New global regulations affecting marine fuel specifications were brought into place last year by the International Maritime Organization (IMO) that reduced the maximum level of sulfur emissions for all vessels travelling in an Emission Control Area (ECA) to 0.1%. This regulatory squeezing is likely to continue: a global sulfur cap of 0.5% may also come into force by 2020 with the EU already having committed to this date.
Any vessel that comes through these areas will now have to burn low sulfur fuel, such as marine gas oil (MGO) or LNG, instead of fuel oil (FO). Vessels will now also need to stimulate exhaust gas scrubbing, which reduces sulfur emissions to acceptable levels before it enters the atmosphere.
Where we are today
In recent years, the cost of compliance has been a mounting concern for ship owners and operators. However, these new regulations arrive at a time when oil prices are falling, which has allowed ECA compliant MGO to present itself as a feasible option. Previously, the price of MGO has been considered by many to be prohibitive as a long-term compliance option. As a result, the investment landscape for those investing in alternatives to MGO has significantly changed. For example, a reduction in the price differential between high sulfur fuel Oil (HSFO) and MGO will negatively impact the payback time for scrubbers.
The gas market has not mirrored the significant fall in price witnessed by crude oil. Consequently, the price advantage once offered by LNG as an alternative to MGO no longer yields the same value. As a result, the business case for LNG as a bunker fuel is significantly more challenging in the near term.
For many owners, this lower oil price has given them time to hold back on investment decisions about scrubbers or switching to LNG, both of which require significant capital investment. However, despite these obstacles, the momentum for LNG as a bunker fuel continues.
Supply and demand
As a result of increasing production and new sources of supply, largely from developments in Russia, the US and Australia, global supply is set to expand over the next few years. Although this boom will support the growing demand for LNG as a bunker fuel, the short-term picture is one of oversupply, particularly if current oil price levels remain.
The market for LNG as a bunker fuel will expand at a rate of more than 60% per year for the next 10 years, and has already been embraced in Northern Europe and North America.
Expanding ECA regions is likely to be a large component of this increased demand, as is the growth of LNG bunkering in Asia due to tighter regulations on sulfur emissions. China has recently published an action plan that promotes LNG as a marine fuel and supports the establishment of China’s own ECAs. Additional proposals have also been put forward to extend ECAs to Japan and Southeast Asia.
Progress since January 2015
The first year of ECA regulation has seen significant progress in establishing LNG as a global marine fuel: recent regulations have clearly established a design for LNG-fuelled vessels and provided a much needed international framework.
Although there have been questions about compliance, the results so far have been encouraging, especially in Europe. Data submitted to the EU reports that of 1458 ships inspected in 1Q15, 6% (89) showed non-compliance, mostly related to documentation errors. Only 1.4% was based on fuel sulfur tests. Figures from Denmark suggested that 98% of the ships that passed an emissions monitoring station in the Great Belt complied with the ECA sulfur limits.
Progress has also relied on key stakeholder ‘buy-in’. In the past year some significant players have come to the table. For example:
- Carnival Corp., the world’s largest cruise company, has thrown its weight behind LNG by ordering what it sayd will be the first cruise ships able to run on LNG.
- Shell plans to charter LNG-powered barges for use in northwest Europe from late 2016 while North America’s first LNG bunker barge was scheduled to be launched in February.
- Initiatives to further support LNG can be seen by port authorities in Europe. For instance, in Rotterdam, a discount on port fees is applicable for vessels loading LNG bunkers until 2020.
The adoption of LNG as a marine fuel does, however, face numerous challenges. There is continued uncertainty around regulatory developments, especially around when the global sulfur cap of 0.5% will be introduced. This, coupled with a low oil price, does not create a climate which entices capital investment.
The varying price of LNG globally also continues to be a challenge: for example, an increase in global supply is expected to soften the global spot LNG price but that does not necessarily translate to lower prices. Ambiguity surrounding LNG pricing is largely a result of uncertainty around how LNG will be indexed in the bunker market; as an oil-indexed price or a gas-indexed price based on National Balancing Point.
One of the biggest hurdles to LNG as a global marine fuel is the perception that there is a lack of infrastructure to support it, which has hampered investment from ship owners. Suppliers, on the other hand, have sought evidence of demand, which for many has progressed to committing to investment. Investment has largely been directed towards infrastructure to support truck delivery, which can be restrictive for larger vessels and trades. However, current developments suggest more support for bunkers.
Outlook for LNG
Pursuing a flexible strategy could be the best answer when faced with regulatory uncertainty. Duel fuel engines that can burn both gas and fuel oil and can be converted to LNG will help towards mitigating the risks.
Although the price relationship between marine fuels will continue to underpin the business case for LNG investment, advancements in infrastructure and LNG production suggest evidence of increasing demand and that stakeholders are expecting continued tightening of regulatory requirements and a return to higher oil prices.
While there are a lot of favourable trends enabling LNG bunkering, its cost competitiveness remains uncertain. The challenge today is making decisions in the near term which do not restrict margin retention in the long term; in other words ‘future-proofing’ your business model.
Written by Grace Quinn, Markets & Trading Consultant at Baringa Partners. Edited by Callum O'Reilly
Read the article online at: https://www.lngindustry.com/special-reports/19042016/lng-bunker-fuel-weathering-the-oil-price-storm-2312/