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With the US shipping industry facing a period of upheaval and with tighter environmental restrictions coming into force over the next decade, the popularity of future marine fuels will rest upon commercial considerations. Many shipping firms have been forced to find innovative ways to preserve or recover margins eroded by lower shipping rates and higher overall costs.
Ship owners, fuel refiners, bunkering providers and other stakeholders are readying themselves for a new era of ship fuel, which is Liquefied Natural Gas (LNG).
Given the high capital costs involved with switching to greener fuels, substantial additional financing will be required in the years ahead, an additional hurdle that must be overcome.
With the huge supply of gas in North America depressing prices, LNG seems to be the only cost effective way to meet the dual challenges of lowering operating costs and meeting environmental standards.
The catalyst for change in the marine fuel market is environmental regulation, enacted by the International Maritime Organization (IMO). The designation of Emissions Control Areas (ECAs) represents the first step in the introduction of these rules. There are two ECAs in USA waters which place restrictions on sulfur oxide (SOx), nitrogen oxide (NOx) and particulate matter (PM) emissions. One of these came into full effect on 1 August 2012 (North America) and the other is scheduled to take full effect as of 1 January 2014 (US Caribbean Sea).
Ships traveling within ECAs must comply with sulfur emission limits set by the IMO. Within ECAs, marine fuels used must have a sulfur content of no more than 1 percent m/m, falling to 0.10 percent m/m on 1 January 2015. Outside of ECAs, the limit for bunker fuel sulfur content is 3.5 percent m/m, falling to 0.5 percent m/m on 1 January 2020. But some industry figures have called for the date of this review to be brought forward, in order to mitigate uncertainty and therefore it creates a degree of insecurity.
IMO rules also subject vessels to emissions standards for nitrogen oxides (NOx), which are applicable to diesel engines, and vary depending on the engine size and maximum operating speed. Particulate matter that emanates from the ship’s exhaust in the form of smoke or soot contains free radicals linked to cancer and respiratory problems. One of the greatest benefits of LNG-fuelled vessels is the elimination of this hazardous pollutant.
Alternative to changing fuels
As an alternative to adopting compliant fuel, ship operators can choose to fit exhaust gas cleaning systems or undertake other approved methods to cut SOx emissions. Such systems must reduce total SOx emissions to 6.0g SOx /kWh when within the ECA. Other key regulatory requirements instated by the IMO include the Energy Efficiency Design Index (EEDI) for new ships and the Ship Energy Efficiency Management Plan (SEEMP) for all ships. The EEDI will require all ships built from 1 January 2013 onwards to meet a minimum energy efficiency level per capacity mile. Reference levels will vary depending on ship type and size segment, and will be tightened every five years.
The rising cost of shipping
The adoption of MARPOL emissions regulations around USA waters caused increased prices for low sulfur fuels, ultimately pushing up the cost of shipping in the US in 2012. But in the latter months, the price fell to more normal levels. However, even at present levels the cost of low sulfur fuel compared to marine heavy fuel oil inflates the cost of shipping within ECAs substantially, so that ship owners will continue to consider alternative options.
Looking ahead at the longer term, opinions vary as to how the industry will respond to new more stringent environmental regulations. By 2018, the IMO will carry out a study to determine whether or not introducing a global 0.5 percent sulfur emissions cap by 2020 is feasible. But some argue that unless the industry picks one alternative now and invests in it, the switchover to lower sulfur fuels in 2020 is not practicable.
To comply with new regulations, here are some realistic options:
To continue burning traditional heavy fuel oil but to fit emissions abatement technologies.
To burn lower sulfur marine fuels i.e. marine diesel oil or marine gas oil.
To shift fuel-type to run on LNG.
After comparing the benefits of these different solutions, there is some consensus that LNG fuel is anticipated to be more cost-effective than using alternative low sulfur distillate fuels such as marine diesel. However, it is unclear which of abatement technologies or LNG is the most cost effective. While cost considerations are a major part of this decision, they are not the only factors at play. Some ship owners and shipbuilders are opting for a dual fuel solution, such as marine diesel and LNG, in order to hedge against the possibility of shortages.
LNG – a viable solution
Two important drivers make LNG an attractive alternative marine fuel. Firstly, the use of LNG reduces sulfur oxide (SOx) emissions by 90-95 percent. This brings emissions within limits mandated by the Emission Control Areas designated by the IMO. LNG also has a lower carbon content than traditional bunker fuels, giving of up to 25 percent less CO2 emissions.
Secondly, it is anticipated that the cost of LNG will be less than marine gas oil (MGO) or marine diesel oil (MDO). At present prices, utilizing LNG would yield significant cost savings for ship owners and operators. In the US, LNG costs about half as much as fuel oil, and it is anticipated that fuelling vessels with LNG could save up to 30 percent of fuel costs.
Long-term costs and benefits
LNG is likely to remain cheaper than other alternatives in the long-term, and data from the US Energy Information Administration Outlook supports this. When the cost of liquefaction and transportation are included in the price of natural gas, the economic case for LNG-fuelled vessels is even more compelling. But unfortunately, energy price forecasting is notoriously uncertain. Furthermore, demand for LNG is expected to increase, driven by exports to Asia and Europe. Using LNG as a marine fuel would mean compliance with long-term MARPOL requirements. LNG is the most effective in reducing sulfur, NOx, CO2 and Particulate Matter (PM) emissions, and is EEDI compliant.
Peppered with obstacles
The route to LNG becoming widely used in shipping is peppered with obstacles. The main issues concern the cost of initial investment, the availability of bunkering infrastructure and the cost efficiencies of LNG compared to other compliance solutions. A primary issue is the cost of building an LNG-fuelled vessel, or converting an existing vessel for LNG. Adopting LNG requires a purpose built engine or modifications to an existing one, as well as a significant investment in an LNG tank system. In addition, converting a heavy fuel oil ship to LNG or building an LNG ship means sacrificing TEU slots in comparison with traditionally fuelled carriers.
Lost capacity is mainly a concern when retrofitting ships and cannot be considered in isolation, but is just one of the factors ship owners will consider when deciding on which fuelling system to adopt in the future. Overall, the estimated cost for an LNG fuelled ship compared to an equivalent vessel is about 20-25 percent higher.
Delivering LNG bunkering on a global scale will require substantial investment from bunker service providers. While some European ports have plans to develop LNG bunkering infrastructure, North American ports have a long way to go.
Whether enough LNG can be supplied in order to meet demand is another concern. Given the abundance of reserves and current pricing levels, US demands can be easily met, and some firms are moving early to position themselves for the opportunities. Moreover, ship builders and bunkering operators are aware of the risks of methane slip, which occurs when any LNG gas that is not combusted is released.
Payback times for LNG
A study by Germanischer Lloyd & Man found that payback times for an LNG system are attractive compared to scrubber systems. The study also found that at price parity of HFO and LNG, based on energy content, payback time for the larger vessels is longer than 60 months. Under these conditions, the LNG system would break even only with 2020 IMO sulfur emissions regulations in effect. This supports the opinion that LNG is a long-term solution among ship owners.
Another factor enabling ship owners to make the decision to switch to LNG is its availability at European ports, which needs to be addressed if LNG-fuelled shipping is to take hold in the US. According to a study conducted by the Danish Maritime Authority recently, LNG-fuelled vessels in Northern Europe could be consuming up to 4 m tonnes per annum (mta) by 2020. This would require at least 11 LNG bunkering facilities around the Baltic and North Sea.
From an environmental as well as a cost perspective, the benefits of LNG are clear. Given the ageing state of many US ships, and news that low viscosity alternative fuels are causing erosion to engines designed for heavy fuel, appetite for LNG could increase faster in future. Demand for LNG fuel among deep sea vessels is expected to follow, depending heavily upon natural gas maintaining its price advantage over alternatives. Like Europe, the US may also make a transition to dual-fuelled ships.