This blog post compares the uses of liquefied natural gas (LNG) as a marine fuel with other options for complying with the more stringent sulfur emission requirements of the International Maritime Organization (IMO) beginning in 2020 and then discusses the development of LNG as a marine fuel.
The IMO 2020 sulfur limit
The IMO is the United Nations agency tasked with setting global standards for safety, security and environmental performance in global shipping. In 1973 the IMO signed the International Convention for the Prevention of Pollution from Ships (MARPOL), and on May 19, 2005 the provisions for preventing air pollution from ships (Annex VI of MARPOL) came into force. Over the past decade the IMO’s Marine Environment Protection Committee (MEPC) has been lowering the emission limits set forth in Annex VI for sulfur as well as other pollutants such as nitrogen oxide. Ships had originally been permitted sulfur emissions of 4.5 percent, but after several incremental reductions the MEPC confirmed in October 2016 that the new sulfur emissions limits effective January 1, 2020 are 0.5 percent globally and 0.1 percent in IMO-designated emission control areas (ECAs).
Sulfur reduction options
- Low sulfur fuel oil
There are currently three options for meeting the IMO’s 2020 sulfur limits. The most straightforward option, and the one with the least capital investment required, is simply to switch from powering ships with high sulfur oil fuels to oil fuels that have low enough sulfur emissions to be deemed compliant by the IMO, such as gas oils and low, very-low or ultra-low sulfur fuel oils. Since the marine sector has been responsible for around half of the global fuel oil consumption in recent years, many analysts doubt that oil refineries have the capacity to produce the quantity of low sulfur oil fuels required for such a shift in fuel oil consumption patterns.
There is also a significant price differential between low and high sulfur fuel oils (HSFO). As of May 8, 2019, the current spread between IFO 380 (the HSFO most commonly used by ships) and marine gas oil (the low sulfur fuel most commonly used by ships) was $261.5 per metric ton. Energy and shipping consultancy Wood Mackenzie estimated that the spread would increase to closer to $350 per metric ton once demand for compliant fuels grows in 2020. For owners of large ships such as Newcastlemax bulkers or very large crude carriers (VLCC), which consume 60 to 70 metric tons of fuel per day, such a price jump could drastically increase operating costs. Most shipowners will pass these higher fuel costs onto charterers since fuel costs are usually for charterers’ account, but this will in turn will reduce such ships’ attractiveness to chartering clients.