Feature: LNG’s uptake as bunker fuel to hinge on commercial interests
Commercial interests and infrastructure development will be critical to acceleration of LNG bunkering globally, despite environmental considerations and market fundamentals strongly in favor of its use as a marine fuel, sources at an industry event in Singapore said this week.
- Pricing of LNG as bunker to hinge on right index benchmarking
- Current LNG-MDO spread offers only marginal incentive
- Push from ports crucial for LNG bunkering success
“Despite LNG’s many advantages, including it being nontoxic and a fuel with relatively high energy density, people are worried about its potential for bunkering and are still pondering over how it is going to develop,” Peter Godfrey, managing director for Singapore at Energy Institute said at the 3rd LNG Marine Fuel Forum 2017 organized by PetroMin.
LNG bunkering will likely be only some 1 million-3 million mt by 2020 but is expected to accelerate after 2025, as adoption and infrastructure accelerate, John Harris, principal consultant at Enerdata Pte said.
More stringent emission requirements for shipping, including the International Maritime Organization’s 0.5% global sulfur cap starting January 1, 2020, and new emission control areas, which require ships to burn cleaner fuels, has prompted the industry to assess LNG’s viability for bunkering, among other options.
Ample supply of LNG, thanks to the burgeoning production from the US, also means that fundamentals will not restrict its availability for bunkering.
It has been estimated that in the next three to five years, there will be about 40 million-50 million mt of “homeless” LNG, which does not have fixed customers, Scott Pilkington, partner at global law firm HFW, said.
“However, investment in infrastructure and technology, and harmonization of standards and procedures are vital to make LNG bunkering a success,” he added.
The economics of LNG as a marine fuel is dependent on several factors, including the area where the vessel operates, the life of the ship, and most importantly, its relative price to other fuels.
A spread of $1-$6/MMBtu with a core $2-$4/MMBtu to marine diesel oil is likely to be required to promote its use as a marine fuel, Enerdata’s Harris said. However, the current Asian LNG spot prices at around $5.50/MMBtu mean that after allowing for infrastructure and logistics, the LNG-MDO spread is only marginally higher than $2/MMBtu, making the economics of using it for bunkering marginal, he added.
“Pricing for LNG as bunkers, needs to be given further consideration — particularly, assessing a benchmark to index it to. Common pricing mechanisms, such as Henry Hub and the Japanese Crude Cocktail, are designed for gas as an energy commodity and not as a marine fuel. The known hub-based and oil-indexed prices also do not factor in the logistics costs of transporting LNG as bunkers — these costs are not publically available. One possibility is indexing to existing hubs with an adjustment for bunkering, or to other marine fuels, such as MGO or MDO”, HFW’s Pilkington said.
In the current landscape, where LNG prices are soft, buyers can be a lot more flexible by targeting spot contracts, rather than locking themselves into long-term agreements, which have traditionally stretched to about 20 years or more, another industry source said.
However, long-term contracts are required to boost infrastructure and a key challenge for LNG suppliers will be to convert these spot buyers into long-term customers, he added.
INFRASTRUCTURE AND STANDARDS
Singapore, the world’s largest bunkering port, has been at the helm of the initiative to promote LNG bunkering.
A focus group, which was first formed in 2014 by the Maritime and Port Authority of Singapore, the Antwerp Port Authority, the Port of Rotterdam, and Port Zeebrugge, now consists of 11 ports and maritime administrations across Asia, Europe, and North America.
In April, Singapore LNG Corp. and the MPA jointly launched the city-state’s first LNG truck loading facility, an important first step in developing the LNG trucking business in Singapore, helping to facilitate truck-to-ship LNG bunkering at the city-port.
Ports in South Korea, Japan, and China are also making efforts to promote LNG bunkering.
“We expect more orders for LNG-fueled vessels from these regions moving forward,” Godfrey added.
More impetus from port authorities through infrastructure development and incentives to ship-owners, as well as simplification of LNG procedures, can also augment its use for bunkering, sources said.
There’s enough evidence to demonstrate that there have been no major issues in LNG transportation. However, fears about the safety of LNG for bunkering also need to be quelled, they said.
This would happen as the frequency of its use as a marine fuel increases, more training is provided to personnel, and a structure is introduced for bunkering operations, they added.
In April, Singapore launched its first technical reference — TR56 — for LNG bunkering. The TR56 is essentially aimed at providing a safe and efficient framework for conducting LNG bunkering operations in Singapore.
There is a need to harmonize various standards for LNG bunkering, as sometimes they can be very region-specific, Vincent Chua, manager of offshore and energy business at Bureau Veritas Marine (Singapore) said.
The ISO/AWI 21593 — a marine fuel bunkering quick connect/disconnect coupling standard — for example, is still a working document, and once it is complete, the coupling standards will hopefully be adopted globally, he added.