Pacific Maritime Magazine - Marine Business for the Operations Sector

LNG: A Brief Review of 2014 and a Look Ahead

 


As the year ends, thoughts invariably turn to reflection on progress, unfulfilled optimism and the outlook for the continued movement to LNG. As a general statement, LNG continues to gain acceptance throughout the marine industry and it is no longer seen as a novel concept. Producers and suppliers are also becoming more interested in finding domestic uses for this gas, and some are working diligently to break down the market barriers between their industry and marine operators. With that in mind, I offer some observations on developments in 2014 and identify several issues that could affect the future growth of LNG.

The United States

In the United States, 2014 was less a “breakout” year than a continuation of the same cautious steps toward adoption of LNG in the marine and transportation industries. All of the previously announced LNG vessel construction projects – Harvey Gulf Marine, Tote, Crowley, Matson – continue toward completion, with the first LNG-powered vessels entering service in 2015. By 2019, every offshore Jones Act market will be served by LNG vessels, which is additional evidence of progress. There are also very positive indications from Washington State Ferries and the Staten Island Ferry that they will move forward with new vessels, so an entirely new class of vessels may be introduced. All of this activity constitutes an assured demand for LNG, and efforts are underway in Port Fourchon, Jacksonville, and Tacoma to construct the necessary infrastructure.

The United States Coast Guard (USCG) continues its forward-leaning efforts to craft the appropriate regulatory structures to allow these projects to move forward, as does the International Maritime Organization (IMO) and classification societies. Finally, there is growing interest among suppliers in commercial opportunities in the marine industries and they are actively exploring ways to move forward ahead of specific vessel projects.

Tempering these positive steps is the fact that no new marine LNG projects were announced in the US, raising a concern that momentum may be lagging. All of the major Jones Act deep sea operators have committed to LNG, and with the sale of Horizon Lines to two companies that have new vessels on order, the last remaining operator is effectively removed from the picture.

There does not seem to be interest by vessel owners to move to LNG capability on any of the product tankers now under construction, which is a potential demand that remains unrealized. It may be possible for the charterers of these vessels, many of whom are also involved in natural gas production or transportation, to provide incentives for these new product tankers to be outfitted with full LNG capability upon delivery. So far, however, this has not happened. Similarly, there has not been significant movement to LNG in the inland and offshore barge industries, or among the harbor services sector either.

Some of this hesitation may be based on economic analyses that suggest the premium cost of converting to LNG will not produce the same return on investment (ROI) found among ocean going vessels, irrespective of the emissions gains and other “non-economic” aspects of LNG. But, apparently other nations have come to a different conclusion about the viability of LNG for their inland sectors.

Even in the projects that are moving forward in Jacksonville and Tacoma, it appears that the infrastructure development is lagging behind the ship construction, due at least partially to the continuing regulatory uncertainties and permitting issues. This creates a potential dilemma when the new ships enter service since the owners will have to either arrange for an interim supply chain, possibly using over-the-road trucks, or purchase much higher cost ECA-compliant fuel. Both choices, albeit temporary, are suboptimal, since one involves additional complexities and operational risks and the other significantly changes the operating costs of the new vessels.

With the exception of those ports where LNG vessels will start calling in 2015, we have not seen any of the other major US ports stepping forward in a meaningful way to promote LNG as an emissions compliance strategy and a means to preserve competitive advantages in anticipation of major international carriers moving to LNG. This appears to be more of the “Alphonse and Gaston” phenomenon where all the players, operators, ports, and gas suppliers, are waiting for one to go first, leading to the stasis we have seen elsewhere. Fifty five percent of all container vessels in the United States call on just ten ports. If one accepts the inevitability of LNG in the global marine industry, certainly within the next decade, it seems logical that ports would begin the process now to be positioned to serve the international community.

Europe and Elsewhere

Meanwhile other nations are embracing the transition to LNG with national policies to promote the transition. Europe’s multi-faceted approach to marine LNG is producing tangible results, and there will be multiple LNG bunkering stations in operation next year. The initial aggressive schedule for LNG infrastructure encountered resistance among members of the European Union (EU), who were concerned about the feasibility of establishing LNG bunkering infrastructure in all deep sea ports by 2020. When asked to ratify the schedule, the 25-member states modified the original goal to delay until 2025 the mandate that all ports have infrastructure. In taking this action, however, all of the states agreed to “ensure that an appropriate number of refueling points for LNG are put in place” by 2025. This is further evidence of the power of defined national goals and unanimous concurrence from all EU member states to create momentum.

Singapore has also announced formal policies to move forward with LNG infrastructure and preserve its position as the largest bunkering port in South Asia. And, in a clear message with regard to what Singapore perceives is the locus of LNG-related activities, it is in discussions with Rotterdam and Zeebrugge on the harmonization of LNG bunkering rules and procedures.

A development that was surprising to me is the emergence of China, which has been developing LNG for several years. The Chinese actions are significant, given China’s large internal market and its proven record of setting and achieving industrial goals. One needs only to look at the solar panel industry, or shipbuilding, to understand the impact China could have on the global LNG industry if it becomes a national commitment on the part of the government.

A critical element in the Chinese decision to aggressively pursue LNG is the growing concern with the environment; particularly air emissions that, in addition to leading to serious health issues, cast China in a negative light. The recent bi-lateral agreement regarding global warming is evidence of this, but after I had the opportunity to meet with a delegation from the Chinese Ministry of Trade, the role of LNG in the Chinese policy approach became clear. As the meeting began, one of the Chinese delegates poignantly described his experience of flying into Washington, DC and seeing blue skies and sunshine in contrast to the perpetual haze in Beijing and elsewhere and thus it seemed that the commitment to environmental improvements was personal as well as a formal government policy.

China is building its LNG infrastructure starting in its extensive inland waterways system and moving outward to the major ocean ports. It is implementing multi-faceted programs designed to raise overall natural gas consumption in China to 10 percent by 2020, and convert 10 percent of its large inland fleet to LNG in five years. There are approximately 40 LNG powered vessels in operation today, with another 600 on order or under construction along with the use of LNG, CNG or LPG in trucks and other industrial equipment.

Their infrastructure strategy involves a combination of shoreside terminals; bunker vessels and what they call “pontoons.” By 2020, LNG infrastructure will be available throughout 9,000 km inland waterway system and connect with the major export ports. Like the EU and Norway, China has realized that the LNG transformation can be accelerated by proactive government actions such as subsidies for vessel and infrastructure construction; and issuance of clear regulatory standards and class approval for designs.

Issues that Bear Watching

Despite the positive movement, there are a number of issues that proponents of LNG must keep an eye on, among them: world oil prices, increasing acceptance of scrubbers as an alternate compliance strategy, creation of new emissions control areas (ECAs) and the IMO global sulfur standard. Each of these issues has a bearing on the pace and breadth of LNG adoption throughout the industry.

The most compelling argument for LNG is the long-term price advantage over compliant fuels. I cannot help but wonder if the recent precipitous drop in oil prices has caused some shipowners to pause and re-evaluate their decisions to move to LNG. While a short-term phenomenon is not a long-term trend, there is still something disquieting about oil prices falling below $70. However, the long-term trends are that oil prices will continue to exceed the cost of LNG, and the environmental benefits of LNG remain constant, regardless of the price, and thus there should be confidence that LNG will maintain its advantage.

There also seems to be an uptick in interest in scrubbers, and manufacturers are initiating more aggressive marketing efforts. Certainly, scrubbers may be a compliance solution, particularly for existing vessels that are not appropriate for LNG conversion. However, questions remain regarding life cycle costs of the systems; maintenance and repair issues; resistance among engineering staffs; and disposal issues related to the waste stream that is created. I suspect, however, that there will be expanded scrubber use, as the technical and operational issues are resolved, but long term the innate advantages of LNG, particularly for new vessels, will continue.

There is a possibility that new ECAs will be implemented in areas of Asia and Southern Europe. Several nations, among them China, Japan and Singapore, have raised the possibility of creating ECA zones around their coasts. If this occurs, it should provide additional impetus and momentum to the adoption of LNG as a marine fuel, just as has been seen in North America and the EU.

Finally, there is an issue that has the potential to be a breakthrough event for the adoption of LNG throughout the world. MARPOL Annex VI requires global sulfur limits to drop from the current 3.5 percent to 0.5 percent in 2020 and this could have as large an impact on the adoption of LNG in the global industry as the implementation of the ECAs in North America and Europe.

However, Annex VI also mandates a review of the 0.5 percent standard in 2018, with specific focus on the availability of compliant fuel in 2020. If the IMO determines that there will be inadequate supplies of ultra-low sulfur fuel, the global implementation date will be delayed until 2025. As presently configured there is no middle ground; either 0.5 percent becomes the standard in 2020, or it is delayed until 2025. Obviously a delay would likely dampen the interest in LNG among world shipowners who could continue to use cheaper high sulfur fuels.

If compliant fuel supplies are really an issue, which was not the case in the United States despite the alarms that were raised prior to ECA, then perhaps the IMO could find middle ground and modify the global standard to create a tiered approach similar to the ECA process. Global standards could be reduced from 3.5 percent to 1.0 percent in 2020, and 0.5 percent in 2025. This would at least create some rationale for international ship owners to consider moving to LNG now, and affirm to the world that there will be stringent new standards in 2025.

This is a clear opportunity for LNG proponents to collaborate with the environmental community and those nations that have adopted a progressive stance and implemented ECAs, to take a stand at the IMO and advocate for cleaner air, continued progress, and new technologies.

So, as 2014 ends, there is some very good news, some discouraging items, and definitely some areas that we need to watch. One can only wonder what 2015 will bring.

John Graykowski is the former Deputy and Acting Maritime Administrator and is now a Principal of Maritime Industry Consultants, www.maritimeconsults.com, most recently working with marine operators on regulatory and market issues associated with use of LNG as a marine fuel.

 
 

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