[NGW Magazine) Interview: Gas Natural LNG Bunkering
The bunkering contracts that Gas Natural Fenosa signed with ferry operator Balearia may include standard gas terms, but the seller sees a growing future as shipping is forced to find alternatives to dirty fuel-oil.
The LNG shipping industry is really evolving, and increasing fast so it is a very exciting time, Gas Natural Fenosa's head of industrial gas and power sales for Spain and Portugal Joaquin Mendiluca told NGW March 9. But the terms of its latest contract for bunkering embody the standard gas industry terms that enable long-term stability, sharing of risk, and favourable discounting.
As more shipping companies are considering using LNG as a fuel, getting ready for the International Maritime Organisation’s change to ultra-low sulphur [0.5%] fuel-oil (ULSFO) from 2020, “this means a big change for the industry and more and more companies are asking us for quotations for LNG bunkering,” he said in an interview.
“We know that some companies are even considering retrofitting their fleet to run on LNG, even though this is very expensive; most though are doing it just for new fleets. LNG demand for bunkering is rising every year, but there are still only about 114 classified vessels. Vessels take about two years to build; and there are not many new kinds of ships that do not have LNG-fuelled equivalents.”
He said French container shipowner CMA CGM is building container ships that run on LNG and those can have a lifespan in excess of 20 years, compared with ten to 12 years for ferries and cruisers, so the renewal rate for the latter is a lot higher. "Shipping companies are already doing the numbers, thinking about refuelling options, what size of tanks to use and looking for LNG supply quotes,” he said.
LNG tanks need to be 80% bigger than the high-sulphur fuel-oil equivalent for a journey of the same distance. Some shipping companies are building bigger tanks to avoid frequent refuelling on routes from Europe to Asia. When they have analysed the size of tank, where the bunkering will happen and what route they will use, then they can decide whether to go for LNG or ULSFO, he said.
The Balearia ferry operator is planning to retrofit ships that refuel every two or three days, while new-build ferries have bigger tanks that can last for a week, he said. “Balearia initially tendered the bunkering of two ferries in Barcelona, Algeciras and Valencia. Now, they are analysing the retrofit of five more ferries that could also be supplied within our contract."
'Brent minus' beats 'TTF plus'
Used to buying oil products for shipping and perhaps distrustful of the ability to hedge LNG as satisfactorily, ship-owners are not keen to price LNG off gas hubs, he said.
"For our LNG contracts, the preference is to use Dated Brent crude or oil products, which is good because most of the world’s LNG is priced off those commodities, not gas hubs such as Henry Hub or the TTF.
“If you have to choose between the two, it is easier to use oil. Nobody knows if Dutch TTF gas will be €19 or €90/MWh as it was at the end of February, so there is a risk of being uncompetitive. Oil prices may move a lot, but you need to keep ahead of your competitors. If their ship runs on ULSFO or marine gasoil and yours is indexed against that, but the formula discounts it, then it will be guaranteed to be cheaper. In our contracts LNG is delivered at the customer’s vessel.”
Of the 21bn m³/yr of LNG that Gas Natural buys, 7bn m³/yr will come from the US and only that is priced off Henry Hub.
LNG from Qatar, Yamal, Trinidad, Oman and Nigeria is priced off crude or Brent derivatives (fuel-oil or gasoil). He said: "We sell LNG from our portfolio indexed to Henry Hub or Brent derivatives but we strongly recommend our clients to go for a Brent derivative."
Long term rules
The other traditional element is the duration, he says: “At first, our customers were surprised by the length of our contracts: they are used to buying their bunkering fuel as they need it, whereas our contract with Balearia is for 11 years.
There are two reasons for this: we have to build infrastructure to deliver LNG to the customers’ ferries, which means we have to have the commitment from them before we invest; and they need the commitment from us that the LNG will be there at a competitive price.
“For a shipping company analysing an LNG bunkering sourcing, the investment in each new ship is very important (tens or hundreds of millions of euros), and having a dual-fuel propelled ship can have up to 10% additional cost compared with the investment needed in a gasoil- or ULSFO-propelled ship. These shipping companies want to know that the price will not suddenly go up over their lifetime and a Brent or gasoil indexed formula protects them from price variations.
“So they build a slightly more expensive ship, but the additional cost is covered by the price difference between oil products and LNG and so they have the confidence they need to invest,” he said.
No squeeze on LNG
He discounted worries that the post-2020 world would see a price spike as demand rose for LNG for bunkering. “In Europe, we [at Gas Natural Fenosa] have regasification capacity in Spain, and also at Montoir in France. There is much more LNG offered in the market than the LNG that will be needed for bunkering, so we do not see bunkering having any significant impact in the LNG price.”
Bigger uncertainties come from the gas demand in China, he says. By 2025, according to Wood Mackenzie analysis, LNG will only account for 4%-5% of total bunkering, or maybe 15mn mt/yr, he said.
And a lot more capacity in liquefaction plants is coming on stream, he said. He said that like all sellers, “We try to meet our clients’ needs, which all vary. For Balearia we have three terminals with different logistical supply. At Barcelona, we will use a tanker to take LNG to the ferry; at Valencia we will have a special tank; and at Algeciras a truck will carry LNG to the quayside and pipe it to the ferry with a cryogenic hose.
“We are not strangers to this kind of business. In Spain we have been using small-scale LNG technology for decades, often as a way of gasifying towns before the gas pipelines could be laid. In the 1990s we decided to move forward using LNG trucks from Barcelona before pipelines were built. Even now there are still more LNG trucks in Spain than anywhere else in Europe – 40,000 deliveries per year– and half of those are delivered by Gas Natural.”
Yet the IEA in its 2016 World Energy Outlook, published November 2017, forecast an upbeat ‘New Policies Scenario’ in which global gas demand rises by almost half from 3.5 trillion m³ in 2014 to over 5.2 trillion m³ in 2040.
Under that, gas used in bunkers doubles from 8bn m³ in 2020 to 17bn m³ (12.5mn mt) in 2025 but then keeps growing: to 27bn m³ in 2030 and 49bn m³ (35.5mn mt) in 2040.