The milestone of 100 confirmed LNG projects worldwide has been recently passed and it is true that we are seeing many more developments in LNG ship fuel industry. Currently, there are three key stakeholders regulating the future development of LNG; charterers, LNG suppliers and shipowners, each and one of them having their own objectives and challenges moving ahead.
Until now, there were two players dominating the discussions around the future of the LNG industry; LNG suppliers and shipowners facing the well-known ”chicken- egg problem”. On the one hand, shipowners are talking about not enough supply in order to justify the investments for LNG fuelled ships and on the other hand, suppliers claim that there are not enough LNG fuelled vessels in order to justify the investment in bunkering facilities. But now, a third player has entered the picture and this is the charterer who is the one gaining the benefit of lower fuel cost whereas the shipowners are the price and risk takers. The solution to this challenge is charters to reward dual fuel vessels and share the profit or shipowners to take on the fuel cost. These three parties need to work and cooperate smoothly in order to achieve success. From experience, a third party involvement is essential to integrate the process. There is a need for an Integrator such as DNV GL to provide technical knowledge and to ensure transparency in discussions and even perform separate calculations.
The diagram below presents the current development of LNG fuelled fleet and shows that is currently in line with DNV GL projections of 1,000 vessels in 2020. It is interesting to investigate whether this exponential growth will continue.
Moving on, I will present the results from a DNV GL study on LNG newbuild of a Kamsarmax bulk carrier.
The vessel is considered to perform a trade route from Europe to North US with a conservative ECA fuel consumption of 25%. Issues to consider are the following:
- Vessel build after 1st of January 2016 would need to comply with NOx Tier III regulations when operating in NOx ECAs, reducing NOx emissions with 80% from today’s level. Possible solutions would be LNG, SCR and EGR
- From 1st of January 2015 all vessels operating in designated SOx ECAs will need to comply with the 0.1% sulphur regulation
From the study it was found that If you would like to operate the vessel in ECAs using LNG and performing only one bunkering operation and having the vessel sailing at 12 knots, you need a tank size of approx. 500 m3 . On the other hand, If you want to sail the full route using 100% LNG, again with one bunkering and same speed, you need approx. 2,000 m3 .
The biggest challenge with this ship type is to accommodate such a large tank without losing any cargo. In the picture below, some ideas are presented regarding potential tank locations. These ideas may seem extreme for current industry standards; however a lot of thinking outside of the box is required In order to help the industry take the next step ahead.
DNV GL experience from previous projects has shown that the maximum amount of LNG that can be accommodated on a Kamsarmax vessel is ~ 3000 m3. Installing a larger tank increases the flexibility of the vessel and also increases the yearly fuel savings. If you invest an additional amount of $1,200,000 and increase the capacity of the LNG tank from 2,000 m3 to 3,000 m3, you will increase your endurance by 50% and your flexibility, in the number of dry bulk trade routes the vessel can perform, by 37%. Also, yearly fuel saving will increase between USD 40,000 – 300,000 depending on the LNG price and the ECA exposure percentage. It may sound a little bit controversial, but in this case the more you burn the more you save!
LNG can become an attractive investment and can give you bigger flexibility in terms of selecting the fuel price and the port of bunkering. The potential value of a dual fuel investment is more than an ECA- compliance strategy. On diagram below we have managed to plot some investment strategies that shipowners might have. You can choose to burn MGO and choose a modern ECO vessel which slightly decreases your fuel bill from lower fuel consumption or you choose LNG fuel. By choosing LNG, you can either install the tank from the beginning or prepare your vessel for a future retrofit and make the vessel ” LNG-ready”. By installing a small tank it will make the vessel compliant with the coming ECA regulations. Another investment strategy is to go for deep sea long range larger LNG tank. By installing a bigger tank, it will give you the opportunity to trade globally. In this case with an attractive fuel price deal, you might end up having a daily profit after removing the CAPEX, around 2,700$/day by trading both globally and in the ECAs. This is an achievable figure if bunkering is performed in the US.
Additional benefits: vessel becomes more favorable for trading in areas with high ECA exposure; it has reduced port fees and priority in port which will reduce the waiting time.
So, is LNG an attractive and feasible option for a Kamsarmax vessel? Instead of giving you the answer, I will give you some facts so that each and one of you make his own judgments.
LNG from a Technical Perspective
- No showstoppers identified
- Major challenge is the tank location and the required modification in superstructure
LNG from a Financial Perspective
- The cost of the LNG system is the biggest cost driver
- The financial attractiveness of the investment depends entirely on the ECA exposure and the price spread of LNG compare to MGO and HFO
- The attractiveness of the business case is currently dependent on bunkering in the US
LNG from a Commercial Perspective
- Larger LNG tank provides greater operational flexibility
- Significant daily fuel cost savings can be achieved under specific circumstances which can be translated to daily premiums
- Charterers need to share profits with shipowners
- Shipowners need to become price makers and not only price takers
Above article is an edited version of Alexandros Chiotopoulos presentation during 2014 GREEN4SEA Forum
More details may be found by viewing his Presentation video
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