LNG-as-marine fuel: Are prospects hampered by the “gas crisis”?

Ask consumers of fuel what their priority is, and most will say they want stable prices and security of supply.

 

In the growing LNG market, for industry and power stations, or smaller-scale applications like marine fuel, these principles are as valid as ever. But, will the current instability of gas and LNG markets detract from the credibility of LNG as a marine fuel? And will it cast doubt on LNG’s future status as an orderly market?

 

LNG as a marine fuel has been progressing in leaps and bounds at major ports worldwide. In Rotterdam, vessels have been refuelled by 18,600-cbm LNG bunker vessel Gas Agility, owned by Japan’s Mitsui O.S.K. Lines, and now the largest LNG bunkering vessel in the market. By the end of 2021, a second sistership owned by Mitsui O.S.K. Lines is expected to be deployed in the French port of Marseille-Fos, in collaboration with French operator TotalEnergies Marine Fuels, and the French company will also share the use of a third vessel in Singapore during 2022. In Singapore, FueLNG Pte Ltd, a joint venture between Shell Eastern Petroleum Pte Ltd and Keppel Offshore & Marine, has targeted to make between 30-50 ship-to-ship bunkering deliveries in 2021, and earlier this year made the first refuelling delivery for an LNG-powered oil tanker.

 

However, global gas markets have surged in recent weeks, driven by the recovery of gas demand in China, lower pipeline deliveries from Russia to Europe, and strong LNG demand in Latin America. Wholesale price benchmarks and indicators in the US, Europe and Asia have escalated, leaving end-users of gas and LNG with higher bills and a more uncertain outlook. For many years until roughly 2014, gas and LNG prices were typically indexed to crude oil prices in wholesale supply contracts. From that point, when the gas market largely decoupled from oil, one of the perceived benefits was that it would find its own dynamics, free of the volatility which has beset the oil market over decades. But, as their importance is now rising, gas and LNG may be assuming some of the same characteristics of volatility, supply shocks, and become increasingly prone to the effects of speculators and even vulnerable to cartelisation.

 

The current “gas crisis”, if it persists, will reinforce the uncertain outlook and highlight certain risks attached to LNG as a marine fuel.

 

Final Investment Decisions (FIDs) for new LNG production projects have been dwindling over recent years, and this has cast doubt over future supply. And, if prices remain high, demand for LNG could be dampened, although some may argue that sellers need strong prices to stimulate the development of LNG marine fuel infrastructure. The price volatility we have seen may also mean that large-scale buyers, such as power generators, start to request optionality in new or amended long-term supply contracts, potentially halting the growth of spot LNG volumes in the future, which may put growth of LNG as a marine fuel at risk. LNG as a marine fuel also lacks a liquid and organised futures market, making hedging positions potentially troublesome as its utilisation grows. There are, indeed, futures contracts for wholesale LNG on major exchanges, but these may be far removed from LNG prices “at the pump” for ships, and hence offer only a partial hedge. Major players could hedge positions in the over-the-counter (OTC) market, but the range of operators to hedge with could be very limited, and the cost could be high, especially in times of volatility.

 

But, how could the market evolve to circumvent some of these risks?

 

As well as an improved futures market, and the encouragement of FIDs to ensure adequate LNG supply on the spot market, marine fuel operators could try to establish a presence in the long-term LNG contract market. This would put them in direct competition with power stations and industry, but there is no obvious way to avoid such competitive pressures over the longer term, given the strength of demand growth. There may also be a case for subsidies, similar to financial support given to LNG-as-fuel by the EU as projects of common interest, to develop the global LNG marine fuel infrastructure system to support the industry’s growth. Governments are dedicating transition funding to support efforts to reach CO2 targets, and some may consider LNG as a marine fuel to be a legitimate recipient of funding. But of course, as it is derived from a fossil fuel, we can be sure there would be some opposition. However, certain banks and financiers are moving away from funding anything to do with fossil fuels, and arguably this creates a stronger case for Governments to be become involved at the early stage of the industry’s development to fill any vacuum.

 

Additionally, if LNG is increasingly perceived to be a transition fuel towards CO2 targets, and this is ratified in some way at the forthcoming COP 26 conference by enough participating nations which have extensive shipping industries, the case for subsidies to the marine industry’s LNG ambitions would also be strengthened.

 

Uptake of LNG as a marine fuel has been encouraging so far. But, the gas crisis has thrown some additional risks into the equation. There is no getting away from market forces and no way to eliminate risk altogether, but are there methods by which risk can be managed, and the progress of LNG as a marine fuel can thereby be maintained.

 

 

 

 

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