Fuel for a clean shipping future: Is LNG the solution?

There has never been a more challenging time for investment decisions in shipping. The IMO's 2050 greenhouse gas emission targets will bite within the life cycle of assets now under consideration. 

Suppliers and users of marine fuels must continue to investigate the application of alternative fuels. Until other alternatives are proven, LNG must be the strongly favoured transitional solution.

Ninety per cent of all world trade is carried at some point by ship.¹ It is estimated that shipping may be responsible for 17 per cent of greenhouse gas emissions.² If growth in trade by sea continues at the current rate of 3.2 per cent per year, it is likely that 32 billion tonnes of cargo will be shipped annually by 2050.³ This would produce 3,000m tonnes of CO₂ each year.⁴

The problem will not simply go away. Shipping is a structural part of the global economy. Population growth and economic development demand increasing sea freight services. 

The regulation of greenhouse gas emissions in the shipping industry has been made a priority by the United Nations (UN) through the International Maritime Organization (IMO). The IMO has set targets to reduce the industry's carbon emissions by at least 50 per cent by 2050, compared to 2008 levels.⁵ Given that ships have an average lifespan of 20 years, meeting these targets will require ships producing substantially less carbon emissions to be on the water by 2030.⁶ 

How will the industry reach these targets? This time frame creates a new urgency around the decarbonisation of shipping when the economic life of a ship is approximately 20 to 25 years and ten years may be needed for the repayment of the capital cost. 

One approach is to use liquefied natural gas (LNG) for main propulsion. LNG has lower particulate, sulphur and nitrous emissions and is considerably less greenhouse gas intense than traditional heavy fuel oil and marine diesel oil. 

Is LNG the pathway to 2050, or is it simply a transitional answer? This article will explore the potential for LNG and look at case studies of some early adopters. It will also consider the lessons learned from another challenge currently being faced by the industry: meeting the IMO's low-sulphur fuel oil regulations that come into force on 1 January 2020. 

The IMO and its 2050 strategy

The IMO is a supranational body set up by the UN to regulate shipping. The IMO's 2050 strategy identifies for the first time a need for a reduction in greenhouse gas emissions from international shipping. The aim is to reduce shipping greenhouse gas emissions by 50 per cent, while pursuing efforts to phase them out entirely. The strategy also includes specific reference to "a pathway of CO₂ emissions reduction consistent with the Paris Agreement temperature goals".⁷ This approach was adopted by the IMO's Marine Environment Protection Committee (MEPC) during its 72nd session held at IMO Headquarters in London.⁸

To meet IMO targets, the global shipping industry should be producing less than 470m tonnes of CO₂ by 2050.⁹ This represents a huge challenge for a dispersed and unevenly regulated industry. Is LNG the best way to get there? 

LNG for main propulsion

LNG enjoys established status as a fuel of choice in land-based applications around the globe. However, in commercial shipping the uptake has been slower. There are several reasons for this. 

Newbuilding and conversion costs 

The capital cost of a new ship must be repaid over the life of the investment and the same applies to the conversion of existing ships. To date only a relatively small selection of ship owners (and their financiers) appear to have reached the positive conclusion of adequate return on an investment in LNG propulsion. 

Case study: Shuttle tanker owner TEEKAY and engine manufacturer Wärtsilä's latest shuttle tankers will be able to run on a combination of LNG and recovered Volatile Organic Compounds (VOCs), which is the gas evaporating from oil cargo tanks during the loading process.¹⁰ The cost of converting these four tankers was €110m. The companies claim these tankers will slash CO₂ emissions by 40 per cent compared to conventional designs. So while there appears to be a marked improvement in reducing emissions, it remains to be seen whether fuel cost savings will be available. 

Inherent price uncertainty surrounding LNG makes it trickier to calculate return on the investment needed to convert ships. Currently, the commodity is traded using a variety of different indices. As LNG becomes traded more freely and in greater volumes, it is likely to sustain its own index independently of the price of oil; however, it is far from clear how long this will take. The cost of LNG as ships' bunker fuel will also depend on its availability at major bunkering ports.

Availability of LNG bunkering 

Some bunkering ports already offer LNG bunkering facilities but there is clearly a cost in establishing the required infrastructure. Ports also need to be sure that they will make a return on their investment albeit this risk is mitigated by the fact that ports have relatively long horizons to recover capital investment. 

In addition, ports are cautious about installing infrastructure that carries operational exposure. Ahead of the transition to mandatory low-sulphur fuel oil, the insurer, Gard, has stated that it has already received around 100 fuel-related claims.¹¹ Some of these claims relate to low quality fuel which has allegedly resulted in machinery damage. Ports may be disinclined to engage with providing new infrastructure and fuel until technical standards are better established and bunkering practices can be quality assured. 

Nevertheless, ports that make LNG bunkering available may be able to take advantage of a significant commercial opportunity. The present "chicken and egg" scenario (where vessel owners need readily available bunkering services to convert to LNG, but ports will not invest in LNG bunkering facilities until sufficient demand is present) will change. At some point, LNG-enabled ports will attract vessels and volume of trade. 

Where on the curve are we?

LNG used for main propulsion is on the way but there are questions about how, when, and in what places it will appear. The following examples of early adopters across shipping companies and bunkering ports provide some insight. 

Hapag-Lloyd

Global shipping leader, Hapag-Lloyd, has announced plans to retrofit its 15,000 TEU container ship "Sajir" to operate using LNG.¹⁷ This will be the world's first retrofit of a mega container ship. The pilot project is scheduled to start in 2020. The LNG storage system will occupy an area equivalent to 350 containers, including the pipework between storage and engine. Once the retrofit is complete, the engine would be able to function with either LNG or low-sulphur fuel. 

When it merged with United Arab Shipping Co (UASC), Hapag-Lloyd took over 17 "LNG-ready" newbuildings (including Sajir) which were delivered in 2014. However, "LNG-ready" means that a ship is only partially prepared to be converted to LNG. Despite this, the pilot project could lead to more investment in LNG propulsion by Hapag-Lloyd, along with other major shipping companies.

SeaRoad

In another example of an early adopter, SeaRoad is operating a dual fuel vessel, SeaRoad Mersey II.¹⁸ This vessel can burn LNG as its primary source of energy. In regular service, the vessel is able to use diesel for less than 1 per cent of ship operations. This represents the first coastal ship in Australia to use this technology. 

The vessel has commenced a six-days-a-week overnight Bass Strait service between Devonport and Melbourne. However LNG bunkering facilities are not available in these locations so specially built cylinders and cradles will be needed to enable the use of LNG.

Ports 

At a 2019 Nor-Shipping press briefing, ABS claimed that LNG bunkering infrastructure supplies less than 1 per cent of the global fleet.¹⁹ At the end of 2018, there were 782 LNG and non-gas carriers either using LNG for propulsion, or being built with the capability to use LNG.²⁰ 

Bunkering infrastructure is presently limited. However, several ports that provide LNG bunkering have seen significant increases in demand. The Port of Rotterdam has reported that the throughput of LNG as bunker fuel increased from 1,500 tonnes in 2017 to 9,500 tonnes in 2018.²¹ Also, Titan LNG, Shell and Anthony Veder have registered as LNG bunker specialists in Rotterdam.²² As further LNG refuelling infrastructure is developed in the world's major ports, LNG adoption is likely to increase. 

What is the tipping point?

Regulations 

The uptake of LNG could see a rapid increase if there are more discussions around the regulation of greenhouse gas emissions. 

The UK's upcoming 2050 net zero emission law is instructive. By leaving shipping untouched, the UK has deferred responsibility for regulation to the IMO.²³ The IMO has the opportunity to set standards across the industry. However, this is a difficult task because the IMO must balance increasing pressure to reduce carbon emissions with practical considerations. 

If IMO is seen to fail, the threat of unilateral regulation is a concern. If regulation occurs at a national level there could be fragmentation in the industry and two-speed compliance where lower efficiency vessels must operate outside areas of stronger regulation. 

Is the answer different across different types of shipping?

It is unlikely that there is a one size answer to fit all sectors. Container ships, for example, would have a relatively easy pathway to switch to LNG. Dedicated to the same routes with few bunkering points and large volumes of cargo, the switch to LNG could be a viable option much sooner than for "tramp" shipping (which is available to call at all ports). Cruise and passenger ferry operators may experience consumer pressure to respond to changing environmental expectations.

Other alternatives

A variety of alternative propulsion systems have been proposed to help the industry reach the 2050 targets. One example is methanol. Green Maritime Methanol, a consortium of major Dutch maritime companies, is undertaking research on nine vessels. This is focused on the cost of implementation and use of methanol as fuel.¹² The results will be compared with low-sulphur fuel. Singapore is also working on a project to operate a methanol-powered vessel within port limits by the end of 2019. 

Other proposals include "green ammonia",¹³ solar,¹⁴ battery technologies¹⁵ and hydrogen fuel cells.¹⁶ However, these proposals are in the developmental stage. 

Currently, using LNG for main propulsion is more established and appears to be the preferred option for moving towards the 2050 targets.

Lessons from history 

The IMO's 2050 targets mean that the shipping industry will need to undergo some fundamental changes between now and 2030. In order to change the industry's status quo, it will require an unprecedented level of innovation. It is worth remembering that when the diesel engine was introduced, it took years for the industry to develop bunkering networks and change established practices.²⁴ 

Singapore as a catalyst? 

Singapore has made a clear move on LNG bunkering with two licences granted to develop the facilities to fuel ships with LNG.²⁵ As the biggest bunkering port in South East Asia, this move could be a catalyst to inspire more companies to invest in LNG facilities.

Conclusion

Currently, industry is understandably focused on meeting the challenges of low-sulphur regulations which came into effect on 1 January 2020. Attempts to push the cost of compliance on to customers appear to be experiencing considerable resistance. Owners of less fuel efficient ships will be disproportionately disadvantaged by the increased cost of compliant fuel and marine diesel. This will tend to favour the operators of more fuel-efficient ships that are also "cleaner" in greenhouse gas emissions terms.

Major charterers and businesses reliant on sea freight are increasingly aware of the benefits of greener shipping for their own emissions reporting and environmental and social governance credentials. Banks financing the building, conversion and acquisition of ships now require detailed information on emissions ratings of the asset to be financed. More ports are likely to follow the lead of some Canadian ports in incentivising cleaner shipping by favourable tariffs. 

A convergence between commercial factors and the IMO's 2050 targets (which will come within the lifespan of any ship ordered today) means that suppliers and users of marine fuels must continue to investigate the application of alternative fuels. Until other alternatives are proven, LNG must be the strongly favoured transitional solution.

Authors: Julia Derrick, Partner; Hazel Brasington, Consultant; and Edward Sinnott, Graduate

 

 

1 https://business.un.org/en/entities/13; http://www.ics-shipping.org/shipping-facts/shipping-and-world-trade.
2 https://www.ashurst.com/en/news-and-insights/legal-updates/climate-change-alert---ship-sourced-emissions-make-landfall-in-australia/.
3 https://lloydslist.maritimeintelligence.informa.com/LL1127301/How-to-decarbonise-shipping.
4 Ibid.
5 http://www.imo.org/en/MediaCentre/HotTopics/GHG/Pages/default.aspx.
6 https://lloydslist.maritimeintelligence.informa.com/LL1127687/The-Lloyds-List-Podcast-Sailing-on-solar (podcast); https://www.bbc.co.uk/sounds/play/w172wy9k864bh8w (podcast).
7 http://www.imo.org/en/MediaCentre/HotTopics/GHG/Pages/default.aspx.
8 http://www.imo.org/en/MediaCentre/PressBriefings/Pages/06GHGinitialstrategy.aspx.
9 https://lloydslist.maritimeintelligence.informa.com/LL1127301/How-to-decarbonise-shipping; https://lloydslist.maritimeintelligence.informa.com/LL1127333/The-Lloyds-List-Podcast-Time-for-shipping-to-engage-in-ocean-sustainability (podcast).
10 https://lloydslist.maritimeintelligence.informa.com/LL1127301/How-to-decarbonise-shipping.
11 https://lloydslist.maritimeintelligence.informa.com/LL1127744/Insurance-claims-over-2020-sulphur-cap-spike.
12 https://lloydslist.maritimeintelligence.informa.com/LL1127643/Methanol-fuel-group--selects-nine--vessels-for-research?vid=Maritime.
13 https://europe.edf.org/news/2019/02/05/shipping-can-reduce-climate-pollution-and-draw-investment-developing-countries; https://lloydslist.maritimeintelligence.informa.com/LL1127687/The-Lloyds-List-Podcast-Sailing-on-solar (podcast).
14 Ibid.
15 Ibid.
16 Ibid; https://lloydslist.maritimeintelligence.informa.com/LL1127301/How-to-decarbonise-shipping.
17 https://lloydslist.maritimeintelligence.informa.com/LL1127563/HapagLloyds-complex-conversion-to-LNG.
18 https://www.lngworldnews.com/searoads-lng-powered-roro-ferry-launched/.
19 http://www.seatrade-maritime.com/news/europe/lng-the-marine-fuel-of-the-near-future.html/.
20 http://www.seatrade-maritime.com/news/europe/lng-the-marine-fuel-of-the-near-future.html.
21 https://www.portofrotterdam.com/en/news-and-press-releases/bunker-figures-2018-less-fuel-oil-much-more-lng-and-timetobunker-app.
22 Ibid.
23 https://lloydslist.maritimeintelligence.informa.com/LL1127867/UKs-upcoming-2050-net-zero-emission-law-leaves-shipping-untouched--for-now.
24 https://lloydslist.maritimeintelligence.informa.com/LL1127301/How-to-decarbonise-shipping; https://lloydslist.maritimeintelligence.informa.com/LL1127687/The-Lloyds-List-Podcast-Sailing-on-solar (podcast).
25 https://www.lngworldnews.com/minister-shell-pavilion-to-start-singapore-lng-supplies-later-this-year/.