The future of LNG as marine bunker gains continuously the interest of business decision-makers and regulators. The benefits of using LNG are only partially cleared; the burdens and difficulties are often exaggerated, while key elements towards the verdict of the market are missing thus increasing the uncertainty and delaying investments and projects. Briefly stated, LNG as a marine fuel is not a new idea; boiled off gas is consumed on LNG-carrying ships since the early 70s. Regulation, technical maturity, and political reasons revived the interest on LNG. Ship operator resist to LNG-fueled ships as they concern about the cost of bunkers, any changes in the employment of the ships and finally the impact on all other operations.
The International Maritime Organisation (IMO) adopted Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL) that sets limits for non-GHG such as sulphur oxides (SOx) and nitrogen oxides (NOx) emitted from the engines of ships and consequently impacts ship operations in the high-seas as well as in Emissions Controlled Areas (ECA’s). This is the main instrument of the IMO that addresses non-Green-House-Gases (nGHG). Europe and California, among other jurisdictions, introduced regional regulations, such as the Sulfur Directive 1999/32/EC, as amended by the EU Directives 2012/33/EC and 2005/33/EC and the California Air Resource Board (CARB) rules, that set even stricter limits than Annex VI; a typical gold-plating imitative that complicates further the problem! The issue of Green-House-Gases (GHG) such as carbon dioxide (CO2) is also intertwined, as there is a need to reduce the carbon footprint of the industry and the current technical measures do not suffice, therefore the Market-Based Measures (MBM) are currently discussed at the IMO. As a summary, Figure 1 is provided in order to tabulate the established limits and the corresponding implementation dates.
Finally of equal importance are regional approaches and incentives not limited to the abatement of SOx and NOx. As such, many ports provide incentives for operations deemed to be beyond minimum compliance or peer performance standards. Some of these incentive regimes may even be related to the Environmental Ship Index (ESI), i.e. a measurement derived by the World Port Climate Initiative (WPCI) of the International Association of Port and Harbors (IAPH) that determines seagoing ships that outperform current emission standards and consequently special tariffs or scheme of benefits can be applied for the ships reducing their CO2 footprint. Examples include a rebate offered by the port of Hamburg, the award of a ‘Green Trophy’ by the port of Rotterdam, the adoption of simple concepts and ideas by Swedish ports and incentives introduced by Singapore such as the ‘Green Ship’, ‘Green Port’, and ‘Green Technologies’ programs where qualifying ships enjoy significant reduction of registration fees and tax burdens
Given the current regulatory limits, operators effectively have three compliance options, which are categorized as follows:
1. Fuel switch: operators can install dual-fuel systems, which allow high-sulfur heavy fuel oil (HS-HFO) to be consumed when the ship is operating outside an ECA, and low-sulfur heavy fuel oil (LS-HFO), marine diesel oil (MDO), or marine gasoil (MGO) to be consumed while inside an ECA. This solution complies with SOx regulations however, it also increases operational risks, especially for ships that frequently enter or operate within an ECA. Furthermore, selective catalytic reduction (SCR), exhaust gas recirculation (EGR), or relevant technology must be used for the abatement of NOx.
2. Add-on technology: operators can install an exhaust gas cleaning system (EGCS) that desulfurizes the exhaust gases. This option implies that HS-HFO can be consumed in all cases. As in the previous option, a relevant NOx abatement technology must also be installed.
3. LNG fuel: operators can use LNG as a marine fuel. LNG provides significant reductions in SOx and NOx emissions, which allows operators to comply with existing and proposed regulatory limits.
Focusing on the LNG option, operators are not willing to switch to LNG or more expensive conventional marine fuels with reduced emissions profiles (e.g. MDO and MGO), and are unwilling to shift operational practices and technologies, due to the following key risks:
1. There is no market trend or commitment that indicates ships with reduced emissions profiles will attract more cargoes or be able to charge higher freight rates than their conventional competitors to increase revenues. Consequently, any increase of the cost elements will lead to deterioration in profit margins.
2. There are operational risks associated with the global availability of fuels, such as MGO and LNG. There are many concerns related to the availability of LNG-bunkering facilities, particularly the geographic and routing restrictions associated with using LNG-fueled vessels (i.e. vessels can only serve specific markets and routes).
3. At present, there is no after-market for LNG-fueled ships.
4. There is regulatory uncertainty regarding not only the future limits for currently restricted emissions, but also the probable limits for known pollutants that are not yet restricted, such particulate matter (PM), which LNG-fueled ships may or may not address
Consequently, operators are faced with a very complicated dilemma: they have to move towards a new technical solution yet at the same time all technology options are full with uncertainties. In such difficult markets, the last thing owners envisage is more risks and ambiguities. Nevertheless, LNG as marine fuel should not be considered as such an abstruse and perplexing alternative.
Any shift from HFO to any other bunker is justified by the price differential; the higher the benefits, i.e. the savings, from the alternative fuel the higher the probability to shift. Statistical analysis of the HFO versus LNG prices in Singapore suggests that there is a substantial potential of reduction of the bunker bill. In contrast to conventional bunkers, where the supply and energy content are relatively well known and understood, the supply of LNG is more complicated and the capacity required to store the same energy content is notably increased. Therefore, there is substantial ambiguity surrounding the pricing of LNG as a marine bunker. First, the various natural gas pricing mechanisms (e.g. hub-based, oil-indexed, bilateral monopoly, regulated, and subsidized) that serve the needs and purposes of natural gas as an energy commodity (i.e. not as a marine bunker), combined with the unknown costs of distributing LNG to a ship, obscure the transparency of LNG pricing for marine bunkering purposes. Second, the quality of LNG as a natural gas mixture, which varies depending on the natural gas reservoir, production process, and liquefaction facility, determines its energy content, price, and usability as a marine fuel. Third, the liquefaction technology, i.e. transportation of natural gas (NG) to a liquefaction facility, refrigeration/liquefaction process, cryogenic storage facilities, and transportation from LNG storage to the ship determine the final price. Unfortunately, these costs are not publicly available, and the known hub-based and oil-indexed prices do not include these costs. The most common approach to consider the price that marine operators will pay for LNG fuel is the sum of either the Henry Hub (HH) natural gas, or the UK National Balancing Point (NBP) natural gas, or a European LNG import price, and an adjustment for bunkering. Figure 2 provides substantial evidence of the potential; all fuels are compared with HFO and various scenarios for the supply cost as reported by bunker-supplies are considered for the final price of LNG faced by the ship operator.
In few words, given the above the circumstances, the price of LNG as fuel is merely demystified. In addition, LNG abates almost fully SOx and NOx, thus enabling operators to enter ECA and ports, where regional stricter rules apply, without uncontestable stumpers. Consequently the risk of future regulation, international or regional, is adequately mitigated.
Nevertheless, the encouraging results and facts yielded from research and rational thinking are challenged and disputed when drafting the financial plan of the project. There is substantial evidence that LNG-fueled ships are 10-15% more expensive than conventional ones. Considering operating expenses equal to the conventional ones, an assumption that shall be proven from the market, and considering the voyage expenses different, due to the price differential, it is the port dues and related fees that may deem the daily operation of the LNG-fuelled ship more lucrative than of the conventional one. Research yields a simple formula that estimates the discount port authorities should offer to LNG-ships ceteris paribus, in order to compete with the conventional ones on equal terms. This formula considers the higher capital expenses, the price differential and the port dues for the ships of that size. Hence, a local or regional policy, which reduces port dues for LNG-fueled ships (or punishes the conventional ones, as they pollute more), is requested. This regulatory acupuncture contradicts the practice of internationally applied limits, yet it seems necessary, as different ports and regions face different environmental and trade needs.
Furthermore, the higher original capital expenditure implies also lower returns or increased securities required for the financiers. Higher initial outlay demands higher freight rates to break-even with conventional ones, and there is no indication that LNG-fuelled ships will earn them. Therefore financial engineering solutions should be put into practice, in order to attract investors. Manufacturers and technology providers might cover the exceeding part of the initial cost either as mere equity providers or through deferred payments after the delivery of the ship. In any case they should somehow undertake part of the risk of the “showcase” projects otherwise the ship owners will not easily shift and opt for their technology. This financing gap could also be addressed through export credit schemes, yet this implies the support of States. There are already some export schemes in place but they should be further customized.
All in all, LNG is a prominent alternative fuel for marine operators. Definitely, none expects LNG to fully replace HFO, but significant segments of the market, such as ships engaged in coastal trading or calling often ports might shift; a push from policy-makers should be expected. Last but not least, LNG-fueled ships address also the need of reducing the carbon footprint better than conventional ones. In this regard the exposure of the owners to market-based measures (MBM), expected to be introduced around 2020, will be lower, and therefore the annual financial result will become more predictable. Anyway, why should somebody invest in ships and especially in LNG-fueled ones, unless he envisions a better market for them?