There’s no question that liquefied natural gas is an amazing fuel. It’s relatively inexpensive (at least in North America) and burns without releasing particulate matter or sulfur oxides into the atmosphere while creating far less CO2 and NOx emissions than conventional fuels. But it does have some drawbacks. Gallon for gallon, LNG has less energy in it than conventional fuel, requires sophisticated technology to liquefy and is a lot more challenging to transport due to the fact it has to be stored at or below -259 deg F (-162 deg C).
Nonetheless, John Hatley, VP, Ships Power North America at Wärtsilä noted in a presentation today at the Brookings Institution that 36 ships are being built, or scheduled to be built, for the North American market that will either be LNG powered, or LNG-ready.
For owners that are considering an LNG-powered newbuild or a retrofit, the primary question is, “will there be a reliable supply of LNG available for my ship and will it provide a less expensive alternative to Ultra-Low Sulfur (ULSF) diesel fuel?”
Ben Semmes, Senior Financial Analyst at Cheniere Energy notes today’s price for IMO380 (intermediate fuel oil) in the Port of Houston is about $8 to $9 per mmbtu and for ULSF is about $16 MmBTU.
Ship operators don’t buy bunkers on an MmBTU basis, but considering that is how natural gas is priced, it is the only way to compare apples-to-apples in this case.
Semmes adds that the price for
LNG natural gas has fallen along with oil prices and now sits at around $2.70 per Mmbtu at Henry Hub, a price that would make it extremely competitive against ULSD.
For power companies that can connect directly to gas pipelines, conversion to natural gas power is happening on a wide scale, however for the marine market, the existing infrastructure is not ideal.
Firstly, North American ports do not have LNG liquefaction capabilities yet and will have to rely on LNG bunkers to be delivered via truck or rail until local liquefaction or storage facilities are available.
Such is the situation for TOTE, a company that is building two LNG-powered containerships at NASSCO for use between the U.S. mainland and Puerto Rico.
Due to the high associated cost of building LNG liquefaction plants or appropriate storage facilities, it is a bit of a chicken-and-the-egg situation.
Oil and gas companies widely recognize the US natural gas market demand as mature and overwhelming at 23 trillion cubic feet (TCF) per year, which is the largest in the world. What comes as a surprise is illustrating that the next greatest potential gas market is the world’s commercial shipping fleet, which today consumes nearly 370 million tons of heavy fuel oil annually.
That much fuel oil is equivalent in gas terms to 15 TCF, which is two-thirds the size of the ENTIRE US gas market. It looms out there on the horizon, but off the radar of many companies and governments due to the difficulties inherent in maritime shipping, whereas they possess a much greater awareness with other transportation modes encountered in daily life, such as cars, trucks, trains, and planes.
The reaction is telling when we provide US stakeholders with a global top down view:
Considering 8 percent of the world trade comes to the United States, the potential natural gas market is roughly 1.2 TCF.
Looking at this issue from a marketing standpoint, would your business prefer sales to a large number of small consumers, or a small number of large consumers? Obviously the latter is easier to target as it exhibits a lower cost basis to effectively pursue, particularly when a new market such as the natural gas market is developing.
The typical gas company business plan of today takes this idea forward by seeking to target truck fleets as a key to achieving bulk sales. It’s an easy to understand fact as many highway trucks each consume about 20,000 gallons of diesel per year, or 34,000 diesel gallon equivalents LNG.
Alternatively, let’s consider the fuel consumption numbers for a marine player.
Take a common ocean tug that burns 30 tons of diesel fuel daily, or about 200,000 gallons monthly. This represents a couple million gallons per year, or 3.4 million diesel gallons equivalent of LNG.
Scaling this up, let’s now consider a large container ship that consumes 200 tons fuel per day. Suddenly, your potential market for LNG has now exceeded 20 million gallons of LNG per year, per ship!
While the U.S. happily approves exports of liquefied natural gas from its shores, Mr. Hatley has outlined a huge potential domestic market for this fuel. Without U.S. government policy that directly addresses the monumental opportunity that LNG presents however, it may be some time before widespread adoption of this fuel takes hold.