The LNG-as-fuel Tsunami is coming

In the days of Ancient Greece, back in the year 338 BC, King Philip the 2nd of Macedonia was gradually extending his Kingdom sovereignty over the Southern Greece regions.

After winning the battle of Cheronia against a large coalition of southern Greek states, where Sparta state was not participating, he was feeling so powerful that instead of continuing marching further towards attacking to conquer Sparta, he just sent some messengers to the Spartans in order to convey below warning to them:

Philip the 2nd: ‘ I am asking you to surrender Now! If I invade your territory, I will destroy everything I find in front of me ’ …

The Spartans were fast to return - through the same messengers - the following reply to the King Philip:

Spartians: ‘ If ’

I was reading the above historical incident during my morning coffee relaxing routine - since I am currently on holidays, while during the afternoon I selected to read a quite interesting study published in the Journal of Marine Science and Engineering, related to various propulsion systems analysis using ammonia and hydrogen as fuel, done for a 2500 TEU feeder container.

Within the study I counted maybe more than 20 potential assumptions of various expressions (the If’s…), while these are multiplied further by the equivalent ‘if’s’ of a quite high number of references used (106!).

The study concludes to the totally disappointing outcome, that even if the price of ammonia reaches the same price of the HFO (taken as 405 usd/ton in the study), then the cumulative 25 years ship lifetime costs (capex, opex, O&M) for using alternatively either ammonia or hydrogen versus conventional diesel propulsion, will be 2-4 times higher. This means that – according to the study – there is no way – for the next 25 years - to have an alternative green propulsion fuel system that can use a cheaper or at least same as HFO fuel price, and the Owner will have to pay more than double for what he pays for a current modern ship!

Despite the multiple ‘If’s’ and the discouraging conclusions, the authors select to end the abstract paragraph which summarizes the study paper, as following: ‘Although this study has some limitations and assumptions, the results indicate a meaningful approach towards solving GHG problems in the maritime industry’.

A Meaningful approach??

The 3 Unbreakable Laws of the Shipping market

During my 20+ professional life so far, for which I am truly thankful to God for enabling me to receive quite rich experiences in multiple serving levels, roles and positions, I have distinguished the below three fundamental laws of the shipping cargo market:

Law No 1: The Supply of tonnage is compensated proportionally to the Demand for ton.miles

Law No 2: A materializable Shipping Investment is the one to have a Bankable employment

Law No 3: The cargo Ship is a 25 years worthy tradeable asset

IF these laws (that have robustness and trustworthiness throughout the ages in similar way like the law: ‘the Sun always rises from the East and sets on the West’), still do not fundamentally change throughout the years 2020-2050, then can you guess Which next fuel fits the Laws and When the transition will happen?

IF not yet, let me walk you through a bit further…

The Shipbuilding boom of 2003-2007

When I entered the world of newbuilding project management and contracting in Asia, it was that exact time – the year of 2003/2004 - where the super thirsty commodity trading giant called China had already just woken up. Take the time with me to observe how many cargo ships were built during 5 consecutive years from 2003-2007 (bulk carriers, general cargo, oil/product/gas tankers & container ships):

·        2003 / 1,800 ships

·        2004 / 3,000 ships

·        2005 / 2,300 ships

·        2006 / 3,700 ships

·        2007 / 5,250 ships

(source LloydsList, rounded figures)

These are totally about 16,000 cargo ships! Where the normal average yearly shipbuilding rate is abt 1,000-1,500 ships max.

Can you relate WHEN all these ships will cross one by one their 20 years age mark?

2023 – 2027!

Which means that IF the newbuilding activity throughout the years 2020-2022 remains at similar of today low levels, IF zero global GDP growth, zero population growth and zero trade growth is occurring (unlikely), then abt 23% (almost a Quarter) of the global existing oceangoing merchant fleet above Handysize will need to be replenished within 5 years, under the pressure to obey the Law No 1.

Does this smell to you a Newbuilding boom?

If not yet, let me take you further…

When a risen demand for ton-miles through such a rapid and massive fleet ageing, enforced further by the GDP growth (say a modest 2.5-3% yearly), the global population growth (say a modest 1% yearly) and the global shipborne trade growth (say a modest 2% yearly), will be such that cannot meet any more the supply of available remaining tonnage, the value of hiring a cargo ship will increase dramatically.

By ‘coincidence’ 2023 is the last year for installing the remaining fleet with ballast water treatment systems, therefore, vintage ships built in 2002 and 2003 will better be scrapped, which might even further widen the aforementioned supply-demand gap. These are together about a rough extra 1,500 oceangoing cargo ships.

Hold on – I am not finished yet: what Else will also happen during the year 2023?

IMO plans to enforce the EEXI or CCI, which will require all existing ships above 5000 GRT built before the year 2014 – which are not designed in accordance with the EEDI rules, to meet the respective EEDI phase II, which means that they will be obliged to reduce their CO2 emissions per ton.mile by 20%! The IMO EEDI/CCI will mostly affect ships built between – say - years 2004-2013, that will be by then still worthy tradeable assets.

So how these ships will react to this requirement, what is the easiest way to comply?

Slow steaming, reducing their operational speed by 1.5-2 knots, and making any low hanging fruit, low cost energy efficiency upgrade interventions. Therefore starting from 2023, the existing fleet speed reduction consequence (about 50% of the fleet) will even aggravate the problem of ton.mile supply, fueling even more charter rates and asset prices increase!

It smells like methane

What is further interesting for the younger ships, built 2014 - 2020 is that these have electronically controlled main engines, where the LNG-as-fuel upgrade is comparatively cheaper than mechanically controlled ones. So the younger eco-designed ships can sail through 2034-2040, completing their lifetime with a nicely retrofitted LNG-as-fuel upgrade on board, which will help them further reduce a 10-15% of CO2 emissions and render them compliant!

Now, if the supply-demand starts to demonstrate such a big gap (and if we do not see any overwhelming global crisis the like of a Covid-23, or some World War III…), the existing ship values will rise dramatically, as ships will earn more and more money. Asset playing will fire-up interest for newbuildings, at it would be cheaper to build a new ship (fast) than buy a 2nd hand one.

Please keep the Key word here: ‘Fast’!

But if a new ship is to be built in 2023, it must comply already the EEDI Phase II (20% below baseline) and since 2025 (30% below baseline) is very close - and actually for some ships IMO voted already to bring Phase III closer to 2023 - the target for any newly ordered ship will be to meet EEDI Phase III (30% below baseline), so that the tradeable asset (Law No 3) survives at least by 2040.

Do you think that in 2-3 years from now, there will be a ‘Fast’ way for Shipyards in Asia to build ammonia fueled ships or hydrogen fueled ships? Wartsila and MAN will have their very first tested 4-stroke and 2-stroke respective engines by 2023-2024, so it would be impossible commercially to respond to any such demand, even for affluent and opportunistic investments. LNG-as-fuel will be the fast choice that provides compliance down to 2040 with the least effort, highest technical confidence, logistic availability and with the lowest comparative capex. The high demand for both new and existing ships becoming EEDI compliant, will favour economies of scale for LNG fuel system and tank providers, bringing extra capex down to even below 10%, with retrofits also quite workable as a project for an existing ship, despite the cargo loss.

The other reason for an LNG-as-fuel Tsunami to come is Law No 2.

Even if the market is booming, if the fuel prices are over 80 $/barrel, and there is a big demand for tonnage so that employment can be secured even for up to 2 yrs TCs with historically high rates, asking from Owners at any given moment to build an ammonia/hydrogen fueled ship which costs at least 30% more so that it complies through and beyond 2040 for a just 5% -10% comparative less CO2 emission gain difference versus a fully optimized LNG-fueled Phase III ship, makes no sense commercially, neither for the Banks, nor for the Owners, unless certain high premium is secured by Operators (remember: bankable employment).

Now, don’t start me with the Poseidon Principles, the ESGs and the like, because money here will talk again (especially the lease financing from Asia), and this is already a ‘green’ investment (like scrubbers – lol – as many listed Owners had boasted couple of years ago to their markets). The Charterers will also be OK with the LNG-as-fuel option, since their biggest struggle is fuel and carbon costs. If they cannot find to pay by 2030 a fuel which is less costly or at least same price like VLSFO, why should they give on top premiums to a ship owner that invests in an ammonia or hydrogen fueled ship (Law No 1) for a more expensive fuel?

LNG-as-fuel gives the answer, even for the Charterer, who despite the bullish market high freight rates, they will always want to make a profit on the fuel, while they will be absolutely legit over carbon footprint of their operations (in case of carbon levies, etc).

And the methane slip? This cannot kill a good deal for a hungry market ecosystem, while DF engines are already improving a lot.

Building LNG bunkering vessels like shoes

In the brink of 2023, where all above fundamental Drivers can bring a wave of newbuilding booming demand for LNG-fueled ships, there will be an extra 25 LNG bunkering ships - currently under construction - that will have hit the waters, raising the total number to a bit more than 50 ships globally. By 2023, Europe will be pretty mature of LNG port fuel supply, Singapore will have 5 ships, Malaysia, Korea and China their first 2-3 LNGBV ships as well.

The most ‘EEDI score deficient’ ships are the large ones, especially those over 100.000 dwt capacity, oil and dry bulk, where even modern ship designs with electronic ultra-long stroke diesel propulsion cannot surpass a 20-25% of EEDI (Phase II), unless designed with significantly slower speeds.

Design-wise, where the EEDI is concerned, a new ship cannot have a propulsion plant just small enough to match a slow steam speed to pass the rule, because of the minimum propulsion power for safe maneuverability criteria and the capability to keep course and speed at rough seas, so a design reduction of 0.5-1kn max can only be workable, giving a rough 5%-7% improvement in the EEDI. The ready-to-install 2nd generation LNG DF engines, being technically mature, available, certified, tested, proven, known and with already available LNG fuel handling systems and tanks in a competitive way, will give another 15% of CO2 reduction potential.  

Then by using available energy saving techniques and technologies, another 5-7% reduction can be achieved, bringing the 2023 built LNG fueled efficiency optimized oceangoing cargo ship to get and surpass the EEDI Phase III as required for 2025, and will also be close to the 2030 requirement (40%), as voted by IMO.

Being an existing ship by 2029, the 2023 built LNG-fueled EEDI Phase III ship that has already over 30% CO2 reduction compared to 2008 baseline, can then further slow steam with operational limitations in mind (not design limitations) getting another -10%, or even install whatever more mature and cost reduced electric and mechanical means of energy efficiency that time (i.e. air lube, wind propulsion, etc) and make it through for the next 10 years of her lifetime, competitively with any ship built until 2040. Let alone the possibility later to use bio-gas or synthetic LNG, provided that prices and availability allow, without extensive systems retrofitting.

If you play a bit with the EEDI formula, you can observe, for example, for an Aframax tanker:

-         A 2015 super-efficient modern, ultra-long stroke e-controlled diesel engine ship of 115.000 dwt with a hull & propeller optimized design at 14.3kn service speed, can achieve an EEDI of -27%. Reducing the service speed at 12kn will bring the EEXI further down by -12%. Retrofitting with an LNG fuel propulsion system, and keeping the 12kn, will further reduce the EEDI by -10%, ending up at -49%!

-         A 2011 conventional built Aframax tanker with mechanically controlled engine and design speed of 15kn, will reach -15% by slow steaming a 2kn less. An LNG propulsion retrofit will reduce the EEDI further by -15%, thus in total achieving a score of -35% (making it through for 2023, 2030 and needing -5% and above for surviving even towards 2040), keeping it fully valuable and tradeable for lifetime.

Seeing the charter rates soaring through from 2023-2024, shipowners and Bankers will not miss this great opportunity. It might be the case that the demand for LNG bunkering ships will then become so high, Shipyards will even produce copy-paste 25-30M USD simple spec LNGBVs to get them out there. Owners may even escort every NB order they make with a couple of simple spec LNG bunkering vessels as bareboat providers, observing the opportunity, and selling higher later (Law No 3).

Unlike any other low carbon fuel, there is so much Gas out there globally, it is a matter of months for the market pieces to come together in response to the foreseen demand.

The time for ammonia and hydrogen will come

By 2040, the global GDP will have grown conservatively by 50%, the shipborne trade by 60% and the population by 20%, which will indicate that a major fleet replenishment and growth will eventually happen during 2023-2029, while decelerating thereafter.

The new generation of a 2 decades lasting, 2023-2028 built, LNG fueled tradeable assets will have been borne in the oceans and will be ageing by the dawn of 2040.

By 2035, ammonia, hydrogen and other technologies will have been tested, certified, regulated and offered by Yards at 10-15% price difference over an LNG-fueled equivalent ship, while the planned offshore wind based hydrogen fuel supply mega-projects will be erected up and running, and the eternal Law No 1 and No 2 will determine the pace with which the next 2 decade lasting cargo fleet generation will evolve.

If …