Global policies to cut shipping emissions could create massive new demand for LNG as a bunker fuel, with Europe in particular planning to invest nearly Eur2 billion ($2.4 billion) in LNG refueling infrastructure at both sea and inland ports to 2030. Some observers are saying LNG could displace up to 25 million metric tons a year of gasoil or fuel oil demand by 2030, which would equate to more than the annual LNG output of Qatar, one of the world’s largest LNG producers.

S&P Global Platts editors Jack Jordan, Desmond Wong and Siobhan Hall examine the supply, demand, pricing and policy drivers which could take this niche market mainstream – and what might get in the way.

With Siobhan Hall, senior editor for EU energy policy, Jack Jordan, editorial lead – bunkers, oil news and analysis, and Desmond Wong, managing editor, European and Atlantic Basin LNG

SIOBHAN HALL: Hello, and welcome to this Brussels to Beijing policy podcast from S&P Global Platts. I’m Siobhan Hall, Platts’ expert on European Union energy policy based in Brussels, and I’m joined from London by bunker news editor Jack Jordan and LNG managing editor Desmond Wong.

Today we’re talking about how policy is driving take up of lower emission shipping fuels, and in particular liquefied natural gas or LNG. This is a topical issue, with new EU rules requiring large ships using EU ports to start monitoring and reporting their emissions from January 1 next year. And at the global level, ship owners will have to reduce the sulfur content of the fuel oil they use from 3.5% to just 0.5% by January 1, 2020, which is only two years away.

So, Jack, how do these policies encourage take up of LNG as a shipping fuel?

JACK JORDAN: Well LNG is the shipping fuel with some of the lowest emissions levels and sulfur content, and fuel standards are likely to get even stricter over time, so investing in LNG fueled ships is a way to future proof your fleet. Ships last about 25 years on average, so decisions taken now will still have impacts in the 2040s.

SIOBHAN HALL: Right, so the 2040s, so investing in LNG ships is a long-term play. Des, how do the economics stand up? Is LNG cheaper than the alternatives?

DESMOND WONG: Well, LNG is cheaper than low sulfur marine gasoil, and even conventional fuel oil, if you add scrubbers into the costs as well, but LNG-fueled vessels cost more on their own, and LNG fuel tanks take up more space, so you’re going to end up with less room for cargo or passengers. So you have to look at the payback times when you buy your vessel and the routes you will run, because you’ll have to see if you can get LNG along the way.

SIOBHAN HALL: Right, so you mentioned that the routes used are important. I know the EU has goals to introduce LNG bunkering facilities in all core EU sea ports by 2025 and core inland ports by 2030, but what’s the situation like outside Europe?

DESMOND WONG: Not as good. Now for Europe they’ve got all of those new refueling infrastructure projects coming up under TEN-T, and in the US they’ve got a domestic push for it at their own ports, but if you’re going to Asia, you’re not going to get a lot of infrastructure for LNG bunkering.

At the most at the moment you have one major hub offering and that’s in Singapore, and potentially in China down the line as well, because they have small-scale LNG. But elsewhere it’s going to be limited.

JACK JORDAN: There is of course a way round that problem of lack of infrastructure in Asia, if you’re taking on ships with larger fuel tanks. For example, the latest big news on LNG bunkering is that French shipping company CMA-CGM has ordered nine container ships fueled by LNG, and it has a contract with Total to refuel them. That’s a big expression of confidence in LNG as a bunker fuel for even the largest ships in the world. Previously it’s mostly been used for smaller passenger vessels, and that’s a very different market.

DESMOND WONG: Well, just out of curiosity, which routes are these new container ships following?

JACK JORDAN: They haven’t yet specified the routes, but a spokesman told me a few weeks ago that they would have 18,000 cubic meter tanks that would be sufficient for a full round trip before refueling. And by that I’d assume they mean a trip between Europe and Asia, presumably French ports.

SIOBHAN HALL: Right, so, this is clearly a really interesting area to watch. I saw that the European Commission estimated last month that the EU would need to invest up to Eur945 million in seaport infrastructure by 2025 and up to Eur1 billion in inland port infrastructure to support LNG as a marine fuel. So how many LNG-fueled ships are there operating now?

JACK JORDAN: It’s around a hundred worldwide, not including the LNG carriers that burn their own cargoes, so it’s a tiny market at the moment, and likely to remain so until the infrastructure develops. But by 2030 some are now saying LNG could take up to a 5 to 10 % share of the global bunker market. That would displace between 12.5 and 25 million tonnes a year of gasoil or fuel oil demand.

DESMOND WONG: And it’s important to note that that’s equivalent to about how much LNG Qatar produces in a year, so means quite a bit for global gas demand.

SIOBHAN HALL: Wow, now I know the European gas industry has really high hopes for new demand from the shipping sector, because demand in its traditional sectors on land is likely to be flat or even declining in the long term, because the EU has these goals to decarbonize its economy by 2050.

JACK JORDAN: What may help with those high hopes is the fact that we are expecting some further IMO rules on reducing nitrogen and particulate matter, for example, these are emissions from shipping, and those emission reductions would also favor LNG use. We could see rules like that coming into force over the next decade or two.

And it will be interesting to see who follows CMA-CGM now they’ve come out with this announcement, and follows them in investing in LNG-fueled ships. If things go well for these container ships, that will be a big signal to the market that LNG ships of this size can be economical.

DESMOND WONG: Essentially, 2020 is that crunch date, because if there’s no uptake in LNG ships by then, we could see ship owners simply sticking with fuel oil and scrubbers to get rid of the problem, or switching to low-sulfur gasoil.

JACK JORDAN: And the thing to note with the 2020 date is that people thinking about buying LNG-fueled ships are presumably going to be announcing their plans by early next year at the latest, if they want to have them operational before 2020. When it comes to scrubbers, they can be fitted to existing ships, so that’s an easier decision that can be taken a little bit later.

We also know that there’s going to be a big wave of fleet renewal coming within the next few years, and the thing to watch with that is whether this global fleet renewal is going to come just slightly too early for LNG to be a mainstream fueling option.

SIOBHAN HALL: So can you refit ships to run on LNG?

JACK JORDAN: No, it’s not really a practical or economical option to retrofit them at the moment. The trouble is that LNG fuel tanks are very different from conventional fuel tanks. They take up a lot more space on board, and need different conditions, so it’s not really practical just to remove the conventional fuel tanks and slot in an LNG version.

SIOBHAN HALL: So we’ve got this emerging demand for gas in the shipping sector. How is it being priced?

DESMOND WONG: Well at the moment anyone who’s using LNG as a bunker fuel right now is doing so through bespoke contracts, so there isn’t really a spot trade around it for one. Secondly, there’s no real unity in the pricing formula, because the only real common element that we’re hearing from market participants is that everyone wants it linked to their original fuel.

What that means is that contracts are priced against fuel oil or gasoil or whichever fuel that company was originally using for their vessels. Most of these counterparties are ship owners, and they don’t want to have to deal with gas pricing or international LNG pricing. They want it related to something that they recognize.

SIOBHAN HALL: Ah right, so it’s like how oil-indexing started in the European gas markets – then the gas was priced at a discount to crude and heating oil specifically to encourage switching.

DESMOND WONG: Exactly, but in this case LNG as a bunker fuel is discounted against fuel oil or gasoil. I mean the last thing that we heard from the market was that Gasnor, the Shell subsidiary, was looking at introducing a formula that was about a 30% discount to marine gasoil. So at this point in time LNG is fundamentally long for quite some time, so these discounts to your existing fuel can be quite attractive.

JACK JORDAN: And as I was saying before, this is all about future proofing fleets – LNG is one of the cleaner fuels on all counts, and the long-term growth potential is huge, if the right infrastructure is put in place.

SIOBHAN HALL: Right, so this is all interesting stuff, gas is cheap, it’s clean, the gas industry really wants this, it’s clearly a very interesting topic, and it’s one we’ll be following very closely here at Platts. So, thank you Jack and Des for your insights. That’s all we have time for today. Thank you for listening, and tune in next month for more Platts perspectives on policy.

Source: Hellenic Shipping News.