November 23, 2015

Low oil price delays demand for LNG

New rules limiting sulphur emissions from ships came into effect ten months ago, but the expected increase in demand for LNG in the Danish market has yet to materialise. The low oil price has created insecurity in the market.

There has been a lot of talk in recent years about how the shipping industry in Denmark and the rest of Europe could increase their use of liquefied natural gas (LNG), but very little action. The main reason is that converting a vessel from diesel oil to LNG requires millions in investment from both the ports and the shipping industry.

The shipping companies either have to buy new vessels or replace their existing ship engines with LNG-powered engines, while the ports have to invest in infrastructure for storing and bunkering LNG. Until now, ports have waited for shipping companies to begin asking for LNG infrastructure, while shipping companies have waited for the ports to make the first move: in other words, the classic ‘chicken or egg’ problem.

Price of oil the dominant factor

The EU Sulphur Directive, which lowers the maximum permitted sulphur content of bunker fuel from 1.0% to 0.1%, was expected to break the deadlock by sparking demand for LNG and, by extension, triggering infrastructure investments.

However, by the time the directive came into force on 1 January 2015, the price of oil had plunged to USD 57 per barrel, and it has since fluctuated between USD 42 and USD 66 per barrel.

According to Per Nielsen, country manager for Primagaz Danmark, which delivers gas to companies and distributors, the low price of oil can be felt in the market.

“The low price of oil means that shipping companies are in no hurry to switch to LNG,” he says. Still, he believes that the new sulphur regulations will make a difference.

“The low oil prices are delaying the effect of the Sulphur Directive, but we will see an impact eventually. Everyone in the industry agrees that something has to be done: the low price of oil just means that it will take a bit longer. Right now, everybody is waiting to see what everyone else does.”

One step at a time

Mogens Schrøder Bech, Head of Division at the Danish Maritime Authority, agrees that the plunging oil price and ensuing market volatility are the main reasons why demand for LNG has not taken off. On the other hand, he sees no reason why the ports should hold off investing in infrastructure until demand from shipping companies reaches a certain level.

“The ports should look at the market demand and then try to design scalable LNG solutions,” he says, pointing to the Port of Esbjerg, which recorded its first LNG bunkering in September 2015.

The Norwegian supply ship, REM Leader, became the first vessel ever to bunker LNG at the Port of Esbjerg. At only 48 hours’ notice, three tanker lorries transported LNG from Rotterdam to the vessel in Esbjerg. Primagaz organised the delivery.

“I don’t think Port of Esbjerg knew that they could deliver LNG, but we proved to them that they could. And that’s what all Danish ports should realise: by using lorries, you can bunker at short notice,” explains Per Nielsen of Primagaz.

Need for more regular routes

Currently, there are only two regular shipping routes in Denmark using LNG-powered ferries: SamsøFærgen, a ferry serving the island of Samsø, and Fjord Lines’ two ferries serving the routes between Hirtshals in northern Jutland and a number of cities on Norway’s western coastline.

SamsøFærgen has been exclusively LNG-powered since March of this year, and the Norwegian ferries MS Stavangerfjord and MS Bergensfjord have been LNG-powered since 2013 and 2014. According to Fjord Lines, these cruise ferries are the first in the world to be LNG-powered.

Q8 supplies LNG to SamsøFærgen and has developed a solution that sees LNG shipped from Rotterdam to the Danish port of Hou every three days. Meanwhile the two ferries bunkered LNG from Risavika in Norway until this summer, when Denmark’s first LNG tank facility opened at the port of Hirtshals. Now, the ferries can bunker in both ports.

According to Q8 Sales Manager Hans Ørum Andersen, it will require another major ferry route in Denmark for the country’s LNG infrastructure to be expanded significantly and help attract even more LNG-powered vessels to the market.

Collaboration and legislation to pave the way

There is widespread agreement across the value chain that greater use of LNG in the shipping industry will require better and closer collaboration between the ports, the suppliers and the shipping companies, plus even tougher regulations.

“We need to drive the market forward together. No one can do it on their own. In order to generate the necessary demand, we have to work together across the entire industry,” says Q8’s Hans Ørum Andersen.

“Eventually, we’ll probably have to rely on legislation to increase demand for LNG. LNG is the only answer if even tougher environmental requirements are introduced, but of course the price of oil will also play a part.”

The Danish Maritime Authority encourages the ports to take the initiative.

Mogens Schrøder Bech emphasises that the ports have an important instrument at their disposal: their ability to vary port fees depending on the type of fuel a vessel uses. The Port of Gothenburg, for example, offers a 30 percent discount to LNG-powered vessels.

“I strongly believe that the ports should take the lead by mapping the market and involving the entire value chain. To do that, the ports must take responsibility. That’s what they’ve done at the Port of Esbjerg and other places, by systematically involving a large number of stakeholders. However, their initiative also showed that the time wasn’t right for making the investment,” says Mr Bech.

“Everyone is is watching everyone else right now. That’s why it’s so important for all the parties involved to start talking to each other.”

What is LNG?

• LNG is natural gas in liquefied form. Gas liquefies at about minus 162 degrees Celsius.

• The volume of LNG is about 600 times less than natural gas in its gaseous state. This makes it much easier to transport.

• Vessels that are powered by LNG do not emit sulphur dioxide (SOx) and they emit up to 90 per cent less nitrogen oxides (NOx); vessels with four-stroke engines emit up to 25 per cent less CO2 as well.