LNG remains the fuel to take shipping into the coming decades. However, the “fog” of artificially low oil pricing has shrouded that passage. The drivers and incentives are still there, they just cannot be seen as clearly. This 5th annual LNG Perspective update on bunkers looks at the driving factors and possible consequences, and offerssome vision.
LNG prices remain linked to the fortunes of oil. Current low oil and gas prices result largely from an oversupply in the market and the situation is not due to change anytime soon. Oil supply will continue to be buoyant in the short-term for as long as OPEC, and particularly Saudi Arabia, considers that defending its market share is more important
than controlling supply and thus underpinning weak energy prices. Change will surely come though and for solid fundamental reasons.
Optimism drives investment in oil and gas production. Underinvestment in the current pessimistic climate is building problems for the future. Energy demand continues to grow and oil demand, which each year grows by more than a million barrels a day, will catch up with supply and leave behind those who are unprepared.
On the back of the shale revolution, the US has become the world’s biggest energy producer with annual natural gas production now exceeding 30 tcf. The longer term picture for gasis further compounded by the rapprochement with Iran, which will bring unlock the world’s 2nd largest proven gas reserves, at around 1,000 tcf, or 16% of the global total. The gas market itself continues to evolve, particularly LNG, where traded volumes continue to grow at the expense of long term contracts.
We expect this runaway pessimism in the oil markets to hit the rocks, with demand and supply approaching balance by 2018 resulting in a return to higher oil pricing and a clearer economic incentive for gas.
HITTING THE ROCKS
When demand starts to close in on supply, the current low cost energy ride will come to a bumpy end and the fog will evaporate. Oil prices will hike significantly and quickly. Gas and LNG will follow less abruptly, with spot availabilities eventually tightening and those with guaranteed supply contracts enjoying an advantage.
LNG remains the smart choice for shippers and the time to make this choice is closing in. Typically it takes 1 – 3 years to build a ship, depending on specification. Today, yard capacity is available for new vessel construction and possible conversion, along with facilities and equipment for LNG supply, but the surge in demand for LNG fuelled propulsion will see this capacity taken up fast. The future will also likely be marked by opportunistic build cost premia. Structurally, LNG is 50% cheaper than its compliant alternative, low sulphur Marine Diesel Oil and those left paying diesel prices for fuel will be seriously uncompetitive.
CROISSANTS COFFEE AND CONSENSUS
The consensus of the cognoscenti today is that all carbon emissions should be halted by the end of this century, in order to guarantee an acceptable and sustainable quality of life for mankind thereafter. How this might be achieved remains as yet unsolved, but the unanimous agreement on environmental objectives at the UNFCCC COP 21 meeting in Paris in December 2015, which did not include the marine and aviation sectors, will have far reaching effects for all. COP21 reaffirmed the goal of limiting global temperature increase below 2°C, while urging efforts to limit the increase to 1.5°C. During the meeting, the IMO and IATA were slated as “fossils” by antagonists for not speaking and the IMO subsequently responded with a stated intent to move the marine sector forward in line with the assembly agreements. What might be expected?
The IMO Marine Environment Protection Committee (MEPC) is due to meet in 2018 to ratify a global sulphur cap on marine fuels of 0.5%. It is increasingly likely this will go ahead. Failure to ratify will see the limit introduced in 2025. Greenhouse gas emissions (GHGs) and especially CO2 are in the spotlight. CO2 emissions are a function of the quantity and type of fuel used, but also include factors such as engine and propulsion efficiency, wind and current velocities, wave heights and other sea conditions. A further conundrum is that engine efficiency is inversely proportional to unit NOx production. So, before agreeing specific limits, the IMO is engaged in developing an equitable methodology for determining the metrics of CO2 emissions.
Another important emissions component, which is in the spotlight but has yet to be fully addressed, is what is sometimes referred to as black carbon, or Particulate Matter (PM). Ships’ marine diesel engines, especially low-speed engines burning residual fuel oils, are the most prolific producers of PM, which has been tagged as a Grade I carcinogen to add to its association with ice blackening, ice melt and sea level rise.
If the spirit of COP21 is to be honoured, permitted levels of CO2 and PM in ships’ emissions, will need to be cut and soon. This could see an end to residual marine fuels as the global 0.5% sulphur cap is rolled out in 2020 and possibly an end to the use of some distillate fuels sometime thereafter. Shippers are understandably nervous as all the alternatives will cost money at a time when shippers have little to spare. The use of oil as a marine fuel could, quite foreseeably, be coming to a close. The loss of an outlet for residual fuel creates a particular problem for the oil industry.
THE REFINERS’ DILEMMA
When a refinery processes a barrel of crude oil, its ambition is to extract the maximum value from that barrel. Refinery economists run complex “refining models” with algorithms designed to determine the optimum product split from the blend of crude oil feedstock, based on the inputs of pricing, timing, crude oil quality, refinery capacities and configuration, supply chain metrics and any constraints in market demand.
One constant however has been that the residues that remain after all the higher-value products have been removed, could always be sold as heavy fuel oil. The annual marine market for such heavy fuel oil is about 250 million tonnes. If the marine disposal option disappears, the logical route is for refiners to upgrade as much as possible to lighter fractions, which can be sold at a premium. Eventually this would leave just the carbon, but there is no market for the quantities of carbon that would inevitably be produced. This is a serious conundrum for refiners as it would impact the basic underlying economic premises of conventional refinery economics.
THE DECARBONISATION OF ENERGY
The best way to make sense of the changes is to take a step back to the big picture and put the changes into context. Since the beginning of mankind, we have been reducing the carbon content in what we use as fuel, from solid fuels with a high carbon content, to lighter oils, to gas, to renewables, hydrogen and nuclear present and future with no carbon. So, there is a logic in the use of oil being challenged and diminishing, underpinned by the carbon regulatory stranglehold. Gas and for transport as LNG and CNG is the likely way forward for shipping, long-distance rail and commercial road transport, although we will also see an increase in electrification, subject to the provision of infrastructure. This will likely be with be with us until the end of this century, eventually to be replaced by the best low or zero carbon option.
The clamour for change has started. Arctic regions are among the most sensitive regions on earth and have recently come into the crosshairs of 15 NonGovernmental Organisations (NGOs) which have petitioned The Arctic Council, now under the chairmanship of the United States, to discuss protection of the marine environment, and take action on heavy fuel oil, which presents a high pollution threat and long decay span.
THE SHIPPERS’ DILEMMA
There can be few shippers that do not now recognise the importance and imminence of the need to substitute oil as their primary propulsion fuel. Those that still do not, in their imagination of an oil fuelled future, suffer a triumph of ptimism over experience. Life is not fair and the playing field is not always even. Shippers need to have the confidence that they can find LNG bunkers within a reasonable range wherever their vessels ply in the far flung corners of the world. We are certainly not there yet and more needs to be done urgently. Current LNG Bunkers “black holes” with no obvious planned activity include:
- South America, excluding Buquebus’ facility in Buenos Aires
- The Mediterranean
- Arabia and the Gulf
- South Asia
- East and South East Asia, excluding China, Hong Kong and Singapore
- Australia, New Zealand and the Pacific
REGULATIONS – TO COMPLY, OR NOT
Another conundrum for shippers in hard times, choosing fuels is whether to be fully compliant with regulations. Regulation effectiveness is determined by the clarity of regulations, the deterrence of infraction and enforcement. North America is ahead of the game, with the US and Canadian Coast Guards. Europe is talking about a Coast Guard, mainly aimed at seaborne migration, but it is yet to be implemented and such a Coast Guard could also be used to enforce European ECAs. With the imposition of a global 0.5% Sulphur cap, it is hard to envisage enforcement, both on supply and use of non-compliant fuels, without change in the less law abiding parts of the world.
Europe has taken one useful step though. The Øresund Bridge is a railway and motorway bridge across the Øresund strait between Sweden and Denmark. Ships entering the Baltic from the North Sea are obliged to pass beneath its span. “Sniffing” devices have been fitted beneath the central span to sample ships’ emissions as they pass y. So far the level of compliance has been described as “positive”. This model can be repeated, but it is also possible to envisage the use of sensor-equipped drones to follow ships in service and sample emissions.
China’s Bohai Sea, Pearl River and the Yangtze River Deltas are set to become 0.5% Sulphur Emission Control Areas (ECAs). In addition, 90% of working vessels in the area will have to use shore power when berthing by 2020. Half of the container, cruise and ro-ro terminals in the regions will also have to provide shore power to berthing ships. The plan also actively promotes the use of LNG as primary marine fuel.
According to the Chinese Ministry of Environmental Protection, SO2 and NOx emissions from ships accounted for 8.4% and 11.3%, respectively, of China’s total emissions. In a connected move, China’s Honghua Group confirmed it has secured an order from Shanghai-based LNG Power Shipping to build 200 LNG-powered inland river vessels. The
RMB760 million ($11.6million) order includes one hundred 700 dwt vessels, fifty 950 dwt vessels and fifty 1,350 dwt vessels, which will be used to transport materials along Shanghai’s inland river. The vessels are reported to be delivered by the end of September in 2016.
Also, reportedly, LNG Power Shipping placed an order for 200 LNG-fuelled vessels in 2015 at Jiangsu Qinfeng Shipbuilding. The company plans to invest in 600 LNG-fuelled ships within the next three years.
After an initial and dedicated truck to ship (TTS) operation in Incheon, the first open LNG bunkering facility is planned to be constructed in the city of Tongyeong by 2017, as part of the existing public gas terminal. The cities of Gwangyang, Boryeong and Incheon are next in line.
After a number of years banging on the door, it is good to see that Singapore, the world’s biggest bunker port by far, is finally joining the LNG bunkering club. The Singapore Maritime and Ports Authority (MPA) awarded a tender for NG bunkering service to Pavilion Gas and a consortium of Keppel Offshore & Marine Ltd and BG Group, which are obliged to supply (LNG) bunkers to vessels in Singapore in pilot schemes from 2017.
Shell has recently passed the hurdles to its £36bn takeover of BG to form one of the world’s largest gas companies, representing around 12.5% of global equity gas reserves. Shell has already shown a strong commitment to LNG as a arine fuel and is currently building a 6,500 m3 bunker vessel in Korea, for ocean-going and coastal use in the Amsterdam–Rotterdam–Antwerp (ARA) region of northern Europe.
After the TEN-T initiative, that has enabled the construction of LNG bunkering facilities at around 36
seaports in northern Europe. Focus is now being given to providing the necessary LNG bunkering infrastructure, with Spain and Greece taking the lead, although details are awaited. A second project, the Rhine LNG Masterplan, came to a successful end in 2015. The 3 year project cost €34 million, €17 million of which was provided under the EC’s TEN-T Programme. Today not all European countries have been equally successful at introducing LNG, nor have been successful across all sectors. Many barriers still have to be overcome for the wide-scale adoption.
A series of fifteen 110m inland waterway barges are being built for Belgium based Plouvier Transport, to be chartered
by Shell, and will be powered by Wärtsilä dual-fuel main engines. The barges will operate primarily on liquefied natural gas (LNG) and the scope of supply also includes other propulsion equipment and LNGPac fuel gas handling systems. At the moment the ships’ hulls are under construction at the VEKA Shipyard CENTROMOST in oland and outfitting will be carried out at VEKA Shipyard Werkendam, Netherlands. Shell will use the LNG fuelled arges to support its growing operations in the ARA (Amsterdam-Rotterdam-Antwerp) and Rhinetrack Germany/Switzerland) regions.
LNG remains the fuel of choice for new ferries in Europe. Finnish Meyer Turku has started building a new LNG uelled ferry for Estonian Tallink. Driven by environmental regulation, Rederi Ab Gotland has signed a contract with Guangzhou Shipyard International in China for a new LNG-powered ro-pax. When delivered in 2017, it will be the first Swedish-flagged passenger vessel using LNG. The new vessel will have a passenger capacity of 1,650.
After 6 months’ delay, Germany’s first converted LNG fuelled ferry entered service and has been complemented by a second new LNG fuelled vessel, “Helgoland”.
After fitting a Rolls-Royce gas engine electricity generator, for reduced emissions while in port, Spanish ferry perator Baleària has ordered two dualfuel ferries from compatriot Shipyard Construcciones Navales del Norte – LaNaval, with an estimated €350 million ($390m) deal expected to be firm by April 2016.
The new ferries, will be the first new buildings in Spain to run on LNG and will reportedly be the biggest ever built in any Spanish shipyard with a length of 225 m and a breadth of 30.4m. Baleària’s new ferries will be powered by dual-fuel engines. Construction of the first unit will start in 2016 and will be in operation during the first quarter of 2018.
Moving away from ferries,Croatia’s Brodosplit Shipping Company has ordered four dual-fuelled container vessels from Croatian shipbuilding sister company Brodosplit, for delivery in November 2017. The 2,000 teu vessels, will be powered by MAN 11,060kW dual-fuel engines. The 24,000 dwt vessels will be over 184m long and 27.5m wide, with an operating speed of 18 knots. Reportedly, the efficiency of the engines will mean that investment in them is paid back within three years. The engine will be manufactured under license from MAN at Brodosplit’s diesel engine factory. Brodosplit will also manufacture the LNG fuel tanks. Brodosplit claims that the new vessel will have an operating cost per mile of four to five times lower than other vessels in the same class. Steel cutting began in November 2015.
Canada’s BCFerries named of the first of 3 new 360-foot, dual-fuelled ferries. The vessels are under construction by Remontowa Shipbuilding in Gdansk, Poland. Additionally, BC Ferries’ larger 550-foot Spirit of Vancouver Island (adjacent) is expected to be converted to LNG-diesel dual fuel operation from Q3 2018 with relaunch in early 2019.
TOTE Maritime took delivery of its 2 new Marlin class ro-con vessels, built in Nassco, San Diego, for the Jacksonville – Puerto Rico route. TOTE Maritime Puerto Rico has successfully bunkered Isla Bella, the world’s first LNG powered containership with LNG, at the Port of Jacksonville in Florida, U.S. — the first successful LNG bunkering operation to take place at the port. Approximately 400m3 of LNG was loaded during the bunkering operation, which is said to have been transported by 12 TOTE-owned LNG ISO containers.
For the supply of LNG bunkering for TOTE’s Tacoma – Anchorage route, it has partnered with Tacoma, Washington with Puget Sound Energy. These facilities will, reportedly, also be available for other shipping to use.
In the Gulf of Mexico, the second Harvey Gulf “Enviro” LNG fuelled Offshore Support Vessel (OSV) entered service under a 20 year contract with Shell. The vessels are 92m long and operate on three dual-fuel Wärtsilä engines. They run on 99% LNG fuel and are able to operate for around seven days before refuelling. They load from Harvey Gulf’s new LNG bunkering facility at their terminal at Port Fourchon.
OTHER LNG FUELLED VESSEL TYPES
Driven by sustainability goals, in 2015, it was announced that Meyer Werft is to build two new next-generation cruise ships for Carnival’s Costa Cruises, in Papenburg, Germany. These will be the world’s first cruise vessels to run on NG. Each vessel will exceed 180,000 tonnes and will use LNG to generate the ship’s power in port and at sea. They will accommodate a total capacity of 6,600 guests, making them the largest guest capacity cruise ships in the world.
The four-ship contract with Meyer Werft is part of a larger previously announced strategic Memorandum of Understanding with Meyer Werft and Fincantieri S.p.A for nine new ship orders between 2019 and 2022.
Adoption of LNG as the preferred marine fuel to date has been with a small selection of vessels, ferries, some Offshore Support Vessels and some Container Vessels. So it is good to see the range complimented by milyiputpose vessel designs. Nantong COSCO KHI Ship Engineering Co. (NACKS) and Lloyd’s Register have
developed a dual-fuelled evolution to NACKS’ established multi-purpose vessel (MPV) design.
The new concept is fitted with a 500m3 C-type LNG fuel containment system, located aft on deck above the engine room and the LNG fuel supply system. A MAN ME-GI engine provides propulsion in a high-pressure gas fuel system provides propulsion while the main electrical generator and boiler are in a low-pressure gas fuel system.
Accommodation is located forward, maximising space for cargo operations, with three deck cranes (2x350te, 1x100te)situated on the port rail.
The design complies with Lloyd’s Register’s gas fuelled ship rules and also has gone through the class society’s ShipRight risk-based design assessment procedure. The dual-fuelled system design and arrangement have also achieved approval in principle and gasready descriptive note GR(A).
- The conclusions from the 2015 LNG Perspectives paper “Troubled Waters” remain valid, while the global oil and energy oversupply has cast a fog over some of the issues, notably the size of the economic incentive to switch to gas.
- Many oil dependent economies are already showing signs of distress and investment cutbacks. This is not without risk and could lead to volatility and potential social unrest. A bumpy ride lies ahead.
- Global oil demand is projected to come to balance closely with supply by 2018, based on current demand growth projections, which are led to some extent by low energy prices, and based on the continuing depletion of existing eserves and underinvestment in production capability. A demand led energy market will see price escalation. Gas spot markets will wane and those with access to term LNG supply contracts will benefit.
- The accord achieved at the UNFCC COP 21 meeting in Paris in December 2015 is significant and will have far-reaching effects on shipping, not that shipping is necessarily the worst polluting sector, but because it is relatively less well organised and so less able to defend itself than, for example, aviation.
- New and global CO2 and particulates emissions restrictions may eliminate the use of residual and higher viscosity fuels in ships, driving a rapid switch to LNG and some other low-carbon fuels.
- COP 21 has now made to introduction of a 0.5% Sulphur cap on all marine fuels in 2020 more likely than less.
- The use of low sulphur and low carbon fuels will have a significant impact on refiners and today’s refinery economics for refiners who are used to, and will then be denied, the easy disposal of sulphurous residues into the marine pool.
- Despite the warnings, many shippers are still adopting a “wait and see” approach regarding the changes. This is misguided. To meet the deadlines, operators aspiring to environmental compliance and sustainability need to be planning and building their new fleets now.
- Enforcement of new regulations will be a challenge, especially when applied globally. New enforcement authorities will be required, assisted by new and enabling technology.