LNG to fuel shipping, perhaps to a hydrogen future
Small-scale LNG appears set to take a leading role in the decarbonisation of shipping. But to achieve the IMO’s 2050 target, the industry may well need to turn to hydrogen
The International Maritime Organization (IMO) has set ambitious targets for decarbonisation that will tighten over the next three decades: from a reduction of at least 40pc by 2030 to 70pc by 2050. LNG is increasingly seen as a solution in the near term, with substantial decarbonisation benefits and the most developed supply globally of any alternative to bunker fuel. But to hit the 70pc target, it is hard to imagine a solution that does not involve hydrogen. To discuss the matter, Petroleum Economist caught up with three experts from PwC’s Strategy&: Giorgio Biscardini, partner; Rafael Schmill, associate partner; and Adrian Del Maestro, director. The three experts recently launched a report, Small going big… and greener, that covers short to medium-term decisions, so we took the opportunity to also ask them about the longer-term outlook.
Would the widespread use of LNG bring shipping into line with the Paris Agreement? And how close would the universal adoption of LNG get shipping to the IMO 2050 target?
Biscardini: Small-scale LNG (ssLNG) is part of the solution and is available now. In the long run, meeting the various emission reduction targets will require a portfolio of solutions: traditional ssLNG now, ssLNG with a growing bio component in the short-medium term, and hydrogen-based solutions and electrification, for shorter routes, in the medium-long term.
Schmill: LNG can reduce greenhouse gas (GHG) emissions by 20-25pc on a tank-to-wake basis [emissions produced on board a ship]. This is a big step forward compared with traditional fuels, but it is not enough to reach the even more ambitious targets of the IMO. This could be obtained in the long run by adding increasing quantities of biogas with LNG. This solution would leverage existing technologies and the same LNG infrastructure, with minor adjustments, to obtain a reduction of GHG emissions by up to 80pc, in line with the IMO goals for 2050.
While LNG lifecycle emissions could be improved by blending in a bio component, the IMO regulatory assembly has not yet reported back on its lifecycle approach to emissions. Is this likely to be a viable route?
Schmill: Yes, we believe that bioLNG will play a significant role in the future, but this will imply mainly changes upstream, while shipowners and bunkering companies will continue to operate as usual. A portion of the future market will be covered by biogas and bioLNG, which can substitute LNG using the same engines and infrastructure.
With the IMO’s fourth study on GHG emissions, already major steps have been taken to identify methods of assessing emissions consistent with the UN’s Intergovernmental Panel on Climate Change guidelines. This includes CH4 and N2O emissions. It is likely that lifecycle emissions will be taken into account in the future. As described in our report, blending biomethane or biogas into the LNG feed could be a viable route to make use of the same infrastructure for a greener fuel from the perspective of the entire value chain.
How certain can the shipping industry be that emission regulations will not be strengthened, potentially to the detriment of LNG? Given the long lifecycles, can shipping companies be confident when commissioning new LNG vessels?
Schmill: For the time being, LNG is the most environment-friendly solution for shipping and, as regulations evolve, LNG-fuelled vessels might be relocated from the most advanced regions, such as Scandinavia, to less-advanced regions where regulation is currently less stringent or less favourable and where the LNG infrastructure is not yet developed. Given the long lead time for the development and roll-out of alternative technologies, we believe that LNG-fuelled vessels will provide a good return on investment.
Natural gas prices are low at the moment. But this may change as new sources of demand emerge, such as for coal replacement as China seeks to meet its 2060 pledge. How much could international gas prices increase before LNG is no longer the most attractive option?
Biscardini: To answer this we need to consider a number of dimensions. Firstly, what matters is the comparison of ssLNG versus marine gasoil or HFO using scrubber technology. In both cases, ssLNG will remain competitive in most commodity scenarios (gas vs oil). It is only in extreme scenarios of very low oil prices and very high gas prices that ssLNG would be at risk. We view this as an unlikely scenario given the expected enduring overcapacity and oversupply of both gas and LNG.
The global shipping industry needs a universally available fuel source. While LNG infrastructure is affordable in developed countries, how long would it be before it was universally available?
Schmill: I am not sure that LNG needs to be universally available. It needs to be available where there is a strong demand from point-to-point vessels that are the key target for this technology, such as cruise ships, ferries and container ships. In the Mediterranean Sea for example, while it was an available solution in Spain and France, it will be available in the whole Northern Mediterranean Sea in a few years.
Biscardini: LNG is a good solution for areas where there is a high density of point-to-point shipping routes and good availability of gas/LNG. For example the Mediterranean Sea, Singapore, Japan and coastal China are likely to see the next wave of LNG infrastructure development.
Hydrogen is discussed as a potential zero-emissions solution for shipping among many other applications. Do you think it would become viable at some point in the future? If so, roughly when do you think it will become competitive?
Del Maestro: Yes, at a macro level there is a significant amount of industry interest and activity in hydrogen and there is a sense this technology is building momentum. Several governments are looking at hydrogen as a fuel to build back better. Germany being a case in point, with its recently announced hydrogen strategy.
In shipping there is a role for hydrogen. And a few real-life applications are starting to emerge. Maritime Belge launched a hydrogen-powered passenger shuttle boat in 2017 in Belgium. It is also looking to develop a hydrogen ferry for Japan next year and is involved in a tugboat project with the port of Antwerp.
But there are a couple of challenges still. Hydrogen’s energy density is less than other conventional fuels. This means you need more storage capacity for onboard fuel. This in turn means hydrogen-powered vessels are more feasible for shorter voyages only. Also, for the hydrogen to be environmentally sustainable it needs to be green hydrogen. Currently, some 4pc of hydrogen produced globally is by electrolysis and, needless to say, it is much more expensive to produce than hydrogen sourced from natural gas.
Schmill: The market players we interviewed in our report clearly stated that LNG is currently the only scalable solution. Hydrogen could play a significant role in the future—we believe it will do so in the shipping industry—but it will require time. It will probably take a decade before it becomes relevant at industrial scale.
