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Financing marine LNG

With the deadline for IMO regulations approaching, the industry is closely evaluating the business case for liquefied natural gas

LNG has long featured as a means to an end: a way of transporting natural gas from source to markets. But it was only in 2000 that a Norwegian ferry, the Glutra, entered service as the first non-LNG carrier vessel to be powered itself by the fuel. Since then, the fleet has grown significantly. As the idea of LNG-fuelled ships has gained traction, financial officers and accountants at shipping firms around the globe have had to crunch the numbers to see how it might work for them.

Industry officials believe a blend of regulation, reputational issues, logistics and economics will drive further growth of the market for LNG as a marine fuel. But in the immediate aftermath of the introduction of the International Maritime Organisation's MARPOL Annex VI regulation in 2020, fuel oil and marine diesel oil will still comprise the vast bulk of bunker fuels consumption. Industry officials believe these drivers will be strongest in Europe and North America, where Emissions Control Areas (ECA) already mandate the use of marine fuels with a maximum sulphur content of 0.1%.

"As we looked at operations and ECA and US Environmental Protection Agency and IMO rulings, we knew we had to do something that would stay well ahead of the regulations," said Peter Keller, Executive Vice President of Tote Inc, which, in 2015, launched the world's first dual-fuelled container ships. These operate on US domestic routes between the continental US and Puerto Rico. While Tote is a privately-held company, publicly-listed concerns such as cruise-line operator Carnival Corporation, whose sustainability image is important to shareholders, have also turned to LNG as an environmentally-acceptable fuel.

"Legislation on emissions is going to get tougher," says a market analyst with a leading tanker broker. "I think it'll push people more in the direction of LNG as an alternative fuel." Russia's SCF Group, which is equipping its new Aframax tankers to run on LNG, notes that LNG use can reduce total carbon emissions by 27%, nitrogen oxide (NOx) emissions by 85%, and practically eliminate sulphur and particulate emissions. All these make LNG-fuelled vessels compliant with all currently applicable IMO emissions limitations.

More bunkering needed

Many market participants reviewing the business case say the adoption of LNG by the shipping industry is being slowed by logistical limitations. While major bunkering centres such as Rotterdam and Singapore are steadily improving their local LNG bunkering infrastructure, and nearly all ports of any significance are studying offering LNG bunkering facilities, the fuel isn't delivered worldwide. One bunkering company official notes that of the 800 locations in which his company delivers marine fuels, only about 55 provide LNG bunkering services.

Such infrastructural limitations don't appear to be preventing LNG from being adopted for long-haul shipping outside ECAs, industry officials note. They point out that while the market for LNG as a marine fuel is concentrated in the ECAs, large long-haul vessels regularly ply routes between ports with LNG availability. France's CMA CGM has ordered nine 22,000-twenty-foot-equivalent-unit (TEU—approximately 200,000-deadweight-tonnes) container vessels designed to run on LNG. At the same time, the replacement of the 325,000-tonne ValeMax vessels moving iron ore from Brazil to China are being built as LNG-ready, suitable for conversion to LNG from other liquid fuels at short notice.

Supply and pricing

While infrastructure requires improvement before LNG becomes a fuel in worldwide maritime use, market participants aren't worried about fuel supply. According to the International Gas Union, world gas liquefaction capacity in January 2017, the latest year for which it has published figures, stood at 339.7m tonnes a year, with a further 114.6m t/y under construction. Global regasification capacity doubled over the decade to 2017.

Regarding LNG pricing, widespread gas-to-gas pricing in the US and the European Union, and loosening LNG-contract terms in Asian markets have kept gas values competitive with those of other fuels. Wood Mackenzie and other analysts say that the delivered LNG prices are likely to remain below that of marine diesel oil. Many see this as the leading alternative to high-sulphur fuel oil (HSFO) for bunkers under MARPOL Annex VI rules through 2035, although LNG prices will remain above those for HSFO.

There's a further business consideration, even if marine LNG infrastructure improves and the fuel's price remains competitive with alternatives. A significant factor still for operators deciding whether to choose LNG as a marine fuel will be the capital cost of installing on-board LNG-compatible propulsion systems. Wood Mackenzie estimates that installing LNG as a propulsion system will lead to a $12m increase in capital expenditure, compared with the installation of scrubbers to clean sulphur dioxide (SO2) from stack emissions. But industry officials note that scrubbers don't aid in reducing NOx emissions. So, LNG propulsion systems "future-proof" vessels against additional, already foreseen, capital spending.

Tote provides a case study in a shipowner's conversion to LNG. According to Keller, Tote decided to make its fleet LNG-capable in 2010, when the US ECA was established, after studying environmental and economic trends for the US shipping industry. Its two 3,100-TEU Marlin-class ships for voyages to Puerto Rico from Tote's base in Jacksonville, Florida, were delivered in 2015, and operate principally on LNG from temporary truck-supplied loading facilities.

The company is the baseload contractor for a new-build gas liquefaction terminal at Dames point, near Jacksonville, which is expected to enter service this year. On the West Coast, Tote is converting four ships to be able to operate on LNG supplied by a terminal at Tacoma, Washington. According to Keller, Tote's gas is supplied at the market price of gas plus costs of liquefaction, a formula similar to those used for exports of LNG from large US liquefaction terminals. Shippers worldwide are likely to be referring to that formula in rising numbers in the years ahead.

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