LNG & Offshore — Demand Growth Slowing Down — bunkering could buck the trend

AUSTRALIAN liquefied natural gas (LNG) production is growing fast. And based on the research from analysts at BMI Research, a unit of the Fitch Group, it is likely to increase 50% by 2020 on the back of Australia’s ‘mega’ LNG export ventures.

Investments have topped $200 billion and over the next ten years Australia’s LNG production is set to increase from around 30 million tonnes a year to 75 million tonnes, leaving the country on track to rival Qatar – the world’s largest supplier.

To put the increase in perspective, calculations by KPMG suggest that when all the Australian projects come on stream they will boost global supply by around 20%.

But demand is not keeping pace with the surge in production and LNG prices, like prices for oil and coal, are plunging.

In Asia alone, China’s gas demand growth dropped to single digits in 2014 and Japan, the word’s biggest buyer of LNG, has been cutting imports as more of the country’s nuclear power plants come back on-line.

Not that these factors are expected to dent output. As Graeme Bethune, chief executive officer of the Australia energy advisory firm EnergyQuest, points out, even with lower prices, the Australian export projects are likely to “generate loads of cash, just as existing projects have done”. And the operators of the new terminals will want their projects to produce as much LNG as possible, almost at any price, to cover their up-front investment costs.

Against that background, it is not hard to see that the market could be entering a prolonged period of oversupply. However, based on impending sulphur regulations, shipping could emerge as a new source of demand.

Currently, the number of ships using LNG as a bunker fuel is small. Estimates from the classification society DNV GL put the figure at less than 65, with another 76 under construction.

However, the MARPOL Annex VI regulation that would mean a reduction of the sulphur limit for bunker fuels to 0.5% on a global basis, possibly as early as 2020, could be a game changer.

The new sulphur limit, agreed by the International Maritime Organization (IMO), will leave the vast majority of the world fleet unable to use intermediate fuel oil (IFO). That means the shipping industry must look for alternative fuels as a matter of urgency.

As things stand, most ship operators expect to switch to low sulphur marine gas oil. There are fears, however, that demand will massively outstrip supply.

Ships could install emission abatement technology (scrubbers) - an option that would allow them to continue burning IFO – but time is running out and if there were a rush of orders, there would be questions as to whether the demand in terms of installation could be met quickly enough. 

As a result, LNG is being explored as a viable alternative to IFO. It has no sulphur, hence it is fully compliant, and supplies are plentiful, and its price has been dropping.

A ship using LNG to power its engines will be complying with the majority of the current and expected environmental regulations that control airborne emissions from ships. It is therefore no surprise that some major players in the shipping and bunker industries are beginning to take LNG seriously.

The signs that interest is growing are plain to see.

In February, Qatar and Royal Dutch Shell signed a memorandum of understanding with Maersk, the world’s largest container shipping company, to develop LNG as a marine fuel. Maersk’s chief executive, Nils Smedegaard Andersen, eulogized about LNG’s ability to give shipping an opportunity to cut its SOx (sulphur oxides) emissions and its carbon footprint.

In addition to this, marine engine manufactures have reported a steady stream of orders for dual-fuel engines that can switch between LNG and oil-based products. In the United States the container ship operator TOTE has taken delivery of its second LNG-powered newbuild. In addition to that, global bunker hubs and many smaller ports – particularly in Scandinavia and the Baltic - are preparing regulations and infrastructure in the expectation of demand for LNG as a ship’s fuel.

Adrian Tolson

The Asian market

In Singapore – by far the largest bunker supply port in the world – the first LNG bunker supplier licenses were issued in January 2016.

Singapore’s Maritime and Port Authority (MPA) chief executive Andrew Tan predicted that tighter controls on airborne emissions meant LNG was likely to become “a part of the fuel mix for global shipping”. He added that Singapore was keen to work with other major ports and the shipping community to promote LNG bunkering as an alternative marine fuel.

His remarks highlighted a key issue. Ship owners will be reluctant to invest in LNG-fuelled ships if they lack confidence that a network of LNG bunker supply ports can be in place in time to serve their ships.

As terminal owners or operators are unlikely to make significant investments unless there is already a credible demand for LNG bunkers there could be a case for governments in the Asian region to kick-start the process by offering financial incentives.

Players in Northern Europe and North America, the two regions where strict controls on ship’s sulphur emissions are already in place, have shown the most interest in LNG but environmental regulations are tightening in Asia too.

Hong Kong already requires ships at berth to use low-sulphur fuels and there are proposals to establish Emission Control Area (ECAs) in parts of Southeast Asia and Japan. China has outlined plans for controlling pollution from ships and they include setting up its own version of ECAs.

Whatever the regional picture, the IMO is moving towards its sulphur cap of 0.5% for marine fuels, not just in specially designated waters, but across the globe.

‘Fog’ of low prices

The need to comply with rules limiting emissions from ships is core to the argument for using LNG as a marine fuel.

There can be little doubt that environmental rules are only going to become tougher and that Asia will be as susceptible to the rule changes as everywhere else. The Singapore-based Maritime consultants TRI-ZEN have called LNG the “smart choice” for fuelling ships, adding that the time to make the choice is closing-in.

But one factor that could put a break on the take up of the LNG option is the low price of oil. TRI-ZEN’s analysis is that while LNG remains the fuel “to take shipping into the coming decades” a “fog” of artificially low oil prices is clouding the issue.

One prediction is that when the 0.5% sulphur cap on marine fuels comes into force a surge in demand will drive up the price of low sulphur marine gas oil, in conjunction with the anticipated rise in crude prices over the next four years, and the fog disguising the advantages of LNG will begin to evaporate.

Any ship operator that has LNG-ready vessels and guaranteed supply contracts will enjoy an inevitable competitive advantage.

Crossroad

Shipping companies are waking-up to the urgency of finding an alternative to IFO as their primary propulsion fuel.

Companies that have not, and who are pinning their faith on an oil-fuelled future, are displaying the triumph of optimism over experience.

Environmental rules have placed the shipping community at a crossroads. A handful of ship operators are already turning to LNG. Others are almost bound to follow.