Will LNG Become A Fuel Of Choice For Shipping?
“Shipping needs to reduce its carbon emissions, so it has turned to LNG. According to some, it is still too dirty. ”
The United Nations’ International Maritime Organization (IMO) has been driving the global shipping industry to reduce its emissions. The most recent push, effective January 1 of this year, was to force all ships to switch from burning high-sulfur fuel oil to burning either low-sulfur fuel oil or some other lower-carbon fuel. They can also continue to burn high-sulfur fuel oil, but install scrubbers that remove the sulfur from the exhaust gas from burning the polluting fuel oil. One of the lower-carbon fuel oil options is liquefied natural gas (LNG). Its increased use is part of the global transformation of the world’s petroleum energy mix from high-carbon emission fuels to lower-carbon fuels.
Exhibit 13 (next page) shows graphically the latest breakdown of the world’s carbon emissions by sector in 2016, according to work done by Climate Watch and the World Resources Institute. It shows that the global transportation sector was the third largest emitter of CO2, after industry and buildings, at 16.2% of the estimated 50 billion tons per year of greenhouse gas emissions. Of that total, the global shipping industry represented 1.7%, or roughly 850 million tons, which was slightly below air transportation’s 1.9% share.
Exhibit 13. Shipping Is Small Share Of Global Emissions SOURCE: Our World In Data
The IMO’s push to reduce emissions – starting with sulfur – is expected to ramp up in future years as the organization is striving to cut shipping’s carbon intensity (i.e., its emissions per transport work) by 70% by 2050. It also hopes to reduce the industry’s total GHG emissions by at least 50% compared to 2008 levels. To achieve these goals, between 30% – 40% of all shipping fuel bunkered will need to be carbon neutral.
The sulfur cap on shipping requires that all ships use a fuel containing no more than 0.5% sulfur (SOx), or employ a scrubber. Low-sulfur fuel oil is essentially compliant diesel fuel. The switch, which requires the refining industry to significantly increase its clean-diesel output and make sure that it would be available in the world’s ports, had shipowners and regulators concerned about the impact on the economics and operation of the shipping industry. Would ships be able to find low-sulfur fuel oil everywhere they traveled? Moreover, would the fuel’s cost create economic challenges for the global shipping fleets? In the initial months of 2020, there appeared to be few incidents of a lack of fuel availability, and the cost of clean-diesel did not skyrocket, as some forecasters had predicted.
The picture for the shipping industry has been much more impacted by Covid-19’s economic shutdowns that have cut global oil demand drastically. It has created serious challenges for global trade, as consumer spending fell, as did global trade. That meant fewer ships were actively trading and port activity dropped.
Pre-Covid-19, the global shipping industry accounted for approximately four million barrels per day of oil demand, or roughly 4% of global energy use. Although all segments of the transportation industry were significantly hampered by the coronavirus, the shipping sector seems to be recovering, and possibly quicker than other oil-consuming sectors, as economic lockdowns ease and global trade increases.
LNG offers long-term promise for cutting carbon emissions. While practically eliminating emissions of sulfur and nitrous oxides, it also reduces CO2 emissions. If the global fleet were to switch to LNG tomorrow, the immediate CO2 reduction would be 15% compared to 2018 fleet statistics. An April 2019 independent analysis of LNG shows that its lifecycle GHG emissions reduction is up to 21% compared to conventional ship fuels. It is anticipated that these reductions will increase as technology improvements further reduce methane slip, the unintentional releases of methane from ship engines.
The shipping industry is not overlooking the potential for LNG as a solution to its long-term GHG emissions challenge. As of early this year, there were 175 LNG-fueled ships currently operating, excluding the approximately 600 LNG carrier fleet, the majority of which are LNG-fueled. There are 203 LNG-fueled ships on order, and 141 LNG-ready vessels in operation or on order. This would support the estimate by Reuters that the world’s LNG-fueled shipping fleet will grow to over 1,000 vessels by 2030. Virtually every category – cruise ships, container vessels, crude and product tankers, and bulk carriers – is represented in the LNG-fueled fleet. Additionally, ferries and bunker vessels are being powered by LNG. To further appreciate the LNG fleet growth, SEALNG, a UK-based multi-sector industry coalition aiming at accelerating the adoption of LNG as a marine fuel, indicates that as of February 2020, LNG can be delivered to vessels in some 93 ports with a further 54 ports in the process of facilitating LNG bunkering investments and operations. The growth of port services for LNG has been rapid. As of early February, there were 12 LNG bunkering vessels in operation with a further 27 on order and/or undergoing commissioning.
Each article and report we read has a different LNG-fueled vessel number, likely due to the timing of data collection. A report by the International Council on Clean Transportation (ICCT) showed two charts about the LNG fleet and its growth. They are based on data collected by IHS Markit through mid-2018, including vessels on order or under construction at that time. One chart shows the cumulative growth in the total number of LNG-fueled vessels, while the other chart shows the fleet growth by vessel type. We expect a chart prepared today would show a greater number of new vessels entering the fleet in 2021. That said, these charts provide an interesting perspective on the LNG-fueled shipping fleet.
Exhibit 14. Growth Of World LNG-fueled Shipping Fleet SOURCE: IHS Market
Exhibit 15. Growth Of LNG-Fueled Fleet By Category SOURCE: IHS Market
Some of the vessel owners adding LNG-fueled vessels to their fleets are entering into long-term supply arrangements with oil companies. France’s CMA CGM is adding nine of the world’s largest container ships powered by LNG, as well as five slightly smaller LNG-powered container vessels, that have just started to enter service and will continue through 2021. It recently took delivery of its first large LNG-fueled container ship, Jacques Saade, which is capable of carrying 23,000 20-foot equivalent units (TEUs) and promptly established a world record for the largest load of filled containers on an LNG-powered ship.
Exhibit 16. World’s Largest LNG-fueled Container Ship SOURCE: CMA CGM
The company said, “The choice of LNG must be considered as part of the long-term strategy of the CMA CGM group to comply with future regulations, and to demonstrate the importance the group gives to environmental protection.” To supply its growing LNG-fueled fleet, the CMA CGM group entered into an LNG supply contract with French oil company Total in 2017, at the same time it placed its order for LNG-fueled container ships. According to officials with the group, the purchase price of the LNG bunker is lower than that of heavy fuel oil (HFO), however, the cost of delivery (supply ship and gas terminal operations) is higher, but the overall fuel costs are similar. As Total’s head of its integrated LNG offering noted, “The big challenge for this nascent market lies with its logistics infrastructure, which still needs to be optimized.”
To deal with this challenge, oil companies and fuel suppliers are investing in LNG bunkering vessels. According to SEALNG, at the beginning of 2019 there were just six LNG bunkering vessels in operation around the world. That number doubled by the beginning of 2020. As of September 2020, the fleet had grown to 15. There are a further 25 vessels on order or under construction due to enter service by the end of 2021. The growth of this fleet will be key to the growth of the LNG-fueled vessel fleet. For example, Carnival Corporation, which services more than half the world’s cruise business, has decided that LNG will be the fuel of choice for its future vessels. In April, Carnival’s Aidanova, its latest addition to its fleet, became the world’s first cruise ship to bunker LNG in the port of Barcelona. The ship is propelled by four dual-fuel engines and, while it continues to carry marine gasoil (MGO) fuel for safety reasons, it has been running on LNG for 98% of the time. The vessel sails primarily through the western Mediterranean and the Canary Islands, but it is not able to refuel at all ports along its route. Management is hopeful that as more LNG-fueled vessels enter the world fleet, LNG bunkering services will grow, but in the meantime, Carnival has contracted with Shell Oil Company to handle its bunkering needs in the region.
A potential problem facing the global shipping industry is the charge that methane slip actually may lead to LNG becoming a much greater polluting fuel than projected. The ICCT report was published in January 2020 in advance of the February meeting of the IMO’s Pollution Prevention and Response Subcommittee. The report stated that LNG emits between 70% and 82% more GHG emissions over the short-term compared to clean distillate fuels (MGO). The authors of the report consider LNG to be a disaster as a solution to carbon emissions. They were particularly critical of the most popular engine type as being the worst emissions offender due to it having the highest rate of methane slip. This engine is especially popular with cruise ships, whose owners promote them as having significant climate benefits.
The Pollution Prevention and Response committee held its February meeting. In reading the meeting summary on the IMO’s web site, there is no reference to any recommendations regarding LNG having been sent to the Marine Environment Protection Committee, which was scheduled to meet at the end of March. This meeting was postponed due to Covid-19, and was rescheduled for a virtual meeting last week. We were unable to find any agenda for the meeting to see if the topic of LNG was to be discussed.
While we wait to see what, if any, response there is to the ICCT report, it is important to have a grasp of its conclusions. We are not sure exactly what expertise the authors have, as it becomes evident that they rely on others for estimating the carbon emissions of the upstream oil and gas business, as well as the technical aspects of the engines studied. We also know that the authors based their work on the Intergovernmental Panel on Climate Change’s (IPCC) worst case environmental analysis.
The gist of the conclusions is captured in the chart in Exhibit 17 (next page) that shows the life-cycle GHG emissions by engine and fuel type, the 20-year global warming potential (GWP), and the higher methane scenario. The three engines studied in depth are the high-pressure injection dual fuel (HPDF) and the low-pressure injection dual fuel (LPDF) in two formats – two-stroke piston versus four-stroke piston engines. One was calculated to run at slow speed and the other at medium speed. The ship’s speed has become an important consideration, as methane slippage seems to be accentuated when vessels steam slowly, something that was done during the worst of the coronavirus as global trade slowed and shipowners sought to reduce operating expenses.
Exhibit 17. LNG-Fueled Ship Engine Methane Slip Issue SOURCE: ICCT
As the chart above suggests, the major problem is for LPDF engines due to their methane slippage. The report contains two appendices discussing engines and how they may leak or fail to burn completely the LNG entering the cylinders. In the discussion, there are points about new engine designs that are either now being installed or will be available for use next year that may mitigate much of the methane slippage. To counter this engine technology progress, the authors relied on data about vessel age. According to their data, 37% of merchant ships are five to 14 years old, representing 54% of the tonnage. In their mind, this attests to a fairly slow replacement rate. We do not know what database they relied on for this conclusion, but shipping goes in cycles and fleets of vessel types often are replaced at shorter lives than suggested. In fact, an article in The Wall Street Journal last week highlighted how the economic downturn due to coronavirus has boosted scrapping of cargo vessels and cruise ships. While there have been 557 ships demolished this year, compared to 889 last year, both years are only a fraction of the 1,996 vessels scrapped in 2012, all data from VesselValue, a maritime reporting service in the U.K. The 2012 scrapping total was the result of the shipping industry’s removal of a vessel overhang that existed after the 2008 financial crisis. Is it likely that a large number of vessels will be scrapped in the next year or two because of Covid-19? In addressing the issue of methane slippage, there are two important questions to be asked: 1) Are existing LNG-fueled ship engines capable of being retrofitted to reduce or eliminate methane slip, and 2) Will the world’s shipping trade recovery dictate an increase in the pace of vessel scrapping?
In an attempt to present a balanced assessment of the ICCT report, we are quoting its final conclusions.
“We compared the life-cycle GHG emissions of LNG, MGO, VLSFO [Very Low Sulfur Fuel Oil], and HFO [Heavy Fuel Oil] for engines that are used in international shipping, including on cruise ships. The maximum life-cycle GHG benefit of LNG was a 15% reduction compared with MGO over a 100-year time frame. Note that this is only achieved by ships using an HPDF engine and only if upstream methane emissions are well-controlled. Controlling upstream methane emissions could be challenging as more LNG production shifts to shale gas and given recent evidence that upstream methane leakage might be higher than previously thought.
“Using a 20-year GWP, which better reflects the urgency of reducing GHGs to meet IMO’s climate goals, and factoring in higher upstream and downstream emissions, we found no life-cycle GHG emissions benefit to using LNG for any engine technology. HPDF engines using LNG emitted 4% more life-cycle GHG emissions than if they used MGO. At least 90 ships that are in service or on order use HPDF engines. The most popular LNG engine technology—LPDF, four-stroke, medium-speed, which is used on at least 300 ships and is especially popular with LNG-fueled cruise ships—emitted 70% more life-cycle GHGs when it used LNG instead of MGO and 82% more than using MGO in a comparable MSD engine.’
LNG is making impressive inroads into the global shipping fleet. The demand for LNG-fueled ships is a direct response to the pressure on the global shipping industry to clean up its carbon emissions. While not a major contributor to global emissions, a shift to cleaner-burning LNG will help the industry. Prior to the outbreak of the coronavirus that derailed the world’s economies, energy consultant Wood Mackenzie had offered the view that LNG would power a growing proportion of the fleet in the future. They suggested that the demand increase, while stark in its growth rate, would have a gradual impact on future oil demand. In their forecasting, late last year, the firm projected a 70% increase in LNG bunkering in 2020, but it only equated to a displacement of just under 100,000 barrels per day. The question is whether the trend toward LNG-fueled ships might be derailed by an IMO decision that the fuel is not as clean as advertised. The agency might still allow the transition to occur, but put more regulations on the engines used. It also might allow these ships to operate until the IMO’s and Europe’s preferred hydrogen fuel system is established toward the end of this decade, as it could be burned directly as a fuel. Either way, we do not see shipping ending its growth, although its growth rate may slow, but the pressure will continue to build on cleaner fuels for ships. At the moment, LNG is the best alternative. Oil demand will be the loser, but, as pointed out earlier, the rate of demand destruction will be slow rather than a one-off demand implosion.