LNG Bunkering: Benefits Obscured

Maritime consultants TRI-ZEN International of Singapore have released their latest analysis on the use of LNG as bunker, highlighting that the incentives for using LNG may be obscured, but are still present.

An extract from TRI-ZEN’s Analysis:

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 fifth annual LNG Perspective update on bunkers looks at the driving factors and possible consequences, and offers some 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. Under investment 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 U.S. has become the world’s biggest energy producer with annual natural gas production now exceeding 30 tcf. The longer term picture for gas is further compounded by the rapprochement with Iran, which will bring unlock the world’s second largest proven gas reserves, at around 1,000 tcf, or 16 percent 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 shipping companies and the time to make this choice is closing in. 

Typically it takes one to three 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 percent cheaper than its compliant alternative, low sulfur 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 sulfur cap on marine fuels of 0.5 percent. 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.

PARTICULATE MATTER

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 honored, 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 percent sulfur cap is rolled out in 2020 and possibly an end to the use of some distillate fuels sometime thereafter. Shipping companies are understandably nervous as all the alternatives will cost money at a time when shipping companies 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 tons. 

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 us until the end of this century, eventually to be replaced by the best low or zero carbon option. 

The clamor for change has started. Arctic regions are among the most sensitive regions on earth and have recently come into the crosshairs of 15 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 SHIPPING COMPANIES’ DILEMMA

There can be few shipping companies that do not now recognize 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 optimism over experience. 

Life is not fair and the playing field is not always even. Shipping companies 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
Africa
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