As the 2020 deadline for lower emissions looms ever closer, shipowners increasingly prefer to install LNG propulsion in new ships rather than retrofit existing ones, according to just-released research by the Oxford Institute for Energy Studies.
The numbers show that just eight of the current global LNG-fuelled fleet of 143 vessels are retrofits – all the rest are newbuilds, said the 60-page study entitled LNG supply chains and the development of LNG as a shipping fuel in northern Europe.
Further, all of the eight vessels are larger ships – four ferries, three oil product/chemical tankers, and a container ship. In short, vessels with high fuel consumption.
And that looks to be the trend for the future. The evidence shows that shipowners increasingly prefer to invest in new LNG-fuelled vessels rather than retrofit LNG-fuelled propulsion systems to existing vessels, the paper concluded.
Among other things, this suggests a steady rather than spectacular adoption of LNG by the marine sector. “Given that vessels have lifespans of several decades, and that the size of the LNG-fuelled fleet is growing year-on-year, this leads to the conclusion that LNG is being phased into the marine shipping sector,” the paper argued. “Consequently, demand for LNG as a shipping fuel is likely to rise at a steady pace rather than in a sudden ‘big bang’.”
In the long run, the steady-as-she-goes approach should be beneficial because it will allow time to develop the necessary additional infrastructure. Just as importantly, it should lead to steady LNG pricing by “preventing demand for marine fuel from acting as a source of volatility on the global LNG market”.
One of the many factors in a retrofit decision is the vessel’s home waters, particularly if it spends most of its time in an emissions control area (ECA) with much stricter regulations. If a ship never leaves the area, the main consideration is the cost of low-sulphur fuel such as marine gasoil compared with the capital investment in an LNG-fuelled power unit or, alternatively, in a suitable scrubber. That is because it vitally affects payback times.
And here the numbers favour LNG, noted the study. Interestingly, LNG bunker fuel in northwest Europe has not only consistently traded at a substantial discount to low-sulphur marine gasoil (LSMGO) but has also competed on price with heavy fuel oil 180/380 (HFO), the study showed. In 2018, for example, LNG averaged US$220 per tonne less than ECA-compliant LSMGO. Even more surprisingly, the price hovered between US$64 – US$38 a tonne lower than HFO 180/380.
Despite the late-2018 fall in oil prices, LNG still sold on average at US$120 a tonne cheaper than LSMGO in December. Thus, LNG has come out well overall: “Even with strongly declining oil prices in Q4 2018, LNG retained a substantial discount relative to LSMGO – and remained competitive with HFO.”
Another important consideration in a retrofit is the size of the ship – the bigger the vessel, naturally the more expensive it is. “The cost of retrofitting to run on LNG or of installing a scrubber varies dramatically according to vessel size,” the study said.
The numbers are enlightening. According to Clean Marine Energy, cited in the study, a vessel consuming five tonnes of marine gasoil a day would cost US$6M to retrofit while a large vessel chewing up 80 tonnes a day would cost a hefty US$22M or so to convert.
But how long would it take to recoup that investment? An educated estimate based on LNG staying around US$200 a tonne cheaper than LSMGO suggests it would take a ship using five tonnes of fuel a day exactly 16.4 years to recoup the US$6M spent on LNG propulsion. The proposition improves greatly for the vessel eating up 80 tonnes a day – in that case it would take just 3.8 years to recover the US$22M.
As for scrubbers, because they are cheaper to install than a whole new propulsion system, the payback comes about three times faster. In both options, the numbers are far less favourable for vessels that spend, say, only half their time in an ECA.
Meantime whatever the payback time, the hefty capital investment required in a retrofit is a major deterrent for shipowners. “[It] has largely dissuaded vessel owners from retrofitting their existing vessels with either scrubbers or LNG propulsion,” the study reported. For evidence, it cited the relatively few ships that are having scrubbers or LNG engines installed as a percentage of the global fleet.
The economics change significantly in favour of newbuilds. Because it is cheaper to install scrubbers as well as LNG propulsion on newbuilds than existing ones, the payback period is shorter. Fearnley LNG estimates, for example, that it would cost US$28M to convert an existing 8,500-TEU container ship to LNG compared with US$13M for an equivalent-sized new one.
Finally, assuming similar differences in price between LNG and IMO-compliant fuel oil and gasoil, the study predicts LNG will be the best choice in northern Europe – and probably in other low-emission zones – from 2021 onwards.