Prospects for LNG as a Maritime Fuel Jinsok Sung, PhD Candidate at the 'Chair of International Oil & Gas Business', Gubkin Russian State University of Oil and Gas
Published on 16 August 2018 by Julia Sadieva
Natural gas has been actively used in the power and industrial sectors. Thanks to its advantage as a cleaner fuel and its price-competitiveness, the consumption of natural gas is increasing in the transportation sector. LNG has an advantage over competing fuels as it is price-competitive with diesel and gasoline. At the same time, LNG can decrease the release of pollutants into the atmosphere.
LNG began to be used as maritime fuel more than 20 years ago. However, LNG consumption as a bunkering fuel has not grown as much as previously expected. Annual consumption of LNG as a bunkering fuel is in the region of 1 million tons. In 2018, the global LNG trade volume stood at 290 million tons and the share of LNG as a bunkering fuel is small. However, it is anticipated that LNG as a marine fuel will grow faster, as in many countries LNG bunkering infrastructure is under planning and construction. Following in the footsteps of European countries, infrastructure and legislation are being prepared to launch in the 2020s in the Asia Pacific region.
One of the most important motivations for switching to LNG consumption for marine transport is the well-known global regulation of the International Maritime Organization (IMO) limiting Sulphur in maritime fuel. Up until 2012, the limit on the Sulphur content in maritime fuel was 4.5% and from 2012, it went down to 3.5%. From 2020, Sulphur contents have to be lower than 0,5%. In addition to that, an Emissions Controlled Area (ECA) is in place where the regulation is even stricter, with Sulphur contents below 0.1%. The Baltic Sea, the North Sea and the coasts of North America and the Caribbean Sea are classified as ECA. China is setting up its own ECA, along part of its coast. In comparison with road transport, the regulations for marine transport on air pollution have been loose. In the EU, in 2009, the Sulphur emission limit for road-transport came into effect and it is close to zero. The limit is 10 ppm (0,001%, Euro 5) and it shows the necessity of improving environmental standards in the maritime sector.
Stricter regulation on emissions (in the ECA) will accelerate LNG consumption for ships’ fuel and can result in the swifter development of the LNG bunkering industry. For example, over 70% of LNG-fueled vessels (excluding river-going vessels) are operating in the ECA and most of the planned LNG bunkering projects in Russia are located in the Baltic Sea ECA. At the beginning of 2018, around 120 LNG-fueled vessels operate in the world. The majority of them, 82 out of 120, are located in Europe and 60 of them (50% of the global total) are in Norway alone.
There are several ways of meeting IMO regulations by reducing the emission of pollutants as environmental regulations are becoming stricter. However, at the current time, there is no cheap option for shipowners. LNG is considered as the most environment-friendly maritime fuel, apart from electricity-fueled vessel, which is regarded more as an option for the future.
The Transition to Green Ports and Clean Fuel in Russia
In the Russian Federation, there is one operating LNG bunkering project, providing LNG for a ferry in the Baltic sea. The Estonian company, Eesti Gas provides LNG for the ferry «Megaster» with LNG produced at Pskov. The LNG-fueled ferry Megaster sails the route between Tallinn and Helsinki. Another well-known project, Vysotsk LNG, which is under construction in the Baltic Sea region, is the first Russian project which from project outset has targeted LNG-fueled vessels as consumers. Beyond these projects, there are several LNG bunkering projects in the planning stages in Russia - such as Vladivostok LNG, and Gorskaya LNG. Vladivostok LNG will focus on mid-scale LNG production for industrial users and gas transportation projects at the same time as bunkering for LNG-fueled vessels.
The ECA stimulates LNG consumption for maritime fuel in Russia and the order of 10 «Afrаmaks class» oil tankers by «Rosneft» and 6 by the Russian shipping company «Sovcomflot», can serve as a good example. These «Afrаmaks» oil tankers are LNG-fueled vessels and will operate in the Baltic and North Sea. 10 Afrаmaks oil tankers will be built at «Zvezda» shipyard in Vladivostok. The shipyard «Zvezda» has the potential to build LNG tankers and LNG-fuelled vessels. Having own LNG and shipyard can be a catalyst for the sales of LNG-fueled vessels and the development of LNG bunkering projects. Transition to green maritime fuel is a global tendency and Russia is active in this trend too. Along with the development of other small-scale LNG sectors, the wider use of LNG for vessels presents a broad range of participants in the Russian market with good prospects to achieve their economic and environmental goals.
Countries in East Asia are the largest LNG importers in the world and in the Asia Pacific region there are a large number of LNG regasification terminals. This provides good prospects for LNG bunkering development as many small-scale LNG projects are located in the proximity of regasification terminals. Leading global ship-manufacturing companies are located in East Asia. Therefore, the construction of LNG bunkering infrastructure and LNG-fueled vessels can indirectly subsidise local shipyards, which are going through a difficult time as a result of low orders and global recession in the sector.
Singapore is an established global financial and oil trading hub. It also aspires to be a regional hub for LNG bunkering. The Singapore Maritime Authority has developed «The Maritime Singapore Green Initiative» which seeks to reduce the environmental impact of shipping and related activities and to promote clean and green shipping in Singapore. It is a comprehensive initiative comprising five programmes. These programmes are designed to recognise and provide incentives to companies that adopt clean and green shipping practices over and above the minimum required by International Maritime Organization (IMO) Conventions. According to the programme, $2 million (Singaporean dollars) will be provided for the construction of newly built LNG-fueled vessels and they also benefit from a 25% reduction in port duties for vessels using fuels with Sulphur content of less than 1% while at-berth in Singapore.
In China, there are more than 270 LNG fueled river-going vessels in operation. The Chinese Ministry of Transport will provide subsidies of around 1 million yuan for new LNG-fueled river-going vessels and to ship-owners who modernise and retrofit old vessels into LNG-fueled vessels. The majority of LNG-fueled vessels in China are river-borne vessels and operate on the Yangtze river.
Efforts to develop LNG bunkering is ongoing in Korea and Japan as well. The Ministry of Land Infrastructure, Transport and Tourism in Japan has drawn a road-map to develop the port of Yokohama into an LNG bunkering center. The South Korean government has announced a road-map for supporting the LNG bunkering industry in May, 2018. The road map is designed to develop the LNG bunkering industry, solve environmental issues and support the shipbuilding industry. The possibility of buying LNG at a competitive price and Russia’s close proximity will provide opportunities for Russian LNG and buyers in the Asia Pacific.
Growing market and new opportunities
LNG is well positioned as an alternative to traditional marine transport fuel thanks to its capability to meet strict environmental regulation on air pollution and its price-competitiveness with other maritime fuels such as mazut and diesel. Low operational costs can compensate for the high capital cost for constructing new ships or retrofitting old ships in the long-term. The small-scale LNG market is not a mature market and as it is still developing, it can provide good prospects for ports, companies and consumers which are not positioned as major players in bigger markets such as oil or large-scale LNG markets.