LNG Bunker Demand Is Due a Revival in 2023

LNG's premium to VLSFO and MGO has returned to levels seen before the war in Ukraine. Image Credit: Ship & Bunker

LNG bunker demand is due a revival in 2023 after last year's record prices put a roadblock in front of its progress.

LNG has become the dominant alternative bunker fuel in recent years, rapidly growing in uptake since 2020 as a means of cutting GHG emissions from ships in the interim before zero-carbon fuels become a widespread option.

But that rise in demand stalled last year with global gas markets thrown into a frenzy by the war in Ukraine. Delivered LNG bunkers priced in fuel oil terms at Rotterdam peaked at $3,660/mt in August, according to Ship & Bunker data, almost five times the VLSFO price at the Dutch port at the same time.

Rotterdam saw 328,089 m3 of LNG bunker sales overall last year, down from 603,690 m3 the previous year. In the years before that the sales had grown rapidly from just 224 m3 in 2016, to 3,360 m3 in 2017, 21,242 m3 in 2018, 71,555 m3 in 2019 and 210,334 m3 in 2020.

Singapore saw a similar slump last year, dropping to 16,000 mt in 2022 from 50,000 mt the previous year.

But the market is starting to anticipate a revival.

Last year's slump in demand was triggered by dual-fuelled vessels choosing to switch to burning conventional fuels rather than burning the more expensive LNG. This was not an option for all duel-fuelled ships; some were prevented from doing so by green financing commitments or contractual requirements with customers.

For these dual-fuelled ships, LNG bunker prices are now starting to come down to a level where they may switch back.

LNG priced in fuel oil terms at Rotterdam stood at $849/mt last Friday, the lowest level since September 2021. Its premium to VLSFO prices stood at $266.50/mt, and to MGO at just $23.50/mt.

Looking at the Rotterdam demand data, LNG bunkering demand started to decline from the fourth quarter of 2021. During that three-month period the LNG price in fuel oil terms averaged at $1,400/mt, $832/mt higher than the average VLSFO price and $741/mt over MGO.

Demand in the fourth quarter of 2022 was just over a third of the level seen in the same period a year earlier. If current gas price levels can be sustained with a warmer-than-expected winter in Europe and new supplies arriving from the Middle East, current market conditions should be more than enough to prompt a return to the dual-fuelled vessels using LNG.

Adding to the case for rising LNG bunker demand is the fact that new arrivals of LNG-fuelled ships did not come to a halt last year despite the high gas prices. Classification society DNV put the number of LNG-fuelled ships joining the global fleet at 104 last year, representing 41% growth in the sailing fleet.