Regulatory drivers - IMO 2020 and beyond
The use of LNG as a fuel in the marine transportation sector has been increasing over the last decade.
Regulatory initiatives to reduce sulphur dioxide (SOx) emissions from the marine sector are driving the uptake of LNG as a marine fuel.
In January 2020 the International Maritime Organisation’s cap on the sulphur content (IMO 2020) of marine fuels will be reduced from the current 3.5% to 0.5%.
Sulphur Emission Control Areas (SECA) have been established by some countries to cap sulphur emissions from ships to 0.1%. The areas covered include the Baltic Sea, North Sea, the west and east coasts of North America and the United States Caribbean Sea.
In 2020 a SECA will commence applying to inland waterways in China and from 2022 this will be expanded to China’s coastal territorial waters.
Heavy fuel oil, known as HFO, is widely used in the global shipping industry as bunker fuel. High sulphur HFO has a sulphur content greater than 0.5%.
The International Maritime Organisation has also developed a strategy to achieve a minimum of a 50% reduction (compared to 2008 levels) in GHG emissions from the global shipping fleet by 2050.
Environmental benefits of LNG
LNG offers significant environmental benefits as CO2, NOx, SOx and particulate emissions are lower when compared to the use of other marine fuels.
The benefits from LNG including positioning ship owners on a pathway to achieve lower GHG emissions in line with the IMO GHG reduction strategy.
LNG fuelled ships
There are about 280 LNG fuelled ships (excluding LNG carriers) either in service now or on order. About half the current fleet of LNG fuelled ships are located in Northern Europe.
LNG fuelled ships include:
- dredges;
- offshore platform support ships;
- passenger and vehicle ferries;
- container ships; and
- cruise ships.
The first LNG fuelled cruise ship, the AidaNova, entered service with Carnival in late 2018. Carnival have 18 cruise ships on order, 9 of which will be LNG fuelled.
Availability of LNG bunkering services
LNG bunkering services were initially developed in Northern Europe, where some bunker ships are also used to provide feeder services to locations not serviced by large scale import terminals.
The locations where LNG bunkering is available has been expanding to include ports in North America and in the Asia Pacific.
LNG bunkering services are available at approximately 20 locations across the world.
LNG bunker providers have committed to offer services at 11 additional locations and bunkering projects are being assessed at approximately a further 20 locations.
The Port of Singapore is the largest bunker fuel port in the world.
In 2018 a joint venture between oil and gas major Shell and ship builder Keppel Marine commenced truck to ship bunkering in Singapore. In 2020 the joint venture will start offering ship to ship bunkering services.
Total is partnering with Pavilion Energy to offer a bunkering service in Singapore.
In Canada, Vancouver gas utility Fortis BC distributes LNG by truck and provides truck to ship LNG bunkering services to ferry operators in the Port of Vancouver.
In Europe several gas utilities that own or have access to the capacity of LNG import terminals have commenced offering bunkering services.
Woodside an Australian gas producer and operator of LNG plants is assessing the introduction of an LNG bunkering service for ships calling at ports on the North West Australian coast.
Responses to IMO 2020
Ships can continue to use high sulphur HFO if exhaust gas cleaning systems, known as scrubbers, are installed.
There are two types of scrubbers, closed loop and open loop systems. The waste water containing the sulphur recovered by closed loop systems is discharged ashore.
The waste water containing the sulphur recovered by open loop systems is discharged into the sea.
An alternative to scrubbers is for ship owners to switch from high sulphur HFO to other fuels. These include:
- low sulphur HFO;
- marine gas oil; or
- LNG.
The decision to install scrubbers or switch to another fuel will depend on a range of factors including the:
- availability of LNG bunkering services;
- age of the ship;
- ship owners view on which solution provides the most flexibility in responding to future regulations for GHG emission reductions;
- cost of scrubbers and the alternatives (including where LNG is used as a fuel the cost of conversion or replacement of engines on existing ships); and
- regulations in countries where there are ports that the ship services.
A growing list of countries are not allowing the discharge from open loop systems of the waste water containing sulphur in their coastal waters.
Importantly for Australia’s seaborne trade with Europe and North Asia, Singapore and China are not allowing ships fitted with scrubbers to discharge waste water containing sulphur in their territorial waters.
The financial implications of these regulations are starting to be reflected in the cost of marine freight services.
Singapore based shipping company ONE has announced that due to the China SECA a levy will apply for all containers shipped to or from China, Hong Kong and Macau.
Impact on other fuels
There remains uncertainty about the global impact that IMO 2020 could have on the demand for and price of other fuels.
There is potential for diesel price increases to rebalance the market and increased demand from the shipping industry by reducing the volume of diesel used for road transport.
There are two factors that could have an impact on the price of distillates, such as diesel. This includes the extent to which demand for distillates increases if ship owners choose not to install scrubbers or are unable to install scrubbers and are therefore unable to use high sulphur HFO.
Low sulphur HFO is a type of fuel that can be produced by refineries through blending high sulphur HFO with distillates.
Marine gas oil (which consists of distillates) demand could increase to replace some of the demand for high sulphur HFO.
LNG bunkering methods
The methods for LNG bunkering include:
- ship to ship transfers;
- truck to ship transfers; and
- pipe to ship transfers (from an LNG terminal).
The method adopted at a port will depend on a range of factors including the bunker quantity of the ships receiving LNG and the design of the wharf. Where bunker quantities are smaller there may be potential to use road tankers to both bunker ships and to distribute to land based customers to improve the economics of providing services.
Demand for LNG bunkering services
As noted above there are a range of factors that will influence which alternative to high sulphur HFO combined with scrubbers owners will select for existing and new build ships.
The age of a ship is one consideration as it drives the requirement to replace existing ships with new builds and the potential for LNG to be used as the fuel.
The global trading fleet in 2017 consisted of approximately 57,000 ships (ships greater than 500 mt gross tonnage).
There are approximately 18,000 ships with gross tonnage greater than 25,000 mt, of these 20 percent are older than 15 years (www.equasis.org).
Twenty percent of ships greater than 25,000 mt gross tonnage are less than five years old.
It is at these two ends of the ship life cycle that the potential for LNG as a fuel is strongest.
KOGAS expects that “By 2030, the demand for LNG bunkering in the global market is estimated to reach 20 to 30 million tons per year”.
To put that estimate in context the combined capacity of the six trains at the LNG export plants at Gladstone in Australia is 25 million tons.