Running a newbuild 300,000 DWT VLCC on LNG on the Arabian Gulf to China trade route would have a strong return on investment when compared to other alternatives currently available and scalable to the shipping industry, a new study finds.
The study was conducted by simulation and analytics expert Opsiana, commissioned by SEA\LNG, a UK-based multi-sector industry coalition aiming at accelerating the adoption of LNG as a marine fuel.
The business case compared the relative investment performance of four propulsion alternatives: a conventional VLCC sailing with very low sulphur fuel oil; a scrubber-equipped VLCC sailing mostly with heavy fuel oil; and two LNG powered VLCCs, one with a high-pressure 2-stoke engine, the other a low-pressure 2-stroke engine. As informed, the route was chosen because it is the major energy trade corridor from the Middle East to China.
Specifically, the results for the 300K DWT VLCC show that LNG fuel employing DF engines indicate that the NPV savings versus compliant fuel would range from USD 6.1 million to USD 15.1 million across the fuel scenarios.
LNG fuel delivers less value than scrubbers in both the business as usual (BAU) and Stranded Fuels forecasts resulting in a negative savings of (USD 6.4M) to (USD 12.7M).
The study noted that the stranded fuel scenario is predicated on the assumption that the price of HFO will be substantially discounted after January 2020. If this occurs, it is only likely to be until existing stocks of HFO are exhausted, at which point the price will normalise at a level not yet known, due to the low level of demand from vessels with scrubbers across the global fleet and the added costs for bunker suppliers to support the product.
“The study clearly indicates that LNG as a marine fuel delivers a strong return on investment on a net present value (NPV) basis over a conservative 10-year horizon. The analysis is bolstered by compelling paybacks from three to five years,” SEA\LNG said.
LNG vs Scrubbers
“While the case for scrubbers may appear marginally more favourable, the traditional business model excludes any impacts of CO2 assessments to maintain a conservative approach to this investment case. However, there may be CO2 credit or debit schemes in the future. If these CO2 regimes are enacted, then the LNG business return for NPV improves favourably by several million dollars.
“Although this stranded scenario is possible and analysed as such, it is deemed unlikely due to the growing, but relatively small number of scrubbers ordered in time to take advantage of the expected initial 2020 plunge in HFO pricing,” the study adds.
However, the business case anticipates a VLCC ordered now is delivered in 2022 which will miss the first two years of favourable low HFO prices.
“A shorter opportunity window conveys much greater risk for the scrubber alternative dependent on sustained low HSFO pricing as the energy market and refineries make adjustments toward substantially lower volumes. This market realignment imposes greater price, quantity, and availability risks borne by the scrubber alternative that likely erase initial price benefits over the long term,” the study further reads.
The findings also pointed to the diminishing CAPEX hurdle for LNG engines, LNG’s competitive energy costs, higher environmental performance, and financial benefits as a long-term method for complying with the IMO 2020 sulphur cap.
Namely, the scrubber operation is said to be significantly more expensive than widely reported.
Despite the additional CAPEX for LNG over an open-loop scrubber solution of USD 13.2M, LNG fuel’s operational expenditure (OPEX) cost savings balance out the CAPEX premium, according to the study findings.
Although the study assumed a conservative parasitic fuel penalty of only 1% for the supplementary power requirements to run scrubbers, there is considerable extra onboard ship management and onshore record-keeping required to operate scrubber-fitted vessels and ensure compliance with environmental legislation.
The argumentation in favour of this includes the fact that further restrictions prohibiting open-loop scrubber operations in various port jurisdictions are being debated and, in some cases, imposed. Where open-loop scrubbers are restricted, the additional cost for consuming costly marine gas oil or the increased CAPEX for more complex hybrid/closed-loop scrubbers must be added to the scrubber investment analysis.
On the other hand, the cost of LNG is stable when compared to traditional oil-based marine fuels which reflects the volatility of crude oil prices.
The LNG cost structure is insulated from wild swings since the underlying commodity – natural gas – as variable cost represents a minor contribution (about 25%) in stark contrast to traditional marine fuels where total cost reflects the heavy dominance of fluctuating energy prices.
Natural gas commodity prices have exhibited little fluctuation over recent history due to the steadily expanding global supply, which when combined with stable fixed costs for liquefaction and transportation allows LNG fuel to be contracted on a long term basis.
Long term LNG fuel price certainty provides a competitive advantage to those responsible for fuel payments.
“While this may currently make the business case for LNG look slightly softer, it also underlines the cost volatility and instability risks inherent with HFO post-2020. Will there be sufficient availability? What will the price be? When taking these risk factors into consideration, the investment case for LNG is bolstered. For ship owners and operators, the notion that fuel pricing is relatively stable creates a huge positive budget and business advantage,” the study concludes.
This VLCC study is the third in the series preceded by a 14,000 TEU container vessel operating on the Asia-US West Coast liner route, and a dual study examining an 8,000 CEU Pure Car and Truck Carrier (PCTC) on the Pacific and smaller 6,500 CEU on the Atlantic Trade Lanes.