LNG attracts the interest of policy makers as marine bunkers. It seems that the technology is mature enough and that the price of LNG is attractive enough. However, something is still missing, in order to get a substantial number of LNG-fuelled ships. This article summarises research findings and highlights concerns that should be addressed and will result in a new energy mix in the maritime industry and its segments.

1. 15 Vol.28 Oct - Dec 2016 NGV Transportation
FEATURE ARTICLE
T
he future of LNG
as marine bunker
gains continuously
the interest of
business decision-
makers and regulators. The
benefits of using LNG are
only partially cleared; the
burdens and difficulties are
often exaggerated, while key
elements towards the verdict
of the market are missing thus
increasing the uncertainty
and delaying investments and
projects. Briefly stated, LNG as
a marine fuel is not a new idea;
boiled off gas is consumed on
LNG-carrying ships since the
early 70s. Regulation, technical
maturity, and political reasons
revived the interest on LNG.
Ship operator resist to LNG-
fueled ships as they concern
about the cost of bunkers, any
changes in the employment of
the ships and finally the impact
on all other operations.
The International Maritime
Organisation (IMO) adopted
Annex VI of the International
ConventionforthePreventionof
PollutionfromShips(MARPOL)
that sets limits for non-GHG
such as sulphur oxides (SOx)
and nitrogen oxides (NOx)
emitted from the engines of
ships and consequently impacts
ship operations in the high-
seas as well as in Emissions
Controlled Areas (ECA’s).
This is the main instrument of
the IMO that addresses non-
Green-House-Gases (nGHG).
Europe and California, among
other jurisdictions, introduced
regional regulations, such as the
IS LNG A
TO MARINE BUNKERS
FEASIBLE
ALTERNATIVE
?

2. 16Vol.28 Oct - Dec NGV Transportation
FEATURE ARTICLE
CGTANKTM
Sulfur Directive 1999/32/EC, as
amended by the EU Directives
2012/33/EC and 2005/33/EC
and the California Air Resource
Board (CARB) rules, that set
even stricter limits than Annex
VI; a typical gold-plating
imitative that complicates
further the problem! The issue
of Green-House-Gases (GHG)
such as carbon dioxide (CO2)
is also intertwined, as there is
a need to reduce the carbon
footprint of the industry and
the current technical measures
do not suffice, therefore the
Market-Based Measures (MBM)
are currently discussed at the
IMO. As a summary, Figure 1
is provided in order to tabulate
the established limits and the
corresponding implementation
dates.
Finally of equal importance
are regional approaches and
incentives not limited to the
abatement of SOx and NOx.
As such, many ports provide
incentives for operations
deemed to be beyond minimum
compliance or peer performance
standards. Some of these
incentive regimes may even be
related to the Environmental
Ship Index (ESI), i.e. a
measurement derived by the
World Port Climate Initiative
(WPCI) of the International
Association of Port and Harbors
(IAPH) that determines
seagoing ships that outperform
current emission standards
and consequently special tariffs
or scheme of benefits can be
applied for the ships reducing
their CO2 footprint. Examples
include a rebate offered by the
port of Hamburg, the award of
a ‘Green Trophy’ by the port
of Rotterdam, the adoption of
simple concepts and ideas by
Swedish ports and incentives
introduced by Singapore such
as the ‘Green Ship’, ‘Green
Port’, and ‘Green Technologies’
programs where qualifying
ships enjoy significant reduction
of registration fees and tax
burdens
Given the current regulatory
limits, operators effectively have
three compliance options, which
are categorized as follows:
1. Fuel switch: operators
can install dual-fuel systems,
which allow high-sulfur
heavy fuel oil (HS-HFO) to be
consumed when the ship is
operating outside an ECA, and
low-sulfur heavy fuel oil (LS-
HFO), marine diesel oil (MDO),
or marine gasoil (MGO) to
be consumed while inside an
ECA. This solution complies
with SOx regulations however,
it also increases operational
risks, especially for ships that
frequently enter or operate
within an ECA. Furthermore,
selective catalytic reduction
(SCR), exhaust gas recirculation
(EGR), or relevant technology
must be used for the abatement
of NOx.
2. Add-on technology:
operators can install an exhaust
gas cleaning system (EGCS)
that desulfurizes the exhaust
gases. This option implies that
HS-HFO can be consumed in all
cases. As in the previous option,
a relevant NOx abatement
technology must also be
installed.
3. LNG fuel: operators can
use LNG as a marine fuel. LNG
provides significant reductions
in SOx and NOx emissions,
which allows operators to
comply with existing and
proposed regulatory limits.
Focusing on the LNG option,
operators are not willing to
switchtoLNGormoreexpensive
conventional marine fuels with
reduced emissions profiles
(e.g. MDO and MGO), and are
unwilling to shift operational
practices and technologies, due
to the following key risks:
1. There is no market
trend or commitment that
indicates ships with reduced
emissions profiles will attract
more cargoes or be able to
charge higher freight rates than
their conventional competitors
to increase revenues.
Consequently, any increase of
the cost elements will lead to
deterioration in profit margins.
2. There are operational
risks associated with the global
availability of fuels, such as
MGO and LNG. There are
many concerns related to the
availability of LNG-bunkering
facilities, particularly the
geographic and routing
Figure 1: Timetable of expected regulatory evolution

3. 17 Vol.28 Oct - Dec 2016 NGV Transportation
FEATURE ARTICLE
Figure 2: Relative comparison of LNG prices vs HFO prices in
Singapore (1996-2014)
restrictions associated with
using LNG-fueled vessels (i.e.
vessels can only serve specific
markets and routes).
3. At present, there is no
after-market for LNG-fueled
ships.
4. There is regulatory
uncertainty regarding not only
the future limits for currently
restricted emissions, but also
the probable limits for known
pollutants that are not yet
restricted, such particulate
matter (PM), which LNG-
fueled ships may or may not
address
Consequently, operators are
faced with a very complicated
dilemma: they have to move
towards a new technical
solution yet at the same time all
technology options are full with
uncertainties. In such difficult
markets, the last thing owners
envisage is more risks and
ambiguities. Nevertheless, LNG
as marine fuel should not be
considered as such an abstruse
and perplexing alternative.
Any shift from HFO to
any other bunker is justified
by the price differential; the
higher the benefits, i.e. the
savings, from the alternative
fuel the higher the probability
to shift. Statistical analysis of
the HFO versus LNG prices in
Singapore suggests that there
is a substantial potential of
reduction of the bunker bill.
In contrast to conventional
bunkers, where the supply and
energy content are relatively
well known and understood,
the supply of LNG is more
complicated and the capacity
required to store the same
energy content is notably
increased. Therefore, there
is substantial ambiguity
surrounding the pricing of
LNG as a marine bunker.
First, the various natural gas
pricing mechanisms (e.g. hub-
based, oil-indexed, bilateral
monopoly, regulated, and
subsidized) that serve the
needs and purposes of natural
gas as an energy commodity
(i.e. not as a marine bunker),
combined with the unknown
costs of distributing LNG to a
ship, obscure the transparency
of LNG pricing for marine
bunkering purposes. Second,
the quality of LNG as a natural
gas mixture, which varies
depending on the natural
gas reservoir, production
process, and liquefaction
facility, determines its energy
content, price, and usability
as a marine fuel. Third, the
liquefaction technology, i.e.
transportation of natural gas
(NG) to a liquefaction facility,
refrigeration/liquefaction
process, cryogenic storage
facilities, and transportation
from LNG storage to the ship
determine the final price.
Unfortunately, these costs are
not publicly available, and
the known hub-based and oil-
indexed prices do not include
these costs. The most common
approach to consider the price
that marine operators will
pay for LNG fuel is the sum of
either the Henry Hub (HH)
natural gas, or the UK National
Balancing Point (NBP) natural
gas, or a European LNG import
price, and an adjustment for
bunkering. Figure 2 provides
substantial evidence of the
potential; all fuels are compared
with HFO and various scenarios
for the supply cost as reported by
bunker-supplies are considered
for the final price of LNG faced
by the ship operator.
In few words, given the
above the circumstances, the
price of LNG as fuel is merely
demystified. In addition, LNG
abates almost fully SOx and
NOx, thus enabling operators
to enter ECA and ports,
where regional stricter rules
apply, without uncontestable
stumpers. Consequently the
risk of future regulation,
international or regional, is
adequately mitigated.
Nevertheless, the
encouraging results and facts
yielded from research and
rational thinking are challenged
and disputed when drafting the

4. 18Vol.28 Oct - Dec NGV Transportation
FEATURE ARTICLE
financial plan of the project.
There is substantial evidence
that LNG-fueled ships are
10-15% more expensive than
conventional ones. Considering
operating expenses equal
to the conventional ones,
an assumption that shall
be proven from the market,
and considering the voyage
expenses different, due to the
price differential, it is the port
dues and related fees that may
deem the daily operation of the
LNG-fuelled ship more lucrative
than of the conventional one.
Research yields a simple
formula that estimates the
discount port authorities should
offer to LNG-ships ceteris
paribus, in order to compete
with the conventional ones
on equal terms. This formula
considers the higher capital
expenses, the price differential
and the port dues for the ships
of that size. Hence, a local or
regional policy, which reduces
port dues for LNG-fueled ships
(or punishes the conventional
ones, as they pollute more),
is requested. This regulatory
acupuncture contradicts the
practice of internationally
applied limits, yet it seems
necessary, as different ports
and regions face different
environmental and trade needs.
Furthermore, the higher
original capital expenditure
implies also lower returns or
increased securities required
for the financiers. Higher
initial outlay demands higher
freight rates to break-even with
conventional ones, and there
is no indication that LNG-
fuelled ships will earn them.
Therefore financial engineering
solutions should be put into
practice, in order to attract
investors. Manufacturers and
technology providers might
cover the exceeding part of the
initial cost either as mere equity
providers or through deferred
payments after the delivery of
the ship. In any case they should
somehow undertake part of the
risk of the “showcase” projects
otherwise the ship owners will
not easily shift and opt for their
technology. This financing gap
could also be addressed through
export credit schemes, yet this
implies the support of States.
There are already some export
schemes in place but they
should be further customized.
All in all, LNG is a prominent
alternative fuel for marine
operators. Definitely, none
expects LNG to fully replace
HFO, but significant segments
of the market, such as ships
engaged in coastal trading
or calling often ports might
shift; a push from policy-
makers should be expected.
Last but not least, LNG-fueled
ships address also the need of
reducing the carbon footprint
better than conventional ones.
In this regard the exposure of
the owners to market-based
measures (MBM), expected to
be introduced around 2020,
will be lower, and therefore
the annual financial result
will become more predictable.
Anyway, why should somebody
invest in ships and especially
in LNG-fueled ones, unless he
envisions a better market for
them?
DR-ENG ORESTIS SCHINAS
Schinas heads the Maritime Business
School at the Hamburg School of Business
Administration, since 2008. He possesses
degrees in Engineering, Management and
Finance and his research focuses on improving
maritime decision-making. Therefore he
has published papers in leading journals
on LNG, bunker price forecasting, and ship
finance and contributed in specialized topics,
such as the extensive analysis of the Sulfur
Directive, the extension of ECA, etc. Schinas
has participated in many private projects
involving financing and management of ships
and ports as well as has offered his services as external expert to the
IMO and the European Commission and other Administrations.
NTM By Dr-Eng Orestis Schinas