Expect 2020 to be a watershed year for small-scale LNG supply as more gaps are plugged
With a total of 18 LNG-powered cruise ships under construction, the supply chain for the fuel is in a race against time to meet a demand that threatens to go through the roof.
In early 2019 there were just six bunkering vessels around the world, hardly enough to supply the coming fleet of LNG-fuelled cruise ships, not to mention container, roro and other vessels that are being converted or designed from scratch for the low-emission gas.
Indeed, as energy consultancy Enerdynamic’s Christina Nagy McKenna, a veteran of the US energy industry, highlighted in a 2019 paper entitled The role of small-scale LNG in gas markets, those six bunkering vessels are already fully occupied in pumping gas to existing customers. The future, she predicts, lies with pockets of LNG supply.
“The next big thing in the natural gas industry is small: small-scale LNG,” she writes. “In order to be successful in this industry, [big energy companies] must figure out how to bring LNG supplies to areas where infrastructure may not exist but where demand is growing.”
Her words are echoed by Carnival’s senior vice-president of maritime affairs Tom Strang who says: “The challenge for us is getting fuel to where it is needed.” Carnival has gone some way to solving the problem by signing a contract with Shell under which the oil and gas giant will provide a supply and distribution infrastructure that will scale up as the cruise company’s LNG-fuelled vessels hit the water in coming years.
The shipping industry’s demand for LNG will grow at a spectacular rate of 3% a year for the next 15 years, according to consultancy McKinsey’s global gas and LNG outlook to 2035. “[That is] well above the growth of overall gas demand, which is projected at 1% cent a year,” McKinsey predicts, pointing out however that “LNG’s widespread use as a marine transport fuel is primarily constrained by limited LNG bunkering infrastructure.”
To fulfil booming demand, as McKinsey explains, port-side and floating infrastructure will have to catch up and here the consultancy’s detailed predictions identify a key factor – namely, LNG’s lower cost relative to that of very low sulphur fuel oil (VLSFO). “In all [scenarios] LNG remains far likelier to be more economical than VLSFO for LNG carriers for several reasons,” the consultancy says.
First, VLSFO would experience a significant increase in demand after the low-emissions regulations go into effect and marginal producers would produce VLSFO at a price of 16.0%-17.0% of Brent Crude on a basis of a million British thermal units (mmbtu). Second, Brent Index-contracted LNG is priced below VLSFO prices. Third, Asia-delivered ex-ship spot prices are linked to the delivered cost of American LNG cargoes to Asia, which are expected to average US$7-US$8 per mmbtu in the base-case scenario. And finally, concludes the consultancy in a largely optimistic outlook for the fuel, “most LNG carriers can begin using boil-off gas as fuel today without further modifications.”
The combined effect of these powerful influences will inevitably put pressure on port authorities and bunkering companies to rise to the challenge and plug the gaps in the supply chain as quickly as possible.
And that looks to be happening. Spanish group Repsol, whose director for wholesale and gas trading Laura Rejón Pérez sees gas “as a key fuel in the energy transition”, is developing bunkering services in the Mediterranean that will provide a long-term supply solution for Brittany Ferries’ LNG-fuelled vessels. Starting in 2022 when Brittany Ferries’ second LNG-powered ship, Salamanca, enters service, Repsol plans to build supply stations at any Spanish port, according to demand, the company announced earlier this year. “[This] is a business the company wants to focus on, both for one-off supplies and in long-duration contracts,” said Ms Rejón Pérez.
Repsol is not a newcomer in LNG bunkering, but it now plans to boost its port-side LNG infrastructure in the Mediterranean as distinct from deliveries via tanker trucks, its previous practice. Until now, explains Ms Rejón Pérez, Repsol has mainly relied on trucks that pull up alongside the receiving boat or supply directly from the terminal.
However, to service Brittany Ferries, Repsol will establish intermediate storage facilities that guarantee supply. For instance, at Santander and Bilbao truck-filled tanks will be installed to refuel the ferries.
Fixed sea routes make shore-side infrastructure more viable because a certain level of activity is guaranteed to justify medium- and long-term contracts. However, Repsol also sees value in one-off demand.
As Ms Rejón Pérez explained, Spain is poised to play an important role in the building of the region’s LNG supply chain. “The main challenge for making LNG a global marine fuel is guaranteeing supply to shipping lines and, up to now, the infrastructures were being developed mainly in North America and northern Europe,” she said. “[However] Spain’s logistics system has an ideal geographic location for suppling both Atlantic and Mediterranean traffic.”
Meantime, rival energy groups such as France’s Engie find they are almost overwhelmed by demand. In the first six months of 2019, its two terminals at Fos Cavaou and Montoir-de-Bretagne, operated by its subsidiary Elengy, posted what it called “giddy growth”, with 115 LNG carriers docking and a 40% increase in loaded trucks compared with the comparable period in 2018. “These results clearly demonstrate that LNG is an essential resource for the future and that Elengy is fully consolidating its status as the leader of LNG terminalling in Europe,” claimed the company in a release in July.
For the longer term, Elengy sees its terminal at Montoir-de-Bretagne, where two LNG carriers can moor simultaneously, as a key hub for northwest Europe. Originally designed to unload and regasify LNG brought by ship from countries like Algeria, Nigeria, Norway or Qatar, the terminal now offers ship reloading services from its own LNG tanks and direct trans-shipments of cargo between two vessels.
The gaps in the small-scale supply chain remain considerable though, as classification society DNV GL points out. “There are virtually no integrated networks [such as in the long-standing chemical logistics industry] established for the distribution of LNG,” the group said in an analysis in April. “This makes it difficult to transport gas cost-effectively between suppliers and customers, particularly when relatively small volumes and remote or unfrequented locations are involved.”
As the analysis adds, such cases of stranded demand include a steadily growing number of ship operators that would use LNG as a fuel, provided they were confident of its availability. “Conversions [to LNG] are being stalled due to a lack of options for LNG bunkering,” the chief executive of Avenir LNG Andrew Pickering told DNV GL. “What owners require more than anything else is the confidence that they can obtain fuel when they need it – and today that isn’t there.”
And while forecasters often refer to the chicken-and-egg problem in LNG infrastructure – that is, supply chasing demand and vice versa – a steadily growing LNG-powered global fleet will likely trigger an expansion of floating supply ships. According to the Iberian Association of Natural Gas for Mobility (Gasnam), the worldwide fleet will grow by 87% by the end of next year – that is, from the 136 ships in operation in 2018 to 254.
A falling cost of LNG may also be decisive. According to current calculations, low-sulphur fuel oil (LSFO) costs about 40% more than heavy fuel oil (HFO) compared with 20% more for LNG.
Avenir LNG’s ambition to become a key supplier of small-scale LNG will take a big step forward with the delivery of two dual-fuel LNG bunker vessels in late 2019 and early 2020, followed by two more vessels to be delivered in late 2020. Along with major investors Stolt-Nielsen with 45%, Golar LNG and Höeg LNG (each with 22.5%), Avenir will invest a combined US$182M in small-scale infrastructure, including an 80%-stake in an LNG terminal and distribution facility that is under development in Oristano, Sardinia, due to come online in mid-2020. And a year after that, Avenir expects to ship LNG from Kent in the south of England up to Scotland, replacing fleets of trucks.
Avenir places a lot of its hopes in the plugging of the supply gap. As DNV GL points out, its vessels should go some way to solving the chicken-and-egg dilemma. “Fleet operators won’t switch to gas if they cannot be confident of supply, while suppliers won’t invest if they don’t see sufficient demand,” the society said in its analysis. “Avenir LNG thinks it has found a way to crack the problem and make small-scale LNG distribution to ports not served by pipelines a reality.”
Another energy giant that has seen the small (and big)-scale future for LNG is Shell, which will charter an articulated tug barge (ATB), claimed to be the world’s first, when it enters service in early 2020. The barge is under construction for Q-LNG at VT Halter Marine in Pascagoula, Mississippi. The ATB is a hybrid design that consists of a dedicated tug and purpose-designed hull, featuring a notched stern and coupling system.
The ATB will bunker dual-fuel ships from 2020 under a long-term contract with Shell that has pledged to deliver LNG to various ports in Florida and southeast US. For starters, the barge will supply two Carnival ships of 180,000 grt and two Volkswagen car and truck carriers sailing from Europe.
As well as stranded demand, DNV GL sees weaknesses in what it calls “stranded supply”. Few large terminals are set up to cater for smaller LNG carriers, a deficiency that Avenir hopes to rectify by tapping under-used floating storage and regasification units (FSRUs) anchored near areas of stranded demand.
As small-scale LNG infrastructure takes shape, Avenir believes it will happen through versatile vessels rather than stationary bunkering ships. As chief executive Mr Pickering told DNV GL: “We took the opposite approach to our competitors [in the design of our ships]. We consider them first and foremost as transport vessels, not bunkering ships, and that’s what drove the design.” All the main elements – hull form, dual-fuel engines and propulsion arrangement, fuel system and auxiliaries – were chosen so the vessels were proper sea-going ships.
The bunkering elements were obviously top priority. As well as sophisticated boil-off gas management, bunkering functionality will come from powerful pumping capacity, ship-to-ship transfer equipment and high manoeuvrability, so the vessels can approach receiving ships and find their way into smaller customer sites.
Avenir is looking to the future. The current business model is based on supplying customers on terra firma – power plants and industry – but Avenir expects to capitalise on the steady development of LNG marine bunkering. “The appetite for LNG as a fuel for ships is picking up,” Mr Pickering told DNV GL. “We envisage that the market in a few years will look very different from today, with more local import and storage facilities [that will] make LNG increasingly accessible and appealing to shipping.”
Despite the ground yet to be made up, at the current rate of growth that prediction seems safe enough.