Topics in this section: LNG bunkering to fuel demand as shipowners adapt to sulfur cap LNG bunkering-fuel demand estimates Sulfur cuts in shipping produce big rewards Port LNG bunkering infrastructure needed Background on IMO 2020 sulfur limit
This article is by contributing analyst Michael Filatov from Bloomberg Intelligence. It was first published on the Bloomberg Terminal.
LNG bunkering to fuel demand as shipowners adapt to sulfur cap
With new maritime sulfur limits due in 2020, LNG is set to become the bunker fuel of the future. Even if a small fraction of the world shipping fleet adopts LNG, the added demand would equal a leading consuming nation's. Constraints include shipbuilding and conversion capacity, and the unknown question of enforcement.
With an estimated 55,000 vessels operating globally, there's about 356 million metric tons a year (MTPA) of LNG demand if the ships all convert to LNG bunker fuel. As the 2020 sulfur cap nears, LNG-fueled newbuilds will start to rise, generating up to 30 million tons of annual demand in five years from more than 4,000 vessels. We expect noticeable growth in new LNG-fueled vessels in 2019-20 as some shipowners rush to meet the deadline. This will cause much of the growth to be realized in 2025, with our base case assuming 60 MTPA of demand.
Substantial growth is likely after 2020 with IMO enforcement clarifying how the non-fuel availability clause will be designated. A majority of global vessel fuel is still expected to remain above 2% sulfur content, as scrubber adoption grows on a retrofit level for smaller ships.
Reducing greenhouse gases in shipping will yield a much greater atmospheric impact than targeting cars and trucks on land. The bunker market consumed 459 million tons of fuel in 2017, far exceeding the 60 million gallons of diesel burned in the U.S. in 2016. One vessel requires about 20,000 gallons of fuel for one trip, the same amount a fully utilized semi-trailer truck uses in a year. With emissions curbs in countries such as India and China yielding improved air quality, it will be in their interest to enforce the new IMO rules.
The growing adoption of natural gas in these countries will continue to accelerate. India has begun adjusting tariffs to encourage natural gas consumption and investment.
Twenty-eight ports are equipped to refuel LNG-bunkered vessels, and more will come online in the next few years. The inherent cost gap between gasoil (MGO), ultra-low-sulfur fuel oil (ULSFO) and LNG provides an incentive for shipowners and port operators to convert to natural gas. At current prices, LNG is about $8 per MMBtu cheaper than MGO. The savings could be used to expand the distribution channel with extended paybacks, as high-sulfur diesel phases out and MGO/ ULSFO prices rise. Fuel blending is almost impossible given inconsistent viscosity, which would cause fuel lines and filters to clog with paraffin.
Blending fuels also proves a logistical challenge due to the lack of specific blends at ports. Scrubber technology is cumbersome to install and requires a lot of real estate, leaving a full conversion palatable.
The International Maritime Organization on Jan. 1, 2020, will begin enforcing a new global sulfur limit of 0.5% mass by mass for ships, a drastic tightening from the previous level of 3.5%. This means that fuel used or carried in vessels, including for the main and auxiliary engines and boilers, must have a sulfur content of 0.5% or less. LNG has already become the widely accepted choice of alternative fuel for shipowners, with 11% of newly built ships having LNG-based engines.
Other alternatives for compliance include the addition of scrubbers, use of ULSFO, or full engine conversions to LNG systems -- all extremely costly. Smaller vessels have already announced the adoption of scrubbers at about $2 million a retrofit, but the larger, long-distance vessels will require a more permanent long-term solution.
"The regulations for the Prevention of Air Pollution from Ships (Annex VI) seek to control airborne emissions from ships (sulphur oxides (SOx), nitrogen oxides (NOx), ozone depleting substances (ODS), volatile organic compounds (VOC) and shipboard incineration) and their contribution to local and global air pollution, human health issues and environmental problems."
International Maritime Organization The 2020 Global Sulphur Limit
