- The requirement of a mandatory reduction of sulphur content in bunker fuel proposed by the International Maritime Organisation (IMO) poses a challenge to the global shipping industry.
- Liquefied natural gas (LNG) is a great alternative fuelling solution for ship-owners because it has zero sulphur content and its combustion produces relatively low NOx compared to other fuel oil and marine diesel oil.
- With potential advantages of LNG as a bunker fuel and the pace of recent developments, it is argued that the probability of LNG displacing oil as the preferred marine fuel is likely to continue to increase.
- However, the Asian market for LNG bunkering faces a number of challenges – notably the lack of LNG fuelled vessels in the region; investment required in LNG bunkering facilities and infrastructures; as well as development of new safety regulations – all of which are key elements impacting the fundamentals of LNG demand.
Today, the LNG bunkering market is significantly growing due to stricter environmental regulations across the globe and in spite of the depressed oil price.1 Particularly in Asia, LNG bunkering has gained a lot of attention – the Singapore Maritime Port Authority (MPA) recently announced its plans of launching an LNG bunkering pilot programme (LBPP) which is aimed at developing Singapore as a key LNG bunkering hub.2 The development of LNG bunkering is, however, inevitably plagued with challenges. Nonetheless, given the potential advantages of LNG as bunker and the pace of recent developments, the probability of LNG displacing crude oil as the preferred marine fuel is likely to increase. This article seeks to provide an overview of the drivers for the development of LNG bunkering in Asia and also endeavours to explore the issues and challenges faced in the growth of LNG as marine fuel.
II. Drivers – reasons for growth of LNG bunkering in Asia
Stricter environmental regulations and implementations
Before 2010, the shipping industry was perhaps one of the few emission sources in the world that remained unregulated.3 Subsequently, the IMO, a United Nations specialised agency involved in setting the standards for safety and security of international shipping and prevention of marine pollution, began introducing stringent standards and regulations for the prevention of pollution caused by ships. The IMO first mandated that all ships had to reduce their fuel sulphur content from 4.5 per cent to 3.5 per cent in year 2012, with a further reduction to 0.5 per cent by 2020. At the end of 2014, IMO again announced that "ships trading in designated emission control areas (ECAs) will have to use on board fuel oil with a sulphur content of no more than 0.1 per cent from 1 January 2015".4
It is common ground that LNG has attractive advantages over crude oil in terms of its price, energy content (energy per unit mass) and environmental footprint.5 Due to mandatory environmental regulations within the IMO-designated ECAs, LNG bunkering ports are presently primarily saturated in Europe and the USA.6 Though there are no binding sulphur emissions restrictions on shipping fuels in Asia at present, there are positive moves which suggest a growing recognition of LNG as a primary bunker fuel.7 For example Hong Kong recently started requiring ships at berth to use low-sulphur fuels.8 There are also proposals to extend the ECAs to include Japan and Southeast Asia.9 In the same vein, it is widely speculated that regulations similar to those in Hong Kong are planned for the green berths in Singapore's Jurong Port.10 In fact, the Singapore Green Port Programme (GPP) is already rewarding 15-25 per cent reductions in port dues for vessels that can demonstrate emissions at less than 1 per cent mass/mass of sulphur while at the port, and/or use type-approved abatement/scrubber.11 In China, the Ministry of Transportation has recently issued a special action plan concerning "Ship and Port Pollution Prevention (2015-2020)", which includes promoting the establishment of ship air pollutant ECAs, and calls for active promotion of LNG as marine fuel.12
With stricter regulations on sulphur emissions to be implemented in Asia, it is likely that the Asian LNG bunkering market will continue to grow in the coming years.
While it is evident that the demand for LNG in Asia is partly attributed to stringent environmental regulations, the price of LNG as marine fuel has also provided impetus for the growth of LNG bunkering. Asian LNG long-term contract prices have often been linked with crude oil prices for decades.13 This is because oil was considered to be the main competing fuel against LNG and there has not been a better indicator to represent the general energy market trend in the region. Although recently there has been a move away from using crude oil as a price index,14 regardless of whichever index is used, natural gas has generally been cheaper than prevalent bunker fuels. This has not changed despite the oil price collapse that began in mid-2014.15 From a ship owner's perspective, the lower price of LNG, compared to traditional oil-based bunker fuel, complemented with policy and regulatory measures that penalise the use of more pollutive bunker oil, has definitely made the switch to gas an increasingly compelling argument.
III. Hurdles – challenges to overcome
A lack of LNG infrastructure
Despite the apparent benefits of using LNG as fuel, many believe that the lack of or absence of LNG bunkering infrastructure in Asia poses the biggest challenge for the adoption of LNG as marine fuel.16 The issues relating to the investment in or financing of LNG infrastructure plays a significant role in painting the future prospects of Asian LNG bunkering projects.
Ship owners have been reluctant to invest in LNG-fuelled ships until they are assured that LNG infrastructures are in place. At the same time however, terminal owners or operators are unlikely to make significant investments unless there is already a credible demand for LNG bunkers. As such, unless this conundrum is resolved perhaps with capital or financial support from Asian governmental authorities, there will be a significant hurdle to the growth of LNG bunkers.
Plunge in oil prices
Payback time is defined as the period it takes to generate the cumulative revenues needed to pay back the initial cost of an investment.17 It is often used as a measurement of a project's profitability. The longer the payback time, the more undesirable a project becomes. As most Asian LNG supply contracts are linked to crude oil prices,18 there has been a dramatic reduction in the price of LNG in 2015 because of low oil prices.19
As a result, the payback period for LNG bunkering investment projects further extends, thereby slowing down the adoption of LNG bunkering in Asia. This is evident in several Asia-Pacific nations such as South Korea and China. Although these countries have been steadily investing in the development of LNG bunker fuel, the prolonged dip in crude oil prices will inevitably defer the adoption of cleaner fuels such as LNG.
Absence of LNG bunkering regulations and protocols
Despite an increase in the use of LNG as marine fuel, a binding regulatory framework for LNG bunkering in Asia remains absent.20 While Singapore is seeking to develop LNG operational protocols which include bunkering procedures through its initiated LBPP by 2017, there is still a dearth of LNG specifications and measurement requirements in Asia as well as safety and competence training. Co-operation between ports, waterways authorities, LNG terminal operators, governments and regulators is crucial in producing harmonised rules for the accommodation of LNG bunkering. With many collaborations and pilot projects lining up, the lack of a binding set of rules regulating LNG bunkering could potentially leave many stakeholders uncertain about their investment plans. Therefore in order to promote a wider usage of LNG as the cleaner-burning fuel, the gaps in a standardised modus operandi for LNG bunkering must first be filled.
The world's energy landscape is constantly characterised by transformation – from climate changes, to technology developments and dramatic fluctuations in the price of oil. Indeed, we are now entering a new era where the market for LNG bunkering is expanding exponentially. Surely, with current uncertainties around market fundamentals as discussed above, all options may seem like a huge risk. The current landscape for LNG bunkering in Asia may not be smooth sailing as the shipping sector reacts to the sharp drop in the oil price, but the outlook of LNG supply is undoubtedly becoming less ambiguous as demand continues to increase.
While many are still sitting on the fence maintaining their 'wait-and-see' approach, it is clear that the Asian LNG bunkering market still holds a bright future with many opportunities as the world slowly demands cleaner energy.
1. Bloomberg, 'LNG Bunkering Market Analysis and Demand Forecast to 2020: P&S Market Research' (11 September 2015, Bloomberg Business) accessed on 18 November 2015. Available at: http://www.bloomberg.com/research/markets/news/article.asp?docKey=600-201511091119M2______EUPR_____d66b000002525ab0_3600-1
2. Marine Log, 'Singapore takes another step toward LNG bunkering' (1 October 2015, Marine Log) accessed on 18 November 2015) Available at: http://www.marinelog.com/index.php?option=com_k2&view=item&id=9836:singapore-takes-another-step-toward-lng-bunkering&Itemid=231
3. Ellycia Harrould-Kolieb, 'Shipping Impacts On Climate: A Source With Solutions' (Oceana, 2008) accessed on 11 December 2015). Available at: www.cleanshipping.org/download/Oceana_Shipping_Report1.pdf
4. The emission control areas (ECAs) established under the United Nations International Convention for the Prevention of Pollution from ships (MARPOL) Annex VI for SOx are: the Baltic Sea area; the North Sea area; the North American area (covering designated coastal areas off the United States and Canada); and the United States Caribbean Sea area (around Puerto Rico and the United States Virgin Islands). International Maritime Organisation, 'Ships face lower sulphur fuel requirements in emission control areas from 1 January 2015' (IMO, 23 December 2014) accessed on 3 November 2015. Available at: http://www.imo.org/en/MediaCentre/PressBriefings/Pages/44-ECA-sulphur.aspx#.VlLaumiwq9I
5. Pablo Semolinos, Gunnar Olsen, and Alain Giacosa, 'LNG As Marine Fuel: Challenges To Overcome' (Gastechnology) accessed on 23 November 2015. Available at: http://webcache.googleusercontent.com/search?q=cache:ZG5XAhO-2dMJ:www.gastechnology.org/Training/Documents/LNG17-proceedings/7-2-Pablo_Semolinos.pdf+&cd=2&hl=en&ct=clnk&gl=hk
6. Except for two small LNG truck bunkering terminals in Korea and China.
7. Maritime Executive, 'LNG Bunkering Report Predicts Asian Focus' (Maritime Executive, 16 January 2014) accessed on 10 November 2015. Available at: http://www.maritime-executive.com/article/LNG-Bunkering-Report-Predicts-Asian-Focus-2014-01-16
8. Anna Cummins, 'Do the new regulations on berthing ships in Hong Kong go far enough to curb pollution?' (2015) Timeout Hong Kong (accessed on 11 November 2015) Available at: http://www.timeout.com.hk/big-smog/features/73480/do-the-new-regulations-on-berthing-ships-in-hong-kong-go-far-enough-to-curb-pollution.html
9. P&S Market Research, 'Global Industry Insight: LNG Bunkering Market Size, Share, Development, Growth and Demand Forecast to 2020' (9 November 2015, P&S Market Research) accessed on 7 November 2015. Available at: https://www.psmarketresearch.com/market-analysis/lng-bunkering-market/toc-sample
10. Karen Jacques, 'Is Asia at the helm to pioneer LNG bunkering?' (4 June 2015, LNG Industry) accessed on 24 November 2015. Available at: http://www.lngindustry.com/special-reports/04062015/Dryad-Maritime-on-LNG-bunkering-progress/
11. Karen Jacques, Ibid ; MPA Integrated Report 2014, 'Towards a Future Ready Maritime Singapore' (2014, MPA) accessed on 24 November 2015. Available at: www.mpa.gov.sg/sites/images/pdf.../mpa-intergrated-report-2014.pdf
12. Ministry of Transportation, 'China Initiates ECAs and Promotion of LNG for Marine Fuel' (4 September 2015, NGV Global News) accessed on 23 November 2015. Available at: http://www.ngvglobal.com/blog/china-initiates-ecas-and-promotion-of-lng-for-marine-fuel-0904
13. Hiroshi Hashimoto, 'A major turning point and pricing challenges in the Asia Pacific LNG Market' (2015) Institute of Energy Economics Japan, accessed on 24 November 2015. Available at: https://eneken.ieej.or.jp/data/6058.pdf
14. For instance, Singapore is seeking to introduce an Asian LNG price index: Jacob Gronholt-Pedersen and Anshuman Daga, 'Singapore Exchange eyeing Asian LNG benchmark' (Reuters, 2015) accessed on 10 December 2015. Available at: http://www.reuters.com/article/us-commodities-summit-sgx-idUSKCN0SG18R20151022#gpRudZKsIBsGBTgz.97
15. Max Tingyao Lin, 'CMA 2015: LNG-fuelled future for shipping presents risks and opportunities' (26 March 2015, Lloyd's list) accessed on 15 November 2015. Available at: http://www.lloydslist.com/ll/sector/ship-operations/article459323.ece
16. James Brown, '3 Questions on LNG Bunkering in South East Asia' (22 April 2015, Gastech News) accessed on 7 November 2015. Available at: http://www.gastechnews.com/uncategorized/3-questions-on-lng-bunkering-in-south-east-asia/ ; Federick Adamchak and Amokeye Adede, 'LNG As Marine Fuel' (2012) Potent & Partners; accessed on 17 November 2015. Available at: http://www.gastechnology.org/Training/Documents/LNG17-proceedings/7-1-Frederick_Adamchak.pdf. ; Siyuan Wang and Professor Theo Notteboom, 'LNG as a ship fuel: perspectives and challenges' (2014) Port Tech Intl Journal, 15-17, accessed on 24 November 2015. Available at: https://www.porttechnology.org/images/uploads/technical_papers/LNG_LR.pdf.
17. Richard A Brealy, Steward C Myers, and Franklin Allen, Principles of Corporate Finance (10th edn, McGraw-Hill/Irwin 2010).
18. Howard V Rogers, 'The Impact of Lower Gas and Oil Prices on Global Gas and LNG Markets' (2015) Working Paper NG-99, Oxford Institute for Energy Studies.
19. For instance, it is evident in the huge reduction of Japan's average price for LNG imports of US$8.10/mmBtu, which is nearly half of the initial pricing of US$18.30/mmBtu in March 2014 LNG Prices from Thomson Reuters, 'Japan Aug average LNG spot price rises to US$8.10/mmBtu' (8 September 2015, Thomson Reuters) accessed on 24 November 2015. Available at: http://www.reuters.com/article/2015/09/09/lng-japan-spot-idUSL4N11F1DN20150909#AT37h6gAZxItcM6k.97
20. James Brown, ''Offshore small-mid LNG transportation solution – LNG barge/tankers' (4th Annual Asia Pacific Small & Mid-Scale LNG Forum, 2014) accessed on 6 November 2015. Available at: http://www.gastechnews.com/uncategorized/3-questions-on-lng-bunkering-in-south-east-asia/
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