LNG bunker market players need to make hay while the sun shines [Gas in Transition]

What was previously a chicken and the egg situation is now rapidly evolving to become a much more viable proposition as LNG bunkering becomes practically mainstream.

According to estimates by Shell, global demand for LNG as a shipping fuel may grow from 2.3m tonnes/year in 2021 to 35 t/yr in 2035. 

And giving a glimpse into the future, law firm Reed Smith said early findings from its sustainable fuel survey suggest shipowners are embracing dual-fuel solutions to move towards net zero, as close to half the industry is set to adopt it within the next five years.

The scope of LNG bunker users has also increased. What has previously been the fuel of choice predominantly for the container sector, is now widening to other shipping segments as more newbuildings hit the water.

The world’s first LNG-fuelled panamax bulk carrier has recently started operating. The NYK-owned coal carrier undertook its first LNG bunkering in early October.

LNG bunkering has progressed from the phase where early adopters were hesitant because of concerns about the availability and price of the fuel, and the market is steadily growing, principally as a decarbonisation solution for the shipping industry in the immediate future.

The global LNG-fuelled fleet is currently quite small at just 411 with another 526 on order, according to DNV figures.

But growth is rapid, with the 104 vessels joining the fleet in 2022 representing a growth rate of 41%. And there is also potential demand from LNG dual-fuel retrofit projects as owners of older tonnage consider their options to deal with obsolescence.

Clarksons figures show that almost a third of the world merchant fleet is over 15 years old and have poor IMO Carbon Intensity Indicator rankings of D or E. If a portion of these become conversion candidates, this suggests that LNG bunker demand could quickly ramp up.

According to Market Research Future, the market is set to grow from $610mn in 2023 to $12.1bn in 2032, a compounded annual growth rate of 45%.

What is uncertain is whether it is seen as a long-term or interim solution and what other fuels may take its place eventually.

The demand for LNG bunker is also determined by a variety of factors, not all of which can be reliably forecasted. LNG is used as ship's fuel primarily because it is able to reduce emissions at a competitive price.

For example, the market saw a blip in 2022 when geopolitical issues caused natural gas prices to spike. At its peak,  LNG bunker ex-Rotterdam was about five times the price of very low sulphur fuel oil, the usual alternative, according to Ship & Bunker.

As a result, dual-fuelled vessels that were not contractually bound to use LNG and could switch to alternative fuels, did so. LNG bunker sales in Rotterdam fell by almost half and in Asia's major bunkering centre of Singapore, by about two-thirds.

Demand is expected to recover as prices normalise this year but once again there are yet other factors that may affect the market going forward, many of which are difficult to predict.

For example the switch to true net-zero fuels such as green ammonia or green methanol, both of which have been gaining prominence recently.

"We are seeing global LNG demand shifting geographically, amid a new, dynamic period of regional volatility driven by competing economic, environmental and political agendas - yet there remains a medium-term window of opportunity to be maximised by LNG producers as the market matures," said Trelleborg marine and infrastructure president Richard Hepworth.

A World Bank report has found that LNG as a bunker fuel will most likely only play a limited role, used only for limited, niche applications. This suggests that the fuel will be primarily utilised on specific routes with existing LNG terminals or on selected vessels, such as ferries or cruise ships, where air quality is a greater concern than greenhouse gas emissions.

Despite this, LNG would still have a future role however. The report found that non-liquefied natural gas could still play an essential role in the transition toward zero-carbon shipping as fuel feedstock for blue zero-carbon bunker fuels, using natural gas combined with carbon capture and storage technology to produce ammonia and hydrogen.

"What is certain is that, as green molecule plants emerge in new hubs such as Northern Australia, Chile, and Morocco, for example, traditional oil and gas-driven trading routes will alter," noted Trelleborg's Hepworth.

LNG bunkering going global

To cope with these developments, LNG bunkering infrastructure is being put in place at a rapid pace and with wider coverage than previously available only just recently.

Coverage is already quite good with LNG bunkering available in almost 150 ports worldwide, although this tends to be biassed towards the more developed Western European ports that were first movers in the LNG dual-fuel propulsion wave. More than a third of these ports are in the region.

This is changing however, with LNG bunker suppliers popping up in more locations, and with new entrants coming into the market. These powerful new players include the Middle East gas powerhouses such as Qatar, with its vast gas resources, as well as others such as the UAE, Oman and Egypt.

According to Allied Market Research, investments in new projects in Latin America, Middle East and Africa will also spur the development of LNG bunkering in the near future as domestic players currently only playing minor roles at the region's trade hubs begin to take advantage of the region's opportunities.

"The shipping industry needs access to all parts of the gas supply chain. A stable and reputable supply of gas is a must, and in the future, this will also involve more precise traceability and certification of the environmental impact on the process behind the fuel’s origin," said Hepworth.

With ship-to-ship bunkering being the most popular method of fuel transfer, the market for LNG bunker vessels has likewise also really taken off.

The latest generation of vessels have capacities as big as 8,000-m3 to 12,000-m3 have evolved significantly from the repurposed 2,000-m3 to 4,000-m3 small LNG that were used in servicing the first wave of LNG-fuelled newbuilds.

They are now dedicated LNG bunker vessels built to be fit-for-purpose with customised equipment layouts and piping systems.

The LNG bunker market is a tricky one with many opportunities but also risks as its success depends on so many moving parts, many of which are beyond the control of investors.

As shipping makes its transition to a net-zero emissions future, suppliers of LNG bunker as well as consumers will have to remain nimble as new opportunities emerge while other prior investments fade from popularity.

What is clear is that the use of natural gases as fuel for ships will be an enduring trend. What investments will be made as the market positions itself to take advantage of this will be among the tough decisions to be made.