LNG as a Transport Fuel

On road vehicles account for 50% of demand for diesel in Australia*. In 2017/18 13,800 megalitres of fuel was used in Australia for road freight. Diesel accounted for 86% of this (ABS). Road freight activity is expected to increase by 50% from 2016 to 2036*.

Increased use of LNG in trucks and trains in Australia would reduce Australia’s reliance on imported diesel and oil, and reduce Australia’s energy supply risk if trade routes are disrupted by military conflict.

The potential for increases in diesel prices due to changes in marine fuel regulations could also encourage the development of LNG as a transport fuel in Australia.

Liquid fuel security

The Commonwealth Government’s “Liquid Fuel Security Review - Interim Report” was released earlier this month. The report identifies that Australia’s stock of diesel is typically equivalent to 22 days of normal consumption. Stocks of aviation fuel and petrol were at similar levels to diesel. Australia’s stocks of diesel held in Australia are equivalent to 53 days of net imports. This is less than Australia’s international obligation to hold the equivalent of 90 days of net imports.

The Interim Report identifies LNG as a potential substitute for other fuels in transport applications given the LNG production capacity in Australia.

Marine fuel regulations

IMO 2020 refers to regulations that come into effect on 1 January 2020 capping the sulphur content of fuels used by ships to 0.5%.

The International Energy Agency's (IEA) base case is for demand from the shipping industry for marine gas oil, which is similar to diesel, to more than double in 2020 (Oil 2019).

The IEA expects marine gas oil prices in 2020 to increase by 20% under a scenario of low compliance by ship owners with IMO 2020. The IEA estimated that prices could double in 2020 if there is full compliance with IMO 2020.

There is uncertainty concerning the timing for the shipping and refining industries to adjust to IMO 2020 so that any near term upward pressure on gas oil prices eases.

A feature of the commercial arrangements in the shipping industry that is adding to the complexity of compliance with IMO 2020 is discussed at the end of this paper.

The driver for increased marine gas oil demand is that in the short term ship owners have limited pathways to comply with IMO 2020.

One solution is to install exhaust gas cleaning systems, which allows ships to be compliant and use high sulphur heavy fuel oil. Although the uptake of this solution by January 2020 is expected to be relatively low.

Only a few thousand ships are expected to be fitted with these systems by 2020, out of a global trading fleet of about 50,000 ships.

The second solution is the use of low sulphur fuels. There is uncertainty concerning the availability and compatibility of low sulphur heavy fuel oil. Marine gas oil is a low sulphur fuel that would enable ship owners to be compliant.

The use of LNG as a fuel is a medium term solution on most ships.

LNG for transport in Europe and North America

LNG is increasingly being used as a road transport fuel in Europe. Networks of LNG refuelling stations are being developed in Europe. This is in response to a European Union Regulation requiring the development of a network of refuelling sites along the core European road network.

The availability of LNG fuelled trucks has been increasing. Scania, Volvo and Iveco are three manufacturers of LNG fuelled trucks.

Iveco has delivered 25,000 gas-powered vehicles. Iveco manufactures LNG fuelled trucks with an official range of 1,600 kilometers.

There are significant environmental benefits from the use of LNG as a fuel. Compared with an equivalent diesel truck engine an engine running on LNG emits around 90 percent less NO2 emissions, 99 percent less particulate matter, and up to 15 – 20 percent less CO2 and is 50% quieter.

Filling time for a LNG fuelled truck is the same as that for a diesel fuelled truck. LNG fuelled engines are more fuel efficient than diesel engines and have longer operating lives.

GE Transportation offers kits to retrofit diesel locomotives for dual fuel operation using either diesel (up to 100%) or LNG (up to 80%). Florida East Coast Railway has converted it’s fleet of locomotives to LNG/diesel dual fuel.

LNG infrastructure in Australia

There is limited LNG distribution infrastructure within Australia. Woodside earlier this month commissioned an LNG truck loading facility at its Pluto LNG project, initially to supply LNG to EDL operates a small scale LNG plant in Western Australia from which it delivers LNG by truck to power stations in the Kimberley region.

Elgas sources LNG from small scale liquefaction plants and supplies it to customers, including operators of about 200 heavy vehicles, in Tasmania and eastern Australia.

EVOL LNG operates a small scale LNG liquefaction plant at Kwinana in Western Australia. The LNG is supplied by road to customers.

The operating LNG export terminals in Australia and the proposed LNG import terminals may provide the foundations for more extensive LNG distribution infrastructure within Australia.

These terminals provide potential supply sources of LNG covering western, northern, north eastern and south eastern Australia.

Two or more onshore LNG export terminals are located at or near each of Gladstone, Darwin and northern Western Australia.

Several LNG import terminals are proposed for south eastern Australia. The most advanced of these are at Port Kembla in New South Wales and at Crib Point in Victoria.

LNG distribution in Australia

Several of the LNG export terminals are located on islands near the coast and are not connected by bridges to the mainland. LNG export terminals are also typically remote from onshore infrastructure corridors such as rail lines and highways.

This limits the potential for the transport of LNG from these terminals by either truck or train.

Small scale LNG carriers may provide a more flexible solution to the logistical challenges of connecting the LNG export terminals to onshore fuel infrastructure. For background on small scale LNG visit www.drakeenergy.com.au/news for a discussion paper on this topic.

LNG for road transport could be developed in conjunction with the development of LNG bunkering. This is particularly relevant in northern Australia for ports from which iron ore and coal are loaded on ships dedicated to exports to Asia. For background on LNG bunkering visit www.drakeenergy.com.au/news for a discussion paper on this topic.

The infrastructure required to support the development of LNG as a road transport fuel includes:
• small scale LNG carriers;
• small scale LNG storage facilities;
• networks of LNG refuelling stations; and
• possibly modifications to facilities at LNG export terminals.

LNG could also be supplied by supplementing the above infrastructure with small scale LNG liquefaction plants that are located near gas transmission pipelines.

Compliance with IMO 2020

A complexity for the global shipping industry in preparing for IMO 2020 is the commercial arrangements between ship owners and companies that charter ships. These arrangements are documented in an agreement, known as a charterparty. Under these agreements the charterer pays for fuel. It is in the charterer’s interest for ships to continue to use high sulphur heavy fuel oil as the cost of this is lower than for low sulphur fuels.

The complexity stems from ship owners incurring the cost of installing exhaust gas cleaning systems. The installation of these systems is necessary for charterers to be able to benefit from being able to continue to use high sulphur heavy fuel oil and therefore pay the lower price for this fuel compared to low sulphur alternatives.

The risk for ship owners is that exhaust gas cleaning systems may only be an interim solution or that they will not be able to pass on the cost of installation to charterers.

Drake Energy and Maritime Consulting