With emissions regulations getting ever stricter, many ship owners are turning to alternative fuels to power their vessels. Liquified natural gas (LNG) is proving a popular choice – and for good reason. Want to know more about LNG as fuel? Get an expert overview in 17 important questions.
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Your choice of fuel affects both your profitability and your vessel’s environmental compliance. Liquefied natural gas (LNG) is a safe and cost-effective fuel that reduces greenhouse gas emissions and other harmful pollutants. LNG is playing a key role as a transition fuel and is widely seen as the first step towards decarbonising the maritime industry.
Switching to LNG as fuel for ship propulsion requires investment but can save you fuel costs, increase your profitability and reduce compliance risks. The expert answers to these 17 questions will tell you what you need to know about LNG as an alternative fuel for shipping.
LNG is natural gas that has been cooled to -162°C (-260°F), turning it into a clear, odourless liquid that is easy to ship and store. LNG is typically 85–95% methane, which contains less carbon than other forms of fossil fuels. It is a compact, efficient form of energy that is ideal for ship propulsion.
LNG is primarily used as a clean-burning energy source. It is used for electricity generation, heating, cooking, and as a transportation fuel. LNG is also used as a raw material for products like fertilisers and plastics.
In the shipping industry, LNG as fuel is used for ship propulsion, auxiliary power generation and other onboard energy needs. LNG as an alternative fuel for shipping has gained wide popularity due to its clean-burning properties and potential to help meet stricter emissions regulations.
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LNG as fuel for ships is produced from natural gas extracted from underground reserves, including both onshore and offshore gas fields.
BioLNG is LNG produced from biogas, which is generated from organic waste like food scraps, agricultural waste, manure and sewage sludge. BioLNG is considered a renewable fuel and can further reduce the carbon footprint of ships using LNG fuel systems.
LNG is primarily methane (typically 85–95%), but it also contains small amounts of ethane, propane and other hydrocarbons. LNG can also contain trace amounts of nitrogen and carbon dioxide. The exact composition of LNG may vary depending on the source of the natural gas and the liquefaction process used.
Compared to diesel fuel oil, LNG offers several advantages. LNG produces significantly lower emissions when burned, including:
LNG engines are also quieter.
However, LNG has a lower energy density than diesel, so using LNG as an alternative fuel for shipping will require more fuel and therefore larger fuel tanks to achieve the same range.
The key advantages of LNG as fuel include reduced emissions and cost competitiveness. There is also an established and continuously growing global network of LNG bunkering facilities.
The disadvantages of using LNG as fuel for ships include the need for specialised equipment and training and the potential for methane slip.
Methane slip is when unburned methane, a potent greenhouse gas, escapes into the atmosphere. Modern dual-fuel engines will minimise this issue. Depending on engine type and load, you can reduce methane slip by up to 65% by upgrading your ship’s existing engines. Over the last 30 years, Wärtsilä has reduced the methane slip from its engines by around 90%.
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LNG is cleaner burning than traditional marine fuels, but it is still a fossil fuel. BioLNG, which is LNG produced from organic waste or biomass, can be considered a more sustainable alternative to fossil-based LNG as it has a lower carbon footprint. However, the production and combustion of bioLNG still emit some greenhouse gases. LNG can be seen as a bridging fuel in the transition to alternative fuels like methanol and ammonia, which aren’t yet widely available at scale.
LNG both is and isn’t a future fuel. It enables lower greenhouse gas emissions and reduces other harmful air pollutants compared to fuel oil, but it is still a fossil fuel. Sustainable future fuels are crucial for maritime decarbonisation, but the current cost, limited availability and insufficient infrastructure are challenging for operators. This gives LNG an important role to play in the shipping industry’s transition to a zero-carbon future.
As more ports develop LNG bunkering infrastructure and more ships are built with LNG fuel systems, the use of LNG as an alternative fuel for shipping is expected to increase. LNG is considered a stepping stone on the path to decarbonisation as the industry moves closer to using true future fuels such as methanol and ammonia.
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There are two main problems with LNG as fuel. Firstly, specialised equipment and training are needed to handle LNG safely. Secondly, LNG is predominantly methane and when burned as fuel unburned methane can escape into the atmosphere. This is known as methane slip and can offset LNG’s environmental benefits because methane is a potent greenhouse gas.
Modern dual-fuel engines can minimise methane slip – in fact, Wärtsilä has reduced methane slip from ship engines by around 90% over the last three decades through engine upgrades and ongoing research and development.
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There is also a third problem in some areas where the limited availability of LNG bunkering facilities can be an additional barrier to adoption. Despite these challenges, LNG offers a great opportunity for vessels to reduce emissions and is widely seen as a good first step towards decarbonisation.
LNG is often described as a transition fuel because it provides a good first step towards other alternative fuels. Sustainable fuels will be crucial to maritime decarbonisation, but the current cost, limited availability and insufficient infrastructure can make them a challenging choice for operators.
Converting to LNG is a concrete step towards decarbonisation that vessel owners can take today, helping them to reduce emissions and comply with increasingly strict regulations. Conversion also opens up the possibility to use bioLNG and, eventually, synthetic methane.
LNG produces about 20–30% less CO2 when burned compared to traditional marine fuels like heavy fuel oil (HFO). The exact reduction in CO2 emissions depends on things like engine type, operating conditions and the specific composition of the LNG fuel.
Burning LNG releases about 2.75 kg of CO2 per kg of fuel, while HFO emits around 3.15 kg. While there have been some concerns about methane slip, the latest LNG engine technologies and best practices in LNG handling and storage can help minimise this. Additionally, using bioLNG, which is produced from organic waste, can further reduce the carbon footprint of ships that use LNG as fuel.
While LNG is not a zero-carbon fuel, it does offer a significant reduction in CO2 emissions compared to traditional marine fuels. This gives LNG an important role to play in the shipping industry's decarbonisation efforts until fully renewable alternative fuels are more widely available.
The lifecycle emissions of LNG depend on factors like methane slip during production and transport, energy sources used for liquefaction and engine efficiency.
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LNG produces 20–30% less CO2 when burned compared to heavy fuel oil, but methane slip can negatively offset this benefit. Engine manufacturers like Wärtsilä have been working hard to reduce methane slip. Since , the methane slip from Wärtsilä dual-fuel engines has been reduced by around 90%, taking it from 16 grams per kilowatt hour (kWh) to less than two grams today. Wärtsilä is working on reducing methane slip even further, to less than 1 gram per kWh. When running an engine at optimal load, methane slip can now be minimal.
While Wärtsilä is focusing on reducing tank-to-wake emissions through engine development, producers are working to minimise well-to-tank emissions. They are doing this by investing in carbon capture, using renewable energy to decarbonise energy-intensive processes like liquefaction, and closely monitoring pipelines for emissions.
The shipping industry contributes just 2% of global CO2 emissions but 12% of SOx emissions and 13% of NOx emissions. Switching to LNG as an alternative fuel for shipping reduces emissions across the board, cutting NOx emissions by 85–90%, reducing particulate emissions and completely eliminating SOx emissions.
According to a study by the International Council on Clean Transportation (ICCT), the lifecycle greenhouse gas emissions of LNG can be up to 15% lower than those of heavy fuel oil when considering a 100-year timeframe. Using bioLNG, which is produced from organic waste, can significantly reduce lifecycle emissions, as the CO2 released during combustion is offset by the CO2 absorbed by the organic matter when it is growing.
The global LNG market is expected to grow significantly in the coming years, driven by increasing demand for cleaner energy sources. According to a report by Shell, the global LNG trade is projected to rise by 21% by compared to levels. The expansion of LNG bunkering infrastructure, with 235 ports offering LNG refuelling by , is making LNG more accessible for the shipping industry.
Many modern LNG tankers use LNG as fuel for ship propulsion and auxiliary power generation. These vessels are often referred to as LNG-fuelled LNG carriers. As newer LNG tankers enter the market and older vessels are phased out, the proportion of LNG tankers using LNG as fuel is expected to increase. This is for three main reasons:
In there were more than 2,400 vessels equipped to operate on LNG globally, with another 1,000 LNG-fuelled vessels on order. These include over 20 cruise ships – many of which are using Wärtsilä LNG solutions – as well as tankers, containerships and RoRo ferries.
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LNG is an attractive alternative marine fuel because it has a lower environmental impact than HFO. It produces significantly less SOx, NOx and particulate matter emissions, helping ships meet stricter regulations. Using LNG as fuel can also reduce CO2 emissions by 20–30% compared to heavy fuel oil.
Additionally, LNG is cost-competitive and increasingly available worldwide, with a growing number of bunkering ports. As the shipping industry seeks to decarbonise, LNG is seen as a viable transitional fuel until alternative fuels like green methanol and carbon-free green ammonia become widely available.
LNG is already playing a significant role in the shipping industry’s transition to cleaner fuels. Its lower emissions and increasing availability make an LNG fuel system an attractive option for many shipowners.
As the industry works towards the IMO's goal of reducing greenhouse gas emissions by at least 50% by , LNG is seen as a transition fuel, paving the way for the adoption of alternative fuels like green methanol and carbon-free green ammonia. This makes investing in flexible dual-fuel engine technology the safest path forward, using LNG as a first step towards a carbon-free future.
Pipeline natural gas and liquefied natural gas (LNG) have been readily available in some geographical markets. Thanks to diversification, LNG now has the potential to become easily available, worldwide. Read on.
Pipeline natural gas and liquefied natural gas (LNG) have been readily available in some geographical markets. Thanks to diversification, LNG now has the potential to become easily available, worldwide. Read on.
With a new fuel comes the question: How much is it reasonable to pay for it? Crude oil is traded globally on a scale that leads to a completely liquid market with transparent pricing. It is not difficult to contract heavy fuel oil (HFO) or light fuel oil (LFO) as there are benchmarks and multiple suppliers available. It is also feasible to transport these fuels fairly long distances. The picture is very different for small-scale LNG. In many parts of the world, there is only one supplier or, in the best-case scenario, a few. Furthermore, the prices published for conventional, large-scale LNG deliveries have very little use for someone interested in contracting smaller quantities.
When the buyer has no or little experience, the seller has the power in negotiations. Therefore, this article aims to provide a few pointers to level the playing field. In order to understand the small-scale LNG contracts, one has to have some knowledge about how large-scale LNG is contracted.
Unlike the crude oil market, the gas market cannot be considered a uniform international market, as regions are not interconnected and trading is still fairly uncommon. Therefore, pricing mechanisms have developed differently in different parts of the world. So while LNG prices have largely been linked to crude oil or a basket of oil products in Asia, they were initially linked to Brent oil in Europe, but are now increasingly moving towards hub prices following the increased liquidity of the NBP (United Kingdom) and TTF (Netherlands) gas hubs.
In North America, gas markets are hub based, with Henry Hub being the most well-known. When prices diverge between regions, arbitrage opportunities are created. This means excess large-scale LNG will go to the region that is willing to pay the highest price. There is currently, and for several years to come, an oversupply of LNG, which has improved the bargaining position of buyers. This is leading to more variation in price indexation, more spot trading, shorter-term contracts (previously 25-year contracts were common) and destination flexibility: Free On Board (FOB) instead of Delivered Ex-Ship (DES).
Large buyers hedge their LNG prices by having a portfolio of contracts with different suppliers and pricing mechanisms. This is a luxury small-scale buyers do not have. If a small-scale buyer has only one supply contract, there is less room for error. Therefore, there are some clauses in an LNG sales agreement which small-scale buyers should pay extra attention to.
Since there are not many alternative buyers and sellers for small-scale LNG, the delivery of LNG in accordance with the timetable of the contract is crucial for both parties. But during this time, if either the buyer or the seller of LNG is constructing a new facility, this could present a major risk. As LNG sales agreements should be negotiated and signed before the construction of the facility, assigning a realistic start date is of utmost importance. There should be a funnel where the start date of the contract is specified in an increasingly tighter time range as the facility comes closer to commissioning. Schedule slip could have serious financial consequences.
In large-scale LNG, the trend is towards increased destination flexibility. The buyers want FOB contracts instead of DES, so that they can divert cargoes to spot buyers in case they do not need them. This is not really applicable in the small-scale market, since LNG cannot be economically transported very far on small-scale carriers and there are few alternative customers. However, having the shipping component in one’s own hands might save some money for the buyer, but FOB contracts would also require the buyer to assume responsibility for ship charters, insurance, boil-off gas and port costs. In some cases, DES contracts are advantageous if the supplier can utilise the same ship for other customers and share the costs. Those new to the market would be better off with a DES contract. But to shave off some hidden cost, considering FOB may be a good option.
The contract length is often determined by the financing needs of the parties as financial institutions require certain guarantees. For a utility looking to build an LNG terminal for its power plant, this means a fuel supply contract that is back-to-back with the length of the power purchase agreement. But even without such requirements, a medium-term contract might be preferred. The trend in large-scale LNG is towards shorter contracts and spot deliveries, but in small-scale LNG one wants to make sure that supply of fuel is guaranteed for a longer time. However, if one expects that the number of suppliers in the region will increase, it might be a good idea to have a shorter contract, so that a new contract can be negotiated when the buyer’s bargaining position is better.
One challenge with a long contract is that the quantities required may change considerably. Given the fact that a liquefaction facility wants to produce at a steady rate and there seldom are other takers for a cargo, the seller wants to make sure that the buyer takes the cargoes that have been assigned to him. Also, the buyer wants to be certain that his fuel needs can be met. Therefore, the contract specifies an Annual Contract Quantity (ACQ). These clauses generally allow for some downward flexibility. The buyer has to pay for the cargoes whether he takes them or not (Take-or-Pay), but the outstanding cargoes should be taken the following year, in addition to the normal ACQ. Strict ACQs and Take-or-Pay work fairly well for national gas grids and baseload electricity production, but for power plants running peak loads, the buyer would like considerable flexibility when it comes to annual quantities. If the LNG supplier is the only source of fuel (meaning there are no alternative suppliers and alternative fuels cannot be used), it is also important to specify what happens in case of failure to deliver.
The timing of negotiating an LNG sales agreement also matters as these contracts contain a price review mechanism with the purpose of restoring the conditions of when the agreement was signed. The base period of an index is defined in the contract and constitutes the reference period for the price. The base period values will affect future prices, so it is important not to accept one that would result in a future disadvantage.
A review period for determining the index to be applied is also specified. Instead of choosing a particular day as reference point for the index, an average over a longer time period is chosen. The intention of this is to smoothen out peaks. The period is usually with a lag if time is needed in order to collect the data for calculating the index.
If the contract is increasingly disadvantageous to one of the parties of the contract, it should be returned to equilibrium. The contract should state a price adjustment frequency. With a suitable frequency, the price is kept close to the market level. Buyers would ideally want to mirror the same price adjustment frequency they have with their own customers.
The price of LNG is obviously one of the most important points when negotiating an LNG sales contract. With few suppliers to choose from and a low level of experience among buyers, it is often the suppliers that have the upper hand in deciding the terms. The principles of a fair agreement should be that the price provides an acceptable return on investment for its facilities and operates at a reasonable profit. The seller wants the price to reflect the market value of the gas, while the buyer wants an advantage over competing fuels. Buyers also want the price to mirror the price risk in the sales of their products or services (e.g., electricity). In case of a new market with poor credit ratings, the seller would also require a premium in order to cover the credit risk.
Prices are linked to different indices in different parts of the world, and generally small-scale LNG is influenced by large-scale LNG. Most often in South-East Asia, prices are linked to Brent crude oil, in Northern Europe to TTF hub prices and in the western hemisphere to Henry Hub. This is understandable as LNG suppliers don’t want to absorb the price risk of buying according to one index and sell according to another. But this is not necessarily in the interest of the buyer. Ideally, a consumer wants to make sure his fuel costs are lower than the competitor’s. If the competitor is using HFO or LFO, this is the preferred index. For the buyer, it would be ideal if the price would be linked to a local index, but as they seldom have sufficient liquidity, the seller probably insists on an international index. It is common to use Brent crude as an index, which is beneficial since it is easy to hedge, but there is no guarantee that the price of crude oil and refined products cannot diverge in the future.
Other, more experimental indexing can be considered if the buyer, e.g., a dual-fuel power plant, can use other fuels. Then a different index can be chosen, e.g., Henry Hub or NBP, so that one can play with price differences and produce using the fuel that is currently most affordable. Such a strategy might, however, be difficult to align with the Annual Contract Quantities.
What can be seen in reality is that suppliers of small-scale LNG offer a hub or oil products index plus a fixed component. The fixed component comprises not only the logistical costs in a DES contract, but also reduces the transparency of the pricing mechanism. By coincidence or not, the final price often ends up close to the cost of the competing fuel.
A few cents per MMBTU might sound trivial, but it has a substantial impact on the cost price of gas for the LNG terminal. Figure 1 illustrates the significance of a discount on the FOB LNG price compared with a reduction in total infrastructure cost for a generic LNG terminal (including marine infrastructure) designed to supply gas to a 50, 100 or 200 MW power plant located at a distance of 300 and 600 nautical miles, respectively, from the LNG supplier.
From the figure, it is apparent that even a minor discount on the LNG price has the same impact as reducing CAPEX spent on the LNG terminal by several million USD. While spending less on the LNG terminal will result in lower performance, reliability and perhaps safety, the properties of LNG will not change when lowering the price. The savings also remain more or less the same in both low and high price environments. Therefore, the LNG sales contract should be given considerable deliberation and if needed, an experienced consultant should be brought in to support negotiations.
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