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Opportunities grow as shippers chart course with LNG

Rapid uptake of LNG-powered vessels presents multi-billion dollar opportunity for gas producers

Stricter environmental regulations could provide gas producers with a billion-dollar business opportunity over the next few years, as the number of ships using liquefied natural gas (LNG) for fuel looks set to expand rapidly.

There are around 30 LNG-fuelled ships currently in operation, but the fleet could increase to 10,000 by 2020 due to new global maritime regulations effectively outlawing heavy fuel oil (HFO) for ship fuel, according to Norwegian LNG bunkering firm Gasnor. And this could add another 5 million tonnes a year of LNG demand, head of commercial Trude Gullaksen told Petroleum Economist.

At $8 per million British thermal units (Btu), the average European gas price, this would mean a potential market worth $2 billion for LNG producers.

As well as environmental regulations, LNG is cheaper than conventional ship fuel. The cost of HFO at the three major trading hubs (the US Gulf Coast, Rotterdam, and Singapore) averages between $18-19/million Btu. In the US, gas sells for under $3/million Btu, while LNG trades on the Asian spot market at around $15/million Btu.

Cutting costs

Switching to LNG would help ship-owners slash operational costs. Rising oil prices over the last two years means fuel accounts for between 50-70% of vessel operating costs. Changing to LNG could cut fuel bills by more than half. Switching to LNG could reduce a ship owner’s yearly operating costs by a few million dollars for a small dry bulk carrier or up to hundreds of millions for a large container ships.

Gasnor dominates Europe’s LNG bunkering sector, with 300,000 tonnes a year (t/y) of supply capacity available. It sources 150,000 t/y of LNG from its three small-scale LNG production facilities on Norway’s west coast, with the rest bought on the market.

“Refuelling LNG for ships started in 2000 we have since performed 40,000 bunkering operations, including 46 ship-to-ship transfers,” Gullaksen said. Gasnor has chartered two tankers to transport LNG – the tiny 1,100 cubic metre (cm) Pioneer Knutsen and the 7,500 cm Coral Methane – and has several mini-trailers which can refuel ships from public quaysides.

Norway’s maritime classification group DNV believes the LNG-fuelled fleet will grow to 500 by 2015 and “several thousand” by 2020, while Singapore based consultancy Tri-Zen estimated that if 10% of the world’s shipping fleet converted to LNG by 2025, it would increase global LNG demand by around 25 million t/y. In comparison, Spain, which was the world’s third-largest LNG purchaser in 2010, imported 21 million t/y of the fuel that year.

“Is LNG about to establish its presence as a major maritime fuel? We believe the answer is yes, driven by the dual impacts of emerging legislation on exhaust gas emissions from ships and high oil prices,” Tri-Zen consultant James Ashworth said.

Setting the standard

The growth in LNG powered ships is likely to grow quickly over the next decade with the introduction of emission control areas (ECAs) and the implementation of new global standards, which penalises the release of pollutants including carbon dioxide (CO2), nitrogen oxide (NOx), sulphur oxide (SOx), and particulate matter (PM) from ships.

The International Maritime Organisation (IMO) is adding a 200-mile ECA around North America which will be enforceable from August 2012. This follows the creation of the North European ECA in 2007. Both ECAs have the same emissions regulations. Fuels have a SOx limit of 0.5% inside the ECA, which will be reduced further to 0.1% in 2015. This compares with the global IMO standard of 3.5% SOx outside ECAs.

But the IMO is planning an even wider-ranging cap on sulphur, with a global limit of 0.5% on marine fuels from 2020 (subject to a fuel study in 2018, but introduced no later than 2025). This means the global shipping fleet will not be able to use the standard 3.5% sulphur fuel oil and will probably have to either switch to LNG, fit chemical scrubbers to remove the pollutants, or burn expensive low-sulphur diesel.

From the three main solutions, the option of burning ultra-low sulphur diesel such as marine gasoil (MGO) is considered too expensive. MGO trades at around $28/million Btu at the Singapore bunkering hub. HFO, on the other hand, costs $18/million Btu.

There is a further idea aimed at reducing MGO usage, which would mean using MGO outside ECAs. This , however, would mean installing separate fuel tanks. There is also a risk that the vessel may not switch between fuels at the right times. Each port sets its own penalties for non-compliant fuel, but as an example failure to switch in California could cost up to $182,000 per port visit for repeated offences.

But from the remaining two solutions, neither scrubbers nor LNG conversion have overwhelming advantages, as there are problems with both. Installing scrubber on ships will remove enough sulphur from emissions to meet regulations, but is effectively the same as installing an onboard chemical plant, according to DNV classification manager Martin Crawford-Brunt.

Weighty issue

“There needs to be someone to watch over the scrubbers and there is also ongoing maintenance. It may not be the solution it promises to be,” Crawford-Brunt said.

He added that scrubbers might add up to 200 tonnes to a ship’s weight, far more than the 30-tonne estimate accepted by the shipping industry. And scrubbers need a steady load to work – something which may not be suited to ship engines which run at different rates depending on speed and location.

But because scrubbers are expected to remove most of the sulphur from emissions, they might also allow shippers to burn dirtier fuel oil which should sell at a discount to the standard 3.5% HFO, one major ship owner told Petroleum Economist.

Meanwhile, problems for LNG-fuelled engines include needing larger tanks and expensive refits. Due to lower energy intensity, LNG requires 1.6 times more volume of fuel compared with oil. The extra storage could reduce space for cargo and add weight to vessels, reducing efficiency.

Gasnor also estimated ship engines run on gas cost around 10-20% more than regular fuel engines.

The other problem is that shippers may be unwilling to invest in LNG-powered engines without the bunkering facilities to refuel. And port operators may not invest in LNG-bunkering facilities if they do not see fleets converting to LNG-powered vessels.

The chicken or the egg?

“There is still the chicken or the egg situation with LNG bunkering infrastructure. LNG is a solution, but not the only solution,” Jesper Aagesen, ship design specialist at vessel compliance group Lloyd’s Register, said.

From a Lloyd’s Register survey of 26 high-volume ship owners and “early adopters” within the shipping industry, around a third considered MGO as a solution in the short-term, with another third planning to use scrubbers.

But in the long term, LNG-fuelled engines are expected to become the dominant choice, with a third of shippers considering it the way to meet emission regulations. Scrubbers, on the other hand, were the option chosen by a quarter of the poll’s respondents.

“In the short-term, low sulphur fuel oil (LSFO) and abatement technologies are seen as solutions. In the long-term, LNG for deep-sea ships for container and cruise ships but there is still some doubt among tanker owners,” Aagesen said.

But ports seemed to be very interested in offering LNG bunkering services. In a Lloyd’s Register survey of 25 ports, 54% said they had carried out research into LNG bunkering and 62% saw themselves as drivers of change to LNG as a ship fuel.

DNV was also very optimistic, saying there are six LNG bunkering projects on the table in Europe. It also saw a change in gas producers’ interest in LNG bunkering, with firms now racing to provide supply. “The world’s largest bunkering hub, Singapore, has communicated clear ambitions for supplying LNG in 2014 at the latest. Almost all large North European ports have communicated plans for LNG availability within 2013-2014: Rotterdam, Zeebrugge, Hamburg, and several more,” Lars Petter Blikom, DNV segment director for natural gas, said.

“One year ago the oil and gas majors were not interested. The volumes were too small they said. Since then they have clearly done the maths, and more or less all of them now indicate quite significant interest in this growing market.”

In 1912, the world’s first ocean-going diesel-powered ship, MS Selandia, set sail on its maiden voyage from Denmark to Thailand. It marked the beginning of the end for coal as the world’s main maritime fuel.

And a hundred years later, because of cheap and abundant gas from unconventional resources, a growing LNG market, and environmental concerns, the shift to gas is happening. And it marks the next step change for shipping and a huge potential bonanza for gas producers.

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