The “new” global LNG development emerging from Gastech in Tokyo is the flow of reports and announcements this week that there is significant action being taken to put LNG bunkering (refueling) in place. LNG bunkering is the needed first step for LNG to capture market share when the new Jan 1, 2020 lower sulphur rules force ships to either use low sulphur fuel, add scrubbers, or switch to LNG. This is an important development – without LNG refueling logistics, LNG fueled ships and tankers (either reconfigured or new builds) won’t grow. If LNG can capture 10% of this market, it can add ~2.6 bcf/d of demand, which would be equal to ~1 year of demand growth, and bring forward by ~1 year the expected time when LNG markets move from oversupply to undersupply.
Gastech in Tokyo is ending today, and it is likely the leading conference and exhibition for “advancing the role for gas & LNG in the global energy mix”. The expectation was for ~25,000 to attend. There has been a huge LNG news flow coming out of Tokyo Gastech and our blog yesterday “Tokyo Gastech: Changed/New Views On Timing Of LNG Correction, Impact Of FSRUs, and LNG For Fueling Ships” [LINK] provided a brief introduction to the potential impact of LNG fuel for ships.
Effective Jan 1, 2010, tanker/ships are required to change fuel sources to meet lower sulphur levels. On Oct 28, 2016, the International Maritime Organization announced [LINK] “In a landmark decision for both the environment and human health, 1 January 2020 has been set as the implementation date for a significant reduction in the sulphur content of the fuel oil used by ships”. This landmark decision means that the vast majority of all tankers/ships are required to change fuel sources with a Jan 1, 2020 implementation date for a global sulphur cap of 0.50% m/m (mass/mass) for marine fuel used by ships. This is a big change from the current 3.5% m/m.
There are 4 options on how ships can replace the high sulphur fuel oil. In its Oct 28/2016 release, IMO noted 4 alternatives for the high sulphur fuel oil, but only 3 that are applicable for typical longer sea voyages. IMO said (i) “ships can meet the requirement by using low-sulphur compliant fuel oil”, (ii) “an increasing number of ships are also using gas as a fuel as when ignited it leads to negligible sulphur oxide emissions”, (iii) “Another alternative fuel is methanol which is being used on some short sea services”, and (iv) Ships may also meet the SOx emission requirements by using approved equivalent methods, such as exhaust gas cleaning systems or “scrubbers”, which “clean” the emissions before they are released into the atmosphere.”
The assumption to date has been to switch to lower sulphur fuel oil and/or use scrubbers. The reason to follow these new LNG marine fuel infrastructure developments is that the assumption to date has been that lower sulphur fuel and/or using scrubbers will be the replacement options. One of the most followed long term energy views is from ExxonMobil. On Dec 16, 2016, XOM released its “2017 Outlook for Energy: A View to 2040” [LINK], which included its view on maritime fuel oil demand in light of the IMO new lower sulphur requirements. XOM noted that the world is moving to “Less carbon-intensive marine fuel. Thanks to a range of technologies and energy options, ships will reduce their environmental impact – and cut emissions”. On page 16, XOM stated its clear view that “Fuel oil will continue to be used in marine shipping, though utilized with scrubbers or desulfurized to meet regulatory requirements”. On March 6, 2017, the IEA issued its “Oil 2017: Analysis and Forecasts to 2O22” [LINK], which noted that there are still uncertainties, but that LNG would only marginally increase its fuel for ships/tankers penetration. The IEA said “Although there are considerable uncertainties around the implementation of the International Maritime Organisation’s regulations, we estimate that 0.2 mb/d of fuel consumption will be lost to the specification change and to LNG”.
A lack of LNG fueling infrastructure is why LNG hasn’t been considered an alternative so far. The IMO rules only gave 3 year 2 months to comply. That isn’t much time, especially for a dealing with existing fleets. And its easy to see why LNG has not been considered a major factor to date – there are only a small number of existing LNG tankers/ships fueled by LNG and limited LNG refueling bunkering facilities. On April 4, 2017, Platts reported on a Tokyo Gastech panel [LINK] “As of January 24, 99 LNG-fueled vessels operated globally, with 93 more in the order book and approximately 70 “LNG-ready” vessels on order, according to DNV-GL data shared at the event by a panelist”. And now with less than 3 years to go, the easiest route for refitting the existing fleet remains switching to low sulphur fuel oil. But this week’s updates that there are going to be more LNG refueling facilities should start to provide a viable LNG alternative option for tanker/ship conversions, or new builds.
But this week saw several new developments showing that LNG refueling bunkers and tankers are being put in place. Some of the announcements/reports this week are: (i) Crowley Maritime announced [LINK] its Talleyrand LNG bunkering facility in Jacksonville is on track to be operational in Q3/17. (ii) LNG World reported [LINK] that “Shell has signed a deal with Russia’ Sovcomflot to supply liquefied natural gas to the first Aframax crude oil tankers in the world to be powered by the chilled fuel”. There are 4 Aframax tankers that will start operations in Q3/18. (iii) The Business Times (Singapore) reported [LINK] reported that Total became the 3rd supermajor (after ExxonMobil and Shell) to sign a MOU with Pavilion Gas on their LNG bunkering facility in Singapore. Pavilion has one of the 2 licenses to supply LNG as a marine fuel in Singapore. (iv) Skangas (Norway) announced [LINK] its new LNG bunkering vessel “Coralius” is being delivered in June. Coralius LNG refueling “main operation area will be from the Kiel Canal to mid Norway, including part of the North Sea. Being flexible in terms of location, she can deliver Liquefied Natural Gas (LNG) both in ports and at sea”. (v). CEPSA announced [LINK] that “in 2018, Cepsa will become the first company with the capacity to supply LNG ship-to-ship in Spain with our Multi-product Barge, specifically at the Port of Barcelona”.
Its too bad that LNG isn’t the only option for meeting low sulphur rules – the size of the market is huge. Yesterday’s blog highlighted Woodside Energy’s bullish view on LNG capturing market share in the new low sulphur rules for marine transportation. Woodside said “We anticipate the next wave of demand growth will come from the use of LNG as a transport fuel, in ships and on road and rail. The International Maritime Organisation’s announcement of new caps on sulphur content in shipping fuel from 2020 has added momentum to this switch to LNG as a transport fuel. If all the ships in the world converted to lower-emission LNG, that market alone could account for 200Mtpa. At Woodside, we are switching to LNG-fuelling of our own supply vessels and investing in infrastructure to provide LNG as a fuel to other industries and exporters. Japan is also preparing for this change, with plans to launch ship-to-ship bunkering in 2020 and develop the Port of Yokohama as a regional LNG bunkering hub”. 200 Mtpa would be equal to 26.3 bcf/d, which is 76% of the total global LNG imports of 34.7 bcf/d in 2016.
Capturing 10% of the low sulphur ships demand is significant for LNG and would be another reason why LNG oversupply should be corrected sooner than expected. Our long stated view is FSRUs are a game changer to LNG markets and will be the factor that tips the oversupply to undersupply 2 to 3 years earlier than expected. FSRUs are no longer under the radar. The announcements/news on increasing LNG bunkering capability are new and position LNG to capture more of the marine fuel market in the new Jan 1, 2020 lower sulphur rules. Capturing 10% of this market opportunity or 20Mtpa would add 2.6 bcf/d to LNG demand, which is significant to LNG markets. Ahead of Tokyo Gastech, the International Group of Liquefied Natural Gas Importers (GIIGNL) released its “The LNG Industry: GIIGNL Annual Report 2017”, which is an excellent LNG reference report [LINK]. GIIGNL said that global LNG imports in 2016 were 263.6 MT (34.7 bcf/d), which was up 7.5% (+2.5 bcf/d) YoY from 245.2 MT (32.2 bcf/d), and up from 158.9 MT (20.9 bcf/d) in 2006. If LNG can capture 10% of the lower sulphur marine market, the added 2.6 bcf/d of demand would be equal to ~1 year of demand growth, and bring forward by ~1 year the expected time when LNG markets move from oversupply to undersupply.