Competitive gas prices, increasing knowledge in US shipyards and a growing propensity for LNG fuelled tonnage among some of the sector’s biggest players makes the United States a fertile environment to expand LNG bunkering infrastructure, says Eagle LNG’s Manager of Business Development, Matthew Fisher.
You recently took part in the ship.energy Summit’s ‘Fuel Supply Infrastructure’ panel session where you highlighted the potential for LNG bunkering in the United States in the near-term. Why do you expect this market to grow?
The point I would like to emphasise is the competitiveness of US LNG relative to global markets – and why I think the United States is well-positioned to attract a lot more of the LNG-powered vessels to bunker in the United States.
It really comes down to the supply and demand balances of the various commodities. In conventional bunker fuels, you are just competing against the other bunkering markets – in Europe, in Asia, the Gulf Coast. When you transition to gas-based fuel, and you’re in Europe or Asia, you’re competing against the weather almost. You’re competing against the seasonality in local demand for a fuel that can be consumed for power generation and is attractive for industrial applications, for heating and cooking.
Let’s say more gas-fired power generation or gas fired heating is installed in Europe or Asia. As those loads increase, gas demands will continue to increase and you’re competing in those market for cargoes. In Europe and Asia, those are not supply points for LNG, those are demand centres for LNG – you’re competing against other users in a demand environment.
In the United States, it’s much different because it is a supply environment, so, as long as we’re able to create more dedicated bunkering infrastructure, where it’s not competing with global LNG demand, the United States is well-positioned to be the low-cost provider [of LNG] because it’s not subject to those market conditions.
Eagle LNG has differentiated itself by developing this dedicated small scale LNG infrastructure in Florida and provides direct access to Henry Hub which is attractive to many bunker buyers.
LNG prices have continued to rise in recent months. To what extent is this likely to impact LNG-fuelled shipping?
This comes back to my previous point. In Europe and Asia, yes, we’re seeing a climb in LNG prices, really driven by local demand for gas in those markets - the fuel being consumed domestically in those two regions. During the same time, we’re seeing climbing oil prices during the pandemic recovery and we’re seeing a rise in conventional fuel prices as well, those are going hand-in-hand, so unfortunately the LNG-MGO spread has diminished in those areas.
Obviously a low global LNG price environment will incentivise additional LNG vessels to be constructed but right now the high global LNG prices is making the United States looking more attractive for lower costs, availability and price certainty. Long term additional global LNG capacity will be added to resolve the short-term constraints meeting the domestic needs in Europe and Asia and global prices will come down, but even in the long term view the underlying LNG trade dynamics will still exist. Europe and Asia are demand centres for LNG where United States is a supply point reducing costs and risks.
So in the short term, in the United States, the spread still exists and presents an interesting opportunity. For Henry Hub prices - one of the most liquid gas indexes in the world - in the low of the pandemic was around $2 per million BTU [British thermal unit], today it’s doubled to $4 per million btu – but the delivered cost of LNG in the United States is still around $10 per million BTU. So, even though the cost of the underlying gas has doubled domestically in the United States, the cost of delivering LNG hasn’t doubled, it’s only increased by $2.
As the [LNG] infrastructure begins to be built and paid off, your marginal cost of goods sold is the underlying gas commodity and some variable delivery – maybe some fuel to move the commodity around – but that marginal cost of the net goods sold isn’t $17 per million BTU, as we’re seeing in Europe and Asia, it is $4 for gas plus little extra variable cost a little bit of margin. Once the infrastructure is filled out, Henry Hub prices could double, but the price of LNG doesn’t double [in the US].
Crowley Maritime and Shell recently announced an agreement to build a 12,000 cubic metre-capacity LNG bunkering barge that will operate on the US East Coast in 2024. As a company looking to expand its LNG bunkering business in the US, it must have been encouraging to hear this?
It is good to see the US market developing more capacity because we want to attract more of that demand to the region. We’ve finally cracked the chicken-and-egg conundrum in the LNG space, so to see more capacity being built for bunkering, that’s going to attract more demand to the United States and I think that’s beneficial for the entire region.
How significant is the emergence of a spot market for LNG prices if the LNG bunkering sector is to grow?
In conventional fuels, everyone’s very comfortable with the spot market. Buyers don’t enter into term agreements on conventional fuels, it’s a short (less than 12 months) term if anything. Conventional bunker buyers come from that mindset and would like to see LNG move into this short-term, spot price, price fluctuating environment.
However, I believe one of the advantages of LNG is the ability to lock-in surety on the price. Because the commodity makes up such a small portion of the price in the US, buyers are now able to have price certainty over what their fuel price will be over the next five, seven or 10 years.
In Europe, you’re seeing the spot market develop and for better or worse you are now exposed to the supply and demand balances of Europe. The commodity in Europe makes up the majority of the delivered price – the same in Asia – and very difficult to hedge for extended periods but in the United States it’s completely flipped. In the US, you get the certainty of the price and you’re not subject to the commodity [rising].
Given its potential, why do you think the US been slower than Europe and Asia to develop LNG bunkering supply infrastructure?
If I were to speculate, I would think that the incentive programmes and subsidies that are available in Europe help seed the market whereas we haven’t quite seen that level of subsidy for LNG as a marine fuel in the United States. Fortunately, now in the low US gas price environment, the spread in commodity price could also be seen as a US subsidy in the loosest sense of the term.
The Jones Act does come with some incremental costs – it is more expensive when compared to building vessels overseas for LNG delivery and operating with international crews. Because the LNG bunkering fleet is a developing space – smaller than 40 vessels - the US shipyards are still trying to wrap their heads around it about how they can deliver these vessels cost-effectively, especially if they are a bespoke one-off design.
Most of these LNG-powered vessels are expecting SIMOPS [taking fuel while loading/unloading cargo] and most often that is done through a bunker vessel fuelling on the outboard side while cargo operations happen on the inboard side.There just hasn’t been the investment, subsidy or knowledge transfer to the US shipyards to develop these LNG bunker vessels cost effectively, and there a very limited numbers of US yards that can build these vessels. But now what I think we’re going to see is that shipyards are more comfortable with the technology with a few new LNG bunker vessels being built in the US. The cost is becoming more competitive in the United States and I think we’re going to see a significant uptick in US LNG bunkering which will help reduce that price gap on the infrastructure side. This reduction in infrastructure price coupled with the commodity price spreads is producing a compelling growth story for US LNG bunkering.
With LNG gaining traction among some of the larger shipping companies, do you expect to see an increase in LNG bunkering infrastructure in the US?
That’s exactly it. I think LNG is the clear choice for newbuilds because of the immediate emissions savings and the competitiveness relative to conventional fuels. I do think LNG is going to be used for the majority of newbuilds – I think we’re going to see a significant uptick – and we’re going to see more creative infrastructure solutions to deliver this fuel.
To what extent has the change in government affected the LNG industry in the United States?
I would say both Administrations have been supportive of this developing industry. These are major economic drivers for the economy. The emphasis on sustainability with the current Administration has brought more attention to the space and I think that has supported the industry.
When you do a deep dive you see LNG as the clear choice and then people start getting more creative on how to deliver and produce LNG. So, if anything, just being more vocal about decarbonisation activities has been more supportive of the industry.
The US East Coast, Gulf Coast and Pacific Northwest are all seeing developments in LNG bunkering, however, the West Coast appears to be lagging. Do you share this view and, if so, why are we yet to see much activity in Californian ports?
Over the past three years, we’ve been looking at developments on the West Coast and all of the feedback we were receiving from some of the Asian shipping lines on Transpacific trade was that they would bunker in Asia as they would have enough fuel for the roundtrip.
Circling back to my earlier comments, I think now, fuel importers are looking at what is the best use for the gas that you have imported into Asia. If you have someone willing to pay $15 or $16 per million BTU locally, why load it into a ship when that ship could potentially pick up fuel in the United States for cheaper than it can in Asia? I think the mindset is beginning to change whereby Asian vessel operators are thinking they need the optionality of fuelling points in the United States in case the spread between US LNG and Asian LNG continues to diverge and that imported gas is needed locally.
This year, we’ve seen CMA CGM announce they’re going to be calling at the Port of Los Angeles, but no fuelling announcements have been made. Potentially, they’ve have their fuelling solution and they will still be taking fuel in Asia but the attention of the global shipping fleet will turn to California when there is a clear, established LNG bunkering capacity in San Pedro Bay at a price comparable with what you’re seeing on the East Coast of the United States. This would be beneficial to California to attracting the cleanest operating vessels to its ports.
It all comes down to how we get the infrastructure built at the port at the right capacity to develop the market. The only infrastructure being built today is really trucking LNG in from outside of the port and that’s a difficult supply chain to scale. There needs to be more attention on how you develop a scalable solution in San Pedro Bay and I think it’s going to require global shipping operators driving that push. Suppliers can come to the port all day saying they want to develop bunkering infrastructure but until you have the customers of the port saying they want infrastructure there, the port is going to focus on their traditional business.
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