Pinpointing the challenges, rewards and drivers of LNG as marine fuel

It was once said that changing is what people do when they have no options left. In the context of fuel for transport, changing from a reliance on oil-based fuel to alternatives now seems inevitable. Severe difficulties in using oil lie ahead. Regulatory, environmental and cost pressures are building that will change the type of fuel used for transport beyond all recognition. Of the available alternatives to oil as a marine fuel, LNG seems to hold most promise.

Simon Henry, Shell’s chief financial officer, has stated that his company intends to increase the use of LNG for transport projects to more than 5 million tonnes per annum (mta) over the next decade. One-half of that volume would be used to power shipping in the Great Lakes, the Gulf of Mexico and the Baltic Sea and the other half for trucking in the US and Canada.

The Danish Maritime Authority has reported that up to 4 mta of LNG could be used by vessels operating in northern Europe by 2020. It is not just the shipping industry that has turned its attention to the use of LNG as a fuel. Trains, trucks and aeroplanes may all use LNG, or natural gas, as a fuel in the future.

This article explores the issues as seen by lawyers involved in the LNG sector and also considers the pressures forcing shipowners and others in the shipping industry to consider LNG as a marine fuel.

Regulatory issues are likely to be a key driver in the growing use of LNG as a marine fuel. Shipowners now face a stark choice when planning their operations beyond 2015. Forward planning will be required to ensure the operations of their existing and newbuilding vessels are compliant with the post-2015 requirements.

In 2015 new international ship emission rules introduced as a revision of Annex VI to the Marine Pollution (Marpol) Convention will enter into force. The new requirements will reduce the maximum allowable sulphur content in ship fuels to 0.1 per cent when vessels are sailing in emission control areas (ECAs). Currently ECAs cover the Baltic Sea and the North Sea, including the English Channel as far west as Falmouth. The North American ECA has been in force since 2012 and the US Caribbean ECA will enter into force next year around Puerto Rico and the US Virgin Islands.

The vast majority of merchant ships will enter an ECA at some point during their lifetimes. Indeed many ships, including ferries, offshore support vessels and shortsea and coastal cargo vessels, may spend their entire lives trading within an ECA.

Parties to the Marpol Convention can establish new ECAs and such new areas are expected to be declared in the Mediterranean, Australia and the Far East in the years ahead. Det Norske Veritas (DNV), the classification society, has estimated that the Marpol ECA limits will affect about 40 per cent of the world’s fleet, with larger ships probably being affected the least.

In addition to the 2015 ECA sulphur limit of 0.1 per cent for ship fuel, a global requirement of a 0.5 per cent maximum sulphur content will be applied in all areas outside the ECAs from either 2020 or 2025.

Compliance with the provisions of Annex VI is achieved through periodic inspections and surveys by both flag state administrations and port state control. Upon passing the flag state surveys, the ship is issued with an International Air Pollution Prevention Certificate which is valid for up to five years and is essential for trading.

For shipowners today the options for compliance with Marpol are effectively limited to:

• operating on low-sulphur fuels/distillates

• operating on high-sulphur fuel but in tandem with an installed scrubber; as an example of the latter equipment, a seawater scrubber uses sea water to wash sulphur out of the ship’s exhaust gases

• operating on natural gas supplied as LNG; burning natural gas reduces sulphur oxide emission levels to virtually zero

• operating on alternative fuels such as biofuels or methanol (dimethylether (DME)).

Each option has advantages and disadvantages. Low-sulphur marine gas oil (LSMGO), for example, is already very expensive. When 2015 arrives and demand spikes, this could come to be regarded as an unacceptably expensive alternative as shipowners may be unable to pass the additional costs on to their customers, either in whole or in part.

The installation of exhaust gas scrubbers requires modification to the ship, and concerns have been voiced in some quarters that these devices are not yet sufficiently reliable for continuous use. Such is the concern that the UK government has agreed to work with the shipping industry, class societies and producers of abatement equipment to consider the legislative and enforcement issues in relation to exhaust gas cleaning systems. The issues include clarification of the ‘temporary breakdown’ exemption under Annex VI and a new EU regulation which will set out the actions to be taken by a shipowner/operator to avoid/minimise any prosecution by national authorities for breach of Marpol requirements.

Biofuels appear to be too expensive to compete currently and DME presents its own challenges, including handling problems and high production costs. The use of LNG faces similar hurdles in that upfront costs will need to be met in order to provide the ship with LNG bunker tanks and equipment to prepare the cryogenic liquid for introduction as natural gas into the propulsion system. The availability of LNG bunkering infrastructure in port is another issue.

However, if these latter obstacles can be overcome, LNG represents a more environment-friendly fuel than the other types of marine fuel available. For example, when compared with oil, LNG gives off 20-25 per cent less carbon dioxide, 80-90 per cent less nitrogen dioxide, 100 per cent less sulphur dioxide and 100 per cent less soot and particles. By using LNG as a marine fuel, compliance with Marpol in 2015 and beyond will not be a problem.

Although older ships can be retrofitted to use LNG, it is expensive and extra space would be required for the large, insulated tank required to store the LNG on board. LNG tanks take up about twice as much space as oil tanks on an energy equivalency basis. There are also the costs associated with converting an oil-burning engine to also be able to run on gas to take into account.

Therefore the LNG retrofit option is not likely to be pursued by many owners of older ships. The choice of the LNG fuel option is much more likely to be specified for newbuildings. Even newly built LNG-powered ships, however, could entail capital costs 10-20 per cent higher than those for traditional oil-fuelled ships.

Although natural gas might be cheaper than oil, the upfront costs of LNG-powered ships will be greater and this might be a barrier to investment. Rather than having only LNG tanks, new ships could also be provided with oil fuel tanks and dual-fuel engines. In this way ships would be able to use LNG when it is available or required and burn low sulphur marine fuel the rest of the time. This may become a preferred option, particularly until it is clear that LNG will be readily available to enable ships to rely on it as a permanent fuel.

Fuel pricing is another key issue for shipowners to bear in mind when choosing the future fuel and propulsion system for their ships. Currently the price of natural gas is lower than the price of alternative fuels. In order for gas to be used as a viable marine fuel, it must be liquefied. Although the cost of the dedicated infrastructure needed to facilitate the use of LNG as a marine fuel is expensive, LNG is still a viable fuel as a result of the comparatively low price of natural gas.

Traditionally LNG carriers have been powered by the boil-off gas from the LNG transported in the cargo tanks. However, in the more recent past, when fuel oil was thought to be a cheaper option than using boil-off gas, the large Q-flex and Q-max LNG carriers built to carry Qatari exports were specified with oil-burning diesel engines and reliquefaction plants to process the boil-off gas and send it back to the tanks as liquid cargo. More recently, the price of oil fuel has climbed again, to the extent that the owners and charterers of the Q-flex and Q-max ships are considering converting the oil-burning engines to also run on gas to enable the use of the boil-off gas to power the ships.

The main drawback to using LNG as a marine fuel is the lack of infrastructure to support LNG bunkering and the expense of developing such infrastructure. There is currently only a small number of LNG carriers under 20,000m3 in size and none of these is specifically equipped to function as a dedicated LNG bunkering vessel. If LNG is not available at ports where ships typically berth, then it will not be possible for those ships to bunker LNG fuel.

The situation is a classic chicken and egg dilemma. For obvious reasons bunkering facility developers do not want to provide the necessary infrastructure without a guaranteed market, and shipowners will be unlikely to want to use LNG as a marine fuel until the infrastructure is in place.

Nevertheless progress is being made in relation to the use of LNG as marine fuel and momentum is building. Gasnor, the Norwegian gas distribution company, has entered into an agreement with GDF Suez to purchase 46,000 tonnes per annum of LNG. GDF will provide the LNG in road tankers and small coastal LNG carriers. The additional LNG will allow Gasnor to continue to expand its current activities in the provision of bunkering facilities for 30 LNG-fuelled ships in Norway.

Gasnor is also seeking to expand this role and supply LNG as a transport fuel in other parts of Europe. The company has agreed to provide bunkering services at Elbehafen in Germany, where the LNG will initially be delivered to seagoing vessels and bunkering barges by LNG tank trucks until storage tanks can be built. These developments indicate that if bunkering facilities are available, then shipowners will consider the use of LNG as a fuel.

The energy major Shell, which is now marketing as much gas as it is oil, is investing heavily in the use of LNG as a transport fuel. As well as spending US$450 million on fuelling stations for LNG-powered trucks in Canada, the company has also acquired all the outstanding shares in Gasnor beyond the 4.1 per cent equity stake it originally held.

Shell has also signed up to become the first customer of the new break-bulk LNG terminal that Vopak and Gasunie are building close to their Gate LNG import facility at Maasvlakte in the port of Rotterdam. The import and break-bulk terminals will be connected by pipeline, and Gate will pipe LNG to the new small-scale terminal.

The break-bulk terminal will have the ability to load coastal LNG carriers in the 7,500-20,000m3 range, LNG bunker barges of 1,000-10,000m3 and 50m3 LNG road tankers. This Maasvlakte terminal will bring Western Europe one step closer to having a viable LNG bunkering option.

Other ports are poised to join the LNG bunkering community. It is reported that the new Singapore LNG terminal, shortly to be commissioned, will be providing an LNG bunkering service by 2014. Announcements also suggest that an LNG bunkering facility is being developed in Zeebrugge while a number of new small-scale LNG terminals could be operational in Poland, Estonia, Germany, Sweden and Finland over the next few years. LNG bunkering facilities will also be required in North America as a result of recent orders in the US and Canada for LNG-fuelled offshore support vessels, container ships and ferries. China is another country set to play host to a range of LNG-powered ships, including on the Yangtze and other river systems.

Other players are also taking on important roles. DNV and Korea Gas Corp (Kogas), for example, recently agreed to carry out a study on the feasibility of developing LNG bunkering facilities in Korea. In a statement the parties said the study would be “one of largest and most comprehensive feasibility studies ever initiated in the worldwide LNG bunkering industry”.

Once the LNG bunkering infrastructure has been developed, there are a number of additional issues that will need to be considered. With an increase in LNG bunkering it will be necessary to develop global regulations covering LNG bunkering design and operational aspects.

There is currently a lack of operational protocol in the LNG bunkering industry. Training would be required for both the port authorities and the bunkering vessel and ship crews who handle the LNG. Because one of the key drivers for using LNG as a marine fuel is to cut emissions, it should be noted that any release of methane during bunkering services will need to be avoided. It will be imperative to ensure that correct operational procedures are used to maintain the exemplary safety record established by the overall LNG shipping industry.

The good news is that initiatives and investments continue to be made, which demonstrates confidence that LNG fuel will be the answer for many new ships built over the coming years. Viking Line’s 56,000 gt ferry Viking Grace, which was recently commissioned on the route between Turku and Stockholm in the Baltic Sea, has dual-fuel engines using LNG.

Elsewhere Lloyd’s Register, in collaboration with Cosco and Golden Union, has developed a design for a Kamsarmax bulk carrier. Orders for other types of ship powered by LNG, including fast ferries, ropax ferries, patrol vessels, container ships and gas tankers that are not LNG carriers, are now being logged on a regular basis.

Most commentators admit that LNG will not be suitable as a fuel for all ships. For example, DNV in its 2010 report Pathways to low carbon shipping states that LNG-fuelled engines “are most cost-effective for smaller ships such as reefers and general cargo vessels. For 17 out of the 59 vessel types (considered) it is cost-effective to install gas-fuelled engines.”

Notwithstanding the disadvantages for some ship types, the drive to develop gas-burning engines and LNG-powered ships is undoubtedly gathering pace. In addition LNG is being actively considered for larger sized vessels.

That said, for the moment at least, the main projects being discussed or developed are for small vessels. Hector Sewell, head of marine business development for Lloyd’s Register, has been quoted as saying, “Despite the excitement, there has yet to be an order for a deepsea, large-engined, LNG-fuelled ship.” Torben Skaanild, secretary general of the shipping association BIMCO, has said that he believes a significant shift to LNG as marine fuel will be a “2025 scenario”.

Although the use of LNG as marine fuel in small ships is beginning to flourish in certain parts of the world, it would seem that, due to LNG bunkering infrastructure constraints and the issues associated with the storage of LNG bunkers on board ship, it could be several years before we see large ships refuelling with LNG.

In the longer term, however, using LNG as marine fuel may become the preferred option for a much wider range of ships. With major LNG and natural gas players seeking to get ahead of the curve, it will be interesting to see how LNG bunkering develops in the future and whether the current first movers are proved to be successful. LNG