LNG : The future fuel for EU's Green Corridors?

LNG: The fuel for the Green Corridors of Europe?

Professor Alkis John Corres VISITING PROFESSOR CITY LAW SCHOOL

ADVISOR TO HELLENIC SHORTSEA SHIPOWNERS UNION

POLICY ADVISOR TO PIRAEUS PORT AUTHORITY

Good Afternoon Ladies and Gentlemen,

• Europe has been an enthusiastic supporter of nature’s conservation for more than five decades and it has faught against all kinds of pollution.

• Among the hardest to combat have been the effects of sulphur and its oxides on nature.

• Finally, there has been a break via IMO and the Special Emmission’s Control Areas.

• Now the ball is finally rolling.

It has all started with complaints about acid rain that leads to..

..extensive forrest devastation and..

....deterioration of many aspects of life.

The war against sulphur–related environmental pollution by ships is not new..

• High sulphur content in marine fuels has been with us for a long time.

• The last battle for the establishment of a global cap was lost at IMO in the 1990s following disagreement on a sliding scale schedule proposed by Greece, China and the International Chamber of Shipping.

• Remorse on this negative outcome may have played a part in the establishment of the 2020 global cap on sulphur content in marine fuels.

Nevertheless, as years passed environmental

awareness has been growing.

• So we now have 2015 deadline for SECAs

• Several technologies which still need a lot of time to mature, and

• Two almost mature technologies to address the issue : Scrubbers and LNG..

• .. .for those allergic to the use of gasoil.

This situation has set in motion a complex chess game with multiple players

We all know that ship conversions are costly.

• Let me borrow a couple of estimates from recent literature on this subject:

• LNG retrofit approximately USD 7.5 million including 40 days offhire.

• Scrubber retrofit approx. USD 5.8 million inclusive of 20 days offhire.

• Both solutions enable the vessel trade in SECAs without having to resort to gasoil burning after 1.1.2015.

Let me put my ship owner’s hat on now and see if it makes any sense to go ahead and retrofit.

As I see it one needs to establish:

a) What percentage the retrofit represents to the ship’s value.

b) What part of it is recoverable if ship sold.

c) If it makes sense to stay on gasoil for SECA operation, try and sell ‘’as is’’ and (if necessary) buy another already converted vessel.

What percentage the retrofit represents to

the ship’s value (using UNCTAD figures).

• Example 1 :For a 10 years old 12,000 dwt short sea chemical

tanker worth USD 13 m: LNG 57.6%, Scrubber 44.6%.

• Example 2 :For a 10 years old geared 500 TEU containership worth USD 6m : LNG 125%, Scrubber 96%.

Question: Would it make any sense to convert and sell?

Answer: No, as the retrofit costs would not be recoverable.

For most medium and high age short sea ships the conversion will not be considered worthwhile. ( Secondhand prices today are even lower).

The example ships are too young to scrap therefore will have to trade on gasoil in SECAs.

Let us now see what the impact will be on larger ships (using current prices)

Example A: 10 years old Panamax valued USD 12.5m: LNG 60%, Scrubber 46%.

Example B: 10 years old Aframax tanker valued 17m: LNG 44%, Scrubber 34%.

• Secondhand ship values are presently at an all time low as earnings have been squeezed.

• Surprisingly, the picture in these large ships is not very different from the short sea example previously.

• However, there can be no comparison between them on consumption, therefore the penalty of running on gasoil will be more severe on large ships.

What does all that mean?

• It means that at present market rates retrofits may be an option only for the very young vessels and/or those spending a lot of time in SECAs.

• The rest may stay on gasoil burning in SECAs waiting for 2020.

• A fraction of the cost of the retrofit may be recoverable on sale, so there is a financial risk factor involved which will need to be taken int account.

• Regular shipping lines will need to amend their rates for SECA destinations.

• We may see big changes in the choice of ports and logistics in effort to minimize the impact on landed cost of goods.

It also means a very substantial rise in the demand for gasoil in the SECAs.

• I have seen no estimates yet but one is talking of multiples of the current demand levels in SECAs after 2015 as older ships will have no option and main engines will run on gasoil.

• Oil refiners and traders of all sort have already got the message.

• I have the feeling there will be steep price rises on gasoil in and around SECAs which may have an accelerating effect on vessel scrapping.

• Hopefully the oil refining industry will be able to produce the extra quantities needed without introducing too much sulphur in the atmosphere.

Green corridors in SECAs will be greener by 2015. Other green corridors will have to wait until 2020.

How close LNG bunkering facilities must be to ensure good service?

• If the distance between ports is one day (@13 knots) one has to provide bunkering facilities every 300 nautical miles.

• The distance can perhaps be doubled for regular lines calling at programmed ports.

• One must not forget the domestic needs of ferries etc and the opportunity to make a difference in the atmosphere in and around ports.

The port of Piraeus is outside SECA yet it will be providing LNG bunkering services earlier within the

next two or three years.

The reason for that is the desire to make a contribution to a better local environment.

• Last year the port of Piraeus has been recognized as an Ecoport serving 15,600 ship calls per annum.

• 4,600 ferries arriving and leaving port but also waiting to load /discharge ( with their generating engines running)

• 763 large cruise vessels calling with an average stay of 12 hours.

• Numerous tugs going up and down all the time.

• One can appreciate the urgency for cleaner fuels in a city-bound port.

This brings us back to the key question of dates.

• By 2015 and for the next five years the problem will be limited to SECAs only. Yet, in economic planning terms 2015 is tomorrow.

• By 2020 every ship will have to comply.

• If the costs of retrofitting (either LNG or scrubber) are anywhere near the estimates we have seen, a considerable number of older ships will have to be withdrawn.

If that happens there will be a colossal impact on the Short Sea fleet..

...whose average age is well around 35 years.

Let us consider now who will gain and who will lose :

High vessel age = No time to recover retrofitting costs = Will burn Gasoil= { old and expensive fuel = Scrap }(LOSE)

Medium age + Small cargo intake = Problems financing the retrofit= Some will be scrapped (LOSE),

the rest will have to raise freight rates to recover retrofitting costs and survive in a better market ( UNCERTAIN OUTCOME)

Low age: Longer lives to depreciate retrofits in a better market ( GAIN)

Newbuildings= The majority will be LNG fitted/ no retrofits (GAIN)

All that rock en roll will be taking place against a backdrop of ..

• Marine Equipment production capacity limits

• Limited number of EU shipyards

• Tight money lending

• Uncertainty about LNG filling stations growth

• Unresolved questions on safety during bunkering.

NOW YOU ARE GOING TO ASK ME WHAT DO I SEE

I do not wish to say much at that stage, but I am expecting..

• Higher freight rates in the SECAs shortly after 2015 as a result of fewer ships and higher running costs. You

can call that market distortion if you like but it is really a structural change.

• I see good times for marine equipment manufacturers, shipbuilders and shiprpairers in the EU and outside it.

• I also see the ‘’Short Sea Initiative’’ - that is the drive from road to sea - losing out to road and rail transport.

The biggest challenge however will be after 2020..

• When something around 50% of the Short Sea fleet of the EU will need to be replaced in a short time as a combination of high age and fitting costs.

• I foresee another shipbuilding orders’ boom.

• High demand will push up shipbuilding prices by up to 40%.

• In absence of EU shipyards in sufficient numbers most of these ships will have to be built abroad.

• It will be then that the real impact of the Shipbuilding Directives on EU’s Short Sea fleet will be realized.

A last word on ports bunkering facilities.

• Unlike ship owners, ports will not face an investment problem.

• Most ports will negotiate LNG licenses with ship bunkering companies which will build the facility and seek to recover its cost through sales.

• The number one concern of every port will be the choice of spaces which will ensure the safety of operations as LNG is an explosive gas.

Ladies and Gentlemen,

Thank you for listening. Next time we will examine the role of incentives.