(EnergyAsia, October 19 2012, Friday) — A globally acceptable pricing system and support from key stakeholders must be in place for liquefied natural gas (LNG) to be developed into a viable bunker fuel source, said Lloyd’s Register.

The inspection and classification company released these and other findings in a detailed study, “LNG fuelled deep-sea shipping – Outlook for LNG bunker and fuelled newbuilding demand up to 2025” in response to growing interest over the suitability and viability of using LNG as shipping fuel.

Shipping and energy experts have begun focusing on this possibility in response to emerging long-term global trends including the massive availability of new gas reserves, tightening environmental regulations for cleaner-burning fuels, new efficient gas-burning technologies, and the growing prospect of persistently high oil prices.

The organisation’s marine experts released the full report of their findings in time for the recent Gastech 2012 conference in London, and elaborated on it at this week’s Singapore Bunkering Conference (SIBCON).

Its UK-based marine market analyst, Latifat Ajala, who built the dynamic demand model for the study, said the vast disparity between natural gas prices across the three main regions of Asia, Europe and North America presents a huge hurdle for its use as a fuel for long-distance shipping. In Asia, spot LNG prices regularly trade at US$15 to US$18 per million BTU, while in North America, it slumped to 10-year lows below US$2 early this year, recovering to above US$3 in recent weeks. European prices are somewhere in the middle.

In contrast, crude oil along with bunker fuel oil and diesel are more uniformly represented, enabling traders to do deals across regions.

Apart from pricing, the study found that the adoption of LNG-as-bunker fuel will depend also on the growth of alternative fuel sources and the degree of global collaboration between ship owners, gas producers, technology companies and regulators, among others.

Nevertheless, Lloyd’s Register holds a positive view of LNG as a shipping fuel of the future.

According to its base-case scenario for the period to 2025, there could be 653 deep-sea, LNG-fuelled ships in service, consuming 24 million tonnes of LNG annually. These ships are most likely to be containerships, cruise vessels or oil tankers.

When the study modelled relatively cheap LNG — for example, priced at 25% below current prices — the projected number of LNG-fuelled ships tripled to approximately 1,960 units in 2025. If the cost of LNG increased 25% against current prices, there would hardly be any new LNG-powered tonnage.

“LNG is unlikely to simply replace heavy fuel oil. We will see specific niches – such as in Norway – embrace LNG in small scale applications,” said Hector Sewell, Head of Marine Business Development for Lloyd’s Register.

“Adoption in the deep-sea trades is a different affair; there are different drivers, and we are also likely to see other fuels and technologies emerge as options.

“Despite the excitement [about LNG as fuel], there has yet to be an order for deep-sea, large-engined, LNG-fuelled ships.

“The most likely first movers could be the big containership operators who are able to bunker at two ports at either end of a liner trade route, such as in Rotterdam and Singapore or Shanghai. This might take years. Or it may happen tomorrow.”

He said Lloyd’s Register undertook the study to clarify the issues, reasons and direction as to what LNG-as-fuel might mean for its clients.

“We have the in-depth capability to handle the technology and the risk issues associated with gas, but we wanted to be able to help our clients understand what will be driving industry adoption. We were most interested in the deep-sea trades as these are responsible for most of the world’s tonnage, emissions and fuel bills,” he said.

Ms Ajala said:

“Yes, price is a key. But it’s going to be all about collaboration. There has to be a group of stakeholders who want it to happen.

“Political will and commercial ambition combined with environmental objectives and regulations have driven the modest take-up so far. There is no global market for LNG bunkers, so local or regional initiatives, investment, environmental and fiscal policy all have a part to play.

“Ship-owners who are serious about using LNG as bunker fuel may need to cut their own supply deals and lock in prices for years ahead. It’s going to be really interesting to see what happens.”

 

A summary of Lloyd’s Register key findings on the development of LNG as a bunker fuel

 

Marine bunker fuels and regulation of sulphur content

– Heavy fuel oils (HFO) with high-sulphur content accounted for 76% of marine bunker fuel demand in 2010.

– To limit emissions of the harmful pollutant sulphur dioxide (SOx) from ships, strict limits on sulphur content in marine bunker fuel oils are being implemented in coastal areas known as Emission Control Areas (ECAs). A strict global sulphur content limit of 0.5% could also be implemented in 2020.

– As the schedule for the sulphur limits approaches, LNG as bunker fuel is being considered as one alternative to conventional marine bunker fuel oils because it produces emissions with almost no SOx content.

 

LNG bunker demand assessment – shipowners’ survey

From a survey of shipowners on deep sea trades:

– Low-sulphur fuel oil is seen as a short-term option for compliance with SOx emission regulations.

– Abatement technologies are seen as a medium term option.

– LNG-fuelled engines are a viable option in the long term, particularly for ships on liner trades.

 

LNG bunker supply assessment – port survey

From a survey of bunkering ports:

– LNG bunkering is expected for short sea shipping in ECAs.

– LNG bunkering may eventually cascade into deepsea trade facilitated by regulations.

– LNG bunker demand is highly dependent on LNG pricing and its comparable price difference with competing fuels, for example HFO and marine gas oil (MGO).

 

Forecasts of LNG-fuelled newbuild and bunker demand

Using the LNG bunker demand model, three scenarios have been developed and examined based on assumptions for:

– wider implementation of ECAs

– the date of the strict global sulphur limit implementation

– the propensity of shipowners to adopt LNG as a fuel for newbuilds

– bunker fuel oil and LNG bunker price forecasts.

The three forecast scenarios for LNG-fuelled newbuild and LNG bunker demand are:

 

Base case scenario – current ECAs and a 0.5% global sulphur limit in bunker fuel implemented from 2020:

– 653 LNG-fuelled newbuilds forecasted for the period up to 2025, equal to 4.2% of global deliveries from 2012 to 2025.

– LNG bunker demand is expected to reach 24 million tonnes (MnT) by 2025 for deepsea trades, equal to 1.5% of global LNG production and 3.2% of global HFO bunker consumption.

 

High case scenario – a 25% decrease on the forecast LNG bunker prices used in the base case model and a 75% increase in propensity for newbuilds to convert to LNG-fuelled designs from 2020-2025:

– 1,963 LNG-fuelled newbuilds forecasted for the period up to 2025, equal to 12.6% of global deliveries from 2012 to 2025.

– LNG bunker demand is expected to reach 66 million tonnes by 2025 for deep sea trades. This will equal 4.2% of global LNG production and 8% of global HFO bunker consumption.

Low case scenario – a 25% increase in forecast LNG bunker prices used in the base case model and implementation of global sulphur limits shifting to 2023. Sensitivity testing indicates that shifting implementation to 2025 for the low case would generate a zero demand for LNG-fuelled newbuilds:

– 13 LNG-fuelled newbuilds forecasted for the period up to 2025 (0.1% of global deliveries from 2012 to 2025) LNG bunker demand is expected to reach 0.7 million tonnes by 2025 for deep sea trades. This will equal 0.001% of global LNG production and 0.002% of global HFO bunker consumption.