A range of markets

Whilst the use of natural gas as a transport fuel has been a feature in some markets for many years, the use of LNG is a recent phenomenon, and the reasons for adoption vary between countries and sectors.

The environmental attraction of natural gas as a transport fuel is primarily based on the fact that it emits virtually no nitrogen oxides, particulate matter, or sulphur oxides. LNG provides a particularly concentrated form of natural gas, and this is important in the marine sector, where the International Maritime Organization’s (IMO’s) limits on sulphur in fuel oil - 0.1 per cent in the mandated Emission Control Areas in North America and Europe, and 0.5 per cent globally starting in 2020 - could lead to a significant displacement of heavy fuel oil. The lower levels of emissions coupled with relative high energy density are also attractive in some markets where diesel-fuelled heavy-goods vehicles (HGVs) are a significant source of atmospheric pollution.

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The cost of LNG as a transport fuel is generally lower than that of oil-based products, though the capital cost of the new vessel or vehicle may be higher. This financial trade-off means that LNG is likely to be most attractive in high-utilization sectors that will achieve early pay-back.

When considering the prospects for LNG, it is important to recognize that there are important differences between the road and marine markets:

• In land transport there is a role for both LNG and compressed natural gas (CNG), whilst LNG is the sole option in marine. LNG is mainly used in HGVs, buses, and trains, but not in cars, whilst CNG can be used in most types of road vehicles.
• There are presently low-carbon alternative fuel options in road transport - most notably electricity -that are not yet available in marine. Evidence from some markets such as China suggests that this is causing the land-based natural gas transport market to undergo a transition from smaller natural gas vehicles to larger ones, which, following on from the previous point, offers greater opportunities for LNG.
• Road transport is susceptible to a range of state-based incentives for alternative fuels that generally don’t apply in the marine sector. This in part reflects the fact that most marine fuel is not subject to tax, but also the greater levels of state intervention in road transport for environmental reasons. 

Barriers to uptake

Despite its environmental and financial advantages, LNG faces a number of obstacles. In marine, LNG is not the only solution to meeting new fuel standards: vessel operators may opt to use sulphur scrubbers in conjunction with cheaper high-sulphur fuel oil, burn more expensive low-sulphur diesel, or opt for ultra-low-sulphur fuel oil, which is being developed by a number of refiners. The preference for staying with liquid fuels is evident from data from DNV GL, which show that in June 2019 there were around 320 LNG-fuelled ships either in operation or under construction (excluding LNG carriers). By comparison, the equivalent number for those fitted with sulphur scrubbers was over 3,500.

In road transport, environmental drivers mirror the split noted in a recent OIES study between Europe, where the key driver is decarbonization, and many countries in Asia, where the focus is on air quality. LNG does not provide a zero-carbon option; this, coupled with recent evidence that cleaner diesel engines have closed the atmospheric emissions ‘gap’ between gas and petroleum-based fuels, significantly reduces one of the strongest arguments for LNG in HGV transport. Whilst there is scope for using biomethane in the transport supply chain, and this plays well into the decarbonization agenda in Europe, the scope for bio-LNG appears relatively limited. 

Key future markets

As noted above, the most promising markets for LNG are marine and HGVs. However, the evidence to date suggests that the adoption of LNG is most likely in subsectors where some critical conditions are present.

In the marine sector, the most important such conditions are likely to include operation in Emission Control Areas (already subject to the IMO limit on sulphur of 0.1 per cent), presence of large vessels with regular and predictable journey patterns, and high levels of government support for new shipping investment favouring LNG.

In the road sector, critical factors include high utilization levels, long and regular delivery routes, and a strong consumer brand presence (indicating a desire to demonstrate positive environmental performance).

In both marine and road sectors, the case for LNG is also helped where operators are owners of their vessels or trucks and, because LNG is more likely in new builds, where there is a relatively high level of vessel/vehicle turnover.

Based on these conditions, LNG is most likely to be adopted as a fuel by cruise ships, large container vessels, passenger and vehicle ferries, bulk carriers, and of course LNG tankers. DNV GL statistics show that in June 2019, of the 320 LNG-fuelled ships either in operation or under construction (excluding LNG tankers), most were ferries (26 per cent), tankers (21 per cent), container ships (12 per cent), or cruise ships (10 per cent)3. One other significant category is offshore support vessels, which had a 12 per cent share. These vessels are concentrated in Norway, which has been at the forefront of LNG adoption in marine and has provided particular incentives for new LNG-fuelled shipping.

LNG usage in road transport is still at a relatively early stage (with the exception of China), but take-up is most evident amongst large national or international carriers including large retail chains and major haulers.

Looking at the regional dimension, the picture is mixed. In China, as suggested above, there is increasing focus on the use of LNG by HGVs. The market has been helped by an extensive domestically produced LNG supply chain developed to serve off- grid gas users. There were an estimated 350,000 LNG HGVs at the end of 2017, and sales of LNG HGVs received a further boost from restrictions on diesel freight movements introduced in 2017 to reduce atmospheric pollution. Similar restrictions on coastal and riverine shipping could help LNG in these sectors as well.

In Europe and the United States, most of the growth in LNG use to date has been in the marine sector. This is to be expected, as the IMO’s Emission Control Area restrictions have been in force since 2015. Developments in the truck and bus sectors have taken longer to materialize.

In Europe, a number of large haulage companies have started to make significant moves towards gasifying their vehicle fleets. One of the main drivers behind the development of the LNG supply chain has been the Blue Corridors project. The project is now completed and claims to have promoted the purchase and operation of 140 LNG trucks consuming about 14,200 tons of LNG and the construction of 12 refuelling stations. However, because of the decarbonization requirement, biomethane is an increasingly favoured option for large vehicles, and these users may increasingly opt for CNG, as this presents an easier route for blending conventional and renewable gas.

In the United States, gas use in road transport has been largely driven by the increasing availability of low-cost gas arising from the growth in shale gas production. Whilst initial expectations were that LNG-fuelled vehicles would play a growing role in long- distance haulage, this has not proved to be the case. Where there are no pre-existing liquefaction facilities, LNG is relatively expensive compared to CNG, and the LNG market appears to have stalled. 

Demand outlook

In the marine sector, most forecasts suggest that global demand for LNG will be in the range of 25 to 30 million tonnes per annum (mtpa) by 2030. This would require that, very approximately, between 2,000 and 6,000 new or converted vessels would be fuelled by LNG by then. As at June 2019 there were only around 320 vessels in operation or under construction, so building a fleet of the size needed to fulfil the forecasts would be challenging. The author’s research concludes that a demand level of around 15 mtpa (20 billion cubic metres) by 2030 is a more realistic prospect.