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Stricter environmental regulations, rising fuel costs, and availability of new energy sources are increasing the likelihood for a transition away from the current marine fuel mix dominated by heavy fuel oil (HFO) and marine diesel oil (MDO) to other, alternative fuels. These trends provide an interesting price spread between conventional fuel oil and the competing alternative fuels such as LNG. While alternative fuels or energy carriers such as biofuel and ship electrification are interesting options for the shipping sector, liquefied natural gas (LNG) is the key alternative fuel for new build tankers today. LNG as ship fuel responds to both upcoming regulations and costs drivers. LNG can for example reduce fuel and other operational costs; ensure compliance with the upcoming SOX and NOX regulations; and reduce CO2 emissions. The (commercial) risk of choosing LNG is seen as high by many actors – but what is the risk of not considering LNG fuel? A vessel ordered today will still operate in the 2030s, in a world with unknown fuel availability, fuel prices, and regulatory requirements. Making the wrong fuel choice today can have major implications for the commercial performance of a ship over its lifetime, including tradability and the second hand value.
A ship owner has two options when considering the use of LNG as fuel in the new build phase:
1. Building a LNG ready ship – a ship ready for future retrofit, and
2. Building a LNG fuelled ship – a ship ready for LNG operation from day one
A LNG ready ship is a good option in situations where LNG will not likely be available for another few years or if the commercial terms today are considered to be not sufficiently favourable. The second option, a LNG fuelled ship, is the preferred option when there are no anticipated barriers for using LNG from the date of completion. In this article, we present the business case for building a dual fuel medium range (MR) tanker. We examine the commercial attractiveness of LNG compared to the other main options for emission control area (ECA) compliance – fuel switch to MGO and HFO plus a scrubber – and discuss whether a LNG ready or LNG fuelled ship is ideal for this case. But first, let’s take a quick look at the status of LNG as fuel. LNG – status today LNG as fuel is now a proven and available solution, with gas engines covering a broad range of power outputs. Engine concepts include gas-only engines, and dual fuel 4-stroke and 2-stroke. Methane slip (contributing to GHG) during combustion is practically eliminated in modern high-pressure 2-stroke engines, and further reductions should be expected from 4-stroke engines. The number of ships is increasing fast and infrastructure projects are planned or proposed along the main shipping lanes. There are now 48 LNG fuelled ships (excluding LNG carriers) in operation worldwide, while another 55 new buildings are confirmed. We expect LNG uptake to grow considerably in the next five to ten years. While conventional oil-based fuels will remain the main fuel option for the tanker segment in the near future, the commercial opportunities of LNG are interesting for individual new build projects.
Case: building a MR tanker to run on LNG
This case examines the commercial attractiveness of building a dual fuel 50 000 DWT medium range oil tanker. MR tankers are usually engaged in spot trade, meaning the vessels have an unpredictable trading pattern. This has so far been one of the main arguments for not investing in LNG as fuel – industry actors consider it as too big of a risk before it is certain that LNG can be bunkered globally. However, as charterers look for the cheapest overall cost of transportation, a dual fuel MR tanker will be an attractive choice for trades with high ECA exposure. Especially, for vessels trading to the US, charterers will realise that LNG fuelled vessels may have a lower total cost of transportation. For ship owners with a Dual Fuel MR tanker, this would mean that their vessels would be an attractive choice in the spot pool. In this case, we have therefore looked at a cross-Atlantic trade with a high ECA exposure. The vessel will trade from Rotterdam via New York to Houston, as illustrated on the map below. This means that the vessel will operate in the North Sea SOx ECA and the North American SOx and NOx ECA. From 1 January 2015, all vessels operating in designated SOX ECAs will need to comply with the 0.1 per cent sulphur regulation. If the vessel is built after 1 January 2016, it will also have to comply with NOX Tier III regulations when operating in NOx ECAs. If the vessel runs on conventional fuels, it will then have to install additional emission abatement technologies on board. We assume that the vessel will use LNG for the complete voyage. If the vessel bunkers twice per roundtrip, for example in Rotterdam and in Houston/New Orleans, the vessel will need a tank capacity of 1500 m3. For only one bunkering operation during the roundtrip, the vessel requires a 3000 m3 tank. The latter case will allow the vessel to bunker all of its fuel in the US, where LNG prices are considerably lower than in Europe. LNG is expected to be available on the trade route within the next two years. There are no technical barriers for using LNG as fuel on a MR tanker; there are now several dual fuel engines available to choose from for these vessels (both main and auxiliary), and one or more LNG fuel tanks can easily be located onboard.
Financial analysis
In order to examine the commercial attractiveness of LNG on the case vessel, we have performed a high-level financial analysis comparing LNG to fuel switch to MGO and to HFO with a scrubber:
1. LNG case: The vessel will use LNG for the whole roundtrip
2. MGO: The vessel will use MGO in the ECAs, and HFO outside the ECAs
3. HFO with a scrubber: The vessel will use HFO for the whole trip, and use the scrubber in the ECAs. In the analysis, we include both capital and operational expenditure.
The figure presents an estimate of the total additional capital cost of the LNG system, meaning the delta cost of installing dual fuel engines and the LNG system compared to a regular, diesel fuelled vessel. The cost of the LNG system is based on a 1500 m3 tank capacity. Doubling the tank capacity would only mean a moderate increase in cost. An estimate for a hybrid scrubber system is also shown in figure 2. Figure 3 below presents the cumulative cost of the different fuel options for the new build MR tanker, compared to a HFO baseline. Although LNG has a high investment cost, operational savings can be significant, depending on the fuel price. In this case, we have applied a LNG price spread ranging from 12 USD/MMBtu (600 USD/tonne) to 16 USD/MMBtu (900 USD/tonne). In the case of a LNG price of 12 USD/MMBtu, the payback time compared to HFO with a scrubber is 2.6 years, and 4.5 years compared to fuel switch to MGO. Our analysis shows that LNG can be an attractive fuel option for an MR tanker, depending on the LNG price. This is particularly promising for LNG fuelled vessels trading in the North American ECA, where access to attractively priced LNG in several relevant ports and areas is being developed. These vessels would have a competitive advantage over vessels with other, potentially more costly, ECA compliance options. Could these vessels become the preferred option by cost-conscious charterers with spot cargos and short term time charters for routes with high ECA exposure? Are there sufficient cargos available with high ECA exposure to keep a fleet of DF MR tankers busy, giving a good payback for the ship owner? We believe there could be good opportunities for ship owners today to order such DF MR tankers. Judging by the interest, the first orders are likely not far away. The expected development of LNG bunkering possibilities in key areas makes LNG fuel a more attractive option for MR tankers as well as other tanker types trading with high ECA exposure, and the additional Capex to prepare the ship for later retrofit could prove to be a good investment. DNV GL has to date assessed more than 20 different LNG ready cases, including both new builds and retrofits, covering all ship segments, in addition to the 65 ships that has been delivered or is on order with LNG as fuel. The high-level analysis performed and presented in this article is part of the DNV GL LNG Ready service. The LNG Ready service has been developed in order to assist ship-owners, operators, yards and designers in identifying the most attractive compliance option for their ships. For more information regarding the service,
please contact the authors.
Source: DNV