Industry Insight: A Survival Guide for Evaluating the Cost of Converting a Vessel to Use LNG Bunkers

Pace Ralli is Co-Founder of Clean Marine Energy

2015. What a year for shipping, for energy, for LNG. Despite the oil price plunge, which cast no small amount of uncertainty across global markets, the consensus in shipping is firm: dual-fuel engines will power the vessels of the future. That settled, I offer my opinion on how we'll get to that future, and a guide for shipowners who have yet to drink the LNG cryo-aid.

As a quick introduction, I founded Clean Marine Energy with my partner Volckert van Reesema (himself a US Jones Act shipowner at Mid Ocean Marine) in 2012. We fund LNG conversions, and LNG components for LNG ready newbuilds, so that shipowners don't need to invest the upfront capital required – instead, the ship charterer pays back the investment over time as a fuel adder. In 2014 we partnered with WesPac Midstream (www.WesPac.com) in order to offer the industry's first, and only, turn-key LNG fueling solution. WesPac builds LNG fueling infrastructure and together we work with shipowners to customize an LNG solution for their needs.

We won the TOTE RFP for Jacksonville and Vancouver in 2014, and have fielded a steady stream of inquiries from other customers who want help exploring the LNG landscape. While each conversion situation is unique, this article sets out to simplify the basic LNG approach questions. *Caveat: because the transition to LNG is no simple matter, we always recommend asking for a detailed proposal from a supplier. That being said, here are some thoughts from where we sit:

There are three important questions to ask when evaluating LNG:

1. What is the incremental cost for dual-fuel vs. diesel-only?
2. What is the payback period for that investment?
3. How can I be sure of LNG supply?

Since these gating questions are critical to answer at the outset, the heuristics below can help:

Conversion Cost

The incremental cost for a dual-fuel vessel versus a single fuel is, you guessed it, dependent on a host of variables. However, a few quick calculations and a rough rule of thumb can provide a ballpark answer. Generally, fuel consumption and trading pattern drive fuel tank size requirements, which in turn drive the majority of the cost for an LNG conversion. Here's a useful formula that we've found to be roughly accurate:

1. MGO mt/day X 2 = LNG cbm/day X round trip days X 1.5 (flexibility margin / heel) = Tank size (LNG cbm)
2. Tank size x $10,000 + $5M = Total conversion cost

In practice:

Clearly, there are many variables that could alter an analysis such as this, so it is critical to ask for a fuel supplier to provide a customized quote.

Payback

The second issue, payback, is dependent on the price spread between the status quo fuel (MGO/HFO) and LNG. Generally, this spread favors LNG, even in today's environment. For this assessment it becomes critical to have an idea of the delivered cost for LNG, which can be generated by a fuel supplier for any specific location. Armed with the forward projections for the price of oil vs gas, a shipowner can make an informed decision about the expected return on investment. (Risk can be further reduced by introducing hedging instruments, for those with little appetite for volatility.) Overall, we see payback periods today of 2-5 years for many vessels, so despite the relative affordability of oil, going to gas can still pass boardroom scrutiny, and more importantly, secure an important long term competitive advantage.

© Clean Marine Energy

Where do I get my LNG?

Finally, the question of supply. As infrastructure continues to mature, risk is reduced as most suppliers are able to offer guarantees with physical backup options should the anomaly stoppage occur. The rub for some ship owners is the requirement for long-term contracts (or at least the absence of a spot market for LNG currently). With different pricing mechanisms offered in the marketplace (for example, "gas commodity plus fixed", or "MGO delivered minus percentage"), owners will need to decide what fits their operations best, and what their charterers will accept. As more companies take this leap in North America (TOTE , Crowley, Carnival, Harvey Gulf, Société des Traversiers du Québec, Van Enckevort Tug & Barge, among others), LNG as a marine fuel is swiftly sailing into the mainstream.

If reading this provided you with helpful information, let us know how we can further assist you.

Pace Ralli
CEO, Co-Founder
Clean Marine Energy
www.CleanMarineEnergy.com
pace@cleanmarineenergy.com