The Marpol Annex VI fuel regulations prevent ship operators from using standard 3.5% sulphur content fuel oil in favour of a 0.5% sulphur content fuel oil which doesn’t exist in sufficient quantities to meet demand. On several occasions I have compared this situation to a government telling its citizens that from January 2020 they can still buy regular coffee, but they can only drink decaffeinated coffee, unless they purchase their own portable decaffeination equipment or drink something else entirely. Readers of Macro Macchiato should be concerned!
An alternative which meets the sulphur (and nitrogen) requirements of the new regulations has been available for years. It is of course liquefied natural gas (LNG), the ginseng tea of bunkering. But LNG has struggled for adoption. There are several reasons:
1. Building LNG infrastructure has taken a long time and billions of dollars. It has required transparent future cashflow to achieve project finance, so most LNG has until recently been sold on multi-decade or multi-year contracts, leaving none for the bunker market.
2. Ship owners have been wary of building LNG powered vessels, fearing that the fuel would be unavailable, or scarce and expensive. To date it has only made sense to build LNG powered ships which bunker at a hub or which operate on defined short-sea routes. The market has been restricted to small ferries, barges, coasters and military vessels.
3. Bunker suppliers have been wary of investing in the infrastructure to store, transport and deliver LNG. LNG bunker barges are expensive and require a long-term view of returns to make sense. Onshore gas storage costs money too, while small bunker tanks on trucks or on traditional bunker barges add complexity and cost. The returns simply haven’t looked attractive.
With time, effort and money, these three drawbacks are slowly being overcome. Global LNG infrastructure now numbers hundreds of liquefaction and ship-loading facilities (LNG Trains in in the jargon) and thousands of ship-unloading and regassification plants, used to transfer the gas into overseas gas networks. There are now around 530 LNG tankers afloat around the world. They shipped around 317 Mn Tonnes of LNG in 2018, ten percent more than in 2017. Global LNG trade is forecast to grow to around 500 Mn T by the middle of the next decade, with a greater proportion being sold spot rather than on term contracts. That makes some available for bunkering – though the quantities remain uncertain as yet.
Some ship owners are investing in LNG powered ships. CMA-CGM is the latest, with its order of nine 22,000 box-capacity LNG powered containerships to add to the two that have been delivered this year. The LNG will be supplied by Total, the French oil and gas company, in a long-term deal which provides security for both parties. Container ships make good candidates for LNG bunkering as they operate on regular routes and schedules, making the refuelling planners’ lives easier. CMA-CGM committed in June to operate 20 LNG-fuelled ships by 2022.
The likes of Shell (the world’s biggest non-state gas producer) have invested considerable sums in LNG delivery infrastructure. In June, Shell took delivery of the bunker vessel LNG London and delivered the first cargoes of LNG fuel from it. The LNG London is on long term charter to Shell from its owners, Victrol and Sogestran. Shell will use it to deliver fuel in the Amsterdam-Rotterdam-Antwerp range, the busiest container port in Europe. Shell now has three LNG bunker vessels under operation.
LNG bunkering still has a long way to go. Rotterdam port authority reports 5,403 tonnes of LNG bunker deliveries in Q1 this year compared to 9,483 tonnes for full year 2018, 1,500 tonnes in 2017 and 100 tonnes in 2016. Fuel oil deliveries for Q1 this year were reported to be 1.9 Mn cubic metres, or about 1.7 Mn T. Still, great oaks from little acorns grow and the regulatory environment is on LNG’s side. If LNG deliveries at Rotterdam double each year, they will equal fuel oil deliveries in just six years’ time.
The Take Away
For a century ships have used residual fuel oil as it was relatively cheap and abundant, and the oil companies needed to find a use for the residue left at the end of the refining process. But for environmental reasons the fuel oil era is coming to an end. By the middle of this century, ships will have to cut their carbon dioxide emissions considerably, while they have an urgent regulatory requirement to cut oxides of sulphur and nitrogen emissions. LNG is one solution on the path to decarbonisation, while it meets the lower SOx and NOx regulations already. Until the global economy decarbonises and switches to renewables, hydrogen, cold fusion or fairy dust, LNG remains one of the main alternatives to residual fuel oil. It is the ginseng tea option for those who want to get off caffeine.