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Offshore Support Journal

The commercial case for LNG

Mon 06 Aug 2018 by Mark Pointon

The commercial case for LNG
LNG bunkering operation by truck in Western Australia

When considering LNG as a marine fuel, offshore vessel operators must consider not only the pros and cons of LNG itself, but also the alternatives on offer, writes Mark Pointon

High on the list of factors that may influence an operator’s choice of LNG as fuel is compliance with the requirements of Marpol Annex VI after 1st January 2020. This is especially true if the vessel will be operating within emission control areas (ECAs) where the sulphur limit is 0.1%, compared to the global limit of 0.5%.

Within the offshore oil and gas sector a wide range of strategies have been adopted to meet this requirement, ranging from LNG dual-fuel for new buildings, to the installation of abatement systems and even switching to alternative fuels. Even within an individual operator’s fleet, different approaches are being adopted depending on ship size, trading area and investment ability. Weak earnings from reduced charter rates and the lack of LNG availability in some areas has made some owners reluctant to fund technical solutions, with most planning on MGO or alternative fuels.

Data from the OECD International Transport Forum indicates that globally there are 56,000 ships greater than 500 gt trading today. It has been estimated that up to 4M b/d of fuel production will have to change from 5% sulphur to 3.5% or lower.

The stark reality is that because of Annex VI, in less than two years’ time, 75% of the marine fuel consumed globally will have to change.

“A major commercial reason that so many offshore vessels have the Clean Design notation is that major oil companies require them to do so to tender for charters”

One market source estimates that 2-3% of the global fleet will be using LNG fuel by 2020. There are currently 242 ships using LNG as fuel. This figure does not include LNG carriers consuming cargo boil-off.

Within the OSV sector, there are a number of high profile companies that have invested in LNG dual-fuelled vessels. Typically, these investments have been made with vessels that operate on short voyages, in areas like the North Sea and the Gulf of Mexico where there is a ready supply of LNG bunkers that are on long-term charters.

Factors considered in these investments will have included the size of the fuel tanks, a cost benefit evaluation of dual-fuel capability on auxiliary engines and boilers and whether to use low pressure or high-pressure engines and supply systems.

As a general rule, the cost of building a new dual-fuelled vessel is approximately 20% higher than building a conventionally-fuelled vessel. This higher capital investment is offset by the lower operational costs that result from lower fuel consumption and reduced fuel costs. At present, it is not economic to retrofit LNG fuel systems to existing tonnage.

Specific prices vary regionally, but generally LNG is in the region of 30% cheaper than conventional bunker fuel. Whether this will remain the case after 2020 will depend on whether it is sold at a “reasonable” return on investment price, or if it is priced in competition with alternative fuels?

Specialised bunkering facilities are part of the increased build cost

Alternative diesel fuels

A large and growing number of OSVs operate under environmental class notations, like DNV-GL’s “Clean Design”. This means that they already comply with the 1 January 2020 changes.

Swire Pacific Offshore (SPO) is an example of a company that has adopted this approach, SPO Australia technical manager, Eric Duck explained that “SPO has processes in place to ensure compliance with all the Marpol regulations and Classification Society Clean Design Class Notations relating to fuel quality. For our operations in Australia, we use fuel with sulphur content lower than that prescribed by the 2020 Marpol Sulphur Cap. An example of such fuel is “Diesel 10”, which is available from local bunker suppliers with sulphur content of 10 mg/kg max.”

“Clean Design” is a voluntary environmental class notation that requires owners and operators to design and operate their ships in an environmentally sustainable manner. The aim is to reduce the emissions from each vessel, so that the overall environmental burden from shipping is reduced.

One of the requirements of this notation is that emissions to air are controlled within strict limits. The emission levels in DNV-GL’s rules are lower than those in Marpol Annex VI.

A major commercial reason that so many offshore vessels have this notation is that major oil companies require them to do so to tender for charters.

Abatement technologies

The current advantage of operating a vessel on heavy fuel oil, for the owners/operators, is the low price compared to distillates. The IMO 2020 regulation implies that ships can continue to use sulphur-rich fuels if they have exhaust gas cleaning systems (scrubbers) installed.

The basic function of a scrubber is to use seawater to wash out the sulphur in the exhaust gas. There are currently three types of scrubbers available: open loop, closed loop and hybrid.

An open loop scrubber discharges the sulphur-rich wash-water directly into ocean. With a closed loop scrubber, the wash-water is treated with chemicals and particles are filtered out before it is reused many times. A hybrid scrubber combines the two modes and can run in open mode at sea and in closed mode in ports and sensitive areas.

With increased use of scrubbers, it is likely that there will be ports where open loop scrubbers will be banned, while hybrid scrubbers running in closed loop mode will be allowed.

Today, the cost of an open loop scrubber starts at around UD$1.5M, with a hybrid scrubber having a starting cost of US$2.25M. Interestingly, research shows that running a scrubber increases energy consumption by 2% compared to using low sulphur fuels.

Sources estimate that at the end of 2017 there were 450 to 500 vessels fitted with scrubbers and that estimates of further installations by 2020 range from 1,000 to 3,000, which is lower than expected.

Fuel pricing /availability

The commercial case for all of these alternatives is influenced by the price and availability of fuel. The question of how fuel pricing is likely to change post 2020 is one of the most discussed by ship operators, fuel producers and suppliers. Fuel pricing forecasting is complex and subject to price volatility; you only have to look at the variations in the cost of filling your car to appreciate that.

Industry sources have indicated that typical prices paid for IFO 380 in 2018 have been US$375 per tonne and US$600 per tonne for MGO. Current low-sulphur blends are priced at 5-10% below the price of MGO, compared to IFO 380 which is 38% below MGO. There is a common expectation that after 1 January 2020 there will be a “base case” shift from IFO 380 to MGO.

Past experience shows that whenever fuel regulations and the supply chain have changed, as will be the case in 2020, problems with out-of-specification fuel will spike, resulting in increased costs to the vessel operator and lost time.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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