With a little over a year to go before the tightening of maritime emission controls in northern Europe and North America, the momentum behind LNG as a marine fuel is going from strength to strength.
There is a multitude of prospective market participants at each part of the LNG marine supply chain. While many still have a way to go to firm up their market positions, some Scandinavian companies are building on their first mover status and setting a blueprint for the wider industry.
While there will always be some geographic specificities, the challenges these companies are overcoming will be echoed across all emerging LNG bunker markets.
LNG bunker developments are happening. Deals are being done. The pace of development will be gradual but the wave is building and the signs for a large market are there.
Europe blazes small scale LNG trail
From the multiple islands off the coast of Japan to the vast land mass across North America, there is increasing interest in the opportunities from emerging small scale LNG supply chains.
Whereas niche small scale LNG demand has been present in various isolated scenarios for some time, the forthcoming maritime emission regulations in northern Europe and North America are driving an anticipated step-change in the global small scale outlook.
The worldwide potential for LNG as a marine fuel could potentially reach more than 30 milion tpa by 2025, according to Paris-based integrated energy supplier GDF SUEZ, placing this specific aggregated 'small scale' segment on a par with the combined amount of LNG imported by China and India last year.
While bullish forecasts of the size of the market come with a series of disclaimers, not least due to the predominant 'wait-and-see' attitude of most prospective market participants, the opportunities for infrastructure investors and traders are both numerous and fraught with risks.
Tightening legislative controls of sulfur content in marine fuels in Europe and North America to 0.1% from 1% from the start of 2015 are setting the scene for LNG as a marine fuel to compete directly with refined fuel oil bunkers.
Additionally, a 0.5% sulfur limit - set to be rolled out globally by 2020 - means this demand is unlikely to be confined to these regions.
Low natural gas hub prices in Europe and North America compared with global LNG levels, coupled with high fuel oil prices, help counterparties on both sides of the negotiating table for LNG bunkering gain sufficient margins to close deals. It is in these regions that LNG as marine fuel are starting to take off.
The small but growing pool of LNG bunker projects in North America and northern Europe are seen as a blueprint for others. However, in Europe, like elsewhere, a series of challenges are being dealt with to varying degrees of success.
Economies of scale
One of the challenges involves adapting facilities and cost structures designed to cater solely for conventional LNG trade to the small scale trade.
The €750 000 (US$ 1.01 million) fixed cost of a berthing slot at Zeebrugge, for instance, is the same regardless of the vessel size.
This could be justifiable when a company is importing or re-exporting a conventional cargo, but with a 7500 m3 vessel it becomes cost prohibitive.
While Zeebrugge and Gate have proved the technical possibilities to berth small scale vessels, the terminals are improving the cost involved by specifically designing break-bulk facilities for the small scale trade.
In October, Zeebrugge started construction of a second jetty to accommodate ships as small as 2000 m3 from 2015 onwards. Zeebrugge capacity holder GDF SUEZ has been awarded with the additional berthing and long-term storage capacity associated with the new jetty, which it intends to use to reload small LNG carriers, such as LNG feeders and LNG bunkering vessels.
Insufficient firm commitments thus far, however, have prevented the Gate LNG terminal from sanctioning its planned break-bulk infrastructure.
Gate, nonetheless, has both imported and re-exported small scale volumes in September using its existing conventional-sized jetty and will continue to do so until a new small scale jetty is sanctioned.
Current berthing slots at Gate are more competitive than at Zeebrugge, according to market sources, underscoring the success of AGA Gas in securing two small scale LNG supply contracts from Gate LNG capacity holders. The first was with Dutch utility Eneco announced over the summer, beginning with a three-cargo string in September.
The second, which is in the final stages of negotiations, would see AGA Gas start receiving more volumes from Gate starting from 1 July 2014 from another capacity holder. Bank of America Merrill Lynch has previously said it has a supply agreement with a Scandinavian buyer starting in 2014 for which it has sourced Gate LNG volumes and sub-chartered a small scale LNG vessel.
The second supply agreement from Gate was concluded at a 100% TTF hub index price formula, ICIS understands, similar to the Eneco arrangement and comes in addition to a previous oil indexed small scale agreement that AGA Gas has with Norwegian small scale supplier Skangass.
The fixed premium to TTF would cover storage, berthing slots and LNG mark-up and is thought to be greater than US$ 2 - 3/ million Btu in total. The mark-up involved in any re-exports from Gate has to cover the initial purchase costs of the LNG into Gate, which can already be at above the hub price, a trading source added.
Written by Ludovic Aldersley, Global LNG Markets Deputy Editor, ICIS.Edited by Callum O'Reilly
This is the first of a two part special report on small scale LNG. The second part is available here: Small scale LNG developments (part two)
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Read the article online at: https://www.lngindustry.com/small-scale-lng/15112013/small_scale_lng_developments_446/