Is there potential for the global LNG industry to gain from fuel oil’s misfortunes?

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The global LNG industry is hoping to gain from fuel oil’s misfortunes by drawing away a portion of marine demand as emissions regulations are tightened. But there’s a catch.

The main barrier in the past has been the cost involved in switching to LNG. While scrubber systems can be retrofitted to ships relatively quickly and cheaply, in almost all cases retrofitting to LNG-fueled propulsion is not economically viable.

LNG engines have to be included in the design – at a higher cost than conventional engines – when a new ship is first ordered. The space on board a vessel needed for LNG tanks is also larger than that for conventional oil-based bunkers, adding an ongoing cost to the LNG- fueled vessel.

The slow pace of development of infrastructure for LNG bunkering has also stymied widespread investment in it by shipowners. Bringing LNG supply and delivery infrastructure to the world’s bunker ports is a slow and expensive business, and uncertainty over demand prospects has limited the appeal of this new market for suppliers.

But this chicken-and-egg situation – with both suppliers and potential buyers nervous about taking investment decisions before the other side – appears to be resolving itself, with significant investments by both sides of the market over the past two years.

The biggest boost to the market came with the announcement by French container line CMA CGM in late 2017 that it would order nine new 22,000 TEU ships with LNG propulsion for delivery from 2020. This was taken as a vote of confidence that LNG bunkering could be viable even for some of the largest commercial ships in the world.

The ships have been designed with tanks large enough to carry enough fuel for an entire round voyage from Europe to Asia and back, and the company plans to bunker them primarily at Rotterdam. Total Marine Fuels Global Solutions has agreed to supply CMA CGM with around 300,000 mt/year of LNG from 2020, and plans to use a 20,000 cu m barge to bunker the container ships.

Other suppliers have also come forward with plans for LNG bunker barges – an essential step to delivering LNG as a bunker fuel to the largest commercial ships, as deliveries by truck are too slow. LNG bunker industry group Sea\LNG estimates that as many as 20 LNG delivery vessels are now either on order or already in operation across the world.

For suppliers, the cost of providing LNG as a bunker fuel will be determined by the underlying LNG itself and the logistical cost involved in bunkering the fuel.

The breakbulk costs, though significant, should be relatively constant or start to decline over time as economies of scale increase.

The global benchmark for LNG is the S&P Global Platts JKM, which reflects the delivered value of LNG cargoes delivered to Northeast Asia. A spot price for LNG bunker supplied from this region would likely reference this marker as a base price on which addition breakbulk cost and profit would be added. Spot prices in the region can, however, be quite variable during the year due to unseasonable weather, supply outages, and European hub prices.

The average JKM front-month price for 2017 was $7.129/MMBtu, however at its highest point going into winter 2017-18 the JKM reached as high as $11.20/MMBtu and as low as $5.350/MMBtu in March.

Given the relative size of demand in Northeast Asia, pricing in the region tends to also have an impact of other LNG-importing regions that have to compete on price to secure spot LNG cargoes. S&P Global Platts markers for the Middle East and India, for example, were both more than 98% correlated with the JKM in 2017.

As a result, when JKM maintains a strong premium to other gas markets, all other markets have to compete with the Northeast Asian price in order to attract the marginal cargo on a netback basis.

In Europe, the spot price of delivered LNG also depends on the prices traded on onshore gas hubs, such as NBP or TTF. During periods when the netback value – or the cost of JKM less shipping – from Northeast Asia to Europe is below prices on liquid European hubs, the value of delivered LNG will tend to be a discount to the relevant hub price to reflect the base market for the gas arriving at European terminals. In short, LNG sellers are seeking to either beat JKM on a netback basis, or the European gas hubs, whichever is higher.

S&P Global Platts Analytics forecasts steady growth in LNG bunkering after the 0.5% sulfur cap comes into effect in 2020, with LNG’s share of the bunker market climbing to around 7% by 2030 from just 3% a decade earlier.

With LNG bunker infrastructure now being developed at a faster pace, the biggest obstacle to this industry now comes from the IMO. While tightening sulfur emissions regulation by the IMO previously boosted the industry, the UN body’s greenhouse gas initial strategy now threatens future growth.

Burning LNG offers a significant saving in carbon dioxide emissions versus conventional bunker fuels – somewhat pared by the warming effect of the methane released into the atmosphere during its delivery – but the saving is not enough to be consistent with the IMO’s target of cutting shipping’s total GHG emissions by at least 50% by 2050.

Burning bio-LNG produced from renewable resources that offset the subsequent carbon emissions could be one solution to this, but at present the provision of bio-LNG to the bunker industry is far from widespread.

With new zero-GHG-emission vessel designs needing to come into service by the mid-2030s, the window of opportunity for LNG bunkering may be narrow if the IMO’s strategy remains on its current course.

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