Studies from UCL’s Energy Institute and the International Council on Clean Transportation (ICCT) highlight the potentially heavy cost and environmental impact of LNG as a ’transition fuel’ in shipping
With multiple market forces fuelling an orderbook run that is increasingly made up of LNG-fuelled ships, the combined LNG-burning fleet that will be operational in 2030 is at risk of financial losses of US$850Bn, according to a new study by UCL Energy Institute researchers.
The UCL study, in line with many others, shows a boom in ordering of LNG vessels over recent years, with 65% of the newbuilding deliveries by 2025 being capable of running on LNG as a marine fuel, up from only 10% a couple of years ago. And the report’s findings are modelled on continued strong ordering of LNG-capable vessels throughout the remainder of the 2020s.
The study’s analysis suggests the additional cost of building LNG-capable assets, identified as vessels equipped with LNG dual-fuel or LNG multi-fuel engines, is what is behind the projected reductions in asset values.
While policy and competition will have an effect on the asset values of all ships running on fossil fuels, the cost to shipowners for multi-fuel, LNG-ready engines will, the study said, lead to asset values for these vessels that would eventually decline to match the value of similarly aged but lower-cost conventional vessels built to run on fuel oil.
However, with the LNG fleet still relatively small compared to the total number of vessels in the global fleet, the study shows there is still time to mitigate the risk of the potential stranded value it projects.
The study finds the total asset value at risk can be limited by 75-85% – decreasing from US$850Bn to between US$129Bn-US$210Bn. The key to limiting the stranded asset value risk would, however, require changes. One measure to limit the risk would be for LNG-capable vessels to be retrofitted to run on "scalable zero-emissions fuels" such as hydrogen and fuels like ammonia that could be generated using hydrogen.
The study also suggests that governments should not use public funding in a way that would exacerbate the creation of stranded value on vessel assets, and it identifies methods that investors can use to identify the risks to shipping assets.
"Shipowners and financiers should consider not ordering LNG-capable ships and investing in conventionally fuelled ships which are designed for retrofit to zero-emissions fuels. For existing LNG-capable ships, investors should consider ways to manage the risk of stranded value – eg factoring in the cost of retrofit or other actions to remain compliant at the point of newbuild or using a steeper than linear depreciation curve," the study said.
For policy makers, they said clarity on forthcoming regulations is urgently needed, particularly regarding how methane emissions will be considered to allow investors in both existing ships and newbuilds to anticipate the potential impact of the regulation on asset values.
In terms of the environmental costs of running vessels on LNG as a fuel, the study said evidence was mounting against the fuel’s ability to lower total greenhouse gas (GHG) emissions.
"LNG has been portrayed as a transitional fuel for the shipping sector, but there is growing scientific evidence that shows the environmental benefits are limited, if not negative, compared to low sulphur heavy fuel oil, when considering a full lifecycle analysis of emissions and accounting for greenhouse gases (GHG) emissions," the study said.
"The least-cost pathway for shipping to meet its required shift away from fossil fuels is to a mix of electrification in shortsea shipping, and the use of scalable hydrogen and hydrogen-derived fuels such as ammonia and methanol for deepsea shipping."
Another recent report critical of the environmental credentials of LNG comes from the non-profit transport decarbonisation policy think tank ICCT.
The ICCT report takes issue with ’assumptions’ underlying policy-based support of LNG as a fuel and the shipping industry’s rapid uptake of LNG-fuelled engines.
"The idea that liquefied natural gas (LNG) can help mitigate the climate impacts of the maritime shipping sector rests on the assumptions that ships can switch to bio and e-LNG (renewable LNG) in the future and that switching would result in low GHG emissions," a briefing on the report said.
For that scenario to materialise in the shipping sector, ICCT said there must be adequate supply of renewable LNG for future demand and enough use of renewable LNG to result in a substantial reduction in lifecyle GHG emissions compared with fossil-based LNG.
Using renewable LNG could cut well-to-wake CO2 emissions by 38% based on 100-year global warming potentials (GWP) but raise emissions 6% based on 20-year GWP because of methane’s strong near-term warming effects, the report showed.
"Even using 100% renewable LNG doubles methane emissions compared with 2019; this is primarily because of methane slip from marine engines," the ICCT said.
"For renewable LNG to significantly contribute to achieving climate goals, methane slip from marine engines needs to be virtually eliminated and methane leaks upstream need to be greatly reduced. Additionally, methane leaks from onboard fuel tanks and cargo tanks, which researchers are still working to adequately quantify, would need to be near zero. It is important for policymakers and stakeholders to understand that other fuels, including synthetic diesel and green methanol, could offer low lifecycle emissions without the methane problem."
The ICCT report modelled three scenarios showing outcomes if the EU offered different levels of subsidies for use of renewable LNG.
According to the ICCT’s projections, a scenario in which the market set rates and the EU offered no subsidy for renewable LNG, LNG demand would be met using 100% fossil-based LNG. According to the ICCT, this scenario would result in a tripling of well-to-wake GHG emissions from LNG-fuelled ships compared with 2019 levels.
At a subsidy of €25 per gigajoule (US$25/GJ), equivalent to €1,200 per tonne of LNG, which is the current mid-range level of EU policy support for grid-injected biomethane, only 4% of LNG demand would be met with renewable LNG. In that scenario, well-to-wake GHG emissions would still approximately triple from 2019 levels, according to ICCT.
"Only LNG made using inexpensive landfill gas would be cost-competitive with fossil LNG in 2030 and, unfortunately, this feedstock is in limited supply," the ICCT report said.
Doubling the EU’s subsidy to €50/GJ would create price parity between fossil-based LNG and the more expensive e-LNG and LNG biofuels made from agricultural residues, enabling the use of 100% renewable LNG. However, this level of price support would require annual public expenditure of €17.8Bn in 2030, according to ICCT’s projections.
Maritime LNG fuel lobby SEA-LNG took issue with the ICCT report, saying the report "makes flawed assumptions based on outdated data".
"The ICCT significantly understates the potential availability of bio-LNG for shipping in Europe and overstates its costs. It estimates a maximum of 700 peta joules (PJ) of bio
LNG could be available in 2030 if shipowners, operators, and charterers are willing to pay up to €216/GJ (US$213). This is implausible when current volumes of European biomethane production are 690 PJ - from anaerobic digestion, only - at a cost of €14-25/GJ - according to the European Biogas Association," SEA-LNG said.
While SEA-LNG agreed with ICCT’s assertion that renewable LNG will be expensive, the lobby group said the ICCT report did not include information showing that production of renewable hydrogen feedstock – necessary for all e-fuels – would be expensive.
"The ICCT’s forecast that Europe will need approximately €18Bn annually of public support for the LNG pathway in 2030 is based on these flawed figures," SEA-LNG said.
The Maritime Hybrid, Electric & Hydrogen Fuel Cells Conference, Bergen will be held 25 October 2022. Details and tickets can be found here
Want to know more about alternative fuels? Browse Riviera Maritime Media’s free webinar library.
© 2023 Riviera Maritime Media Ltd.