[GGP] Uncertainty Ahead: The Outlook for LNG Demand in the Marine Transportation Sector

There is a lot of excitement these days about the marine transportation sector as a potential driver of global liquefied natural gas (LNG) demand in the decades ahead. With the International Maritime Organization (IMO) set to impose new sulfur emission standards on the international shipping sector in 2020, demand could skyrocket as fleet operators must switch to cleaner bunker fuels, namely low sulfur marine gasoil or LNG, or remove sulfur from high sulfur fuel oil (HSFO) by installing scrubbers. Accordingly, most forecasters predict LNG bunker demand in the shipping sector to reach between 20 and 30 million tons per annum (mtpa) by 2030 from less than 1 mtpa today. This would be a significant increase: for comparison, India’s entire LNG demand was 20 mtpa last year and China’s LNG imports averaged less than 30 mtpa only two years ago.

While this could be great for LNG exporters, there are a few caveats to this broadly optimistic outlook.

First, the LNG demand potential from the shipping sector is only material in the longer term (i.e. post-2025), as converting existing vessels to LNG propulsion is prohibitively expensive, and the turnover rate of the global shipping fleet is fairly slow, with large oceangoing vessels often operating for 25 years or more. The widespread adoption of LNG will also require a dedicated bunkering infrastructure in ports around the world. With a few exceptions across Europe, Asia and North America, this infrastructure is largely missing at the moment, and it could take several years and substantial government support to develop even in the best of circumstances.

Second, the IMO rules can not only help, but also hurt LNG demand, especially indirectly, in the power generation sector. The majority of fleet operators are widely expected to switch to low sulfur marine gasoil as the default compliance option after 2020, and refineries around the world could struggle to shift their product yield immediately to minimize heavy fuel oil and maximize cleaner distillate fuel production. In fact, some simple refineries could even increase their fuel oil output temporarily, as they ramp up utilization to boost distillate yields. In this scenario, the IMO standards could leave millions of barrels of dirt-cheap high sulfur fuel oil on the market, no longer needed in shipping and few places to go other than the power generation sector. If fuel oil prices fall far enough, then countries that are now planning to replace oil with imported LNG for power generation—particularly in the Middle East, Central America and the Caribbean—could very well decide to burn cheap fuel oil in their power plants instead, at least until refineries can adapt to the new market requirements after 2020.

Third, not all future LNG bunker demand will be met with traded LNG. In fact, much of the LNG that is used today as a bunker fuel across Europe and North America is liquefied pipeline gas, sourced from the domestic gas transmission grid. To the extent this type of use remains prevalent, we could see a substantial increase in LNG consumption in the shipping sector without much growth in actual LNG trade. In this scenario, LNG bunkering might not help the bottom line of LNG suppliers—or bankroll the next wave of liquefaction projects—quite as much as many hope in the LNG industry.

And finally, even if the IMO’s 2020 sulfur cap is a long term positive for LNG in the marine transportation sector, the IMO’s newly-adopted greenhouse gas (GHG) reduction target, which is calling for a 50% emission cut by 2050, will further complicate the viability of LNG as a marine fuel in the longer term. While LNG emits about 25% less CO2 than oil-based bunker fuels (and eliminates nearly all air pollution associated with the burning of HSFO), its lifecycle GHG footprint depends greatly on the extent of fugitive methane emissions along the entire LNG supply chain, including during combustion in LNG-powered engines called methane slip. Methane is a much more potent greenhouse gas than CO2, and depending on how much of it escapes unburned, LNG could either meaningfully reduce, or—under some circumstances—actually increase overall GHG emissions relative to traditional bunker fuels. Unlike most other low carbon bunker fuels that are being proposed to meet the new GHG target (such as hydrogen, ammonia, methanol, advanced biofuels or electric batteries), LNG is both practical and proven on a large scale. But whether it offers a step forward or a step backward towards achieving the IMO’s new ambitious GHG targets will largely depend on the industry’s ability to mitigate methane emissions throughout the entire LNG chain.

If lifecycle emissions are properly managed, then LNG can play a substantial role in the marine transportation sector, and LNG demand from bunkering operations could indeed be very substantial over the longer term. But this outcome is nowhere near as assured as some recent analyses suggest—and as some participants might hope in the LNG industry.

Akos Losz is a senior research associate for the Center on Global Energy Policy at Columbia University. Prior to joining Columbia, Losz was senior analyst at Douglas-Westwood. Previously, he worked on the strategy-development team of MOL Group, a Hungary-based international energy company.

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