Marine LNG: Partly Cloudy or Partly Sunny?
One could imagine the LNG pioneers – TOTE, Crowley, and Harvey Gulf Marine – looking over their shoulders and asking, "where is everybody?" Underlying this is concern that LNG may be losing its luster and may never achieve its potential to become a dominant marine and transportation fuel. Before we start hanging black crepe, however, there is ample evidence that LNG remains a compelling alternative to meet growing emissions requirements.
Interest in LNG as a marine fuel was initially driven by three factors: implementation of the Emissions Control Areas (ECAs) in North America and Northern Europe; the unforeseen and rapid growth of natural gas production; and LNG's potential to significantly reduce all categories of marine air emissions, particularly sulfur oxide. LNG offered a long-term compliance solution at prices lower than marine gas oil (MGO) and without the technical and operational risks associated with scrubbers. Oil prices were expected remain at or near $100 a barrel while gas prices were projected to remain at historic low levels for a decade or longer. Thus, even though shipowners would have to pay a "premium" to install the fuel gas system (FGS) and other LNG-specific features on a vessel, the projected payback periods were short enough to justify the expense, with a corollary benefit of addressing future emissions requirements as well.
LNG was predicted to displace a significant portion of the marine fuel market by the end of the decade with forecasts of a 30 percent market penetration by 2030. This development would likely spur broader adoption of LNG and CNG by other transportation modes, which could take advantage of new LNG infrastructure to convert tug, truck and bus fleets, thereby expanding the market for domestic natural gas, and enhancing air quality in port regions.
The optimism, however, was tempered by the challenges encountered by the first adopters. These challenges did not involve the technologies to operate ships on LNG, or to produce, transport and deliver LNG to ships. Rather, the principal challenges first adopters have encountered relate to the lack of regulatory structures and existing market relationships, and the enormity of the task of creating entirely new market relationships, and logistics, distribution and fueling infrastructures, which do not exist today.
These challenges persist, particularly in the United States, where infrastructure development remains tied to specific vessel projects in contrast to the more comprehensive and focused efforts seen in other regions of the world. In this country, there are no national policies or programs to foster and promote LNG development, and there has been no credible signal from the gas supply industry that the fueling infrastructure will be built absent assured demand. With the exception of Tacoma and Jacksonville, which are tied to specific vessel projects, no major US port has stepped forward to actively promote and facilitate the construction of LNG terminals or to partner with gas suppliers to move forward with the construction of facilities.
The major Jones Act ocean carriers have new build programs underway, with full LNG capability on delivery in the case of TOTE and Crowley, and with dual fuel engines and other LNG-specific modifications for conversion to LNG at a later date in the case of Matson, American Product Tankers and others. In large part, the Jones Act blue water market potential for LNG has been realized. While ferry operators in New York and Washington State have signaled intent to incorporate LNG in their new vessel plans, I suspect that challenges will arise both in financing the projects and in gaining the necessary public acceptance for the use of LNG in urban areas. The inland waterways fleet, which offers another large potential market for LNG, has seen no significant movement in that direction among operators or suppliers. In contrast, the 2012 EU Master Plan calls for the entire inland system to be LNG-capable with the initial focus on the Rhine-Main-Danube system which handles most of the waterborne traffic on the continent. Considerable effort is also underway to develop harmonized standards and regulations across national boundaries, and conversion of the fleet has begun.
There is a phrase: "Money talks..." and if that is indeed the case, then the continuing investment in LNG vessels and infrastructure around the world is clear evidence that the migration continues. The EU has not altered its formal commitment to support LNG-related projects, despite economic difficulties and the drop in oil prices and, in addition to spending on projects already underway, new projects continue to be funded. Finland recently announced the construction of an LNG bunkering terminal with approximately 21 percent of the total project costs supported by public investment by the European Union (EU). Singapore, which has an official goal of establishing a hub for LNG bunker operations by 2020, has announced programs to provide funds for the construction of LNG-powered vessels and will grant licenses to LNG bunker operators that will begin operations in 2017. In China, the port of Ningbo will have LNG bunkering capabilities early next year.
At least four LNG bunkering vessels will be operating in the United States and Europe by the end of 2016 and DNV GL estimates that 73 LNG fueled vessels are operating today, with another 80 on order and upwards of 600 vessels could be operating worldwide by 2020. While this is only a small percentage of the global fleet, it nevertheless represents significant financial investments by shipowners who clearly believe that LNG will be available to fuel these vessels at prices below the projected costs of MGO. Nordic Hamburg recently estimated that its six 1,400-TEU feeder vessels will save $55,000 per voyage operating on LNG even with MGO prices at current levels.
So there are silver linings on the LNG horizon, and I am convinced the real breakthrough for LNG will come when the major liner companies incorporate LNG as a standard element in their newbuild plans. A decision by any of the major ocean carriers to install either full LNG capability in their new generations of vessels, or, in a hedging strategy, install dual fuel engines with the intent to move to full LNG at a later date, would provide a strong impetus for the expansion of LNG globally. But this has not happened on a large scale for reasons that may be related to oil prices, but also to concerns about the availability of LNG in their ports of call and the uncertainty related to the 2018 IMO Annex VI consideration.
I believe that this challenge must be approached in a different way by moving forward with infrastructure development without a firm commitment from a shipping company. If LNG infrastructure proceeds first in one of the major load ports in the United States, it would be a powerful signal to the major liner companies that fuel will be available and would likely incentivize ship owners to accelerate the move to LNG. Once that happens, other operators would be compelled to follow to avoid the risk of giving a competitor a huge advantage.
Consider that the time between a decision to commit to a new vessel construction program and delivery of the first vessels can be as short as 18 months. In contrast, the time between final investment decision (FID) and commissioning of an LNG marine terminal will likely be three years or longer. Thus, if gas suppliers and ports are waiting for the major liner operators to commit to LNG, as appears to be the case, it is unlikely to happen because the new vessels, for which the owner has paid a premium for the LNG capability, would enter service with no LNG available at their ports of call in the United States. This creates an untenable risk for the shipowner, which complicates any decision to move to LNG, since it would change the entire economic basis of the newbuild program. On the other hand, if one accepts the "inevitability" of LNG, which I believe is a reasonable proposition, it would seem far more prudent for ports and gas suppliers to move forward to build the necessary infrastructure in the absence of a guaranteed offtake commitment. In addition to incentivizing shipowners to move to LNG, there would also be great pressure to lock in gas supplies long before the terminals are commissioned thus mitigating the risk.
Clearly there are risks in this approach and perhaps it is too much to ask ports and gas suppliers to assume this risk in the current investment climate, particularly for public companies. It is far easier to gain approval for a large investment if there is a guaranteed customer, and the "if we build it they will come" theory may work for baseball fields but is an entirely different proposition when hundreds of millions of dollars are at risk. But risk is intrinsic to life and business, and the key is how risks are managed and mitigated, particularly when the upside potential for the gas industry and ports is so great. There are strategies and approaches that can be employed which identify, quantify, and minimize the potential risks and which maximize the economic opportunities for ports and gas suppliers and, as with other new ventures, the first developers of the infrastructure in a port are most likely to reap the largest return on the investment.
Something has to break the continuing "chicken and egg" impasse and reverse the slow and somewhat sporadic development of marine LNG in the U.S. If there is indeed a broad consensus that LNG is a net positive for the environment, a viable compliance alternative, that massive supplies of gas will continue to be developed thus assuring long-term price stability then it seems we need to approach this market opportunity in a way that does not fit into traditional investment analyses, there are simply no existing models to follow.
One risk that must be addressed is the 2018 IMO global fuel sulfur decision. Under MARPOL Annex VI, global fuel sulfur standards are scheduled to be reduced to 0.5 percent in 2020 from the current 3.5 percent. As written, Annex VI gives the IMO only two choices: either affirm the 2020 standard or delay it until 2025, and the basis for the decision is the worldwide availability of MGO and other "relevant" factors. This provision was agreed on by the IMO long before LNG was under discussion as an alternative compliance fuel. I strongly believe the IMO should affirm the existing 0.5 percent standard, and that should be the starting point of any discussions with the IMO by stakeholders which have already invested in LNG such as the EU and other governmental entities, the environmental community and the gas supply industry. If this is not possible, however, then I would propose that the IMO implement an interim standard of 1.0 percent in 2020 with the more stringent standard delayed until a later date. This approach would essentially mirror the ECA implementation that resulted in LNG moving from a novelty conversation to a serious alternative compliance strategy in the United States and Europe.
This single act would create a powerful regulatory incentive to spur development of LNG infrastructure and vessel construction and provide the impetus to the international liner companies to adopt LNG in their next generation of vessels for delivery by 2020. Therefore, if the ports and gas supply industries have already begun the process of site selection, permitting and possibly construction by 2018, it would serve a dual purpose of undermining arguments that LNG is not a viable replacement fuel because it is not available and reassuring major ocean carriers that their new vessels will have fuel in the ports they serve.
Yogi Berra was right when he said: "It's tough to make predictions, especially about the future," and nowhere is this clearer than in the LNG area. A little more than a year ago, oil prices were near $100 per barrel and those advocating for the early adoption of LNG had the wind at their backs. Now, oil has fallen more than 50 percent, and while the pace of LNG adoption seems to have slowed, by all indications it continues to move forward. As a longtime advocate and proponent of LNG for the marine industry, I believe 2015 ends with more signs for optimism than pessimism. Despite Yogi Berra's admonition, I believe that the clouds will lift in 2016 and LNG will continue its inexorable growth as the most effective way to meet the increasing environmental requirements our industry is facing.
John Graykowski is the former Deputy and Acting Maritime Administrator and is now a Principal of Maritime Industry Consultants, JohnG@maritimeconsults.com most recently working with marine operators and gas suppliers on regulatory and market issues associated with use of LNG as a marine fuel.