High Costs Impede LNG Use for Transport in Europe

Northern European use of liquefied natural gas (LNG) to fuel ships is becoming feasible as supply from Qatar to the Dutch port of Rotterdam becomes available, but for it to compete with oil in transport its price has to fall considerably.

New regulation on sulfur emissions in the shipping sector will come into place for much of the North and Baltic Sea in 2015, sparking interest in alternative fuels to diesel and many see LNG, currently used almost exclusively for power generation, as a viable alternative.

"LNG is seen as a popular alternative to oil as a transport fuel because it is efficient and potentially cost effective," said Gordon Inkson, energy and shipping expert at law firm Holman Fenwick Willan (HFW).

The industry estimates Baltic demand for LNG as a ship fuel will likely be around 2-5 million tons per year this decade.

"Shippers are constrained by regulation and need to adapt, and LNG could provide some cost-effective solutions," said Frederic Barnaud, executive director at Russia's Gazprom Marketing & Trading.

Gazprom so far only supplies Europe with gas via pipelines, which is barely used in the transport sector, but the state-controlled company has said it plans to build an LNG export terminal at the Baltic Sea port of Ust-Luga to supply the region by 2018.

France's Total and Royal Dutch Shell are said to be interested in joining the project.

Currently, however, the only means to import LNG into the region are via North Sea ports, such as Belgium's Zeebrugge and the Dutch Gate terminal at Rotterdam.

"The planned breakbulk expansion of the Gate terminal in Rotterdam is what has made it possible to build up small scale terminal infrastructure in other harbors in northern Europe," said Lars Frisk, head of business development with Swedish infrastructure company Swedegas.

But as Europe's domestic gas reserves are falling, almost all imported gas is needed for electricity generation, so far leaving the gas transport sector short of supplies.

This will change when German utility E.ON gets access to Qatari LNG from next year into Rotterdam's Gate LNG terminal.

The position of the facility is beneficial for LNG use for transport as Rotterdam is also a key development hub of LNG fuel bunkering, driven largely by energy major Shell and tank storage provider Vopak.

The bunkered LNG in Rotterdam can be used to fuel river barges that ply continental Europe's major shipping routes, such as the Rhine, and it can also be sent on to other LNG fuel development hubs such as Sweden,Norway and Finland.

Swedegas and Vopak are jointly investing in an LNG terminal at the port of Gothenburg, Sweden's biggest.

Further in to the Baltic Sea, Lithuania's Klaipedos Nafta won subsidies this month to finance an LNG terminal which could become the first eastern Baltic import terminal if it comes online as planned in December 2014.

GAS IS TOO EXPENSIVE

Although the gas and required infrastructure is becoming available, high costs are still preventing faster development.

"LNG market potential is highly dependent on profitability of LNG conversion versus other alternatives for emission reductions," said the chief of Finland's gas supplier Gasum Antero Jännes.

Gasum plans to build the Fingulf LNG terminal for use in the industrial and transport sectors.

Analysts say that at current oil prices of around $110 per barrel, European natural gas prices would have to fall to levels between $8-9 per million British thermal units (mmBtu) from current levels of over $10 per mmBtu, in order to compete in the transport sector.

French bank Societe Generale said this week it expected UK spot gas prices to drop slightly from an average of 67 pence per therm ($10.95 per mmBtu) to 66 pence a therm ($10.78 per mmBtu).

Additionally, analysts say that LNG as marine fuel is still trapped in the "chicken-egg theory."

"Suppliers raise the issue of vessel supply that can use LNG as fuel, while shipowners are sceptical about available infrastructure and medium-term developments," said Shantanu Bhushan of maritime consultants Drewry.

An executive with the association INTERTANKO, whose members own the majority of the world's tanker fleet, said the shipping world would need to see LNG work in one region before its use in the sector spreads.

"If it becomes successful in North Europe and perhaps in the U.S. and China, the chances are good that it will spread elsewhere," the executive said.