Others might wonder if LNG is losing its luster. If it will ever achieve its potential to become a dominant marine and transportation fuel.
Before we start hanging black crepe, let’s not lose sight of the ample evidence that LNG remains a compelling alternative to meet growing emissions requirements.
Interest in LNG as a marine fuel was initially driven by three factors: Emissions Control Areas (ECAs) in North America and Northern Europe; the rapid growth of natural gas production; and LNG’s potential to significantly reduce all categories of marine air emissions, particularly sulfur oxide. LNG was predicted to displace a significant portion of the marine fuel market by the end of the decade with forecasts of 30 percent market penetration by 2030. This development then likely would spur broader adoption of LNG and CNG by other transportation modes.
The optimism, however, was tempered by the challenges encountered by the first adopters. These challenges were not a matter of technology. Rather, first adopters encountered a lack of regulatory structures and existing market relationships. It would require creating entirely new market relationships, and logistics, distribution and fueling infrastructures.
These challenges persist, particularly in the United States, where infrastructure development remains tied to specific vessel projects. Unlike in other countries, here there are no national policies or programs to foster and promote LNG development. There has been no credible signal from the gas supply industry that the fueling infrastructure will be built absent assured demand. With the exception of Tacoma and Jacksonville, which are tied to specific vessel projects, no major US port has stepped forward to actively promote and facilitate the construction of LNG terminals or to partner with gas suppliers to construct distribution facilities.
The major Jones Act ocean carriers have new build programs underway. In large part, the Jones Act blue water market potential for LNG has been realized but little progress is seen elsewhere. Ferry operators in New York and Washington State have signaled intent to incorporate LNG in their new vessel plans. The inland waterways fleet has seen no significant movement in that direction. In contrast, the 2012 EU Master Plan calls for the entire inland system to be LNG-capable. Considerable effort is also underway to develop harmonized standards and regulations across national boundaries. Conversion of the fleet has begun.
There is a phrase: “Money talks…” and if that is indeed the case, then the continuing investment in LNG vessels and infrastructure around the world is clear evidence that the migration continues elsewhere. The EU has not altered its formal commitment to support LNG-related projects despite economic difficulties and the drop in oil prices. New projects continue to be funded.
At least four LNG bunkering vessels will be operating in the United States and Europe by the end of 2016 and DNV GL estimates that 73 LNG fueled vessels are operating today, with another 80 on order. Upwards of 600 vessels could be operating worldwide by 2020. While this is only a small percentage of the global fleet, it represents significant financial investments by shipowners who clearly believe that LNG will be available to fuel these vessels at prices below the projected costs of MGO.
So there are silver linings on the LNG horizon, and I am convinced the real breakthrough for LNG will come when the major liner companies incorporate LNG as a standard element in their newbuild plans. A decision by any of the major ocean carriers to install either full LNG capability in their new generations of vessels, or, in a hedging strategy, install dual fuel engines with the intent to move to full LNG at a later date, would provide a strong impetus for the expansion of LNG globally. But this has not happened on a large scale for reasons that may be related to oil prices but also to concerns about the availability of LNG in their ports of call and uncertainty related to the 2018 IMO Annex VI consideration.
I believe that this challenge must be approached in a different way by moving forward with infrastructure development without a firm commitment from a shipping company. If LNG infrastructure proceeds first in one of the major load ports in the United States, it would be a powerful signal to the major liner companies that fuel will be available and would likely incentivize ship owners to accelerate the move to LNG.
If one accepts the “inevitability” of LNG, which I believe is a reasonable proposition, it would seem prudent for ports and gas suppliers to move forward to build the necessary infrastructure in the absence of a guaranteed offtake commitment. Clearly there are risks in this approach. Perhaps it is too much to ask ports and gas suppliers to assume this risk in the current investment climate, particularly for public companies. It is far easier to gain approval for a large investment if there is a guaranteed customer. But risk is intrinsic to life and business, and the key is how risks are managed and mitigated, particularly when the upside potential for the gas industry and ports is so great.
Something has to break the continuing “chicken and egg” impasse and energize the slow and somewhat sporadic development of marine LNG in the U.S. If there is broad consensus that LNG is a net positive, then it seems we need to approach this market opportunity in a way that does not fit traditional investment analyses.
One risk that must be addressed is the 2018 IMO global fuel sulfur decision. Global fuel sulfur standards are scheduled to be reduced to 0.5 percent in 2020 from the current 3.5 percent. As written, MARPOL Annex VI gives the IMO only two choices: either affirm the 2020 standard or delay it until 2025, and the basis for the decision is the worldwide availability of MGO and other “relevant” factors.
I strongly believe the IMO should affirm the existing 0.5 percent standard. If this is not possible, I would propose that the IMO implement an interim standard of 1.0 percent in 2020 with the more stringent standard delayed until a later date. Such an approach would essentially mirror the ECA implementation that resulted in LNG moving from a novelty conversation to a serious alternative compliance strategy in the United States and Europe.
This single act would create a powerful regulatory incentive to spur development of LNG infrastructure and vessel construction and provide the impetus to the international liner companies to adopt LNG in their next generation of vessels for delivery by 2020. Therefore, if the ports and gas supply industries have already begun the process of site selection, permitting and possibly construction by 2018, it would serve a dual purpose of undermining arguments that LNG is not a viable replacement fuel for lack of distribution infrastructure..
Yogi Berra was right when he said: “It’s tough to make predictions, especially about the future.” It is certainly true about LNG as a marine fuel. But as a longtime member of the maritime industry and proponent of LNG as a fuel I believe that this year LNG will continue its inexorable growth as the most effective way to meet the increasing environmental requirements our industry is facing. John Graykowski