The Gap Grows Larger
January 1, 2018
When I first became involved in LNG as a marine fuel in 2012, my strong belief was that LNG would grow to occupy a large segment of the marine fuels market and the United States would become the world's leader in the transformation of the industry to this fuel.
My optimism, which remains undiminished, was based on the clear signals from the IMO that emissions regulations would be tightened; the innate advantages of LNG to those requirements; and the expansion of domestic natural gas production which offered long term gas pricing below projected oil prices. With the exception of Norway, which was an early adopter, LNG was new to the marine industry and thus I believed that all nations were starting from roughly the same point. A US Jones Act operator, Tote, was the first in the world to announce conversion of existing ro/ro vessels to LNG, development of an LNG bunkering terminal and in late 2012, contract for the construction of two LNG-powered container vessels which are now in operation.
In addition to the advantages of transitioning to LNG as a compliance strategy to meet the Emissions Control Area (ECA) sulfur limits, I saw an opportunity for the US to lead the world in the adoption of LNG for the marine and transportation industries, the development of new technologies, and the creation of new markets for domestically-produced natural gas. Five years later and based on the way that LNG has developed globally, I find that my assumptions were half right. LNG is now accepted throughout the industry as a viable fuel option in vessels of all types and the "chicken and egg" impasse seems to be resolving, The United States, however, is not the leader in the adoption of LNG based on vessels built, LNG bunkering facilities planned or operating; or national policy commitments to encourage LNG investments.
In April, LNG World Shipping published an article listing 200 LNG vessels worldwide in operation or under contract. It stated that there are 103 LNG-powered vessels currently in operation and another 97 on order. Passenger vessels comprised the largest segment of LNG-powered vessels but what struck me was that LNG propulsion systems are being installed on vessels of all types including container vessels, tugs, and OSVs. Of significance, is the commitment by the largest cruise operators, Carnival, MSC and Royal Caribbean to building "green" ships, with 13 vessels slated for delivery between 2019 and 2026 powered with LNG. Just recently, CMA/CGM, the world's third largest ocean carrier, announced contracts to build nine 22,000-TEU vessels with full LNG capability on delivery. Indeed, more and more vessels are being designed with dual fuel capability and delivered in LNG "ready" condition, which is further evidence of the recognition by ship owners that LNG is a viable fuel option. Even with a conservative estimate that just 5 percent of the world's fleet will be LNG-powered by 2025, more than 2,000 vessels would be relying on LNG as their principal fuel source in the next decade.
Perhaps the surest sign that LNG has reached a level of acceptance is the recent announcement by Rolls Royce that it has designed an LNG-powered super yacht called Crystal Blue which they hope will be on every billionaire's "must have" list. To solve the problem of finding LNG in those island paradises, Rolls Royce includes a sister vessel, Blue Shadow which will accompany the yacht and serve as an LNG bunker vessel whenever it is needed.
Of course, the expansion of LNG-powered vessels elevates the need for infrastructure to meet the bunkering demands for all of these vessels. The CMA/CGM vessels, for example, require 18,000 m3 of LNG during each refueling, which presents a challenge in terms of construction of a barge with sufficient capacities to service these vessels or shore facilities with sufficient storage capacities. But, as might be expected, the increase in LNG-powered vessels is creating the necessary demand signals to spur development of LNG bunkering facilities to meet this demand in Europe and Asia. This most significant development is occurring in Europe, which has implemented a policy requiring each EU member state to have marine LNG bunkering facilities, first in coastal ports by 2020 and throughout the inland system by 2025. When this is completed, 139 ports, both coastal and inland will have bunkering capabilities. Interestingly, these regulatory policies have been accompanied by financial support through the Ten-T and the Connecting Europe Facility (CEF).
Shell, which has been extremely active in development of bunkering operations in Europe, is making investments in newly-designed bunkering vessels, and has announced plans to operate in US markets as well. Similar progress can be seen in Singapore, which wants to retain its position as a major bunker port; China, which sees LNG as a means to address its emissions challenges, and Hong Kong, another major port, are supporting LNG development. In the United States, however, Jacksonville, Florida is the only international port that has LNG bunkering capabilities to serve the Tote vessels, and until a newly designed bunker barge is delivered, bunkering is accomplished through a truck-based system. Another LNG bunkering facility in Jacksonville is scheduled to be operational in 2019 as is a terminal in Tacoma, Washington, and each of these projects is tied directly to specific vessels.
It is very apparent that development of LNG for the marine industry has proceeded at a much faster pace in Europe and Asia, and in a more comprehensive fashion than here. This is perplexing given that the US was one of the first to pursue LNG for marine and it, like all nations, is facing the same stringent emissions requirements imposed by the IMO.
One of the major differences in the way that LNG has evolved as a marine fuel in the United States compared with other nations is the continuing lack of a formal commitment by our government to support, encourage the transition to LNG. I have been writing about the development of these policies in Europe and Asia over the last five years and lamenting the lack of movement toward similar policies here. In Europe, the EU is moving steadily to implement the unanimous EU policy to create LNG bunker facilities in every EU nation, and there has been a concurrent growth in innovative bunkering technologies and vessels.
The recent CGA/CMA announcement to build ultra large container vessels was quickly matched by a French government commitment that it would modify regulations to support LNG bunkering (presumably ship to ship and SIMOPS) in ports and consider changing tax rules to provide incentives on investments in new ships and engine technologies such as LNG. In making this announcement the French Prime Minister said: "We have to use this (energy) transition to differentiate ourselves on the market - in transport and in port services," In real terms, this differentiation means that when the new vessels are operating, France will be able to refuel these vessels and the US won't.
You can find similar pronouncements in China, Singapore, Hong Kong, and elsewhere all designed to signal to marine operators and gas suppliers that the governments are fully supportive of the transition to LNG. And it is clearly having an effect to stimulate and accelerate the development of the necessary infrastructure and vessels.
The United States is different in many respects, structurally and politically, but perhaps the most significant difference is we are rapidly becoming the dominant producer of natural gas in the world, and by all indications will maintain this position for years to come. Thus, it is somewhat baffling that the gas supply industry, seeking new markets for the gas, has not taken the lead in demanding national policies to spur the creation of the marine and transportation markets as outlets for domestic production.
It is unlikely that Congress would enact a significant subsidy program to encourage LNG development, though the relatively modest investments made by the EU are yielding results, but there are other ways that federal policies could be structured to provide the necessary encouragement. The essential first step, however, is a declaration of policy that it is in the national interest to maximize the consumption of domestically-produced natural gas.
There are also market-based measures that could be employed, such as modifying vessel charter terms to provide a competitive advantage for vessels that utilize LNG. In many cases, vessel charterers are paying fuel costs in the form of a surcharge to the basic charter or cargo rates, so in addition to enhancing a company's "green" image, this would also provide a financial benefit to include such incentives.
So, as 2018 dawns, we are still lacking a national commitment to transform the entire transportation industry, take greater advantage of our domestic resources, and create new industries, markets, technologies, and jobs. It is difficult to calculate the opportunity cost of continuing down this path, but one thing is for sure: it's already large and will only grow as LNG gains wider acceptance and the full impact of the IMO 2020 emissions rules are realized.
John Graykowski is the former Deputy and Acting Maritime Administrator and is now a Principal of Maritime Industry Consultants, JohnG@maritimeconsults.com.