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LNG Opportunities and Challenges | Diversifying Shippers’ Marine Fuel Portfolio

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With less than a year remaining before IMO 2020 sulfur regulations take effect, shippers and carriers alike are finalizing viable compliant fuel choices in their marine freight operations. As a result, several options have taken center stage, propelling the maritime shipping industry in a direction that is more environmentally friendly—but much less predictable.

While many vessel operators are choosing to either front the volatile cost of low-sulfur marine fuels or install scrubbers and continue using high-sulfur fuel oils, one compliance option which offers more stable prices, fewer greenhouse and toxic gas emissions, and growing industry demand is the use of Liquefied Natural Gas (LNG). While current infrastructure has a long way to go to be able to support larger LNG fleet operations, LNG has significant potential as an alternative fuel choice.

 

 

The Technology

LNG technology works by creating an environment in ocean vessel storage tanks where natural gas can be liquefied. Natural gas is held at or slightly above atmospheric pressure, so the resulting fuel product is forced into its liquid state and stored at supercooling temperatures.

Containership vessels with LNG capabilities have unique fuel burning systems compared to regular vessels. Since LNG is a more complex fuel to burn, its storage systems and engines require additional machinery to consume it and ensure burn-off gas (BOG) doesn’t escape into the surrounding environment, which is both wasteful and potentially hazardous. LNG in this system is therefore insulated and stored as a liquid at -160 degrees C, and BOG that escapes from the liquid chamber due to unexpected temperature changes can be channeled to dual fuel engines for burning.

LNG Opportunities

LNG offers several advantages over other methods of IMO 2020 compliance, especially regarding price stability and environmental footprint. Compared to the volatility of high-sulfur fuel oil (HSFO) and low-sulfur fuel oil (LSFO), natural gas products by and large experience prices that are lower, and more stable. An additional price element to consider with LNG fuels is a liquefaction fee, or additional fixed cost that accounts for the cooling materials necessary to maintain liquidity. This price addition, however, does not fluctuate to the same degree as other refined products like fuel and gas oils in response to geopolitical or economic activity.

Though oil prices dropped substantially at the end of 2018, middle distillates are expected to experience significant price volatility through 2019 as low-sulfur marine fuels compete for refinery feedstocks used to produce truckload diesel. The chart below illustrates the relative stability in the price of natural gas as compared to diesel in US markets.

LNG’s price stability therefore makes it more attractive to shippers looking for consistency in their maritime freight costs. Another favorable element of LNG compared to other fuel types is its environmental footprint.

Current estimates indicate that powering ships with LNG instead of HSFO or LSFO may reduce toxic emissions of nitrogen and sulfur oxides by over 90 percent. While open and closed-loop scrubber technology removes these pollutants from HSFO ocean vessel exhaust as well, the captured toxins accumulate in the scrubbing system, requiring future disposal directly into the sea, or storage until other disposal methods are available. Additionally, Singapore and China have banned the use of certain types of scrubbers to curb pollution in coastal and inland waters, making scrubbing technology an uncertain investment in these controlled areas.

Carbon dioxide emissions are also minimized substantially with LNG; one British thermal unit (Btu) of burned diesel fuel and heating oil product releases 161 pounds of carbon dioxide, while one Btu of natural gas releases 117. While accidental release of methane—which has a greenhouse gas potential roughly 30 times more potent than carbon dioxide—is possible with LNG-burning engines, standard methods of handling and safe storage minimize this risk.

As the IMO transitions its focus away from SOx reduction and begins to target CO2 in the years following 2020, the pollution-reduction capabilities of LNG will likely become increasingly attractive. Given the organization’s history of dedication to reducing pollution and greenhouse gas emissions from marine vessels, it’s reasonable to expect that this momentum toward cleaner energy sources will continue –and shippers should be prepared to adapt to these changes.

LNG Challenges

That’s not to say there are no significant challenges to the widespread adoption of LNG in marine cargo vessels. Some of the most significant of these include the capital cost and dedication required to build and retrofit vessels, as well as a considerable lack of LNG bunkering infrastructure.

Though several key international ports, including Rotterdam, Singapore, and Panama currently offer LNG bunkering, global availability is still limited. This lack of infrastructure contributes to the current low number of LNG vessels operating on the high seas. With limited global LNG bunkering capacity, vessel operators are left weighing the decision to invest in a technology that has a promising future, but an uncertain present. Additionally, LNG vessels are widely thought to have reduced cargo capacity, as fuel storage tank systems are larger than in traditional vessels.

Despite these hindrances, several major ocean carriers have elected to add new LNG-capable vessels to their fleets. In January of 2019, CMA CGM completed the first LNG refueling of one of its subsidiary vessels in the Port of Rotterdam. This was a first step in the organization’s larger strategy to add nine 22,000-TEU vessels equipped with LNG capability to its global fleet. Hapag-Lloyd has also announced a pilot project to retrofit a 15,000-TEU vessel to run on both LNG and LSFO. With more vessel operators actively pursuing LNG as a means of IMO 2020 compliance, global port infrastructure may slowly, but increasingly, adapt to include more LNG bunkering capabilities, giving these carriers a stronger return on their investment.

Fueling vessels with liquefied natural gas is a promising method of compliance in the changing maritime landscape, but does pose significant logistical and cost-related challenges. While fleet-wide adoption of this fuel oil alternative may not be possible in the near future, shippers and vessel operators who choose to diversify their marine fuel portfolio with LNG may experience greater fuel price stability, as well as reduced emissions, as the regulatory environment continues to transition toward cleaner fuel sources.

Shippers can also advocate for a more agile and market-responsive marine strategy by implementing Breakthrough Marine Fuel Management. With our robust and data-driven program, shippers gain the ability to advocate for better strategies in their marine spend and accurately account for fuel costs, effectively navigating upcoming industry changes in 2020—and beyond.

To learn more about how Breakthrough Marine Fuel Management can elevate your freight strategy, please visit our solutions page.

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