Recently, we discussed LNG bunkering infrastructure across the globe and showed two different ways of building that infrastructure; through onshore and offshore bunkering facilities. If we assume that the LNG bunkering infrastructure will be constructed the next question to ask is “What ships will be most likely to adopt LNG first?” To do this, we must look at not only the positives, but also look closely at the negatives of LNG as a marine fuel. Also we must classify ships in a simple manner in order to easily say which ships will be more likely to adopt LNG.
While limiting the classification of ships to three categories may be an oversimplification, it offers the ability to quickly analyze a ship and whether it may or may not be an early adopter of LNG. First, we have small passenger ferries that are categorized by making relatively short journeys and carrying little or no additional cargo apart from passengers. Second, we have medium size supply ships. These ships make regional voyages and carry a relatively small amount of cargo. An example would be the Harvey Energy offshore supply vessel, or a vessel that is carrying cars across the North Sea. Finally, we have large container ships. These ships are typically making trans-ocean voyages. An example would be a container ship leaving China that is bound for the west coast of the United States.
Lower emissions and reduced fuel cost are the two main reason for adopting LNG. We have written extensively about the positives of LNG, and they are fairly well understood. First, LNG is a cleaner burning fuel than both diesel and heavy fuel oil. Second, LNG is typically cheaper than diesel and heavy fuel. However, since the collapse of oil prices in 2014 the gap between the prices has narrowed greatly. Additionally, lower fuel prices offer reasons for all ships to adopt LNG so that benefit does not provide as much color as to which ships will adopt LNG first. While all ships are impacted by emissions, not all are impacted in the same way. Ships that are operating partially or wholly in Emission Control Areas (ECAs) will benefit more from using LNG as a fuel than a ship which does not operate in an ECA.
There are a few distinct disadvantages to using LNG as a marine fuel. While LNG may be less expansive and burn cleaner, it is not better than diesel and heavy fuel in all categories. Apart from a lack of LNG bunkering infrastructure, LNG falls behind diesel in two categories. First, the switching costs from diesel to LNG are high. The upcharge to build an LNG fueled vessel is significant — costing anywhere from $10 million to $35 million more than the diesel option — per ship depending on its size. With the gap between the price of LNG and diesel narrowing, average payback periods can be well over 15 years.
Second, LNG requires more volume than diesel or heavy fuel oil to travel the same distance due to its lower energy density. One gallon of diesel fuel contains ~130,000 Btus of energy while one gallon of LNG contains ~75,000 Btus. This means a ship using LNG can only travel ~60% as far as what it would have been able to travel were it fueled by diesel, assuming equal fuel tank sizes. An LNG-fueled vessel will need to dedicate more space to fuel storage than a diesel-fueled vessel.
Small vessels will likely be first adopters of LNG fuel. Smaller passenger ferries are more likely to be early adopters of LNG for two reason. First, they typically operate near coastlines, and if they are operating in Europe or North America they will be subject to ECA regulations where LNG meets emission standards. Second, a passenger ferry can afford to give up more space to use LNG as a marine fuel.
On the opposite end of the spectrum, large container ships will likely be the last adopters of LNG. First, they operate mostly on the open ocean where emission standards are not as strict as they are in ECAs. Once a container ship enters an ECA an operator can burn ultra-low sulfur diesel and use scrubbers for the limited time that they are under stricter regulations. Second, a container ship will have to sacrifice a significant amount of cargo space in order to make room for larger LNG fuel tanks. In order to make up for the lost cargo space, a vessel would either need to become larger or the price differential between diesel and LNG would have to become large enough that the lost cargo space is more than made up for with the fuel savings.
While there are benefits to using LNG as a marine fuel, there are also drawbacks. A careful analysis is necessary to define the ships that are most likely to benefit with LNG.
-Tyler Wilson and Uday Turaga
