BLOG: MARINE INSIGHT

[#1]

Until quite recently the use of LNG as a marine fuel on North American coasts and inland waters was the stuff of student theses and largely ignored by shipowners. A passing interest is now morphing into a greater focus as the shipping industry faces the challenges of more stringent exhaust emissions and concerns over the long-term cost and viability of traditional fuels. MARAD (the U.S. Maritime Administration) further raised the profile of LNG by suggesting it could be the “Fuel of the Future” on the Great Lakes, and has recently funded a major study covering both commercial and technical implications.

Indeed, of late, we have witnessed new initiatives on the part of fuel suppliers, engine builders, legislators, fleet owners, ship designers and, with an eye to the revenue potential of LNG bunkering facilities, ports. Invitations to LNG ship fuel and supply-chain conferences pop up in our in-boxes several times a month and there are frequent press releases on pioneering installations suggesting that LNG is a viable alternative to oil. And yet many operators are not convinced and made long-term commitments to heavy fuels with exhaust gas after-treatment or just accepted the fact that expensive ultra-low sulphur distillate is the least problematic solution. The real question is whether a single course of action, without options, will allow fleet competitiveness and sustainability.

In reality, factors against LNG as a ship fuel are machinery capital cost, the need for larger shipboard bunkers - possibly detracting from cargo carrying capacity, an LNG supply chain that’s currently embryonic at best, reduced engine power density, and largely unfounded safety and reliability fears. However, these issues need to be balanced by the risk and cost of continuing with traditional fuels in ECA and SECA areas. There is no set formula for a cost/benefit comparison and each shipping company needs undertake their own analysis, based on their specific trade patterns and fleet mix, with a weather-eye to the future.  In a time of relative political and economic uncertainty, the future must be based on flexibility and options.

Pivotal facts related to LNG fuel are its characteristics of low cost and abundance. In North America the hub price for natural gas is approximately $3.50/mBTU. ULSD fuel, costing approximately $3.40/USgal, contains approximately 128,750 BTU which equals $26.4/mBTU. However, making a direct comparison with a “delivered” LNG price requires negotiations with a vendor, but there is every indication that the bunkered cost per mBTU will be most attractive in terms of return on capital employed. 

Assuming full migration to IMO and EPA Tier 3 emission rules and a full SECA area by January 1st 2016, these are, perhaps, the most important factors for comparing the bottom-line economics of oil based fuels and LNG:

• Installed capital cost. This will be significantly higher for an LNG plant and premiums of up to 70% have been discussed. It is partly due to the reduced power density of the engines themselves and more complex support and safety systems.  A dual-fuel installation will also be higher than spark-ignition because of the need for diesel fuel bunkers. Eliminating the need for exhaust gas scrubbing equipment will provide a very valuable offset.
• Fuel cost. Currently, there is a very clear advantage for LNG both in the short and longer-term. LNG appears to be priced continentally whereas oil is priced on a global basis. The real question is whether the higher machinery capital investment will see an acceptable return on capital employed from significantly lower fuel and emission control systems costs.
• Exhaust emissions compliance. Scrubbing SO2 and particulates from a heavy-fuel engine exhaust gas stream will be expensive in terms of shipboard real-estate and operating costs, especially in fresh water where quantities of relatively hazardous sodium hydroxide will be needed to control alkalinity of the closed-loop scrub water. This expense should not be underestimated. 50% aqueous sodium hydroxide currently costs about $0.50/kg and needs special handling considerations. Powering scrub-water circulating pumps add between 1% and 2% to ship fuel consumption.  Dual-fuel installations using ultra-low sulphur diesel (ULSD) for pilot ignition may require SCR after-treatment, post January 1st 2016,  but this is significantly lower in terms of capital and operating costs than wet or dry scrubbing. A spark-ignition/single fuel LNG system will likely require limited or no after-treatment.
• Redundancy. Modern marine engines are highly reliable and a single main-propulsion engine remains a popular choice. However, increased redundancy and operational flexibility are available from multi-engine installations and further extended with dual-fuel. In this case a divided machinery space is not required since a dual-fuel engine, developing an unsafe operating condition when using natural gas, can switch to diesel fuel and be considered “safe”. The resultant loss of ship performance is minimal. The ability to switch completely to diesel fuel as a come-home feature while maintaining rated engine power provides additional redundancy.
• Loss of carrying capacity. LNG bunkers need to have approximately 1.8 times the volume of diesel bunkers to provide the same vessel operating range. This can encroach on cargo space but each installation needs to be considered on its merits. Innovative LNG tank designs can mitigate loss of revenue-generating space requirements and, perhaps in the future, more frequent bunkering might be possible without losing overall ship productivity.
• Maintenance costs. The clean, low-carbon characteristics of natural gas reduce corrosive and abrasive engine wear to an even greater extent than ULSD. Engine component and lubricating life are extended and the machinery space, including bilges, will tend to stay cleaner. Consideration needs to be given to spark-plug life and cost on spark-ignition engines as they may be more maintenance-intensive than pilot fuel-injection equipment.

When conducting a cost/benefit analysis of available fuel types for existing and new ships, it is critically important to use totally-absorbed accounting methods. Being subjective (sticker-shocked) or overly-conservative might not result in an optimized propulsion and auxiliary plant. Such analyses might require more formal partnering with an engine and fuel supplier to ensure a free and open flow of critical, investment-grade information.

The “wild-card” is, of course, the future. But, assuming emissions legislation remains on-track and there is no medium- to long-term collapse of oil prices, the fundamentals are becoming increasingly clear. The astute ship owner will seek to retain as many fuelling options as possible to ensure the competitiveness and sustainability of the fleet.

Have any comments or questions about this article? We would love to hear your thoughts!

[#2]

Hello Kenneth,

Your article is timely and quite to the point.

It would seem to me the opportunities for LNG fueled vessels and conversions might be greatest for near-shore and harbor marine vessels, such as ferries, tugs, dredges, and possibly river tugs on the Columbia and Mississippi Rivers in the USA. One advantage to these marine locations is potentially closer/easier access to fueling infrastructures.

The one market that seems a natural location immediately is the Southern California Ports of Los Angeles/Long Beach which currently face huge challenges meeting local air pollution regulations which are significantly stricter than the 49 USA state federal standards,  Gas pipeline infrastructure may be an additional factor in North America as well.

Other locations might be San Francisco Bay, followed by Puget Sound.  

Local emission conditions can be a significant issue in driving the conversions, sometimes with economic benefits.

Thanks,

WLJ1943

[#3]

WLJ1943, thanks for the comment. You effectively expanded on my thoughts. It would appear that that major oil and gas suppliers are willing to install the bunkering facilities if they have sight of an expanding customer base. There seems to be a great deal of hesitancy on the part of shipowners to move forward even though some of the gas vendors are offering very attractive LNG prices in return for long-term bunkering contracts. Although it would be easy to give the the usual chicken-and-egg scenario perhaps there are other factors at play including the strength and sustainability of the recovery of the N. American economy (return on capital employed concerns), the posiibility of more emissions exemptions for owners wishing to continue with HFO and others that are discussed only at board level. It is difficult to predict whether the transition to LNG will be conservatively incremental or more rapid should one or two major fleets decide that LNG is indeed the fuel-of-the-future.

Ken.