LNG-Power – will it inflate residuals?
July 18, 2012 Leave a comment
The LNG Question
Last Friday I was sent a question via LinkedIn from Anna in Russia asking about LNG-powered ships. I didn’t know the answer to her question so I started researching the use of LNG as a ship fuel. No sooner had I started writing up my findings when I opened a post on the LinkedIn Lloyds List Group to see a link from Peter Garth of Naftrade pointing to a new report on LNG-powered ships. The report has been produced by James Ashworth of TRI-ZEN International in Singapore (Tel. +65 6734 5550 James.firstname.lastname@example.org). I admit I don’t know TRI-ZEN or James Ashworth, but the report “LNG Markets Perspectives” is excellent. I binned my own write up and will review the TRI-ZEN report instead, just adding in a bit of my left-over comments at the end. The TRI-ZEN report can be downloaded here.
Why LNG Powered Ships?
The TRI-ZEN report answers the questions I was asking myself. The driving force behind LNG-powered shipping is emission compliance, and in time honoured IMO fashion the legislation is complex, but the TRI-ZEN report breaks this down into manageable chunks. By the end of page three I had a clear idea of the background and aims of the legislation. The key points are a maximum of 0.1% sulphur fuel burned in ECAs (including US), and 0.5% sulphur globally from 2020. Ships powered by natural gas will meet these standards.
The analysis then moves onto the cost implications. Lower sulphur fuel is more expensive, and distillate even pricier. Operating a large Containership (TEU not specified) on LNG will save $12-20m compared to distillate, and the savings on a VLCC are between $6m and $12m. The report considers the costs on providing onshore LNG bunkering facilities and offshore using LNG lightering. There is also a section on the onboard capacity required for LNG tanks. The last section is a technical analysis of how LNG bunkering would be achieved. I assume from this emphasis that this report is a smaller version of a feasibility study for the physical delivery of LNG at a bunker terminal. I bet the port finance teams in the major banks are now very active in this area. It is a good story.
To the list of bullet points at the end of the report I would like to add my own findings. There are currently only 157 LNG-powered ships in the world fleet. According to Dr Martin Stopford’s “Maritime Economics” (p25), in 1852 there were only 153 steamships listed in Lloyd’s Register. It took fifty years for steam to replace sail, but the main hindrance was technology. Technology is not the issue today. Most LNG Carriers use boil-off as a alternate fuel. Kleven in Norway are specialist in building LNG-powered offshore vessels and all the major engine builders, Wartsila, MAN Diesel and MHI have or are developing duel-fuel and single fuel LNG designs. The main issue is infrastructure, but as the TRI-ZEN report shows, it is readily addressable.
Will LNG-Power Inflate Residuals?
From my reading of the TRI-ZEN report I think impact on residuals will apply to those vessels trading in the post-2020 era of global low sulphur fuel. This is only eight years away, which for some vessel types, might be the last time they get bank financing (see previous blog about Capesize scrap sales). Furthermore by 2020 the IMO may have introduced more ECAs, such as the Malacca Straits. This choke-point, plus the English Channel and the Panama Canal would pretty much force all tramp trading ships into the Tier III category of emission control. So equation to be run between now and 2020 is the cost of fitting scrubbers, versus the cost of conversion to LNG, versus the cost of an LNG-powered newbuilding. I found the following references to costs. In a worldbunkering.com article an indicative cost of a scrubber for a 34mW engine was given as $3.4m. The conversion of the “BIT VIKING” is believed to have cost EUR 8m (DNV blog). Although scrubbers are cheaper, with most shipping sectors in the trough phase of the cycle, owners are going to have to go to banks to borrow for such upgrades (and ballast water monitoring). It is not an easy story to sell to banks. Therefore, I think there will be a two tier market by 2020, with a premium for LNG-powered vessels. These will show stronger residuals than scrubber-fitted ships
Threat to LNG-Powered Ships
Apart from the lack of infrastructure, the main threat might be the abundance of natural gas. Now that the US is an exporter of LNG due to the “windfall” of shale gas I can see a wholesale move toward LNG powered ships for exclusive operation in the US ECAs. I notice in the Wartsila annual report there is reference to the development of LNG-powered Cruise Ships, which would be very suitable to operation in the US ECA. Cheap and plentiful supply has led UBS to estimate the lower energy prices will add 0.5% for US GDP over the next five years. A leading developer of the required infrastructure is likely to be the US trucking industry. The gas equivalent price is $1.70/US gallon compared to $3.91/US gallon for diesel. For a typical 120,000 miles/year this would be a significant saving, according to a report by IHS CERA. In another report by Michael Stoppard of IHS CERA, he postulates that by 2030 one third of the fleet may be LNG-powered. This begs the question will LNG remain a low cost fuel if a large part of the shipping fleet and US trucking fleet becomes a consumer along with the use of natural gas for energy production?