Investing in LNG Fuelled Tanker Vessels

Maro Varvate's picture
Maro Varvate, Head of LNG Projects, Cass Technava Maritime S.A.
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Effective January 1st 2020, IMO regulation forced shipowners and operators to take measures to reduce Sulphur content of their fleets’ exhaust gases to a mandated 0.5% globally. The entire shipping industry has been working in recent years to identify, evaluate and propose realistic solutions for compliance with the regulation. LNG-as-fuel systems together with Exhaust Gas Cleaning Systems (scrubber) and use of compliant fuels have emerged as the most pragmatic solutions at present, while the use of alternative fuels (ethanol, ammonia, hydrogen) and slow steaming are alternative strategies being explored.

Investment in LNG-fueled vessels represents a solution for compliance with both existing and forthcoming emissions’ control regulation and is gaining increasing momentum from shipowners and charterers, especially oil majors, who take the lead in building or chartering new project purpose vessels. Decision-making process involves three pillars to ensure seamless business operations. First, understanding of the available dual-fuel (DF) propulsion systems and LNG storage solutions and evaluation of their respective advantages and limitations. Second, assessment of the incremental cost of DF systems and amortization mechanism accounting for the prevailing and forecasted price differential of LNG versus compliant fuel. Third, developing safe and reliable bunkering operations and ensuring the availability of LNG at key bunkering points.

The capital expenditure for a DF system comprise the dual-fuel engine, the LNG tank, the Fuel Gas Supply System and the related auxiliary equipment including diesel generators and boilers. The incremental cost of the LNG-as-fuel system versus an eco tanker vessel is amortized through the charter premium that a shipowner would require in order to invest in the system. In ballpark numbers, every $1M of extra DF cost results in a requirement for $400-450 per day charter premium. Considering the prices proposed by leading Chinese and Korean yards, the average charter premium increase for Aframax tankers is about $5,000/day, for Suezmax tankers about $6,000/day and for VLCCs about $7,700/day.

A charterer is incentivized to opt for DF tanker where the expected fuel savings, arising from the lower cost of burning LNG versus compliant fuel, would suffice to cover the required charter premium. Graph 1, depicting actual fuel prices in Gibraltar, illustrates an example of potential savings a DF Aframax tanker could capture versus a conventional tanker if both bunkered at Gibraltar for a period. In any given date, the DF vessel would buy LNG-as-fuel at the prices shown by the blue line while the conventional would buy VLSFO, that is compliant fuel, at prices shown by the purple line. The distance between the lines represents fuel savings for the DF vessel.

For instance in mid-Feb 2020, where the reported Delivery Ex Ship (DES) price of LNG in the Mediterranean was $2.7/mmbtu, adding a surcharge for the bunkering operations costs, i.e. $3.5/mmbtu, the delivery on board LNG-as-fuel price of $6.2/mmbtu is reached. Taking into account the calorific values of the two fuels and the relevant efficiency of the DF engine, the equivalent price is $246/Mt1. On the same day, the actual VLSFO price at Gibraltar was reported at $514/Mt allowing savings of $268/Mt.

The charter hire increase of $5,000/day, mentioned above, translates into a minimum required discount of $200/Mt, for the LNG-as-Fuel price, as depicted by the green dotted line on the graph.

Looking at similar graphs for key bunkering ports worldwide during the last 6 months, for most of the period the charterer of a DF Aframax tanker would capture sufficient savings to cover the required charter premium and, at instances, would get additional profits to compensate for the times of insufficient savings.

In terms of DF engine and the size and type of LNG tanks, the high pressure, Diesel cycle MEGI and the low pressure, Otto cycle XDF are the available propulsion systems with fairly sufficient operation and performance records from their applications in LNG Carriers. Integrated membrane tanks and self-supporting type A, B or C tanks are the available options for the storage of LNG-as-fuel on board.

There are currently 34 small scale LNGCs and 11 LNG bunkering vessels while 23 more units are on order. The current DF tankers order book stands at 52 vessels with deliveries spanning in 2020-2023, while 8 vessels hit water in 2018 and 2019. The total DF fleet is to date controlled by 5 owners and 75% of the fleet is under term charters with 7 oil majors. The sector is growing constantly giving confidence to potentially interested parties that LNG bunkering infrastructure, solid shipbuilding experience and development of safe and reliable operations are supporting DF projects.