S&P Global Platts: : High infrastructure costs, low returns delay US use of LNG for bunkering

The use of LNG for bunkering in the US maritime industry will take some time as shipowners and suppliers consider the costs of building infrastructure and assess the risks, according to industry sources. “Most companies won’t even look at that type of project unless the return on investment is at least 10%, and depending on the capital leverage the return on investment may need to be closer to 18%-20%. The return on investment is largely determined by the cost of capital leverage,” a shipping expert with more than 50 years of industry experience said. The International Maritime Organization decided October 27 to reduce emissions by nearly 87% for oceangoing ships sailing in international waters. Starting in January 2020 ships will be required to burn fuel with a maximum sulfur content of 0.5%, except when traveling in designated Emission Control Areas where the sulfur limit is 0.1%. Although in Asia and Europe shipowners and port authorities are working on the transition to LNG fueling ahead of the new regulations, in the Americas the shipping industry is still assessing how feasible the utilization of LNG can be. “The concern from an owner/operator of tramp ships — a ship with no fixed schedule — would be for the availability of fuel where we need it. So unless we see massive investment in LNG installations around the world, I am afraid the availability of fuel will be a major concern,” said Mikkel Borresen, vice president of Dampskibsselskabet Norden, a shipping company which operates a fleet of about 238 ships and resupplies marine fuel in major ports such as Rotterdam, Singapore, Houston. The IMO’s decision is more a call for shipowners than for refiners, an oil refinery source based in Houston said, because with current market conditions refiners have less interest in processing residuals and are more focused on diesel, which is in high demand because it is “clear and bright.” However, he also said it is unfair to ask shipowners to provide a solution to the issue when the maritime industry is still recovering from the impact of the bankruptcy of South Korean-based shipping company Hanjin in late August. The estimated cost of building an onshore regasification LNG unit is around $1 billion, according to market sources. In the US there is one facility in operation designed specifically for LNG bunkering. The facility in Port Fourchon, Louisiana, is owned by the marine transportation company Harvey Gulf International Marine. WHAT IS DIFFERENT NOW? When the IMO first implemented the ECA zones in 2010, the change had a minimal impact and represented a low-cost investment, as some ships had to change parts of the piping system, and some had to change the bunker tank configuration, sources said. However, the tankage and other systems needed to contain and consume LNG as a fuel are more complex and larger than traditional bunker fuel engines. Ships would lose space which is used to hold the cargo being transported, which would impact the amount of money the ship is able to generate, sources said. “LNG capacity is around 1.6-2 times greater than that of conventional fuel, and with the necessary equipment the actual loss is even greater, and could be as high as 3-4 times,” according to a Poten source. The infrastructure needed for liquefaction of the gas and storage are the primary contributors to the high cost of retrofitting a ship. There are additional costs that are not related to infrastructure, such a crew training or the time lost during the engine conversion process, which shipowners also take into account. The large-scale adoption of LNG bunker fuel will be an “evolution” and is decades away, the Poten source said. Retrofitted vessels alone will not have a meaningful impact on LNG bunker fuel demand because there will not be many of those ships due to the high cost of capital needed, he said. The lifespan of a ship is typically 20-30 years. Shipowners prefer to wait out the life of the ship rather than invest in retrofitting as the return on investment would outlast the ship life. Many sources believe that meaningful LNG bunkering demand will come from newly built ships. –Scott Diamond, Scott.Diamond@spglobal.com –Edited by Jason Lindquist, jason.lindquist@spglobal.com