LNG for Shipping in Southeast Europe and the Mediterranean: New Market Challenges and Opportunities
November 11, 2015
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On 30 September the European Commission closed the consultation process on the EU strategy for liquefied natural gas and gas storage, which will be an integral part of the so-called Winter Legislative Package due to be adopted beginning 2016. The latter comprises of the Revision of the Security of Gas Supply Regulation, EU Strategy for Liquefied Natural Gas and Gas Storage, Second List of the Projects of Common Interest (oil, gas and electricity) and will be complemented by the Report on the European Energy Security Strategy (to be issued in December 2015).
As Europe is set to become balancing market for global LNG against the backdrop of regional LNG prices convergence, LNG is expected to play a role in strengthening EU’s security of supply, particularly in Southeast Europe, as well as helping to meet EU’s climate objectives.
The development of the LNG infrastructure in Europe definitely has to be seen in the context of the wider gas system development, in particular building interconnectors in the South-East Europe, but also unlocking the opportunities for the use of small-scale LNG in the Mediterranean – LNG as marine fuel and LNG bunkering. For that purpose the European Commission (EC) issued a study on LNG as a shipping fuel. Its preliminary results have pointed to the core of the current challenge for industries: despite the major regulatory incentives and environmental benefits that come with the use of LNG as marine fuel and LNG bunkering, there is an acute need for investments in the necessary infrastructure. At the same time, the oil price volatility constitutes another independent variable for the LNG business case.
The LNG markets in North-West Europe are well known for their liquidity and greater use of LNG as shipping fuel, partly because of the environmental regulations in the region, which is not the case yet for the Mediterranean.
However, one may argue that the stringent regulatory changes that are to come in 2020 may well create a window of opportunity for LNG in the region, provided that the necessary financial schemes are in place and stakeholders across the entire value chain establish strong cooperation on the regional, rather than the national level.
Essentially, the deployment of LNG as marine fuel and LNG bunkering depends on three major factors: 1) regulations and standards of emissions limits for marine vessels on the national and international level; 2) availability of the necessary infrastructure (security of demand) and technologies; 3) competitiveness of LNG prices (that is to say, the price of LNG on board, together with the infrastructure costs).
LNG bunkering and the use of LNG as transportation fuel for marine, rail and truck fleets could indeed provide a safer and sustainable alternative to diesel. To put things in perspective, switching from diesel to LNG could reduce nitrogen oxide (NOx) emissions and particulate emissions by up to 80% and 75% respectively, while well-to-wheel greenhouse gas emissions could be reduced by 11% - 20%.
To this end, one may recall the EC’s 2011 White Paper on transport, which suggests that the EU's CO2 emissions from maritime transport should be cut by at least 40% of 2005 levels by 2050, and if feasible by 50%. This makes LNG an indispensable part of the future of EU’s shipping sector, and shift from cheap heavy fuels to LNG is clearly incentivized by the policies in place.
The relevant regulatory framework on emission of air pollutants from ships is developed on three scales: international (UN), EU-wide and national.
On the international scale, the International Maritime Organization (IMO) in line with Annex VI to the MARPOL (Marine Pollution) Convention lays down the legislation for sulphur oxide (SOx) and NOx emissions limits for marine vessels in a number of Emission Control Areas (ECAs), which include the Baltic Sea, North Sea and English Channel, USA, most of Canada, the US Virgin Islands and Puerto Rico.
IMO is currently conducting a fuel availability study (that should be completed in 2018), on the basis of which the decision on introducing 0.5% global sulphur cap will be taken. This regulation is supposed to come into force either as of 1 January 2020, otherwise could be postposed till 2025.
As things stand, the difference is costs of compliant fuel compared to residual fuel may amount at some US $400 per ton, according to the International Chamber of Shipping. However, when it comes to the impact of this regulation on the shipping industry, it will certainly be conditioned by a number of independent variables, and most importantly, crude oil price.
Moving to the EU level, as of 1 January 2015 the Directive 2012/33/EU came into force setting 0.1% sulphur cap in the EU Emissions Control Areas (ECAs) (Baltic Sea, North Sea and the English Channel) - a considerable change compared to the 1% limit pre-January 1 2015.
0.1% cap is set for ships when berthed in any EU ports and 1.5% limit for fuel consumed by passenger ships operating on regular services to or from any EU ports. [1]
What is more, as of 2020, sulphur limit of 0.5% will apply across all EU waters (and the 0.1% limit will continue to apply in the ECA zones).
Subsequently, on the national level, the Directive states that “Member States may provide State aid in favour of operators affected by this Directive, including aid for retrofitting operations of existing vessels, if such aid measures are deemed to be compatible with the internal market.” [2] Hence, the competence of member states to set national regulations and implementing support schemes remains untouched.
Another piece of legislation that has to be considered is the Directive 2014/94/EU (part of the EU Clean Power for Transport package) which requires member states to develop national policy frameworks for the market development of alternative fuels and their infrastructure in line with the timing and coverage set by the Directive (national policy frameworks should be presented by all member states by 2016). [3]
Although the Mediterranean is not an ECA yet, it can become one in the near future, at least for parts of it, as the Italian government is contemplating to introduce the ECA with 0.1% sulphur cap in the Italian waters in 2018 (see map 1).
Map 1. Existing and Possible Future Emission Control Areas
Source: DNV-GL; Jornal da Economia do Mar.
Meanwhile, such international energy majors as ENI have started investing in the infrastructure to enable the use of LNG for road and marine transportation. In 2014 the first Italian LNG/LCNG Station Piacenza was launched and at least four other projects are being developed. Indeed, boosting the use of LNG in transportation sector is one of the important priorities for the Italian government and the Ministry for Transport in particular. Recently, the EC approved financing worth some 33 EUR million dedicated to the construction of seven LNG stations in the ports of Genoa, La Spezia, Livorno, Venice, as well as Koper in Slovenia; and a network of alternative fuels across Italian ports.
Overall, at least 73 LNG ships are expected to be in operation in the Mediterranean by 2020. Although the deployment of LNG bunkering in the region would be much more modest than that in the North Sea, the strong positive dynamics envisaged is evident.
EU funding sources were also allocated to support the penetration of LNG (TENT-T Network through which EU invested over 500 million in the course of the last years) through a number of interregional projects – such as Poseidon Med. The latter has been developing a global strategy for the promotion of LNG as marine fuel in Croatia, Cyprus, Greece, Italy and Slovenia. This way, Poseidon Med was addressing regulatory and technical issues in the context of sustainable transition to LNG.
The scope of the project includes creating an LNG bunkering system in the Mediterranean by 2020, with Piraeus port in Athens as a hub (based on the demand analysis). Essentially it is designed to solve the “chicken and the egg” problem by creating some crucial elements of both supply and demand infrastructure simultaneously.
Another objective of this EU initiative is to establish a system, which would allow redistributing LNG cargoes to satellite ports and increasing the security of supply with diversification of sources and routes, as well as exploring possible synergies with other LNG users (including the potential of sending small LNG volumes to islands to be subsequently used for electricity generation; as well as heating in cooling is some medium-sized cities).
One may consider that the case for building of LNG supply infrastructure in the region (Greece and Croatia in particular) and the relevant infrastructure for LNG bunkering are clearly mutually reinforcing and therefore push the industries across the sectors to work closer with each other.
The use of the Revithoussa LNG terminal which is already in place in Greece (and its expansion has the status of the European Project of Common Interest – PCI) allows to bring down the infrastructure costs for LNG bunkering. According to the study conduced through the project, logistics costs for LNG bunkering in the Piraeus port could constitute only $1 per mmbtu. Notably, Qatar Petroleum is planning to build LNG bunkering facilities at the port; and Mediterranean LNG bunkering could well reach Spain and France.
Looking at the wider region, the ports of Piraeus, Valencia, Barcelona and Genoa are expected to have the highest LNG demand volumes.
However, the countries are facing a number of common challenges. First of all, there will be an acute need for building LNG refueling stations for the Mediterranean ships travelling outside the zone, for instance, in Portugal or the US. This brings about not only the issue of investments as such, but the compatibility of regulations required for building these refueling stations. This is clearly a problem that cannot be solved on isolations and has to be tackled through an international approach. Same applies to the regulations on skills requirements for on land operators across the ports.
While the cooperation between the countries in the Mediterranean is crucial, it is also important to engage in the dialogue with North Africa. While 0.5% sulphur cap will be implemented in EU waters (and the 0.1% limit will continue to apply in the ECA zones), the limit in the bordering waters on North Africa will remain 3.5%. Unless this issue is taken care of, it will have immediate consequences for the competitiveness of the EU ports.
The most critical issue is remains to be financing, i.e. the possibility to offset high equipment costs for tanks and engines by savings in fuel and operating expenses.
Overall, according to the PwC study on the perception of the risks and opportunities of LNG as a shipping fuel, conducted upon the request of the European Commission, the grand majority of stakeholders in the sector (businesses and organisations) is supportive of the transition to LNG as the shipping fuel in the Mediterranean, as and the cleaner alternative to the heavy fuels (in fact, ship-owners tend to advocate for the use of duo-fuel engines). However, the due to the lack of harmonised international regulatory framework, the economic benefits of this transition seems to be confined within the ECAs, where LNG demand and the business opportunities for new bunkering infrastructure are naturally boosted. Hopefully, the new international IMO gas as fuel code will contribute to increasing the level playing field in the sector.
Finally, the Mediterranean countries should definitely try to adopt the good practices developed in the North-West Europe, where the supply-demand balancing issue is being overcome through close cooperation of the stakeholders across the industry supply chain. The independent variable that remains is oil prices: by 2020, according to DNV GL if LNG price rise some 10% above HFO (heavy fuel oil), new build ships running on LNG will account for 7-8%. However, if LNG prices go down some 30% below HFO, the amount of LNG fuelled vessels could rise up to 13% or 1,000 ships.
Notes:
1. Directive 2012/33/EU.
2. Ibid.
3. Directive 2014/94/EU
Image: Adriatic LNG terminal. By Floydrosebridge. CC-By licence.
As Europe is set to become balancing market for global LNG against the backdrop of regional LNG prices convergence, LNG is expected to play a role in strengthening EU’s security of supply, particularly in Southeast Europe, as well as helping to meet EU’s climate objectives.
The development of the LNG infrastructure in Europe definitely has to be seen in the context of the wider gas system development, in particular building interconnectors in the South-East Europe, but also unlocking the opportunities for the use of small-scale LNG in the Mediterranean – LNG as marine fuel and LNG bunkering. For that purpose the European Commission (EC) issued a study on LNG as a shipping fuel. Its preliminary results have pointed to the core of the current challenge for industries: despite the major regulatory incentives and environmental benefits that come with the use of LNG as marine fuel and LNG bunkering, there is an acute need for investments in the necessary infrastructure. At the same time, the oil price volatility constitutes another independent variable for the LNG business case.
The LNG markets in North-West Europe are well known for their liquidity and greater use of LNG as shipping fuel, partly because of the environmental regulations in the region, which is not the case yet for the Mediterranean.
However, one may argue that the stringent regulatory changes that are to come in 2020 may well create a window of opportunity for LNG in the region, provided that the necessary financial schemes are in place and stakeholders across the entire value chain establish strong cooperation on the regional, rather than the national level.
Essentially, the deployment of LNG as marine fuel and LNG bunkering depends on three major factors: 1) regulations and standards of emissions limits for marine vessels on the national and international level; 2) availability of the necessary infrastructure (security of demand) and technologies; 3) competitiveness of LNG prices (that is to say, the price of LNG on board, together with the infrastructure costs).
Political and Regulatory Incentives
LNG bunkering and the use of LNG as transportation fuel for marine, rail and truck fleets could indeed provide a safer and sustainable alternative to diesel. To put things in perspective, switching from diesel to LNG could reduce nitrogen oxide (NOx) emissions and particulate emissions by up to 80% and 75% respectively, while well-to-wheel greenhouse gas emissions could be reduced by 11% - 20%.
To this end, one may recall the EC’s 2011 White Paper on transport, which suggests that the EU's CO2 emissions from maritime transport should be cut by at least 40% of 2005 levels by 2050, and if feasible by 50%. This makes LNG an indispensable part of the future of EU’s shipping sector, and shift from cheap heavy fuels to LNG is clearly incentivized by the policies in place.
The relevant regulatory framework on emission of air pollutants from ships is developed on three scales: international (UN), EU-wide and national.
On the international scale, the International Maritime Organization (IMO) in line with Annex VI to the MARPOL (Marine Pollution) Convention lays down the legislation for sulphur oxide (SOx) and NOx emissions limits for marine vessels in a number of Emission Control Areas (ECAs), which include the Baltic Sea, North Sea and English Channel, USA, most of Canada, the US Virgin Islands and Puerto Rico.
IMO is currently conducting a fuel availability study (that should be completed in 2018), on the basis of which the decision on introducing 0.5% global sulphur cap will be taken. This regulation is supposed to come into force either as of 1 January 2020, otherwise could be postposed till 2025.
As things stand, the difference is costs of compliant fuel compared to residual fuel may amount at some US $400 per ton, according to the International Chamber of Shipping. However, when it comes to the impact of this regulation on the shipping industry, it will certainly be conditioned by a number of independent variables, and most importantly, crude oil price.
Moving to the EU level, as of 1 January 2015 the Directive 2012/33/EU came into force setting 0.1% sulphur cap in the EU Emissions Control Areas (ECAs) (Baltic Sea, North Sea and the English Channel) - a considerable change compared to the 1% limit pre-January 1 2015.
0.1% cap is set for ships when berthed in any EU ports and 1.5% limit for fuel consumed by passenger ships operating on regular services to or from any EU ports. [1]
What is more, as of 2020, sulphur limit of 0.5% will apply across all EU waters (and the 0.1% limit will continue to apply in the ECA zones).
Subsequently, on the national level, the Directive states that “Member States may provide State aid in favour of operators affected by this Directive, including aid for retrofitting operations of existing vessels, if such aid measures are deemed to be compatible with the internal market.” [2] Hence, the competence of member states to set national regulations and implementing support schemes remains untouched.
Another piece of legislation that has to be considered is the Directive 2014/94/EU (part of the EU Clean Power for Transport package) which requires member states to develop national policy frameworks for the market development of alternative fuels and their infrastructure in line with the timing and coverage set by the Directive (national policy frameworks should be presented by all member states by 2016). [3]
Opportunities and Challenges for the Mediterranean
Although the Mediterranean is not an ECA yet, it can become one in the near future, at least for parts of it, as the Italian government is contemplating to introduce the ECA with 0.1% sulphur cap in the Italian waters in 2018 (see map 1).
Map 1. Existing and Possible Future Emission Control Areas
Source: DNV-GL; Jornal da Economia do Mar.
Meanwhile, such international energy majors as ENI have started investing in the infrastructure to enable the use of LNG for road and marine transportation. In 2014 the first Italian LNG/LCNG Station Piacenza was launched and at least four other projects are being developed. Indeed, boosting the use of LNG in transportation sector is one of the important priorities for the Italian government and the Ministry for Transport in particular. Recently, the EC approved financing worth some 33 EUR million dedicated to the construction of seven LNG stations in the ports of Genoa, La Spezia, Livorno, Venice, as well as Koper in Slovenia; and a network of alternative fuels across Italian ports.
Overall, at least 73 LNG ships are expected to be in operation in the Mediterranean by 2020. Although the deployment of LNG bunkering in the region would be much more modest than that in the North Sea, the strong positive dynamics envisaged is evident.
EU funding sources were also allocated to support the penetration of LNG (TENT-T Network through which EU invested over 500 million in the course of the last years) through a number of interregional projects – such as Poseidon Med. The latter has been developing a global strategy for the promotion of LNG as marine fuel in Croatia, Cyprus, Greece, Italy and Slovenia. This way, Poseidon Med was addressing regulatory and technical issues in the context of sustainable transition to LNG.
The scope of the project includes creating an LNG bunkering system in the Mediterranean by 2020, with Piraeus port in Athens as a hub (based on the demand analysis). Essentially it is designed to solve the “chicken and the egg” problem by creating some crucial elements of both supply and demand infrastructure simultaneously.
Another objective of this EU initiative is to establish a system, which would allow redistributing LNG cargoes to satellite ports and increasing the security of supply with diversification of sources and routes, as well as exploring possible synergies with other LNG users (including the potential of sending small LNG volumes to islands to be subsequently used for electricity generation; as well as heating in cooling is some medium-sized cities).
One may consider that the case for building of LNG supply infrastructure in the region (Greece and Croatia in particular) and the relevant infrastructure for LNG bunkering are clearly mutually reinforcing and therefore push the industries across the sectors to work closer with each other.
The use of the Revithoussa LNG terminal which is already in place in Greece (and its expansion has the status of the European Project of Common Interest – PCI) allows to bring down the infrastructure costs for LNG bunkering. According to the study conduced through the project, logistics costs for LNG bunkering in the Piraeus port could constitute only $1 per mmbtu. Notably, Qatar Petroleum is planning to build LNG bunkering facilities at the port; and Mediterranean LNG bunkering could well reach Spain and France.
Looking at the wider region, the ports of Piraeus, Valencia, Barcelona and Genoa are expected to have the highest LNG demand volumes.
However, the countries are facing a number of common challenges. First of all, there will be an acute need for building LNG refueling stations for the Mediterranean ships travelling outside the zone, for instance, in Portugal or the US. This brings about not only the issue of investments as such, but the compatibility of regulations required for building these refueling stations. This is clearly a problem that cannot be solved on isolations and has to be tackled through an international approach. Same applies to the regulations on skills requirements for on land operators across the ports.
While the cooperation between the countries in the Mediterranean is crucial, it is also important to engage in the dialogue with North Africa. While 0.5% sulphur cap will be implemented in EU waters (and the 0.1% limit will continue to apply in the ECA zones), the limit in the bordering waters on North Africa will remain 3.5%. Unless this issue is taken care of, it will have immediate consequences for the competitiveness of the EU ports.
The most critical issue is remains to be financing, i.e. the possibility to offset high equipment costs for tanks and engines by savings in fuel and operating expenses.
Overall, according to the PwC study on the perception of the risks and opportunities of LNG as a shipping fuel, conducted upon the request of the European Commission, the grand majority of stakeholders in the sector (businesses and organisations) is supportive of the transition to LNG as the shipping fuel in the Mediterranean, as and the cleaner alternative to the heavy fuels (in fact, ship-owners tend to advocate for the use of duo-fuel engines). However, the due to the lack of harmonised international regulatory framework, the economic benefits of this transition seems to be confined within the ECAs, where LNG demand and the business opportunities for new bunkering infrastructure are naturally boosted. Hopefully, the new international IMO gas as fuel code will contribute to increasing the level playing field in the sector.
Finally, the Mediterranean countries should definitely try to adopt the good practices developed in the North-West Europe, where the supply-demand balancing issue is being overcome through close cooperation of the stakeholders across the industry supply chain. The independent variable that remains is oil prices: by 2020, according to DNV GL if LNG price rise some 10% above HFO (heavy fuel oil), new build ships running on LNG will account for 7-8%. However, if LNG prices go down some 30% below HFO, the amount of LNG fuelled vessels could rise up to 13% or 1,000 ships.
Notes:
1. Directive 2012/33/EU.
2. Ibid.
3. Directive 2014/94/EU
Image: Adriatic LNG terminal. By Floydrosebridge. CC-By licence.
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