supply and purchase contracts (SPA) between seller and buyer. At present, buyers locked into these long-term supply contracts tend to be large utilities or national oil companies (NOCs) that seek to secure LNG supplies to meet the needs of their countries' power sector. Some of the world's biggest LNG buyers include Japan's Tokyo Electric Power Company (TEPCO) and Korea's Kogas , and increasingly Chinese NOC China National Petroleum Corporation and India's GAIL .

The lack of a robust spot market or global hub t o facilitate LNG trade threatens to slow its take-off as a fuel as the current mode of LNG trade is not conducive for small-scale purchases. Moreover, the lack of LNG adoption also leaves the shipper to take on the f ull risk of bu lk LNG purchases and bunkering, which could be unappealing at a time when the shipping sector is still relatively weak.

Improvements In Sight For Bunker Infrastructure

The supply situation for the maritime industry is set to improve as LNG marketing increasingly moves beyond direct sale to the power sector or large buyers. Smaller-scale LNG liquefaction plants are emerging, particularly in the US, targeting the transportation segment. More importantly, ports are taking the initiative to build up the infrastructure to support LNG bunkering, which could spur a greater development of a LNG market for LNG fuel purchases:

  • Rotterdam: The biggest port in Europe is targeting a LNG bunkering facility by 2014, with small-scale LNG reloads planned for September/October 2013;

  • Gothenburg: The EU confirmed that it will provide SEK305mn (US$46.3mn) to help the Swedish port set up bunkering facilities by 2015 as part of its Motorways of the Seas programme;

  • Antwerp: The Belgian port is looking to set up its LNG bunkering station by the end of 2015. The EU has agreed to subsidise this development;

  • Singapore: The Maritime and Port Authority (MPA) has contracted Lloyd's Register to develop standards and procedures for LNG fuelling, and hopes to start operations by 2014.

These ports enjoy government support in advancing their LNG plans. The EU, in particular, is eyeing 139 LNG bunkering facilities at major maritime and inland ports by 2020-2025.

Even in countries not particularly kn own for their green credentials, governments and private firms are taking steps to prepare for a LNG future:

  • China : A n energy white paper released in late 2012 called for the adoption of natural gas at its ports to be accelerated to replace heavy fuel. T he country's first private LNG bunkering station will be built at the port of Zhoushan, Zhejiang by ENN Energy Holdings , which hopes to bring the facility on-st ream by March 2016.

  • US : The Maritime Administration is looking closer into LNG as shipping fuel and specifically into bunkering and infrastructure needs to achieve this. However, it is the private industry, especially the upstream oil and gas sector, which is leading the charge to develop the infrastructure for LNG bunkering. Vessel service provider Harvey Gulf International is investing US$400mn in the US' first LNG marine fuelling facility at Port Fourchon, Louisiana, partly to support its LNG-powered offshore vessels that will be ready for operations by 2014. Fuel for the facility is likely to be sourced from Royal Dutch Shell 's small-scale liquefaction plant in Geismar, Louisiana, and transported to Port Fourchon with the help of Edison Chouest Offshore .

LNG bunkering facilities could be more carefully considered by other major ports around the world following the publication of the ISO Technical Specification of LNG Bunkering in June 2013. The document, published by the International Association of Oil & Gas Producers (OGP) set out guidelines for the construction and prov ision of LNG bunkering services. Although its finalisation is subject to the industry's approval, a standardisation of LNG bunkering provides clarity on its requirements.

Infrastructure availability could increase companies' appetite for LNG-powered vessels, especially if bunker fuel service operators will share the risk of securing LNG supplies. Nonetheless, in the short-term the above-listed examples of LNG bunker fuel infrastructure development shows a concentration of LNG-ready ports in Europe, limiting the scope for long-distance, deepsea shipment fuelled by LNG.

Hidden Costs And Limitations Of The LNG Switch

Much less obvious is the cost of LNG bunkering services to the shipping industry. It is uncertain how much of the cost of infrastructure development would be passed on to end-users. Labour costs of LNG bunkering services are set to be higher than conventional bunkering, given the higher labour risks associated with handling LNG. This could raise the overall costs of using LNG as a marine fuel and reduce the incentive to switch to LNG particularly in the short- to medium-term, despite its attractive economics.

In addition, we also highlight that the segmentation of the gas market as an impediment to the adoption of LNG use in the shipping sector across the world. Broadly speaking, at present there are three distinct gas markets in the world: North America, Europe and Asia. While the beginning of LNG exports from North America from 2015 could see the beginning of closer convergence in North American, European and Asian gas prices, the controlled speed at which the US liberalises LNG exports would limit the extent to which gas prices in these three markets would converge in the coming decade ( see 'Natural Gas Price Forecast: Tighter Supply To Send Henry Hub Higher Post 2015', August 16 ).

LNG: A Segmented Market
Average LNG Prices In Asia, Europe & US (US$/mnBTU)

Expectations for Asian LNG prices - where indigenous supply would continue to remain limited - to trade at a premium to that in North America could restrict the commercial incentive to switch to LNG in between 2013 to 2020. Together with the lower priority of emissions control in the region's political agenda, shippers could hold off the switch to complete reliance on LNG particularly on longer, deepsea routes until the downward trend in LNG prices across the global is clearer. However, it does offer opportunities for the dual-fuel vessels that give shippers the flexibility to choose the more cost-effective fuel for long distances.

Scouting For Gains

BMI's Shipping team highlights that currently LNG as a shipping fuel is mainly being explored on shorter routes, specifically on inland waterway shipping, with developments on the rivers of Europe and plans on the Yangtze River in China underway.

In terms of deepsea shipping, the outlook for LNG as a bunker fuel on major commercial trade routes received a boost in 2012, when the world's third largest container shipping, CMA CGM, announced that it was working with Daewoo Shipbuilding & Marine Engineering Co. to develop an LNG-powered ship. Since then there have been no updates on the this project and BMI highlights the current trend in the container shipping sector is for bigger vessels - a considerable jump therefore, to powering a ship carrying up to 18,250TEU from the current LNG-powered passenger and river freight barges.

This article is tagged to:
Sector: Oil & Gas, Infrastructure, Shipping
Geography: Global

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