The shipping industry has placed a massive bet on liquefied natural gas as an alternative fuel — as a bridge between traditional fuel oil and whatever comes next, whether it’s methanol, ammonia, hydrogen or something else. Shipowners have spent billions of dollars fitting ships to burn LNG.
What if they’ve made an extremely expensive mistake?
The outcome of shipping’s enormous investment will hinge on price: whether LNG will be cheap enough versus fuel oil, and how regulators treat natural gas’ life cycle greenhouse gas emissions in the EU Emissions Trading System (ETS) and a possible global carbon tax, which the International Maritime Organization is pushing to implement by 2027.
There are already questions about the LNG-fuel option — newbuilding contracts placed this year have shifted dramatically away from LNG toward methanol. On Monday, fresh questions emerged with the publication of a headline-grabbing study that cast doubt on natural gas’ value as a transitional fuel.
The peer-reviewed study — authored by researchers from Harvard, Brown, NASA and Duke — highlighted the effect of methane leakage during the full lifecycle of natural gas production, transport and use.
“Numerous scenarios run in this study indicate that the benefits of gas do not outweigh coal at certain methane leakage rates,” it concluded. Satellite and high-altitude plane assessments “are demonstrating gas leakage rates that meet emissions intensity parity with coal.”
One of the authors, Brown University’s Deborah Gordon, told The New York Times that even small methane leakages render natural gas “as bad as coal” and a fuel that “can’t be considered a good bridge or substitute.”
‘Many are now playing a game of wait-and-see’
LNG is widely accepted as the most practical transitional alternative fuel for shipping. “It already has an established technological and operational track record, coupled with existing shoreside bunkering infrastructure,” Adam Kent, managing director of Maritime Strategies International (MSI), told FreightWaves.
Dual-fuel designs give shipowners the flexibility to continue burning traditional marine fuel at times when LNG is more expensive than fuel oil, as it was in recent years.
The downside is uncertainty over how LNG will be treated under future regulations. Lower confidence in LNG-fuel designs as a means to “future-proof” newbuildings equates to fewer orders. Studies like the one released this week could further undercut confidence.
“The general uncertainty over fuels and technologies is unquestionably preventing some owners in the dry bulk and tanker space from ordering new vessels,” said Kent.
“Many are now playing a game of wait-and-see, assessing the success of those that have already taken the dual-fuel plunge, and keeping a close eye on the reliability of the technology as well as the availability and price of lower-carbon fuels.”
Shipping’s major investment in LNG fuel
The footprint of LNG-fueled ships will nearly double in the coming years as new vessels are delivered by shipyards.
According to data from Clarksons Research, there are currently 936 commercial vessels (including passenger ships) in service that are “LNG-capable,” i.e., designed to burn either fuel oil or LNG. An additional 876 LNG-capable ships are on order.
There are also 413 ships in service that are “LNG-ready,” meaning they’re designed to be more easily converted to future LNG-fuel use, and an additional 95 LNG-ready ships on order.
Container shipping has invested heavily in LNG-fuel designs. Of total container ships in service and on order, 475 are either LNG-capable or LNG-ready, according to Clarksons. That comprises 3.6% of the on-the-water fleet and 29.4% of newbuilds.
The tanker sector is also a major buyer of LNG-fuel designs, although its orderbook is dramatically smaller than container shipping’s. Of tankers in service and on order, 350 are LNG-capable or LNG-ready: 2% of the existing fleet and 20.1% of newbuilds.
Dry bulk and car carriers also have material LNG-fuel design exposure. There are 169 LNG-ready or LNG-capable dry bulk carriers in operation or on order, according to Clarksons’ data. The caveat is that half of the dry bulk total comprises LNG-ready ships already in service that have to be converted for LNG use in the future.
LNG buy-in is more pronounced in the car carrier sector than in dry bulk. There are 137 car carriers in service or on order that are LNG-capable or LNG-ready, and the vast majority (124) are dual-fuel newbuilds that are yet to be delivered. LNG-capable ships represent 82.7% of car carriers on order.
Overall, Clarksons’ data shows a surge in new orders for LNG-fueled vessels in 2021 and 2022 coinciding with container shipping’s historic splurge at shipyards, following by a drop off this year coinciding with container shipping’s pronounced shift to methanol and the ongoing dearth of orders for new tankers and dry bulk carriers.
High cost of LNG-fuel designs
Ships designed for LNG fuel use are expensive.
International Seaways (NYSE: INSW) is one of the tanker companies that have ordered dual-fuel LNG-capable tankers. It ordered three LNG-fuel very large crude carriers (VLCCs) backed by seven-year charters to Shell.
Lois Zabrocky, CEO of International Seaways, said at a Capital Link conference in March, “If you order a VLCC in Korea, it’s probably $120 million. Then tack on another $15 million to $20 million for dual-fuel LNG capability. That’s a really big number.” (Brokerage Fearnleys puts current VLCC newbuild pricing at $121 million, in line with Zabrocky’s earlier estimate.)
MSI Director Will Fray wrote in a report released in May, “As a broad rule of thumb, LNG dual-fuel newbuild container ships are currently 20-25% more expensive than their conventionally fueled counterparts.”
Clarksons’ data shows that most LNG-capable container ship orders are for vessels with capacity of 12,000 to 16,999 twenty-foot equivalent units. Such newbuilds currently cost over $130 million. This implies that many container ship owners are spending over $25 million per ship to add the LNG-fuel option.
Do the math for the overall market and it puts shipping’s wager on LNG fuel in the billions.
SEA-LNG: Immediate GHG reductions of up to 23%
This is a wise investment that will pay off for the environment, according to proponents of LNG marine fuel. They say it will allow the shipping industry to bridge the gap to future fuels and will reduce GHG emissions despite methane leakage.
LNG fuel for shipping is promoted by the organization SEA-LNG. Asked about the newly released study likening natural gas life cycle emissions to coal’s, SEA-LNG COO Steve Esau told FreightWaves that decarbonization regulations “should be based on the current scientific consensus set out by the IPCC [Intergovernmental Panel on Climate Change] and associated metrics adopted by the UNFCCC [United Nations Framework Convention on Climate Change].”
Esau pointed to Sphera’s 2nd Life Cycle GHG Emissions Study, which he said “is widely recognized as the definitive study on the emissions associated with the use of LNG as a marine fuel.” (The study was commissioned by SEA-LNG and industry association The Society for Gas as Marine Fuel.)
The study shows that “LNG provides immediate reductions in GHG emissions of up to 23% on a full life cycle — well-to-wake — basis, including methane, compared with traditional marine fuels,” said Esau.
“In the short and medium term, LNG offers a low cost of compliance with European regulations such as FuelEU Maritime and the EU ETS, and any future global carbon tax proposed by the IMO. Longer term, bio and synthetic LNG offer an incremental and low-cost pathway to net-zero emissions,” he said.
The controversy over methane leakage is nothing new. Maersk Chairman Robert Maersk Uggla said during his company’s annual general meeting in March that due to “significant methane slip,” a Maersk life cycle analysis of LNG fuel showed “it’s actually more damaging to the environment than some other conventional hydrocarbon fuels.” (Maersk has invested entirely in methanol-fuel designs.)
According to Esau, “The industry recognizes the issues of methane emissions and has made significant progress in addressing them, mainly on a voluntary basis. Emerging regulations, reflecting evolving science, will accelerate the required operational improvements and technology innovations in the energy supply chains and on board ships.”
- Is IMO 2020 shipping regulation worsening global warming?
- How ‘historic’ decarbonization deal could inflate future shipping rates
- How push to decarbonize shipping slowed tanker building to a trickle
- New shipping regulation to combat global warming is under fire
- Ship fuel cost way down from war peak, but ‘green’ fallout looms
- New shipping regulation to combat global warming is under fire
- Shipping climate clash: What it means to bottom lines
- Can green shipping scheme lick ‘herding cats’ dilemma?
- Shipping decarbonization hinges on owners of cargo, not ships
- Shipping unveils blueprint for collecting future carbon tax
The post Thousands of ships could use LNG as fuel. Is that a good thing? appeared first on FreightWaves.