LNG Potential as Transport Fuel Explored

Peters Shipyards at Kampen in the Netherlands has been building and servicing ships for more than a century. Last week, its engineers unveiled what promises to be a first for the world’s inland marine industry: barges powered solely by liquefied natural gas.

The two 110m vessels will be chartered by Royal Dutch Shell, Europe’s largest oil and gas producer, which plans to use them in its fleet along the river Rhine. The barges are more than just a showcase for Shell’s green credentials, they are the latest evidence of how the group is trying to leverage its position as a large producer of gas.

In Europe, it recently acquired Gasnor, the Norwegian LNG fuel company. In North America, where the discovery of large reserves of shale has led to an abundance of cheap gas, Shell plans to supply LNG along a truck route in Alberta. And earlier this month it announced plans to build two small-scale liquefaction units to supply two new LNG transport “corridors” in the Great Lakes and Gulf Coast regions. The units will supply LNG to commercial marine customers.

Shell is not the only one promoting gas as a transport fuel. Energy and transportation companies, as well as governments are looking at ways in which to use gas, in particular LNG, in commercial transport, in part as a way to cut down on pollution. In China, where the transportation market is expanding rapidly, several cities already use LNG-powered buses while in Norway much of its shipping fleet runs on LNG.

ENN, China’s largest non-state owned gas distributor, is targeting the US market where it plans to build a small fleet of LNG stations, with two already operating. “We think that right now the conditions are very good for developing this market, because America’s natural gas is cheaper than gasoline or diesel,” says Jiang Yu, chief executive of ENN’s international division.

Earlier this month, BNSF Railway, a subsidiary of Berkshire Hathaway and one of the biggest users of diesel fuel in the US, said it would test using natural gas to power its locomotives. Caterpillar, the maker of mining equipment as well as engines, is investing in LNG engines.

Proponents argue that this nascent industry has the potential to carve out an important share in today’s traditional transport fuels market. Natural gas emits fewer greenhouse gases than diesel for example, but in North America, where the shale phenomenon has seen prices drop to 10-year lows, it also offers a significant cost advantage. Yet there are challenges, in particular the expense of building the infrastructure to supply and store the gas.

“The key driver of economic success is how quickly you can build up demand around any infrastructure,” says Colin Abraham, Shell’s vice-president for downstream LNG business development. “You need to create the demand, given that the barrier to change is there and the infrastructure needs to be built,” he adds.

While different parts of the world will have different reasons for adopting gas for transport, the two main market drivers are legislation and price.

In Europe, shipowners face strict sulphur emission regulations from January 2015 in so-called emission control areas in the Baltic Sea and North Sea, and the English Channel. The new regulations will cut sulphur content in bunker fuel from 1 per cent to 0.1 per cent and will affect the whole shipping industry operating within the emission control area. Shipowners in North America face similar restrictions. The International Maritime Organisation is expected to further restrict sulphur emissions in the next century.

Andrew Buckland, LNG shipping analyst at Wood Mackenzie, the consultancy, believes the marine LNG market has the potential to be “a big market”. The global marine bunker fuel market uses about 250m tonnes a year today and is currently supplied mainly by fuel oil.

In North America the low cost of gas, with the benchmark Henry Hub price trading at about $3.50 per million British thermal units, makes “a significant economic case” for using LNG instead of fuel oil, he says.

In Europe, the commission has set aside €2.1bn to equip 139 seaports and inland ports – about 10 per cent of all ports – with LNG bunker stations by 2025. The plan forms part of the new EU strategy for clean fuels. Up to now, only Norway and Sweden have small-scale LNG terminals for bunkering purposes.

There are big hopes for heavy duty vehicles and trucks. Typically, one-third of a transportation company’s cost base is fuel.

According to Mr Abraham, LNG as a transport fuel has the potential “to make up a decent share of total road transport diesel demand”, over the next decade. People familiar with the industry suggest it could be up to 10 per cent in certain markets.

Sandeep Kar, global director of commercial vehicle research at Frost & Sullivan, forecasts that by 2018, 8 per cent of all medium and heavy commercial vehicles in North America will be built with a natural gas – LNG or compressed natural gas – powertrain system.

“This is a fuel that is available in abundance, it burns cheaper and it’s here,” he says.

Despite the current infrastructure limitations, he believes, the potential is there. “For any new technology there will be upfront costs that are higher but the lifecycle costs are lower. There is short-term pain but long-term gain.”

(ft.com, Edited by Topco)