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LNG Business ReviewSpotLight:September/November 2020

SpotLight

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Contents

LNG by truck: Booming sector delivers the goods, eyes zero-carbon future

LNG by rail: Full steam ahead or chugging along?

Editor’s letter: Small-scale LNG makes dynamic inroads

‘Small-scale is part of the natural evolution for LNG’: Chart Industries

‘Everyone wants to open up new LNG outlets, and that supports growth’: Gasum

LNG bunkering: Growing segment retains optimism despite Covid-19 disruption

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Editor’s letter: Small-scale LNG makesdynamic inroadsThe Covid-19 pandemic may have created an extremely difficult, if not terrifying, environment formany in the LNG segment, but even during these troubling times, the enthusiasm – not tomention curiosity – felt by many companies and individuals for small-scale LNG seemsimpossible to extinguish.

Not a week passes without more news about the sector, be it LNG bunkering, LNG’s use as fuelin road transport or its supply by truck. This is not surprising. Low prices have made LNGaffordable for many new, small and/or off-grid users, and small-scale solutions are a quick way ofsupplying them with the volumes they require.

Of course, the small-scale sector still faces many hurdles. For example, the transportation ofLNG by rail, despite the efforts of a handful of innovators in the field, remains at an embryonicstage. Though LNG by rail has great potential as an alternative way of delivering maximisedvolumes of LNG to demand centres, while also offering considerable environmental andeconomic benefits, its growth is held back by the high cost of initial investment required.Meanwhile, in the US the transportation of LNG by rail has long been a barbed political issue, itsopponents challenging its safety.

As far as the adoption of LNG as marine fuel is concerned, the shortfall of global infrastructure,especially LNG bunkering vessels, remains an obstacle. This is not to say that there is noappetite for investing in such infrastructure, as illustrated by London-based Avenir LNG’sorderbook of six bunkering vessels, with one delivered just this October.

At the same time, the ordering of dual-fuel newbuildings that can run on LNG is gathering paceand is no longer limited to cruise ships and ferries. Tanker and container shipowners are alsoopting for LNG as one of their fuel solutions, as they comply with the 0.5% sulphur content capput in place on 1 January by the International Maritime Organisation (IMO). And while majorcompanies such as Shell and Total have the global reach to create an international LNGbunkering network for their customers, collaborations between regional bunkering players canalso help expand the sector.

In this time of LNG oversupply, any new outlet for LNG, however small, is worth investigating andsupports the LNG industry’s overall growth, the small-scale segment’s supporters insist. Also, itis a business with one eye firmly on a zero-carbon future. This will no doubt prove useful for theenergy sector on its path to decarbonisation, as small-scale LNG companies are alreadyresearching technological innovations that involve biofuels, hydrogen and other energyalternatives.

LNG Business Review’s SpotLight series on small-scale LNG aims to highlight how dynamic thissegment has become in a short period of time, its achievements and hopes voiced by acommunity that firmly believes in its great potential and importance.

Kostya TsolakisEditorLNG Business Review

The views contained in this editor’s letter are solely those of the editor and do not necessarily reflect those of Gas Strategies.

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LNG by rail: Full steam ahead or chugging along?

• LNG by rail still at embryonic stage despite cost-cutting, supply maximisation benefits • VTG, Chart Industries among companies offering specialised cryogenic tanks for rail • Grain LNG, Japex offering multimodal supply solutions that combine rail • Rule allowing bulk LNG transportation by rail in US challenged over safety concer

The transport of LNG by rail is still at an “embryonic” stage, but at a time of oversupply, this smallscale segment holds great potential as an alternative way of delivering maximised volumes of LNG to demand centres, while also offering considerable environmental and economic bene-fits, sources involved in the sector tell LNG Business Review.

One hurdle to its growth is the high cost of investment required, while in the US thetransportation of LNG by rail has long been a barbed political issue. However, major names ingas and LNG, such as Gazprom and Engie, as well as smaller innovators such as New FortressEnergy, are becoming active in the segment and are pushing for its development.

What’s going on in the US?

LNG by rail drew headlines over the summer in the US. On 18 August, a coalition of 15 attorneysgeneral from mostly Democrat-voting US states lodged a legal challenge to the final rule, issuedin June by the US Department of Transport (USDOT) and the Pipeline and Hazardous MaterialsSafety Administration (PHMSA), that permitted the bulk transportation of LNG by rail across the US.

In the lawsuit, the coalition intends to argue that the rule – which came over a year afterPresident Donald Trump signed an executive order in April 2019 commanding the USDOT to“treat LNG the same as other cryogenic liquids” – is “unlawful” due to a “failure to evaluate theenvironmental impacts.”

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“The main concerns revolve around safety, risks of catastrophic accidents, and the environmental and climate impacts of LNG shipped by rail,” Rachel Meidl, fellow in energyand environment at Rice University’s Baker Institute for Public Policy, tells LNG Business Review.

According to Meidl, although LNG has been transported safely by trucks on highways and bymarine vessels for over 40 years in the US, and over 50 years internationally, LNG has not had a history of being shipped by rail in the US. Given high profile incidents in shipping hazardousmaterials by rail, most notably the 2013 crude oil derailment in Lac-Megantic, Quebec, whichresulted in 47 fatalities and released 1.5 million gallons of oil, “there is heightened awarenessand concern for the shipment of LNG by rail,” she says.

“Although enhanced tank car standards, operational controls and other measures weremandated as a result of this catastrophe, incidents, especially those involving fatalities, chal-lenge the public’s trust in our regulatory and safety systems,” she adds.

LNG by rail has been a polarising and politicised issue for many years in the US, and is set tocontinue to be challenged on the country’s political arena, as sustainability, public health and safety issues and climate change are placed at the forefront of debates, says Meidl, “especiallysince the rulemaking was catalyzed by an executive order issued by President Trump.”

Solving constrained supply

Government and industry advocates of LNG by rail in the US claim that it could cut emissions,increase US energy competitiveness and reduce venting and flaring, which have reached recordlevels in recent years. It could also offer US regions with constrained pipeline capacity moreaccess to gas. This includes the US Northeast, which in the past has resorted to LNG imports toaddress gas shortfalls, as a 1920 federal law does not allow foreign-flagged vessels to shipLNG from one US port to another, restricting the region’s access to US cargoes.

June’s final rule permits the transportation of LNG by rail using modified versions of the DOT-113tank cars currently used to transport liquid hydrogen (LH2) in the US. Some LNG has been, andis currently transported by rail in the US using special permits, or in ISO containers, subject toFederal Railroad Administration (FRA) approval, says Meidl.

“Special permits allow entities, after a technical safety review, to transport hazardous materialsusing alternative requirements issued by US DOT/PHMSA that achieves a safety level that is atleast equal to the safety level required under federal hazmat law, or is consistent with the publicinterest if the required safety level does not exist,” she explains.

In 2015, the federal government issued its first ever permit for LNG shipments by rail inmultimodal tank containers between Anchorage and Fairbanks in Alaska. A second suchapproval was issued in 2017 for shipments within Florida. More recently, in December 2019 thePHMSA granted a special permit to ship LNG by rail to New Fortress Energy, which is looking toliquefy gas in Pennsylvania and transport it 200 miles via rail to a proposed storage facility on the Delaware River, New Jersey, from where it plans to export the LNG to the Caribbean.

Multimodal solution

Outside the US, LNG by rail services have been, or are being, developed in several countries as part of multimodal solutions. According to one source, a service thatinvolves both rail and truckscan, depending on what fuel the vehicles are using, “cut CO2 emissions by 80% when compared to transport by truck alone.”

In the UK, the Grain LNG terminal in Kent supplies LNG via rail as part of a multimodal solution.It entails loading ISO containers at Grain and transporting them by truck to Daventry,Northamptonshire – a journey of around 190 km from Grain. At Daventry they are loaded onto atrain to Coatbridge, just outside Glasgow in Scotland, where they are loaded back onto trucks tobe delivered to the final customer. This service began in 2017.

“Currently, the LNG by rail service mainly supplies the Scottish Independent Units,” says PaulOcholla, commercial development advisor, National Grid, Grain LNG. “Typical demand is around10,000 tonnes of LNG per year. It is a key service which ensures those homes in Scotland, whichare not connected to the grid, always have an available energy source to heat their homes.”

According to Ocholla, a multimodal solution that involves both trucking and rail provides asignificant cost reduction, with a saving of over 50% realised per trip in some cases. “This savingresults from a reduction in both logistic costs and wear and tear to the trucks,” he explains.

“There is also the safety and reliability benefit, as transport by road is significantly reduced infavour of a more reliable – and safer – rail service [and there] is a significant saving on CO2emissions and pollution when using rail versus road transport,” Ocholla adds.

Ideally, Grain would like to extend its service to allow ISO containers to be loaded onto trainsdirectly from Grain, or at least much closer to Grain, he says. However, for this to happen“demand needs to grow significantly to ensure the service is cost effective,” he notes.

Reliable delivery: Japex’s story

One of the pioneers in the LNG by rail segment is the Japan Petroleum Exploration Company Limited (Japex). Having launched an LNG satellite system served by tank trucks to supply LNG to customers in 1984 – mainly local distribution companies on Honshu Island – from 2000 Japex also began supplying LNG to customers by rail.

According to a Japex spokesperson, the company’s LNG by rail service was launched because it was seen as “the most reliable delivery method to customers at remote locations.”

Currently, Japex’s LNG by rail service is concentrated on Hokkaido Island, connecting Tomakomai with Kushiro – a distance of just over 280 km. As Hokkaido gets deep snow and frozen roads often in winter, which makes LNG truck delivery slow during this high demand season, transportation by rail enables Japex to deliver gas to customers in the region more safely and reliably, the spokesperson explains. The company also provides technical and commercial solutions associated to the business. Japex’s rail service forms part of a multimodal solution that includes trucks at either end, with the LNG delivered in specialised cryogenic containers to the customer’s location. However, before the rail service was launched in 2000, there was no specialised container available for transporting LNG by rail. As a result, Japex had to find a manufacturer who could create it, “making the specification from scratch,” says the Japex spokesperson.

While the LNG by rail segment remains at an “embryonic” stage globally, a multimodal solution that combines rail and truck in the transportation of LNG has a “clear advantage” when it comes to the environment, as it can cut CO2 emissions considerably when compared to transport by truck alone, the Japex spokesperson highlights.

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Flow maximisation

Across the Channel, Engie subsidiary Elengy, which operates France’s regas terminals atMontoir-de-Bretagne on the Atlantic coast and Fos Tonkin and Fos Cavaou on theMediterranean, is currently working on plans to offer an LNG by rail service out of either Montoiror Fos Tonkin. The development studies for this service “are ongoing,” with a target to achieveinvestment decision in 2021, “as originally planned,” says an Elengy spokesperson.

“The novelty of this service is not in the LNG by rail itself, but in the possibility offered to ourcustomers to massify the LNG flow, by rail, from our terminals to a satellite storage station whereLNG will be further distributed by truck. It will be the first infrastructure of this kind in Europe,” thespokesperson explains.

The main customers Elengy’s rail service will benefit are off-grid industrial players and thetransport sector, with the latter increasingly turning to gas and LNG as fuel to mitigate itsenvironmental impact, the spokesperson says.

“LNG is the choice for these markets. However, Europe still needs infrastructures: LNG servicestations and well-developed distribution networks. Today LNG is only available from the LNGterminals via truck. This distribution mode limits the potential development of LNG as fuel toregions that have reasonably close access to terminals.”

Building intermediate infrastructures, such as satellite storages, and linking them up with LNGterminals by rail, “will foster the connectivity amongst retail LNG infrastructures in Europe andcontribute significantly to secure LNG supply for the industrial and transport sectors,” thespokesperson stresses.

A key advantage rail can bring to LNG supply is the “massification” of the LNG flow, bringing costand environmental benefits with it, as “a train is transporting, in one voyage, the equivalent of 40LNG trucks,” says the spokesperson.

Elengy’s plan to link up one of its LNG terminals with a satellite storage site is “a first project ofthis kind,” the spokesperson underlines. Some economic hurdles remain as the company plansto bring LNG in a region far from existing source of supply and where the demand has still to bedeveloped. “To achieve the investment decision will be challenging but the energy transition callsfor that kind of project.”

Industry firsts

Elsewhere, rail has enabled some notable LNG industry firsts, such as Gazprom Export’s maidencargo shipment of Russian LNG to landlocked Mongolia last year. Amounting to 36 tonnes, theshipment was loaded in made-in-Russia cryocontainers in Yakutsk on 22 October 2019 andarrived in Ulaanbaatar on November 4. The LNG was used as fuel for municipal transportvehicles in Mongolia’s capital – one of the most polluted cities in the world.

“The LNG demand on the Mongolian market is rapidly growing,” Georgy Trofimof, directorgeneral of the Siberian Fuel and Energy Company (SITEK), which shipped the cargo, said on 6 November. “The new LNG export route created by Gazprom Export and SITEK for the first time brings Russian gas to new markets via railway transport, allows to involve Russian railways and to increase the demand for cryocontainers produced in Russia.”

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For its part, Hamburg-based rail and tank container logistics services provider VTG has duringthe past 12-18 months seen “a more and more positive reaction” to its LNG transport concept –the LNG | G91.111D cryogenic rail tank car, which has a nominal capacity of approximately 111cm – says VTG’s LNG expert Heinz-Jurgen Hiller.

VTG, in cooperation with Czech-based cryogenic equipment manufacturer Chart Ferox andGerman gas supplier Primagas, carried out Europe’s first ever loading of a cryogenic rail tank carwith LNG in April 2016 in Brunsbuttel Ports’ Elbe Port in Germany.

Four years later, Hiller says VTG is in discussions with the energy market “and we will see howLNG by rail will develop in the near future. It looks positive but it would be too inaccurate to talkabout [future volume] figures now.” The main query from clients is how a chain for LNG rail transportation would work and could be realised, he adds.

Asked what prompted VTG to get involved in the LNG segment, Hiller says: “We are permanentlyobserving the market, not only for LNG, and we are of the opinion that the market will facechanges in the future. The energy mix is one of these segments. Being a pioneer is of course arisk, but standing still is regression.”

Echoing Elengy’s spokesperson, Hiller says the main benefit LNG by rail brings is “biggervolumes, and it is an option to transport the bigger volumes inland on longer distances.” Also,LNG by rail can work closely with the LNG by truck segment in helping open up more demandcentres.

“We don’t want to compete with trucks. Trucks are part of the chain. For example: terminal –wagon – truck – end user. The benefit is to transport substantial volumes from A to B by rail, andcontinue with maybe smaller volumes to C, or to transport substantial volumes from A to enduser B.”

While investing in the equipment, stationary and mobile, required for the transport of LNG by railis “definitely” a hurdle, Hiller believes the segment has great potential in Europe, as more regasterminals are planned on the continent, including “one or two in Germany.”

Opening new outlets

Shipping LNG by rail is still a very small business, especially when compared to the LNG by trucksegment, which transported 20 mt of LNG in 2019 – a year-on-year increase of 12.5%, accordingto GIIGNL data.

At this early stage, investing in LNG by rail projects will pose a considerable hurdle to thesegment’s growth while demand for the service remains low, the environmental and financialbenefits it offers remain underreported, and the political debate surrounding it in the US staysheated.

However, with cryogenic rail tank solutions already available – apart from VTG, US-based ChartIndustries is another company offering cryogenic rail products – not to mention the far fromnegligent volumes of LNG a single rail trip can carry, the segment’s supporters insist that LNG by rail can provide suppliers many – and, in this time of oversupply, much needed –new outlets. - KT

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The last couple of years have seen Georgia-headquartered Chart Industries, the global designerand manufacturer of cryogenic equipment used across the liquid gas supply chain, focusincreasingly on small scale LNG solutions, ranging from LNG to power and micro-liquefaction toLNG as fuel in road and marine transport. According to Jillian Evanko, the company’s CEO andpresident, and Scott Nason, product manager for Chart’s rail products group, this strategic tiltforms part of a natural evolution, not only for Chart but for the LNG industry, too.

‘Small-scale is part of the natural evolution for LNG’: Chart Industries

“Even up until four years ago LNG was facing the same challenges that hydrogen faces today,where you had the cost comparison to more traditional fuels, the safety concerns and how tobuild the infrastructure,” Evanko recalls.

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“Over the last five years we’ve seen LNG infrastructure mature and that’s where this transition tosmaller scale applications has come into play. People no longer want to wait long to getregulatory approvals and enough offtake to make a ‘big LNG’ export terminal project worthwhileto an operator. It’s possibly five years before you get first gas – a long time in the making. Withsmall scale you can get a project up and running in 12-18 months.”

According to Evanko, the “small scale phenomenon” has made it more economically practical fordifferent parties to participate in a midstream project while giving quicker access to power togeographies, such as locations in the Caribbean and south-east Asia, which in many cases donot have any. Furthermore, small scale LNG can help ease the pressure the LNG glut has put onsuppliers while allowing that release to be achieved in a much shorter timeframe than before.There is still a need for larger LNG terminal projects, she indicates, while small-scale serves adifferent need.

“We’re also seeing LNG grow in different types of small-scale transport applications,” Evankoadds. “We’re seeing it in marine bunkering, rail transport and over-the-road trucking, with agrowing number of LNG fuelling stations that serve day-to-day operations.”

Geographic footprint

Key in Chart’s growth is its global presence and strong drive to maintain and nurture closerelationships with overseas colleagues and clients, says Evanko.

“We have fantastic teams all over the globe and that’s come through a variety of differentacquisitions, which allows us to round out our geographic footprint. In so doing, we have beenable to get the resources that understand the culture, live in the culture and can really developthese relationships. And by getting early with customers in different countries you canunderstand what they’re looking for and the dynamics that go into play.”

The Covid-19 pandemic has of course put an unprecedented strain on any company’s ability tomaintain business relationships. Although technology has helped do so virtually, getting back toin-person meetings, at least in part, is going to be really important to the economy, Evankobelieves.

“It is necessary to maintain relationships in person. And while we have worked very hard tomaintain them virtually in recent months, there’s only so much Zoom you can do!”

Currently, a core regional business for Chart is the LNG as fuel segment in western Europe,where the company provides LNG fuelling stations, which includes permanent and mobile units,as well as on-board fuelling systems and LNG dispensers.

“It is a very promising market,” says Evanko. “We had a couple of sole-source, long-termagreements with customers in the region, which started us down this path years ago, moving into production levels in early 2019.”

While the start of the Covid-19 pandemic resulted in a deceleration in this side of Chart’sbusiness in Europe, it soon after witnessed a rebound, boosted in part by the Germangovernment’s decision in May to extend an exemption from motorway tolls for trucks fuelled by compressed natural gas (CNG) and LNG.

“We saw a significant rebound in June and we expect it to grow over the coming three years,” says Evanko.

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As far as other regions are concerned, Chart has spent a decade working with potentialcustomers looking at different geographies that hold potential as demand centres for LNG-fuelled over-the-road trucks. However, it has been a “stop-and-start type of process,” Evanko admits.

“We just received an order from a customer in Japan. I think that will start to accelerate othercustomers ordering in different regions. I think LNG as transport fuel will continue to accelerate,not just in Europe but also in India, south-east Asia and the Caribbean – places where we haveother small-scale infrastructure. If you have a small-scale terminal being built anywhere, it simplybodes that you’ll also have all this other transport infrastructure that takes advantage of thataccess to the fuel.”

Chart is also keeping a close eye on the development of biomethane, which is widely regardedas a natural and promising successor to LNG as transport fuel.

“We’re very new to this but are looking at a dozen biomethane projects right now that work withcustomers in Europe, with a subset of those in Italy, tied to the carbon credit process and makingit a financially feasible solution. We’ve also seen it start develop in the US. However, it’s a littlemore niche there, with waste taken from farming or food processing and put into the system inplaces like California where there are credits for it.”

“We consider biomethane ‘micro-LNG’ because it really is adjacent to LNG and feels like anatural step forward.”

Rail potential

Another recently developing area for LNG is LNG by rail. While still at an embryonic stageglobally, Nason – who works as Chart’s application development manager focused on railapplications – believes it holds greater potential than LNG by truck as it can be more costeffective.

“LNG by rail can certainly take off,” he says. “What it will take for this to happen is a long-term,less-than-pipeline but larger-than-truckload volume for it to make sense.”

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According to Nason, a key role in the growth of LNG by rail will be played by cryogenic tank cars,as opposed to ISO containers, which up until now have been the most common way oftransporting LNG by rail, for example by Japex in Japan and Grain LNG in the UK.

“ISOs are a good mix when part of a multimodal solution with trucks,” Nason explains. “But a 30-foot ISO wouldn’t be remotely cost-effective anywhere in North America. It’s too small. 40-foot ISOs carry 10,000-11,000 gallons. The tank cars in North America will carry 30,000 gallons.”

Although a truck can offer “more turns per month, you would be more efficient with rail,” Nasonsays. “I personally don’t think the capital cost is the main hurdle. The railcars are notinexpensive, nor are the truck trailers, but if you have a couple of years perspective and a repeat,dependable business, rail dominates the delivery and operating costs.”

As well as being more cost-effective, “if the end-use site also has rail access, there’s a lot to besaid about getting LNG off the interstate highways and onto the rail,” he adds.

For Nason, transporting LNG in ISO tanks makes more sense when water forms part of thecargo’s voyage. “If you don’t have shipload quantities, the ISO is a very good product for marineshipping. For example, there is a great application that brings LNG in ISO containers to MadeiraIsland – 55 ISOs in constant circulation. The ISO container ships seamlessly from land to waterand back to land.”

Nason is optimistic that the final rule issued in June by the US Department of Transport (USDOT)and the Pipeline and Hazardous Materials Safety Administration (PHMSA), which permits thebulk transportation of LNG by rail across the US, will stand and go forward despite the legalchallenge brought against it in August by a coalition of 15 attorneys general from mostlyDemocrat-voting US states.

“LNG is being fought because it is new,” Nason says. “You can’t go back and fight the battle forshipping crude oil by rail. However many problems it may have had, crude continues to move.With the new fuel, you can fight and try to block it. But LNG has a great safety record. There areworse things out there being moved by rail.”

Right technology, right now

With the decarbonisation of LNG now topping the agenda in many industry discussions, Chart ishelping reduce greenhouse gas (GHG) emissions directly across a variety of renewable energyoptions including hydrogen, biogas and, of course, LNG, “in a variety of ways,” says Evanko.

“The first is around our Integrated Pre-cooled Single Mixed Refrigerant (IPSMR®) and IPSMR®+liquefaction technology which creates a more efficient process around the liquefaction itself andin turn can create a more effective, efficient and economical solution for mid-scale terminals,”Evanko explains.

“Another aspect of LNG that we operate in and is underappreciated in our business is around ourheat exchangers, which go into capturing atmospheric gases, whether it’s direct air capture,carbon capture, or just handling atmospheric gases, in natural gas processing plants, petchemapplications, or more traditional fuelling types of sources.”

According to Evanko, the equipment itself serves a purpose around LNG emissions, or any atmospheric gas emissions, while the process technology goes to furthermove this towards net carbon neutrality. 12

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“It is important to get this technology right, right now,” says Evanko. “As part of the energytransition, LNG may currently be accepted as ‘green’ but there are question marks aroundwhether it’s a transition or destination fuel. It is important that these type of questions areaddressed.”

At the end of the day, Evanko believes that the “total answer” in the decarbonisation of LNG will involve a hybrid of various different combinations of types of equipment that handle GHGs.

“I would expect that over the course of the next decade we will see LNG infrastructure workingwith other renewables as well,” she adds.

Curiosity drives innovation

Looking ahead, Evanko says Chart is determined to continue to “really be innovative” and keepits engineering teams looking at what is on the horizon, “not just what’s happening now.” This includes the development of much-hyped hydrogen as an energy source.

Chart is one of the very few companies globally that already delivers hydrogen equipment andhas had these products available for over 50 years. Evanko expects this decade to be the onethat sees the biggest breakthroughs in hydrogen’s development.

“We are uniquely positioned in already offering an equipment suite around hydrogen storage,transport and fueling. We’re starting to see hydrogen develop in transport fuel and in marine,which includes powering the vessels.”

According to Evanko, while the commercial viability of the hydrogen segment is still at a veryearly stage, it is moving very quickly and is seeing dozens of pilot engineering projects fromcompanies looking at how it can play out in the energy value chain.

“We are hearing USD 15-20 trillion numbers out there for the hydrogen market in general. Wehave identified our market for hydrogen in the next 3-4 years at USD 600 million. In the nearterm, year 0 to 3 will be more about how hydrogen compares to traditional fuels in terms of cost,safety and having some form of infrastructure linkage. The question is, how does this ultimatelybecome scalable?”

Overall, Evanko is optimistic that hydrogen will follow a similar path to LNG, but could grow faster because the industry is “very focused on it right now.” After all, “curiosity drivesinnovation,” she concludes. - KT

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LNG by truck:Booming sector delivers the goods, eyes zero-carbon future

• Demand for LNG delivered by truck is growing due to low prices and favourable policies • LNG truck loaders offer tailored solutions to the niche energy problems of their customers • LNG trucking sector continued to thrive during Covid-19 despite initial drop in demand • More and more LNG truck loading firms are now investing in hydrogen and bio-LNG

Low prices and supportive policies have led to a rapid growth in LNG delivered by truck inEurope and North America in recent years. Amid a boom in the number of LNG-fuelled vehiclesbecoming available and a gradual switch to LNG from more polluting and carbon intensive fuelsin several sectors, LNG by truck continued to grow even during the Covid-19 pandemic.

Wishing to act as a bridge between the heavy fuels of the past and the clean fuels of a zerocarbon future, while continuing to serve a diverse, small-scale energy customer base, companies supplying LNG by truck are now also looking at how to respond on growing interestin hydrogen and bio-LNG.

LNG trucking technology

According to Darragh Murphy, transportation manager at British Columbia-based LNG solutionscompany Cryopeak, the technology needed to transport LNG by truck is relatively simple:“Cryogenic trailers are essentially giant thermos flasks on wheels. They’re vacuumous vesselsthat keep liquids cold, at -162 degrees Celsius, for as long as possible.”

For his part, Aleksandar Cook, SVP business development at Cryopeak, says that cryogenictrailer technology “hasn’t changed much since the 1970s, but safety has improved.”

However, entry costs are high. “Cryogenic storage is expensive,” Cook notes, with a typicalcryogenic trailer costing between USD 150,000 and USD 600,000. Cryopeak was able to reducecosts by shifting manufacturing to Turkey.

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“We were able to control our costs and find an economic solution by manufacturing our B-Traintrailers overseas,” Cook says.

In Europe, a typical non-cryogenic trailer costs around EUR 20,000 (USD 23,500), while acryogenic trailer costs as much as EUR 300,000 (USD 275,000), says Juan Menchero, COO at Spanish LNG supply company Molgas.

“We try to select the trailers with the highest safety standards,” Menchero adds. “Depending on the country, we can transport between 19.5-22 tonnes of LNG,” with truck loads depending on local regulatory requirements.

In Canada, Cryopeak’s Super B-Train cryogenic trailer, which became available at the start of 2020, can transport a record volume of 20,700 gallons of LNG – 70% more than traditionalcryogenic trailers.

“There’s been an expansion of load,” Cook points out. “That’s now the forefront of technologicaladvancement.”

Niche solutions

LNG by truck supply businesses vary significantly by geography due to the role they play inoffering niche solutions for their customers.

In Europe, Molgas supplies LNG via truck to customers in three main sectors: industry, heavyduty transport and shipping. Its industrial customers include dairy farms, trucking firms, industri-al scale greenhouses, city bus companies and ceramics manufacturers.

According to Menchero, demand for LNG from vehicular customers is particularly strong in Italyand to a lesser extent Poland and Germany, while agricultural businesses make up the bulk ofMolgas’ Spanish customers.

In 2019, Spain saw the third largest amount of LNG loaded onto trucks in the world, with volumesat 0.83 mt, up 16% from 0.72 mt in 2018, data by LNG importers’ group GIIGNL shows.

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Cook says that, in contrast to Canada, Europe is well served by gas infrastructure, whichexplains why most demand for LNG supplied by truck comes from the transport sector.

“The opportunities to provide off-grid services are rather limited because there’s not a lot of offgrid – natural gas penetration is fairly robust.”

Cryopeak’s business in Canada relies on demand from remote industrial businesses and smallutility companies that are not connected to natural gas pipelines. Its main customers are mines,“who by virtue of where they’re located don’t have access to power,” Cook says.

“Mines generally use either diesel or liquified petroleum gas (LPG). So, we’re looking to try anddisplace those fuels with LNG, mainly in the west of Canada.”

Cryopeak also serves remote utilities located by the Arctic Ocean. More recently, the companyalso moved towards serving shipping companies, following its deal with Japanese trading firmSumitomo to deliver LNG a bunker fuel to customers in the Pacific Northwest via an articulatedtug and barge (ATB).

“Much of Cryopeak’s management has a marine background and we see LNG as being aneconomic and cleaner marine fuel option for consumers, so we’re well down the way to deliveringour ATB,” Cook says. International Maritime Organisation (IMO) limits on the sulphur content ofmarine fuels are expected to drive significant growth in the use of LNG as a shipping fuel, he adds.

The difference between the LNG truck loading sectors in Europe and North America is reflectedin the distances travelled to deliver LNG to customers. For Molgas, the maximum range of atruck carrying LNG is around 1,000-1,500 km – the distance between London and Marseille.“When the distance is too far, the value proposition does not make sense,” Menchero says.

By contrast, Cryopeak’s drivers deliver LNG from the company’s regional distribution hub inBritish Columbia to customers in the Arctic Circle, making a 1,800 km round trip as part of a 7-8day journey. Cook says that Cryopeak sources its LNG from two LNG plants in British Columbia,mainly Fortis BC’s Tilbury Island LNG production plant in Delta, just outside Vancouver.

LNG by truck in China

In 2019, out of nearly 20 mt of LNG loaded onto trucks at regas terminals globally, 16.06 mt, or 80%, was loaded in China, GIIGNL data shows. However, according to one LNG industry source, this reported volume of LNG delivered by truck in China “is almost certainly an underestimate, since it only includes trucks loaded at receiving terminals. There is also a large volume of LNG loaded at China’s many small-scale liquefaction plants.”

LNG truck loading is set to continue growing in China in the coming decade, with some forecasts showing volumes more than doubling by 2025 as a result of low LNG prices, soaring demand for natural gas, and a need to serve customers in regions that lack gas pipelines and infrastructure.

One market observer notes that the use of trucks to deliver LNG “exploded” after the winter of 2017, when millions of Chinese citizens were left struggling without heating due to a major shortage in supply of natural gas. This was caused by a sudden spike in demand due to millions of homes switching from to coal- to gas-fired heating at the same time, driven by government policies. Chinese gas suppliers, determined to avoid another shortage, started transporting LNG by trucks to meet demand. 16

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China is also the largest market in the world for LNG as transport fuel, especially in the trucking segment. The Chinese first started looking into gas-powered vehicles in the early

1960s, as an alternative to oil-fuelled motors, after natural gas discoveries were made in Sichuan province in 1958.

At the end of 2018, there were 343,933 LNG-powered vehicles on China’s roads. Two-thirds (68.7%) of which were heavy duty trucks, according to figures from Shell. As in Europe, the growth in the number of LNG-fuelled vehicles in China is being driven by low prices and supportive policies.

In 2011, the Chinese Communist Party (CCP) called for increased use of LNG-fuelled vehicles in its 12th Five Year Plan. In response, provincial and municipal governments across China quickly introduced new subsidies and incentives for the use of LNG-fuelled vehicles, particularly in China’s public sector companies.

Cryopeak’s Cook says that, though China is “obviously a huge market” for LNG-by-truck service providers to get involved in, his company currently has “no plans to enter any operations” in the country, due to the market’s competitivity. “We struggle with where we would add value in simply trucking from A to B, and thus how we can be competitive in the market.”

Molgas’ Menchero agrees that “China is a very competitive market.” While the company has explored the possibility of doing business in Africa and Latin America, China poses an even bigger challenge, as it is “very far from Spain, and a very different culture.”

Sector growth

Speaking to LNG Business Review, one industry expert says that “trucking LNG is already asurprisingly large business” which is now “growing rapidly.”

“GIIGNL estimates that 19.88 mt of LNG was loaded onto trucks at LNG terminals around theworld in 2019, which is 5.6% of the LNG delivered to terminals during the year. It is also anincrease of 12.4% over the 17.68 mt in 2018,” the LNG industry expert notes.

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According to Menchero the sector is growing “a lot across the whole of Europe,” with growth in demand driven by economic and environmental considerations, as well as the impact of newregulations. The sector is growing so fast, companies now struggle to find drivers in Europe, he says.

Menchero notes that economic savings are driving growth in demand from vehicular customers. “The glut has meant LNG is cheaper than diesel,” encouraging a switch to LNG, although “diesel prices have dropped dramatically in the past year and a half” as well, Menchero says.

In an e-mail to LNG Business Review, a spokesman for the Natural- and bio-Gas VehiclesAssociation (NGVA Europe) highlights that “consumers benefit from huge operational costsavings” when fuelling vehicles with LNG.

“Secondly, environmental restrictions – particularly in cities – and subsidies are drivingcustomers to switch to LNG,” Menchero says. For example, in Germany, the government nowsubsidises environmentally friendly trucks by making them exempt from highway tolls. SeveralEuropean cities, including Paris and London, have also put restrictions on high emissions vehicles.

“Many of our customers are local public bus companies,” Menchero says, adding that Paris isplanning to ban diesel trucks entirely as soon as 2024.

“There has been a boom in LNG-fuelled buses, trucks, and cars,” says Menchero, adding thatbetween 80-90% of Molgas’ own cryogenic truck fleet runs on LNG.

“We have to lead by example.”

The spokesman for NGVA Europe notes that there are currently 11,000 LNG-powered trucks onEuropean roads.

“We are expecting this number to grow to around 280,000 vehicles by 2030.”

As trucks are currently the only way of supplying LNG to fuelling stations, the LNG by trucksegment’s growth is set to continue “if the use of LNG as a fuel for heavy duty vehicles andbuses increases as expected,” says the LNG industry expert.

Individual businesses are now also placing greater focus on their own environmental impact amid growing interest in environmental, social and corporate governance (ESG).

“People are thinking more about the environment,” says Menchero. “Of course, LNG is not thebest form of energy, but it’s cleaner than other fossil fuels. It’s more environmentally friendly.LNG offers a 25-30% reduction in carbon emissions, and a 100% reduction in particulates.”

In Canada, rising carbon taxes are driving energy users to switch to LNG.

“We see opportunity for long-term benefit,” Cook says. “That’s why we’re investing.”

Cook explains that Cryopeak’s business relies on the use of “existing infrastructure, i.e. the highway network,” to deliver LNG to remote consumers.

“We serve communities of hundreds of people, which are thousands of kilometres from the nearest pipeline. I don’t see a credible argument for fixed natural gas pipelines serving those areas.” 18

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“It’s a completely different landscape when you’re talking about small-scale LNG traded on a landbasis,” Cook adds. “While the world is awash with LNG, that doesn’t matter for a landlocked minein British Columbia.”

Cook notes that Cryopeak’s business also offers its customers flexibility.

“Part of our value proposition comes down to the fact that industrial consumers don’t need to sign a 10-20-year volume commitment. It takes a long time to build new natural gas pipelines andobviously there’s a lot of opposition. With us you can sign a multiyear agreement and get naturalgas in a matter of months.”

The growth of renewable sources of energy also offers opportunities for Cryopeak, says Cook.

“We very much believe that the renewables sector can work hand in glove with us. There arenumerous mining operations which are supported by renewable wind power, backed up by fossilfuels. Wind is very much a viable power source for mining operations in the Arctic.”

Impact of Covid-19

Lockdowns aimed at stemming the spread of Covid-19 across the world have of course had a major impact on global energy demand. According to the International Energy Agency (IEA),economy-wide electricity demand dropped by an average of 20% for every month of lockdown,while global energy consumption is expected to drop by 6% this year.

According to Menchero, Molgas saw a 15% drop in demand for LNG delivered by truck early inthe pandemic but “after one and a half months, everything went back to normal. The maincustomers who dropped off were refilling stations, because people weren’t using cars and busesin the cities. This was what was responsible for the drop in demand at the very start.”

He says that, having learned lessons from the economic crisis of 2008, Molgas was ready to faceanother challenge.

“Spain suffered terribly in the last crisis, so we were selective in choosing our customers. Wefocus on serving customers in the agriculture and power sectors. At the end of the day, peopleneed to eat, and they need to switch the lights on at home, even with the lockdowns.”

Molgas even managed to sign new long-term contracts during the pandemic, including with adairy company in Ireland and an industrial-scale greenhouse in the UK, Menchero says.

Cryopeak faced a similar situation. Demand from utilities “is rather inelastic,” says Cook, andutility customers “will still be using electricity for residential purposes, regardless of whetherthere’s a pandemic or not. In many cases they’re using more electricity because they’re at homerather than work. We’ve seen little change. If anything, there’s been an uptick in demand fromutilities.”

However, Cryopeak did experience a drop in demand for LNG from its mining clients, who Cooksays are “very much at the vagaries of the world market. The mining sector has seen a downturnin demand for product which is reflected in their demand for energy.”

According to the World Bank, the global economy is expected to shrink by 5.2% this year, marking the largest global recession since the Second World War. However, domestic electricity demand rose as much as 40% during lockdowns,

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due to the increase in the number of people working from home, according to figures from the IEA.

Hydrogen and bio-LNG drive

Molgas is now looking into investing in technology for supplying hydrogen and bio-LNG, saysMenchero.

“Hydrogen is growing very quickly. We are seeing similar growth to the early days of LNG. Weare currently investing around EUR 12 million (USD 14.1 million) into hydrogen each year. It’sdefinitely seen as the future.”

However, the growth of the bio-LNG sector is being constrained by high prices and limited supply.

“There’s simply not enough biomethane,” Menchero says.

For its part, Cryopeak is currently carrying out due diligence on renewable natural gas (RNG)and other types of fuels “that can work symbiotically with LNG,” says Cook. He explains thatRNG holds a lot of potential in Canada, as the country has “a lot of land and a lot of trees.”

However, at around CAD 30/GJ (USD 23/GJ), the cost for RNG is currently high, says Cook. Thesituation is “very similar to the renewables sector when it was very embryonic,” he concludes. -LG

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‘Everyone wants to open up new LNG outlets, and that supports growth’:Gasum

For LNG bunkering to become a truly global business, interregional partnerships betweensegment players is the way forward, Kimmo Rahkamo, vice president, gas and power sales atFinland’s state-owned gas company Gasum, says in this exclusive interview. And even thoughthe rollout of related infrastructure is often brought up as the main hurdle in LNG bunkering’sgrowth, there is plenty of appetite from investors to put money into it, Rahkamo stresses.

Meanwhile, rapidly growing demand for zero-carbon solutions from customers, both maritime and on land, is supporting the development of biofuels – but, Rahkamo stresses, the segment must remain ethical in its core. As far as hydrogen and other energy alternatives, such as ammonia, are concerned, the devil is in the detail: beyond the hype, and while research and dis-cussion on their benefits continues in the public forum, what needs to be taken into considera-tion is the emissions profile of their supply chain, as well as their safety.

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Partnerships matter

The interview with Rahkamo takes place two weeks after Gasum and Singapore’s Pavilion Energy announced on 8 October that they had signed a memorandum of understanding (MoU) to develop a global LNG bunker supply network for their customers in Asia and northern Europe.The pair agreed to leverage each other’s LNG bunker infrastructure and supply capabilities intheir respective regions of operations to provide global supply points for customers.

Though the two companies operate in very different parts of the world, “like-minded people gettogether sooner than later,” says Rahkamo.

“This is exactly what happened with Pavilion and ourselves,” he explains. “We both have publicownership in our backgrounds. They are controlled by Temasek, which is a Singaporegovernment investment arm, and we are controlled by the Finnish government. From the verybeginning of our discussions we found that our values were compatible. We talk about the samethings, use the same language. It was easy to move forward with them.”

The reason why Gasum wanted to partner with Pavilion was because “a lot of shipping traffic isexisting or planned between the Far East and Europe,” says Rahkamo. “Naturally, these shipsneed to be bunkered at both ends. If we have a customer in Europe heading to the Far East orvice versa, together we can provide them with services at either end.”

This type of interregional partnership between companies is likely to be seen more and more as the LNG bunkering segment continues to grow internationally, Rahkamo predicts.

“We rely on strategic partnerships to create a wider geographic cover.”

In addition, partnering up with a company active in another part of the world offers invaluableregional and cultural know-how, says Rahkamo.

“We don’t pretend to be experts in the bunkering market in the Far East, but Pavilion know theircustomers and culture, and we know ours here.”

LNG bunkering growth continues

Ten months after the International Maritime Organisation (IMO), the shipping industry’s regulator,put in place a global 0.5% sulphur content cap on marine fuels, the adoption of LNG as bunkerfuel by shipowners is getting “faster and faster,” says Rahkamo.

“The shipping industry is one of the most conservative on the planet. It was unreasonable toexpect that everything would change overnight once the IMO rule came into play. However, weare seeing LNG-powered vessels, mostly dual-fuelled, being built at an even faster pace.”

What supporters of LNG as bunker fuel have reconciled themselves with in recent years is thatLNG, instead of becoming “the fuel of the future for shipping” – as Rodolphe Saade, CEO ofcontainer shipping giant CMA CGM, famously put it in 2017 – will in fact be part of a multifuel solution.

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“It’s not going to be a single solution market,” Rahkamo says. “Scrubbers will play a role, lowersulphur traditional fuels will play a role, so will LNG. What nobody knows yet is how big themarket share of LNG-powered vessels will be – but it will be significant. Small companies likeGasum, and many other companies out there, will have a very promising market in LNGbunkering.

Before, we could keep a tab on every LNG bunkering project. Now there are so many, we can’t.

Reflective of the segment’s continuing growth is the increase in enquiries on LNG as bunker fuelfrom around the world, Rahkamo notes.

“If we go back a few years, LNG bunkering was very much a Nordic phenomenon. Most of theships using LNG were in the Norwegian shipping registry. Now it’s become more global. We seenews of shipowners from the most unexpected places going for LNG bunkering. And some yearsago, with only a handful of projects going on, we could keep a tab on every project. Now thereare so many, we can’t.”

Investment galore

While the lack of infrastructure, which includes LNG bunkering vessels, has long been discussedas the main hurdle to LNG bunkering’s growth, the availability of funds for it is not a problem,says Rahkamo.

“LNG infrastructure is a very attractive place to invest money in because it brings steady returns.There’s more than enough money to put in LNG infrastructure in general. We see many companies, from purely financial ones to companies with a gas infrastructure background,investing heavily in LNG bunkering infrastructure. For example, LNG bunkering vessels can costtens of millions of dollars per piece.”

Rahkamo highlights London-based Avenir LNG, which on 14 October received delivery of its first‘dual purpose’ LNG bunkering and supply vessel, Avenir Advantage, to be deployed in southeastAsia. Gasum itself operates five LNG bunkering vessels.

“Avenir are investing in six vessels to start with, which, starting from scratch, is quite anundertaking. I don’t know what they’ll do with these vessels, but it illustrates that theinfrastructure will be there. That will not be a bottleneck going into the future.”

Rahkamo is confident that LNG bunkering will become a global business, supported bypartnerships between regional players, such as Gasum and Pavilion Energy. However, as LNGas bunker fuel remains an emerging fuel, “there will, of course, be some blind spots in the worldwhere the infrastructure will not be adequate for a while,” Rahkamo stresses.

“But longer term I believe that, where there is demand, there will be supply. Everyone is trying to open up new outlets for LNG, and that supports its growth.”

New Baltic customers

In the meantime, low LNG prices may be encouraging the adoption of LNG asbunker fuel by many shipowners, but low-sulphur, oil-based marine fuelsare also currently competitively priced. In this situation,

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what can give LNG an edge is a shipowner’s personal belief of what fuel is best for the environment.

“At the end of the day, it really comes down to that,” says Rahkamo. “And prices fluctuate all thetime. The situation may totally change in six months.”

When we talk to our customers, many, if not all, are asking for more and more bio-content.

Beyond shipping, low LNG prices have encouraged the uptake of LNG by other segments,Rahkamo notes. Among Gasum’s customers, this includes a variety of industrial players.

“Maritime is growing at a very fast pace, but we’re also seeing a 10% year-on-year growth indemand for LNG from off-grid industry in our region,” says Rahkamo.

“Unlike in continental Europe and the UK, the natural gas pipeline network only covers part ofFinland and Sweden, while in Norway it is almost non-existent. For off-grid industries, LNG is theperfect option. We’re just starting to supply a chemical plant in northern Finland that will usebetween 20,000-30,000 tonnes of LNG per year. There are promising leads in our sales pipeline,and we’re starting up deliveries to new customers all the time.”

As regards Gasum’s maritime business in the Baltics, the creation of a Sulphur Emission ControlArea (SECA) in northern Europe in 2016, which capped sulphur emissions from marine fuels at0.1%, may not have led to an overnight change, but the role LNG can play as fuel in shipping inthe Baltics is making inroads, says Rahkamo.

“Just as with IMO 2020, expectations were quite high, but the SECA coincided with the oil pricedrop. LNG’s competitiveness was much lower than it would have been otherwise. But now, LNGis very often, if not always, one of the options that shipowners in our region consider when theyget new vessels.

According to Rahkamo, although the cruise industry was a pioneer in its adoption of LNG asbunker fuel, Gasum is now seeing more cargo ships entering the market using LNG as theirprimary fuel, as well as ro-pax (roll-on/roll-off passenger) vessels and even oil tankers.

Eyes on a zero-carbon future

LNG aside, biomethane is “one of the things we believe in the most,” says Rahkamo, adding that,with rapidly growing demand for zero- and low-carbon solutions, it is “an excellent example”because it is mostly produced from raw materials that would otherwise emit methane in theatmosphere.

“Not only is it zero emission, but it also takes that methane out of the atmosphere,” he stresses.“It even goes negative in that respect, making it the perfect solution. We are expanding ourproduction on that side and are also trying to get biomethane from other suppliers because we believe in this business. When we talk to our customers, many, if not all, are asking for more and more bio-content.”

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Although customers are not committing 100% to biofuels at this point, many companies are considering starting with a 10% share for it in their energy consumption, before gradually increasing it in future years.

Hyped discussions need to always look at safety first.

“These customs are taking place all the time, both in our industry and maritime segments. A thirdsegment is transport, where biofuels are growing.”

Gasum’s production of biomethane is strictly based on food waste, manure and other materialthat doesn’t have any other practical use.

“That’s the ethical way to do it. I know there’s a lot of controversy over using, for example, birchand crops to produce diesel fuel, but that means you’re taking the poor man’s food to producethe rich man’s fuel out of it. For us this type of controversy is not there. It is all from waste.”

Safety first

An alternative Rahkamo is more cautious about it hydrogen. Firstly, he notes, hydrogen shouldnot be referred to as an “energy solution,” as it has to be produced in some way, either viaelectrolysis or steam reforming.

“Hydrogen is an energy carrier and making it is a bit difficult. Also, its density is so small, youwould need a lot of transportation and storage capacity for a very small amount of energy. Thiswould make things much more complicated in every part of the value chain. And if somethingleaks from a pipe or tank, that’s hydrogen. It has such a small molecular size, it gets out ofanything.”

This is not to say that hydrogen will not have, as it already has, a role to play in many industrialapplications, Rahkamo adds. For example, some of Gasum’s biggest customers in oil refiningare using hydrogen in their processes, he highlights.

However, while there is a lot of discussion going on about hydrogen, Rahkamo personally thinksthat there is “a lot hype in that. It is difficult to see that all these expectations that have beenpronounced in public will materialise. Hydrogen is attractive – it is emission-free in the end, butyou have to take the whole chain into consideration. How you move it, how you store it. And it’shighly flammable. How do you handle that?”

Ammonia, too, is a much-talked-about solution that is “pretty tricky from the safety and technicalperspective,” he says.

“If asked, not many people want to get on board a vessel that uses ammonia as its fuel. If there’san ammonia leak in a big city, the whole place needs to be evacuated. And it’s not just an issueof safety. Ammonia is not something exists as such, but is produced from natural gas. What isthe added value in using ammonia instead of LNG? Why convert natural gas into ammonia if youcan use it as gas?”

While it is important for topics such as the potential of hydrogen and ammonia to be researched and discussed in the public forum, “hyped discussions need to alwayslook at safety first,” Rahkamo concludes. - KT

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LNG bunkering:Growing segment retains optimism despite Covid-19 disruption

• Dual-fuelled LNG fleet continues rise in 2020, but growth likely dented by Covid-19 • Northern Europe remains key market, Asian market shows signs of stronger demand • Growth in scrubber retrofitting carries on, but regulatory headwinds could slow appetite • LNG to play role in maritime decarbonisation, but set to remain a niche market

Eleven months after the International Maritime Organisation (IMO) – the shipping industry’sregulator – put in place a 0.5% sulphur content cap on marine fuels, the outlook for the LNGbunkering sector remains optimistic. Long expected to benefit from the new regulation, thesegment carried on growing in 2020 despite delays caused by the Covid-19 pandemic.

LNG bunkering’s growth continued to be concentrated in northern Europe and the Baltics. A recent announcement by Concordia Damen illustrates this: in early November, the Dutchshipbuilding company signed an order for 40 barges with LNG propulsion which will be charteredby Shell and will transport cargo on Dutch, Belgian and German canals and rivers. The firstvessel will be delivered in November next year and, following this, one vessel will be deliveredevery month until 2024.

There are currently around 190-200 LNG-fuelled ships in operation around the world – anincrease of 30-40 since last year, according to market observers. The annual growth has beensteady at around 70 new ships annually in recent years. However, growth slowed down this yearin line with an overall reduction of ships delivered to the commercial shipping market.

The orderbook of new vessels, regardless of fuel engine type, in the first ten-and-a-half monthsof 2020 was 281 in total versus 710 in 2019, says Xavier Pfeuty, strategy manager at Total.

“The orderbook for new vessels as of end-October is only 40% of what it was last year. This ispartly to do with Covid-19, but also because shipowners are waiting for clarifications about theIMO’s strategy revision in 2023,” says Pfeuty.

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“We have seen some segments having to defer construction due to lockdowns at yards and portswhile at the same time seeing some segments rush to lock in slots to take advantage offavourable shipyard pricing,” says Tahir Faruqui, general manager, head of downstream LNG,Shell LNG Marketing & Trading.

Significantly, there have been plenty of examples of large-scale LNG-fuelled ships beingdelivered to the world market. In August, South Korean Hyundai Heavy Industries said it had builtthe world’s first very large container ship (VLCS) to run on LNG. The ship boasts a 12,000 cm LNG fuel tank, which means the vessel can travel on an Asia-Europe round trip on a single filling.Hyundai has an agreement with Singapore-based Eastern Pacific Shipping (EPS) to deliver atotal of six such vessels by the third quarter of 2022.

In September, EPS said it had won a contract with BHP to charter five LNG dual-fuelNewcastlemax bulk carriers which will carry iron ore between Western Australia and China. Thevessels will be delivered in 2022.

Regulatory support

Regulatory developments, infrastructure expansion and cost competitiveness are key reasonswhy the outlook for LNG as marine fuel remains optimistic despite the disruption caused this past year by the Covid-19 pandemic.

Over the last few years, the growth in the number of LNG-fuelled vessels has been mainlysupported by the IMO’s 0.5% sulphur content cap imposed on 1 January 2020, down from theprevious cap of 3.5%. The sulphur content of LNG – in contrast to heavy fuel oil and diesel – ismuch less than 0.5% and is therefore compliant with the new IMO regulations.

LNG reduces sulphur oxide emissions (SOX) and fine particles emissions by 99% compared with conventional fuels, and nitrogen oxide emissions (NOX) by up to 85%. But CO2 is a different story, as LNG typically ‘only’ reduces CO2 by 15-20% compared with conventional fuels. Methane leakage is also a concern.

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The relatively modest reduction in CO2 emissions means that many see LNG as a bridge fueland not a destination fuel in shipping. The duration of this bridge period will depend on severalfactors, not least the global level of ambition on the decarbonisation targets for the maritimeindustry.

The current IMO target is for ships to cut carbon intensity by 40% by 2030 and 70% by 2050compared with 2008 levels. Until now energy efficiency regulations have been a requirement fornew ships, but a new draft amendment recently adopted by the IMO’s environment committee isextending this to include all ships. Formal adoption is expected next year, but many observerssay the measures do not go far enough to sufficiently reduce GHG emissions from shipping. On an EU level, there are also plans to include shipping under the EU’s Emissions Trading System(EU ETS).

To this end, the European Community Shipowners’ Association (ECSA) has warned thatregulations to cut GHG emissions from shipping should come at a global level through the IMO.Regional initiatives could create carbon leakage – moving trade to countries with less stringentenvironmental legislations – and distort the level playing field, it says.

Favourable economics

But one clear advantage of LNG is that, unlike hydrogen and biofuels, it is widely available andtechnologically proven. Moreover, the drop in global gas prices has also been an advantage forLNG bunkering, though according to an LNG analyst, it is hard to compare LNG and fuel oilprices on a like-for-like basis. This is because the costs of transporting LNG from a regasterminal to the end client is not included in the price for LNG as bunker fuel, the analyst explains, and with both LNG and fuel oil prices having fallen due to the pandemic, it is hard to tell whichone is cheaper in real terms.

Shipowners say there is an economic rationale for LNG when ordering large dual-fuelled shipsbecause the added cost of fitting an LNG fuel system is quite small compared with the overallinvestment. That means LNG-fuelled vessels are cost competitive especially when buyingseveral ships in bulk.

“In the next 12 months we are likely to see cost reduction in the incremental capex required on installing dual fuel engines as well as continued expansion of the LNG bunkering network,” says Faruqui. 28

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The biggest markets for LNG are big vessels: big container ships, Aframax tankers, vehiclecarriers and passenger vessels, industry sources say.

“This year, LNG accounted for 35% of the orderbook for such vessels compared to 15% overall,”says Pfeuty.

However, a major drawback for LNG bunkering is that it only makes economic sense for newships. Broadly speaking, retrofitting ships with LNG fuel systems is not an option for shipownersbecause it is too expensive. Retrofitting scrubbers, which help reduce the sulphur content fromconventional fuels, is a much cheaper option.

The number of ships with retrofitted scrubbers has increased sharply since the IMO’s 0.5% capwas first announced in 2016, from around 700 in 2018 to over 4,000 projected by the end of 2020.

“There were around 3,000 ships with scrubbers by the end of 2019 and another 1,400 on order.Scrubbers seem to be the choice if you own a large vessel and don’t want to buy a new one,”says Jack Sharples, a research fellow at the Oxford Institute for Energy Studies (OIES).

Yet lower prices for IMO-compliant LSFO, caused by lower demand due to the Covid-19pandemic, will make shipowners think hard about new investments in scrubbers. In the longerterm, there are also uncertainties linked to the supply of scrubbers and to what extent they areeffective in reducing CO2. The European Parliament’s environment committee has proposed aphase-out of open-loop scrubbers. The dossier still has a long way to go before adoption by the EU Parliament as a whole and the Council of the EU. But it is a sensitive issue. The majority of scrubbers used in shipping are open-loop, which discharge seawater often without treatment.

“Scrubbers increased rapidly in 2019 in order to cope with the IMO 2020 SOX regulation, but theincentive disappeared with the narrowing spread of LSFO compared to HSFO in Q1 ‘20,” saysPfeuty. “In the long run the increase of tonnes of CO2 emissions implied by this technologycoupled with a decrease in supply options should make further investment difficult.”

One major challenge for LNG bunkering is refuelling. According to Shell, there are 75 ports withLNG bunkering infrastructure worldwide but are mostly located in Europe. Another alternative is road trucks, but the drawback is that they have limited capacity for LNG storage.

Ship-to-ship bunkering

As a way of overcoming this challenge, ship-to-ship refuelling is seen by some market observersas a key growth area. There are around 15-20 LNG bunkering vessels in operation today, withanother 20 on the orderbook, says OIES’ Sharples.

“You are seeing shipowners becoming more comfortable with LNG because there is moreinfrastructure that supports it. Bunkering vessels and regasification terminals are being built,”says Walter P. Purio, founder and director at the LNG Marine Fuel Institute.

LNG bunker vessel capacity grew threefold between 2019 and 2020, adds Faruqui.

“LNG infrastructure is growing at a rapid pace to support the expected demand growth for LNG as a fuel and support shipowners with a greater level of flexibility for their routes,” he says.

There are now plenty of examples of increased activity in the ship-to-ship bunkering segment. For example, on 16 November, the largest bunkering operation ever took place at the port of Rotterdam. A large container ship received around 17,300 cm of LNG from a bunker vessel owned by Total. Refuelling took around 24 hours to complete. 29

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Asian demand

But there are signs that demand is beginning to pick up also in Asia. Malaysian oil and gascompany Petronas completed its first ship-to-ship bunkering operation at Pasir Gudang, Joho in the first half of November in collaboration with Dutch company Titan LNG. The 7,500 cm MV Avenir Advantage is the first dedicated LNG bunkering ship to serve customers in South EastAsia, according to Petronas.

In late October, Japan’s first ever ship-to-ship bunkering operation was carried out by a jointventure between NYK, Kawasaki, JERA and Toyota. The 3,500 cm Kaguya will be operating outof the Kawagoe gas-fired power station northwest of Tokyo.

Moreover, Singapore’s first ship-to-ship bunkering vessel, a joint venture between Shell andKeppel, is expected to be operational by the end of the year. The first contracts for the 7,500 cm FueLNG vessel is for refuelling Shell-chartered tankers and one of Hapag Lloyd’s containervessels.

Whether ship-to-ship and port bunkering can keep up with the anticipated growth in LNG demandlater this decade is another matter.

“At this stage, there is not really a bottleneck in terms of bunkering services and LNG supply butthe issue may arise from 2024 as demand increases,” says Pfeuty.

Having more LNG-fuelled ships is also supportive for gas demand, although on a fairly limited scale, sources add. Total expects LNG demand for shipping to reach 30 mtpa by 2030, up from around 1 mt in 2020.

“LNG is the best solution in terms of GHG emission for new build ships, at least for the next tenyears. There is no competing fuel at the moment. LNG-powered vessels are not stranded assetsand will also be easily retrofitted to run on e-fuels at a later stage,” says Pfeuty.

Part of a multifuel world

The 2019 Shell LNG Outlook projected marine LNG fuel use to triple by 2025 and have growntenfold from 2019 to 2030.

“Based on vessels on the water and on order, LNG consumption is likely to have risen fivefoldbetween 2017 and 2022. We are seeing demand grow across the whole spectrum of deep seasegments, with some of the largest ship sizes being built due to be LNG fuelled,” says Faruqui.

Although LNG will play a role in cleaning up the shipping sector, it is only seen as part of thesolution and not a silver bullet – it cannot do the job on its own.

“The marine sector is moving from being a mono-fuelled to a multifueled world. LNG is atransition fuel that will eventually be replaced by other sources. But the alternatives are still intheir infancy – we may not get hydrogen before the next ten years,” says Purio.Maritime transport emits around 940 mt of CO2 per year, which accounts for around 2.5% ofglobal GHG emissions. This is expected to grow significantly unless global action on emission reduction is taken.

“I am a strong advocate of LNG but I am also a realist. Oil is not going to give up lightly, it will try to get green. At some point methanol and ammonia will also enter the scene. It is important that the LNG marine fuel industry remains open to ancillary and competitive alternatives,” concludes Purio. - AW 30

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