MTS Matters welcomes a well-known and regarded figure in D.C. transportation circles. John Graykowski, a Principal of Maritime Industry Consultants, served as Deputy Administrator of the Maritime Administration, and for two years as Acting Administrator, during the Clinton Administration. He is an attorney with experience in both private and public sectors. The subject of LNG-fueled transportation and how it might develop in the context of maritime policy and port communities has been a focus of his attention in recent years. This is the first of his contributions to this blog’s musings on port/maritime policy—present and future.

Over the past year, LNG as a marine fuel has gone from novel concept to an accepted alternative fuel here in the United States. Some LNG-capable vessels are operating and more will be under construction as appreciation is growing for the environmental, economic and energy security benefits offered by LNG. This transformation of a marine cargo commodity to emerging marine fuel in here and elsewhere might lead one to conclude that the broad deployment of LNG throughout the U.S. is underway and faces no challenges or constraints—but this is not the case. Lagging behind LNG-fueled vessel development here are the necessary market and regulatory structures that promote its widespread development.

The most common platitude in any discussion of LNG is the “chicken and egg” problem. Ship owners are loathe to make the large capital investment in LNG technologies absent certainty of supply.  Meanwhile gas suppliers are averse to spending $150 million or more on bunkering infrastructure without firm, long term purchase contracts by ship owners. This reflects the lack of historic relationships between the gas supply industry and marine operators, who purchase bunker fuel in virtually every port on a spot basis and never needed long term contracts.

Compounding that is a lack of understanding and knowledge about each other’s industries. Marine operators are not familiar with gas production, transportation and market dynamics and gas suppliers have little direct knowledge about the marine industry practices, requirements, and the like. Emblematic of the divide between the two industries is the simple fact that marine operators purchase fuel on the basis of metric tons or barrels of oil, while the gas industry sells LNG on the basis of million BTUs. Potentially complicating this market disconnect, are increasingly stringent accounting rules that likely require a long term LNG contract to be carried as a contingent liability, thus impairing a balance sheet and constraining future capital expenditures for a marine company.

Beyond these market issues are significant regulatory challenges related to both operational procedures for bunkering vessels and, more importantly, the siting, permitting and operation of small and medium sized LNG marine terminals. It may come as a surprise to some, but there are no existing uniform federal regulatory structures that apply specifically to LNG marine fueling terminals.

The United States Coast Guard (USCG) and Pipeline and Hazardous Materials Administration (PHMSA) each have regulations that apply to LNG fueling terminals. These regulations, however, were developed with large scale export and import facilities in mind and thus are largely inapplicable to a small marine fuel terminal and the fueling of other than LNG carriers. In many cases these regulations may conflict, which creates a large area of potential regulatory confusion and will most likely result in ad hoc development of LNG regulations. Adding to this uncertainty is the probable requirement that these facilities will be subject to local permitting actions, which can provide opponents of LNG the opportunity to intervene and delay the project.

Where do ports fit in this puzzle of a marketplace?

Ports can and should be a catalyst to spur LNG development throughout the transportation industries since they are at the center of marine activities in the United States. They provide a ready-made, multi-modal market for LNG expansion beyond large oceangoing vessels, which includes ferries and harbor craft, trucking, and rail operations. Port agencies may have some degree of jurisdiction, and even control, over property where LNG operations will occur. Depending on the port, it may have a role in the siting, permitting, financing, development, or even operations of an LNG fueling terminal. As a responsible economic development agency, a port can also play a critical role in the public education and promotion of LNG and the mitigation of local opposition to such projects.

Public port agencies generally understand this is a constructive role they are in a position to play. We are seeing that in isolated initiatives, notably on the West Coast, as well on an international scale with Antwerp leading a working group that includes the Ports of Los Angeles and Long Beach.

The expansion of LNG and compressed natural gas (CNG) as a replacement fuel in port related operations, already showing benefits, is also a powerful tool that ports can use to achieve significant emissions reductions and thus reduce the cost and impact of increasingly more stringent environmental regulations or measures to meet local community demands. If LNG is used to fuel vessels’ auxiliary generators while in port there may be no need to install costly shore power systems for cold ironing since equivalent emissions results could be obtained with LNG.

Collectively, ports can be in the forefront of a “Green” initiative, leading to the expansion of LNG as a transportation fuel throughout the nation. Individually, ports that facilitate LNG bunkering operations could find them to be a competitive factor in attracting and retaining liner business as those companies bring LNG-capable vessels on line to meet IMO global standards by 2020.

Much has been written of the significant impact that domestically produced natural gas and its liquefied form will have on our on our nation. Ports are where all surface modes of commercial transportation intersect and where LNG distribution will naturally occur. They are in a position to be influential in the development of national policies that promote and accommodate the broad deployment of LNG as a transportation fuel.
John E. Graykowski