With the first of BW LPG’s 12 dual-fuel LPG carriers setting sail, Drewry senior research analyst Ishan Dafaria examines the economic and environmental benefits underpinning the retrofit strategy
As the first of 12 ships to be retrofitted with dual-fuel propulsion engines, BW LPG’s BW Gemini received class certification and embarked on a historic transpacific voyage on 4 November with LPG as its primary fuel.
In order to comply with the IMO 2020 sulphur emissions guidelines, BW LPG opted for LPG dual-fuel engines over exhaust gas scrubbers and VLSFO. While BW LPG has widely marketed the various benefits of the technology, its peer Dorian LPG has opted for scrubber retrofits. Epic Gas, a smaller vessel operator, has stated it does not intend to use this technology at least until 2030 as it does not make “economic sense” at this point in time. It is noteworthy that the cost of retrofitting is close to US$9M per ship.
Dual-fuel LPG engines: a thing of the future?
BW LPG recently became a pure-play very large gas carrier (VLGC) owner/operator, with 34 owned vessels and 46 operated vessels; the owned fleet averages a little over nine years old. BW LPG has scheduled dual-fuel retrofits for 12 vessels in China that will be completed by end-2021. Each retrofit costs the operator about US$9M and takes about two months to complete which is probably why its peer Dorian has retrofitted its vessels with scrubbers.
In a recent interview, Epic Gas chief executive Charles Maltby indicated they may only look at dual-fuel LPG engines after 2030, citing economic reasons. According to media sources, there are as many as eight more VLGCs from various owners that are expected to be retrofitted with dual-fuel LPG engines in 2022, but no retrofitting has been planned so far in the smaller vessel segment. However, of the 10 medium gas carriers (24,000 m3 to 40,000 m3) on the orderbook, six will be delivered with dual-fuel engines by 2021.
Impact of dual-fuel LPG engines
As LPG propulsion engine reduces fuel consumption by 10%, sulphur dioxide emissions by 99%, particulate matter emissions by 90%, CO2 emissions by 15% and NOx emissions by 10% when compared with the conventional compliant fuel, it is a good alternative marine fuel for the 2030 IMO target for reducing emissions by 30% from 2008 levels.
LPG as a marine fuel for VLGCs offers multiple efficiency gains. Aiming to capitalise on these gains, BW LPG expects output efficiency to improve by as much as 11% for BW Gemini over the use of LSFO. Using LPG as a fuel will also result in easy storage and faster refuelling, decreasing the turnaround time for these vessels at ports. LPG as a marine fuel is also future-proof and cost-efficient. In addition to savings from reduced fuel consumption, the vessel is also protected from price sensitivity with dual-fuel flexibility.
Using LPG as a marine fuel will not require high investments on infrastructure as is the case with LNG. Most LPG loading/discharging terminals are capable of bunkering LPG-fuelled vessels as the fuel is not cryogenic and does not require complex technology. For offshore supply, there are over 500 small coaster vessels which can perform STS transfers making LPG an infrastructure-ready alternative marine fuel.
Is BW LPG the only one?
Although BW LPG is the first company to use dual-fuel propulsion, it is not the only one aiming to harness the benefits of this technology. A snapshot of the existing orderbook provides a key insight of the upcoming trend. New vessels, especially fully refrigerated, mid- to large- sized ships, are first in line for retrofitting. Both BW Gemini, with a capacity of 84,134 m3, and BW Leo (owned by BW LPG), with a capacity of 84,195 m3, were built in 2015. The trend, therefore, is obvious as an investment of US$9M along with two months of drydocking cannot be justified for older and smaller vessels.
Is the investment worth it?
The upfront cost of LPG propulsion retrofitting is significantly higher than that of scrubber retrofits with scrubbers costing anywhere between US$2M and US$3M per vessel. However, the direct impact can be seen in fuel consumption. Based on calculations by Drewry, there should be at least a 15% reduction in fuel consumption as compared with high-sulphur fuel oil and 12% reduction in fuel consumption as compared to low-sulphur fuel oil over the next five years.
While LPG is perhaps the best bet in terms of fuel consumption, it loses out on fuel costs. HSFO leads the tally by only 4% as compared with LPG and a whopping 32% when compared with compliant low-sulphur fuel. This makes LPG an ideal candidate among the three options, which is further affirmed by the earnings per day commanded by each vessel type. Based on our estimations and calculations, an LPG-fuelled vessel should overtake an HSFO-fuelled vessel by 2023.
According to Drewry’s assumptions of earnings and fuel consumption, when taking into account the US$9M upfront capital expenditure, the payback period for a newbuild vessel costing close to US$80M increases by about eight months. This presents a lucrative opportunity, as any earnings beyond that period would enhance the cash flows.
It makes both economic and environmental sense to switch to dual-fuel LPG engines, mainly for young or new mid- to large-sized vessels. BW LPG’s smart decision will give it the early mover advantage which may last for a while, as the other vessels will start making their way into the market at least a year after BW LPG.
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