Despite the current oil price dip, large marine operators continue to pursue the use of natural gas as a fuel that offers long-term price stability, operational simplicity, and environmental advantages over scrubber systems, low-sulfur marine gas oil and other marine fuels. Compounded by the long asset life of the average marine vessel, natural gas offers an appealing solution to a variety of issues faced by operators around the world. LNG as a marine fuel has moved passed the demonstration phase and early project efforts have created fully functioning LNG supply chains that will, in turn, facilitate a continued acceleration and expansion of natural gas powered marine vessels.
International Investment in LNG
Natural gas has proven to be a very viable replacement for other marine fuels in various operations, from tankers, container ships, and carriers, to tugs, cruises and ferries. In Europe and elsewhere, where diesel prices remain high, governments provide direct support to deploy cleaner vessels and supporting infrastructure, which is combined with strong regulation that prohibits the operation of heavily polluting fuels within controlled coastal regions. Some operations – such as the Fjord1 ferry line in Norway – have been running a 100% LNG fleet for many years already, and others are moving in this direction.
New projects are announced almost weekly, with planned or existing operations in the Netherlands, Singapore, Scotland, Spain, Ireland, China, the United Arab Emirates, Germany, Australia, and others. Ports in these areas, including the Port of Antwerp in Belgium and the Port of Rotterdam in the Netherlands, have developed comprehensive and integrated strategies to facilitate the deployment of LNG vessels. These ports have detailed plans for bunkering services across multiple countries, incentive programs to encourage LNG vessels to call at their ports, and other strategies to help drive the market for this clean fuel. The cooperation, innovation and progress achieved with these projects are all tremendous examples that should be carefully considered by the gas-rich countries such as the U.S. and Canada.
Domestic LNG Sails Ahead
In North America, natural gas powered ships have become increasingly appealing with the phasing in of more stringent emission standards and the Emission Control Areas (ECAs). When the price of diesel began its downturn, some operators opted for the use of scrubbers, low-sulfur marine fuels, and other engine technologies to meet regulations. However, ship owners are now beginning to better understand the shortcomings of these systems. At the same time, those with the knowledge and preliminary investments in a natural gas pathway are seeing themselves as competitively positioned for the long-term. A few key projects in North America include:
- Harvey Gulf International Marine, an operator of offshore supply vessels (OSVs) for deepwater operations in the Gulf of Mexico, continues to propel its natural gas operations forward at an impressive rate. Five of the six LNG-powered OSVs Harvey Gulf has ordered have been delivered and entered service with Shell, with additional units to soon follow. In addition, the company recently received approvals from the American Bureau of Shipping and the United States Coast Guard for a 4,000 cubic meter LNG articulating tug barge.
- TOTE Maritime’s two LNG-fueled container ships (Isla Bella and Perla Del Caribe) are the world’s first and have logged more than two years of service making regular weekly runs between Florida and Puerto Rico. Jax LNG, a partnership between Pivotal LNG and Northstar Midstream, has started construction of a LNG facility at Jacksonville’s Dames point. The new facility will eventually produce LNG that will be transferred to TOTE’s vessels via a dedicated-LNG bunker barge (Clean Jacksonville), which is currently under construction in Texas.
- Crowley will soon put into service two LNG powered ConRo ships (El Coqui and Taino). The vessels, which are currently under construction in Pascagoula, MS, by VT Halter Marine will operate between Jacksonville, Florida and San Juan, Puerto Rico. A new LNG plant in Jacksonville, FL, is currently under construction by Eagle LNG and will supply LNG to these vessels. Crowley Maritime has also taken delivery of four LNG-ready petroleum tankers.
- In Canada, LNG-powered ferries are making extraordinary progress. The Societe des traversiers du Quebec (STQ) took delivery of the first natural gas ferries to operate in Canada, with two additional ships to follow. Seaspan Ferries Corporation recently took delivery of its second of two LNG commercial ferries (Seaspan Swift and Seaspan Reliant), while BC Ferries has taken delivery of three new LNG-powered Salish Class ferries (Salish Orca, Salish Eagle and Salish Raven). BC Ferries also expects to conduct LNG retrofits of two existing Spirit Class ferries (Spirit of British Columbia and Spirit of Vancouver Island) beginning in late 2017.
- Canada is seeing progress in more than just ferries. Quebec’s Groupe Desgagnes recently launched the second of four LNG dual fuel ships — one of which transports asphalt-bitumen on the US East Coast and in Canadian waters, the other three will be oil/chemical tankers.
Dozens of LNG Vessels Confirmed to Hit the Water in the Years Ahead
In the last 12 months, the North American LNG marine market has seen exceptional progress. While this is exciting and notable, this is just the beginning. As noted above, there are currently more than two dozen natural gas powered commercial marine vessels on order for operations in the U.S. and Canada. Now in various stages of design, build and deployment, these vessels will result in 300% market growth in the next few years. Beyond these forthcoming deliveries, industry experts expect to see significant additional near-term growth, especially in applications such as cruise ships and other vessels that spend a majority of their life in the North American ECA.
Nearly 20 percent of the cruise ships now on order will be LNG-powered, with Carnival Corporation leading the way here with their Aida Prima already running on LNG and a total of seven LNG ships to be delivered beginning in 2018. MSC Cruises, Royal Caribbean and Disney Cruise Lines all have ordered LNG-powered cruise ships.
In the last 12 to 24 months, many in the LNG industry were talking about the cruise sector potentially being the next big opportunity for natural gas; looking back, these premonitions were clearly correct. Today, there’s growing focus and attention on the tanker and car carrier lines as the next segments to move to clean-burning LNG.
To prepare for this forward growth, LNG production plants and bunkering strategies are being aggressively developed from the Pacific Northwest to South Florida. To meet the fuel needs of this growing fleet, a half dozen new LNG production plants from Jax LNG, Eagle LNG, and Puget Sound Energy’s Tacoma LNG are being built, and/or existing plants—such as FortisBC’s Tilbury facility—are being upgraded and expanded. Bunkering vessels of various shapes and sizes are also being designed, constructed and delivered, and other innovative truck and rail-based supply chain solutions are being developed. In spite of the low oil price environment, it is an exciting time to be in the LNG marine business.
Beyond the engines, fuel and supply chain solutions that are being deployed in the market month-after-month, tremendous progress is also being made on training programs, standards and other considerations needed to accelerate the use of LNG as a marine fuel. A cross-industry initiative called SEA\LNG was recently launched to help further address market barriers and stimulate demand for LNG vessels. Founding members include Carnival Corp, DNV GL, Engie, ENN, GE Marine, GTT, Lloyd’s Register, Mitsubishi Corp, the NYK Line, the Port of Rotterdam, Qatargas, Shell, TOTE and Wartsila.
Environmental Stewardship, Reduced CapEx Costs and Shorter ROI Driving Market Penetration
While the North American market for LNG powered marine vessels has only been under development for the last five or so years, tremendous innovation has occurred in this relatively short period of time. This innovation continues with new approaches, technologies, and systems designed to significantly reduce Capex costs and therefore the ROI periods for new natural gas ship builds. One soon-to-be-announced innovation could reduce the incremental cost of an LNG vessel by as much as 50%, which would then reduce ROI periods to as little as two to three years.
Such cost reductions will further accelerate investment in LNG as a marine fuel in the years to come, particularly as international rules and regulations require the marine industry to dramatically decrease emissions of sulfur—a major component of air pollution and acid rain. These requirements put in place by the International Maritime Organization (IMO), the body which governs all international shipping, were recently affirmed to require a cap on the sulfur content of marine fuels, also known as bunkers. The new requirement—that marine bunkers contain no more that 0.5% sulfur by 2020—will have a dramatic impact on the operations of all of the world’s marine vessels. Global consulting firm Wood Mackenzie recently reported1 that the IMO’s sulfur cap rule may cost shippers up to $60 billion in higher fuel costs annually; a cost that creates tremendous opportunity for the LNG industry.
Fortunately, shippers have a lower cost option when deciding what fuel to use to power their ships. Not only is LNG sulfur-free, but it also emits about 25% less carbon. The international marine industry has been aggressively pursuing the use of LNG as a marine propulsion fuel long before the IMO affirmed the 0.5% sulfur cap in October 2016, but the 2014 collapse in oil prices dampened enthusiasm somewhat. Now that the price of oil has nearly doubled since its January 2016 lows, coupled with the IMOs decision not to delay implementation of the new regulation, interest in low emission, low cost LNG has skyrocketed. In addition, there is little doubt that the price of petroleum fuels will inevitably continue its traditional roller-coaster ride and in the long term, rise.
Of course, as we have seen with companies like TOTE, Carnival and many others, investments in LNG fueled vessels often come as a result of a company’s strong commitment to environmental stewardship and sustainability; because reducing discharge from their vessels is simply the right thing to do.
(Originally published in LNG Industry Magazine, July 2017)