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LNG Thrown A Lifeline By Shipping Industry

Introduction

Marine vessels offer the cheapest and easiest way to transport goods around the world. There are an estimated 50,000 container ships moving goods from point A to point B in all four corners of the globe. Given the amount of trade that occurs globally, moving goods by water also is one of the cleanest forms of transit.

Still, there is an extraordinary level of pollution from the shipping industry. International shipping is responsible for about 3% to 4% of total carbon dioxide emissions worldwide. If counted as a single country, shipping would rank number six in the world for total greenhouse gas emissions, ahead of Germany.

That has regulators gunning for the industry. Stationary sources of pollution such as factories and power plants, and even onshore vehicles such as cars and trucks, have long been regulated for their pollutants. But until recently, there has been very little regulation over the emissions of the shipping industry. Container ships use heavier fuels that release not only carbon dioxide, but also sulfur oxide, nitrogen oxide, and particulate matter.

New Environmental Limits Set to Kickstart New Era For Industry

Ships were permitted to burn fuel with a sulfur content of 4.5% before 2010, which stands in stark contrast to U.S. Environmental Protection Agency standards of just 0.15% for road vehicles. But the International Maritime Organization (IMO) passed standards that required ships to lower the sulfur content to just 3.5% beginning in 2012. Those limits are set to tighten significantly – by 2020, sulfur content in maritime vessels must drop to just 0.5%.

But individual countries are allowed to set stricter limits if they want. At the beginning of 2015, ships passing through American waters, for example, were required to use fuel with just a 1% sulfur content, lower than the international limit.

This presents shippers with a dilemma. To comply with increasingly stringent emissions standards, shippers do have the option of purchasing low-sulfur diesel fuel. But that could increase fuel costs by an estimated 30%. They could install scrubber systems that will capture the sulfur before it is emitted. But those are also expensive to install and their ability to achieve the necessary emissions reductions is still questionable.

The Future Is LNG

LNG offers marine shippers lower fuel costs over the long-term plus the potential to more than exceed the minimal reductions required by both international and regional shipping regulations; regulations that are set to tighten in the years ahead. LNG could reduce ship-related emissions by as much as 70%.

The European Union is also driving much of the transition to LNG ships. The EU has implemented a policy that will lead to LNG bunkering capability in all deep-water European ports by 2025. They have also subsidized the transition.

Ports with LNG bunkering capabilities should not be confused with the slew of major liquefaction terminals under construction for the export of LNG. The ports needed for fueling ships, as opposed to LNG export, are small by comparison. The flow of natural gas needed is 95% less than those for an export terminal.

While there are no major technical or engineering challenges, the biggest obstacles are market-related, according to maritime industry consultant John Graykowski, who spoke at Brookings Institution event in Washington DC on the subject on March 3. “The potential stakeholders in putting together an LNG project include: suppliers, marine operators, the ports, regulatory agencies, potentially maritime unions…none of these elements are traditionally aligned.”

It is a chicken and egg problem. Ship builders are reluctant to invest in LNG-equipped ships when they are unsure if ports will be equipped with LNG bunkering capabilities.

But that cycle could be broken in Jacksonville, Florida, which is shaping up to be an LNG maritime hub.

TOTE Maritime, a private shipping company that operates in Alaska and off the eastern coast of the U.S., is building the world’s first LNG container ships. It is contracting out the construction to General Dynamics NASSCO, a ship builder and subsidiary of General Dynamics (NYSE: GD). General Dynamics NASSCO also builds naval ships for the U.S. military and is based in San Diego. The two ships under construction will cost an estimated $350 million and will be completed by the end of 2015. They will operate out of Jacksonville, Florida and run to Puerto Rico. The new LNG ships will have about 60% more cargo space than TOTE’s previous line of ships. When the ship hits the seas and demonstrates costs savings and environmental compliance, General Dynamics NASSCO will explode with new orders.

Another private company, Crowley, has been contracted for the construction of two LNG-powered container ships, and they should be completed in 2017. They will also be based out of Jacksonville.

In order to service the market that is forming off the coast of Florida, refueling infrastructure needs to be constructed. A company started by T. Boone Pickens is jumping at that burgeoning opportunity. Pickens’ Clean Energy Fuels Corporation (NASDAQ: CLNE) is building an LNG bunkering operation in the port of Jacksonville. The facility will liquefy around 300,000 gallons of LNG per day and is expected to be completed by the end of the year. It is being constructed in conjunction with GE (NYSE: GE) and Royal Dutch Shell (NYSE: RDS.A). GE estimates the U.S. market for LNG maritime fueling could support 50 to 100 small-scale locations, with each costing between $50 and $150 million.

Still, despite the progress in the U.S., the United Arab Shipping Company (UASC) is far ahead of the pack, and is currently the only shipper in the world that is amassing a huge fleet of LNG-powered ships. Based in Dubai, UASC is building 17 ultra large container ships that will all be dual-fueled – that is, the ability to handle both LNG and traditional heavy fuel. UASC has been able to move forward on LNG ships much quicker than the rest of the world due to the extraordinary abundance of natural gas in the Persian Gulf. Not only is the upstream production there, but the Persian Gulf has a long history of liquefaction technology and marine transit of LNG. The jump to LNG powered ships was a short leap to make. UASC will lead the world, at least for the foreseeable future, in shipping using LNG as a fuel source.

The market for maritime LNG is set to surge. There are an estimated 36 ships currently under construction that will be equipped to use LNG for fuel. The first LNG container ship will come online by the end of the year. But that is just the beginning. By 2020, there will be more than 1,000 LNG-powered ships, with an additional 600 to 700 retrofitted to handle LNG fuel.

“Within the next five to 10 years, LNG will become the main fuel source for all marine transportation,” Anthony Chiarello, TOTE’s president and CEO, told Bloomberg in a 2013 interview.

Conclusion

Due to the tightening environmental regime worldwide – a set of regulations that will almost certainly not go away – high sulfur fuel oil is facing a grim future. While low-sulfur fuels and other technologies can clean up shipping, high costs will likely limit their use. LNG powered ships provide the most obvious path forward.

That will not only create new opportunities for shipbuilders, but it will also provide yet one more major market for upstream natural gas producers. Already supplanting dirtier coal in the electric power sector, natural gas will increasingly steal market share from oil-based maritime fuels in the shipping sector. Soon, all the Iphones, clothes, electronics, and all the rest of the consumers goods that travel by sea, will be delivered by LNG.




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