Coming Out of the Cold Page 1 February 2013

LNG Markets Perspective is

a periodic paper looking at

key issues and events.

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market are discussed in

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James Ashworth

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LNG BUNKERS – COMING OUT OF THE COLD

THE LAUNCHING OF A NEW AGE Earlier this month, Viking Line took delivery of the world’s first LNG powered passenger

ship, Viking Grace from the STX Finland shipyard.

Viking Grace is the world's first LNG powered cruise ship.

At 57,000 Gross Tonnes and carrying up to 2,000 passengers Viking Grace is the largest

non-carrier LNG fuelled vessel built. This represents a significant milestone and shift away

from the smaller short-distance ferries and offshore support vessels that have occupied

the space to date. We are already seeing designs and commissions for vessels with a wider

range of geographical and type diversity. LNG bunkers are becoming a global reality.

The Approaching Storm

Since our LNG Markets Perspective “The Genesis of LNG Bunkers” early last year,

many things have changed, some obvious, others less so. LNG Bunkers, restricted so

far to small ferries and offshore support vessels in the colder climes of northern

Europe, are now beginning to spread to the south, east and west. The introduction of

the North American Emissions Control Area (ECA) in August 2012 was a watershed.

Asia too is now weighing emissions control over commercial expediency.

But while some have reacted with new strategies and investment, the majority of the

maritime sector remains asleep at the helm, perhaps with the expectation that the

tide of emissions legislation can, somehow, be pushed back or that ultra low sulphur

diesel will not cost that much more to burn. They will be disappointed. The storm of

change is coming. This is the wake up call.

LNG MARKETS PERSPECTIVE February 2013

Source: Viking Line

Coming Out of the Cold Page 2 February 2013

THE TIDE OF EMISSIONS LEGISLATION Arguably the most important event in the marine calendar for 2012 was the introduction of the North

American Emission Control Area (ECA). This took the concept of marine emissions control from a purely North

European phenomenon to signal a global tide, signalling further change to come. The North American ECA was

compounded by the introduction of an ECA in US and French Caribbean islands at the beginning of 2013.

Eyes are now turned to the US and Canada’s Arctic coasts and Mexico has stated an interest to establish ECAs

around its US and Gulf coasts and the Gulf of Cortez. Panama has a newly widened canal, good for business,

but bad for marine pollution. A Panama ECA will have a profound effect on world shipping, especially

circumnavigation traffic.

EMISSIONS CONTROL AREAS (ECAS) What is an ECA?

Under the International Maritime Organization (IMO) MARPOL Annex VI legislation, certain sea areas are

defined as "special areas" in which, for technical reasons relating to their oceanographic and ecological

condition and to their sea traffic, the adoption of special mandatory methods for the prevention of sea

pollution is required. Under the Convention, these special areas are provided with a higher level of protection

than other areas of the sea.

The main pollutants covered are sulphur (SOx), nitrous oxides (NOx) and Particulate Matter, or Black Carbon.

Sulphur (SOx) The next watersheds are 2015 with

the introduction of 0.1% Smax in ECAs

and the global limit of 0.5% Smax

globally (subject to review in 2018).

These maxima will consign Heavy Fuel

Oil (HFO) bunkers to history, as oil

companies are not prepared to

provide ultra low sulphur HFO.

Nitrous Oxides (NOx) The NOx control requirements of IMO MARPOL Annex

VI apply to installed marine diesel engines of over 130

kW output, other than those used solely for emergency

purpose, irrespective of the tonnage of the

ship. Different levels (Tiers) of control apply based on

the ship construction date, and the engine’s rated

speed. Currently, Tier III rules will only apply to ships

operating inside ECAs.

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 3 February 2013

CURRENT AND FUTURE ECAS

Regional View

Europe Following a meeting of IMO’s Marine Environment Protection Committee (MEPC), the

EU has updated its Sulphur Directive with formal approval at the end of 2012. The EU

will now enforce a maximum 0.5% sulphur limit in all EU seaports from 2020 and

inland waterways by 2025, independent of the 2018 IMO review. EU Sulphur Emission

Control Area (SECA) requirements will also be formally aligned with MARPOL Annex VI

parameters.

It is clear that the European Union is serious about adoption of the highest

contemporary standards on emissions and has proven ready to put money behind this

intent, in spite of economic doldrums and fiscal constraint. Future adoption of ECA

status around all EU coasts (Norway is already engaged) and inland waterways.

New areas covered will include the northern Norwegian and Swedish coasts, Great Britain and Ireland’s Irish

Sea and Atlantic coasts, France, Spain (including the Canary Islands) and Portugal’s Atlantic coast, the

Mediterranean and Bulgaria and Romania’s Black Sea coasts. Since most of the North African nations are gas

producers and do not have large shipping fleets, it is reasonable to conclude they would not object to a

Mediterranean ECA.

Ukraine is establishing a measure of energy independence by becoming an LNG importer and may well seek

market opportunities in marine bunkering. Establishing an ECA around its Black Sea coast might be one way of

facilitating this. Russia, Georgia and Turkey have yet to declare their intentions.

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 4 February 2013

Straits of Malacca Singapore remains the world’s leading bunker port,

delivering around 40 million tonnes per year (albeit with

some slippage in 2012). Singapore opens its LNG import

terminal in 2013 and has ambitious expansion plans.

Singapore’s government has mooted the prospect of

related LNG bunkering and has targeted 2015 without

specifying how. It is also on record as stating that the new

terminal priority is meeting domestic demand, suggesting

LNG bunkers is lower on the radar. Likelihood is that

future bunker provision will involve a floating import facility.

Meanwhile, Malaysia could well enter the game. Malaysia has just opened the new import terminal at Melaka

and could use this to make LNG bunkers available in Johor. With Indonesia having little of its own traffic in the

Straits, all this is commensurate with the possible introduction of a future ECA, again making a significant

impact on global shipping traffic. Panama, the Mediterranean (and Suez Canal) and Straits of Malacca would

make ECA transit virtually unavoidable for most shipping traffic.

Pearl River Delta The Hong Kong government aims for all ocean-going vessels switch to cleaner

fuels when they berth in Hong Kong waters from 2015. The government has

also made an appeal to the authorities in Guangdong province to enforce

similar policies in the Pearl River Delta. The clean fuel target is one of a series of

pollutant emission reduction benchmarks announced and include targeted

reduction of sulphur dioxide, nitrogen dioxide, suspended particulates and

volatile organic compounds.

The Hong Kong government has taken unilateral action already, with an incentive scheme inaugurated in

September 2012, to reduce 50% of the port fees, including port facilities and light dues, for ocean going vessels

- if they switch to low sulphur diesel whilst berthed in Hong Kong waters.

Airborne pollution is an issue of serious concern in China. The government is on record as saying that

unchecked pollution will retard Chinese growth by 2% of GDP per annum. Although coal fired power

generation is the main culprit, shipping emissions are very much in the sights. The Chinese government is

“strongly encouraging” Yangtze River traffic to convert to LNG and is overseeing a significant growth in LNG

imports. In the Pearl River, new import terminals have come into the picture at Zhuhai, Dapeng Bay,

Dongguan, and Shenzhen. It is logical that, to maximise the return on investment, they would offer LNG

bunkering and declare an ECA to underpin this. Major adoption of LNG fuelled ships will also revive a Chinese

shipbuilding industry, currently in the doldrums.

Japan and Korea As in Norway, both Japan and Korea have environmentally aware populations and a strong historical affinity

with the sea. Both are also large importers of LNG. Korea’s KOGAS has recently commissioned a feasibility

study to look at the introduction of LNG as a bunker fuel. It is almost a given that the recommendations will be

positive and introduction of an ECA is a logical corollary.

Japan was an early adopter of LNG in the 1970s as a way of abating deteriorating air quality from industrial

growth. Reasons to go ECA are compelling but years of economic stagnation, aggravated by the effects of the

2011 tsunami, a mounting energy bill in the wake of post Fukushima reactor shutdowns and compounded by a

decade of weak government could retard momentum. That said, a stagnant Japan shipbuilding industry could

also be revitalised by any major adoption of LNG fuelled ships.

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 5 February 2013

Australia and New Zealand After the mixed reaction to the introduction of an Australian carbon tax in 2012 and with a general election in

2013, it is unlikely that the Australian government will introduce further emissions legislation. However,

Australia does have an existing mechanism for dealing with the marine emissions problem. Work has already

started to identify Particularly Sensitive Sea Areas (PSSAs) and this has led to the adoption of new

nomenclature, Marine Environment High Risk Areas (MEHRAs). IMO guidelines are in use to study and manage

selection criteria and we can reasonably conclude that limits will be aligned as well. MEHRAs are unilateral,

faster and easier to introduce than walking the IMO ECA path. A likely outcome will be the widespread

adoption of MEHRAs around the Australian coastline such an ECA would be a small next step.

Although the environment is high on the political agenda, with no LNG infrastructure in place, New Zealand is

in no position today to request ECA status. The planned New Plymouth LNG import terminal has been on and

off the table for years. But that could all change fast if Australia adopts LNG bunkers and if supplies are made

available from Australia, or if New Zealand manages to commercialise its gas reserves.

COMPELLING ECONOMIC ARGUMENTS While ECAs have highlighted the environmental drivers towards the utilisation of LNG as a marine fuel, less is

understood by the bunkering and shipping community about the economic drivers.

Since January 2009, the cost of 180cSt High Sulphur

Fuel Oil (HSFO) in Singapore, the world’s largest

bunker port, has doubled, while the price of LNG in

Asia has remained largely unchanged.

Fuel has become by far the single largest expenditure

for most ship owners. In 2012, the fuel bill equalled

around 25-30% of average ship earnings. All the

signals for change from oil to gas are clear. The perils

of not changing are also equally clear. The “chicken

and egg” cycle is being broken, with an increasing

range and diversity of LNG supply. But it appears that

most of the marine industry remains soundly asleep

at the helm. It is now time to wake up an act.

In the adjacent chart, 380cSt Heavy Fuel Oil (HFO) is

included for reference, but is an irrelevance for use in ECAs

and post 2020 globally (subject to ratification), as refiners

are unprepared to produce Low Sulphur HFO, so it will

most probably be withdrawn from the marine bunker

market. The markers to determine Opportunity Cost are

LNG against Singapore 0.1% Sulphur Diesel for use in ECAs

post 2015 and 0.5% Sulphur Diesel globally post 2020 (not

yet quoted, so 1% S diesel used for comparison). We can

also see differentials in LNG pricing with the greatest

spread making USA LNG more than 50% cheaper than Singapore 0.1%S diesel. No wonder that American and

European ship owners are increasingly keen to adopt LNG. The lower pricing of LNG in the USA and Europe

suggest that these may become the preferred bunker locations, upturning Asia’s recent historical dominance.

With LNG becoming increasingly prevalent and ultra low sulphur diesel variants increasing in demand,

compromising availability, we can expect this trend to continue.

Source: a-aservices

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 6 February 2013

CHANGING LNG SUPPLY AND DEMAND PATTERNS The inevitable wholesale adoption of LNG as the preferred marine fuel will have a major impact on global

supply and demand pattern. It will effectively, double today’s global LNG demand of 240 million tonnes per

annum. The response will need a flexible approach to supply. The challenge with traditional LNG terminals is

that they are geared to one or two shipping movements per week. Any increased frequency to supply LNG

bunkers back over the wharf is seen as an unwelcome risk to operations and safety. This is about to change as

new demand drives the emergence of an alternative supply chain. With around half the top 10 bunker ports

offering or planning LNG bunkers, the others will not be long to follow.

LNG BUNKER SUPPLIES

LARGE SCALE LNG We think of large scale LNG plants today as meeting nations’ needs

for energy, both as electricity generation and industrial and domestic

gas supply. The surge in demand for gas as a transport fuel for on

and off-road commercial vehicles, trains, and ships, will require the

significant expansion of existing, or construction of new liquefaction

capacity. As demand for oil tankers continues to shrink on the back

of continued economic recession, demand for large LNG carriers,

already high, will grow substantially.

SMALL SCALE LNG Small LNG facilities have been in

operation for some years, but

usually at a limited number of

dedicated facilities in Norway,

China and Japan. Moves are

afoot that will globalise the

concept and application. Small

Scale LNG requires supply from

any piped gas source. It is

particularly suitable for the

monetisation of stranded gas, as

is the case of providing LNG supply for trucks in the USA and Canada. There is also an extensive network of

Small Scale LNG production in China, including the liquefaction of Coal Seam Gas (CSG).

Shell is now making a strong play into small-scale LNG. In

2012, it acquired Norway’s Gasnor, which has played a key

role in developing the world’s leading small-scale LNG market.

In a land transport, but relevant initiative, Shell took the final

investment decision in 2011, on the Canadian “Green

Corridor” project. The initiative will develop a retail

infrastructure for the supply of LNG along a busy truck route

in the province of Alberta. The LNG will be supplied from a 0.3

mtpa plant near Calgary, based on Shell’s new Moveable

Modular Liquefaction System (MMLS). With low cost and quick installation, this technology is suitable for the

easy establishment of marine LNG bunker facilities in locations that have access to a piped gas supply.

Source: RasGas

Source: Nova Atlantic

Source: Shell

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 7 February 2013

FUTURE SUPPLY OPTIONS Small Scale LNG production is very suitable for the start-up phase of LNG bunkering and will remain so for

small ship operations located close to a pipeline gas supply. But given the potential scale for wholesale

adoption of ocean going vessels Small Scale LNG is not an economic option. None of the world’s major

seaports is located near liquefaction facilities, so supply will have to be from an imported LNG storage facility,

possibly dedicated to bunkering. Land is often scarce in port areas and public attitudes hostile to new large

scale gas facilities. While this may be misguided, it is probable that many new facilities will need to be located

remotely or more likely, floating.

FLOATING STORAGE AND OFFLOAD FACILITIES Floating Storage and Offload (FSO) vessels are usually modified LNG carriers that are typically 20-25 years old.

They have been faster to bring into service and have cost half that of dedicated new builds. More commonly

used as Floating Storage and Re-gasification Units (FSRU), vessels have been 75,000 to 100,000 m3. But the

current shortage of such vessels might see new LNG bunker FSOs move directly into the 120,000 m3 category.

FLNG FOR BUNKER SUPPLIES Shell has led the field by commissioning the world’s

largest floating structure, the “Prelude” Floating LNG

production facility, to be stationed off northwest

Australia. At 500 m length and designed around the needs

of serving large scale LNG supply, Prelude itself is unlikely

to be suitable to offer LNG bunkers. But as gas producers

increasingly seek to diversify their markets and LNG

bunkers grows in importance, future modification or even

dedicated FLNG construction could serve the marine

market at sea. This would also avoid requirements for land space and NIMBY (Not In My Back Yard) issues

associated with the construction of onshore terminals. It is conceivable that future smaller FLNG facilities

could become a common source of LNG Bunkers whilst exploiting marginal gas fields, not suitable for large

scale commercialisation.

LNG BUNKER DELIVERY SYSTEMS Finland’s Wärtsilä has joined the growing list of developers of concept LNG fuelled LNG bunker barges. This

follows from similar designs from Sweden’s White Smoke and FKAB and Germany’s TGE. At 350 m3, this is

again a small vessel, suited to the needs of small ferries and offshore support vessels. To achieve a single

bunker delivery in an acceptable time, ocean going vessels will require much larger bunker barges, typically

25,000 to 30,000 m3. Although there has been much talk, we have still yet to see designs on this scale and this

remains an important opportunity for shipyard innovation.

Source: Wärtsilä

Source: Shell

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 8 February 2013

In the USA, Houston-based Waller Marine is planning to build the first of seven

planned natural gas liquefaction facilities on the Mississippi River in Louisiana,

with capacity of 500,000 gallons (1,900 m3) per day, with a second Mississippi

site to be disclosed during the first quarter of 2013. The plants will feed

specialised vessels which will in turn supply LNG bunkering services to gas-

fuelled ships.

Waller has also adopted an articulated push barge concept. Whilst elegant in its simplicity and flexibility, such

designs can be difficult to manoeuvre for ship-to-ship bunkering operations, especially in adverse weather.

Waller anticipates that significant savings can be achieved by vessel owners using LNG fuels with payback for

conversion costs being as short as six months. Waller has also initiated a vessel conversion strategy and is

working with partners to provide funding for the conversion of ships to be fuelled by LNG. Working with

engine manufacturers and equipment suppliers, Waller is engineering shipboard LNG fuel storage and supply

systems for vessels having a range of horsepower. Waller is also developing pre-manufactured systems to

reduce or eliminate downtime during conversion.

Multiple other schemes are underway in the USA and Canada. In a move to capture US LNG demand in the

wake of the North American ECA introduction, Shell and Wärtsilä jointly announced in late 2011, the signing of

an MOU to encourage and accelerate adoption of LNG as a marine fuel, with Wärtsilä providing the engine and

gas handling technology and Shell supplying low-cost LNG to Wärtsilä natural gas powered vessel operators

and other customers. The agreement has focussed first on supplies from the US Gulf Coast and will later

expand to cover a broader geographical range.

Under the European Union’s Trans-European Transport Network (TEN-T), 139 ports have been targeted across

Europe to offer LNG bunker capability by 2020 (seaports) and 2025 (inland water ports). This and extended

emissions legislation will inevitably hasten the adoption of LNG as the preferred fuel for vessels trading

predominantly in European waters, with inevitable spin-off elsewhere.

Meanwhile, other projects are continuing in spite of, or in conjunction with, regional initiatives:

Gothenburg, Nynashamn, Hamburg, Bremen, Rotterdam, Antwerp, Zeebrugge, Ghent and Dunkirk are planning LNG bunker facilities by 2015

34 further sea ports in Europe are currently planning/proposing an LNG bunker service

A Bomin/Linde joint venture plans to have a multiple supply points in Northern Europe starting with Hamburg

Gazprom/Summa Group JV plan to develop bunkering infrastructure across North Sea & Baltic regions

Source: Waller Marine

Source: Waller Marine

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 9 February 2013

NEW LNG FUELLED VESSELS COMMISSIONED AND DELIVERED The march of new ferries, tug boats and offshore support vessels has continued. By the middle of 2012 the

global order books for non-LNG carrier, LNG fuelled vessels were up 26% year on year, even during the

greatest shipping recession in living memory. Numbers are still relatively low, but we expect a sharp pick-up as

the combined effects of new legislation and elevating fuel prices generates awareness.

Deen Shipping’s bunker barge, “Arganon”, delivered by Trico in 2011,

is the world’s first of her kind. Carrying 6,100mt of two grades of

bunker fuel and with 110m length, she is powered by two Caterpillar

Dual Fuel engines, burning a mix of 20% diesel and 80% LNG,

bringing her within all current and planned marine emissions

regulations. Europe has realised the practicality and benefits of

adopting contemporary marine emissions standards for application

to its network of inland waterways. This mirrors China’s new policy

on emissions from Yangtze River watercraft.

Shell has signed up to be the first customer of a new breakbulk LNG facility to be

built adjacent to the Gate import terminal in Rotterdam. This will inevitably

improve LNG bunkering infrastructure in one of the world’s busiest seaports.

Meanwhile, Shell has chartered two new “Rhine” LNG fuelled 110m long tanker

barges to serve the route from Rotterdam to Basel in Switzerland. The first is to

be delivered in spring 2013.

To serve the inland waterway demand, Poland’s Seatech Engineering has

developed a LNG fuelled inland waterway pusher tug. Each tug is powered by

twin Mitsubishi GS12R engines, each producing 720 kW.

In a break from small ferries, Baleària, a Spanish Mediterranean ferry

operator will re-engine some high-speed vessels to replace diesel with

LNG to meet new economic and environmental realities. Overall, it plans

to convert nine ferries over the next five years using dual-fuel technology.

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016

No

. of

Ve

sse

ls

Delivery Year

New LNG Fuelled Tonnage (exc. LNG Carriers)

Tugs

Cargo Ships

Harbour Craft

Patrol Vessels

Tankers

Container Ships

Cruise Ships

OSVs

Ferries

Source: Deen Shipping

Source: Shell

Source: Seatech

Source: Baleària

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 10 February 2013

Following implementation of the North American ECA in 2012, we have seen a number of small ferry operators

adopting the “Norwegian” model. These include Washington State Ferries (WSF), New York’s Staten Island

Ferry and Canada’s Société des Traversiers du Québec.

Illustrating the driver, WSF burns more than 64 million litres of fuel each

year, making it the fastest growing operating expense. The fuel budget

today is nearly 30% of the total operating budget, or US$67 million, US$50

million more than it was 12 years ago. The fuel cost saving moving from

diesel to LNG is more than 40% at today’s pricing. This will be even higher

once the 0.1% sulphur maximum kicks-in in 2015. New York estimates a

50% saving on operating costs by converting to LNG.

Australian shipbuilder Incat Tasmania Pty Ltd launched the world’s first high speed passenger Ro-Ro ship

powered by LNG, commissioned in January 2013.

Named the Lopez Mena, the 99m LNG ship was contracted by South

American company Buquebus in November 2010, for operation on their

River Plate service between Buenos Aires, Argentina and Montevideo in

Uruguay. It will be the largest catamaran they have operated and,

according to Incat, the fastest, environmentally cleanest, most efficient,

high speed ferry in the world.

Lopez Mena carries almost 1000 passengers + around 140 cars, has a lightship speed of 53 knots, and an

operating speed of 50 knots. Crossing the River Plate (Rio de la Plata) at high speed will allow the ferry service

to compete with airline traffic between Uruguay and Argentina. LNG will be supplied from Argentina’s Bahia

Blanca import terminal.

“BREAKING THE MOULD” In an important move away from ferries and offshore

support vessels and in another response to the hike in fuel

prices and new environmental legislation, General Dynamics

NASSCO, of San Diego, California will design and construction

two 3,100 TEU LNG-fuelled container ships for delivery in Q4

2015 and Q1 2016. The announcement was a major shock

for the industry, as it represented a radical departure from

the mainstream and has revitalised an otherwise flagging US

shipbuilding industry.

The vessels will serve TOTE’s Puerto Rico service. At 233m and designed by DSEC (a subsidiary of Daewoo

Shipbuilding & Marine Engineering (DSME), Busan, Korea) they will be the largest ships to date to be powered

primarily by Liquefied Natural Gas (LNG). The deal includes options for three additional ships.

The design, with Type “C” LNG tanks mounted under a sheltered poop deck, will be based

on proven container ship design standards and will include DSME's patented LNG fuel-gas

system and a MAN ME-GI dual-fuel slow-speed engine.

TOTE and NASSCO have also contracted for the conversion of TOTE’s

two “Orca” Class trailer ships to burn LNG. The 256m ships, delivered

by NASSCO in 2003, have diesel electric propulsion and serve the

Tacoma, Washington to Anchorage, Alaska route.

Source: Washington State Ferries

Source: Buquebus

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 11 February 2013

TECHNICAL ISSUES

LNG BUNKER DELIVERY - THE LAST METRE To date, most LNG ship refuelling has been carried out using flexible cryogenic hoses, either manhandled for

small ship applications, or crane suspended for large ship transfers, such as FSRU replenishment. The main

challenge is the point of connection, particularly at the receiving vessel’s manifold. Recent LNG bunker barge

concepts have focussed on rigid arm technology. There are issues with both approaches.

Rigid arm technology is well suited to remote

operation, an obvious operational and safety

benefit. But it requires seven degrees of

freedom at the flange interface, making it

sophisticated, vulnerable and expensive. The

performance envelope is relatively narrow, so

that relative ship movement will limit

operations to moderate sea swell only.

Excessive ship movement could lead to arm

damage, or in the most serious case, rupture,

an obvious safety hazard.

Flexible cryogenic hoses are also

expensive. While they are much

more tolerant to sea swell and a

wider range of ship movement,

stress fatigue will cause them to

breach and possibly rupture over

time. It will be interesting to see how

this conundrum will be resolved -

perhaps a hybrid rigid arm up to the

last metre followed by a short,

replaceable section of flexible hose.

THE GREAT SCRUBBER DEBATE Why scrubbers are not the answer

Exhaust Gas Scrubbers, in use successfully in land based

power generation since the 1930s, have been lauded as the

“White Knight” for the perpetuation of heavy oil burning.

Unfortunately this reasoning is wrong on many levels.

Scrubbers are large pieces of equipment with multiple

associated tanks and pumps, requiring space that most

vessels simply do not have. Even if the equipment can be

shoehorned into the available space, the additional pumps

often require power beyond the existing capability of many

vessels, particularly those with shaft drive power take-off

generators. So a new generator is required, potentially

costing $ millions and taking up even more scarce space.

Source: TGE

Source: Excelerate

Source: Aalborg

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 12 February 2013

Scrubbers produce toxic acidic sludge that is either de-watered and contained in tanks, especially in port, or

discharged while at sea. There are currently no port facilities for dealing with such toxic sludge and acidic

discharge at sea is unacceptable.

Scrubbers are only part of the supposed solution, dealing with sulphur (SOx). To deal with the equally nasty

problem of nitrous oxides (NOx), we need to turn to Selective Catalytic Reduction (SCR). This involves reacting

the hot exhaust gases after the turbocharger with either, ammonia, or more commonly urea, the cost of both

which is related to oil and has doubled over the past 3 years. And then there is the additional cost of fitting

the reactors into the current exhaust system to add to the bill. If this was not enough, running EGS+SCR will

add around 3% to an already elevated fuel bill.

And yet, there is more. If the burden of proof of emissions compliance is removed from the fuel to the

exhaust gas, the gas must be monitored on a continuous basis when proof of compliance is needed.

Equipment to achieve this not yet available in marinised form, costs millions to fit and requires high levels of

expert calibration, well beyond the normal capabilities of seagoing staff. Fines for non-compliance will be

punitive.

Ultimately the net costs of conversion to LNG, or building to burn LNG, are roughly the same as conversion or

new building to burn oil + a scrubber. So, for the cost and uncertainty of converting your old oil burner to

continue as is, you may as well have converted to gas (if possible), or scrapped and built future proof.

TECHNICAL, SAFETY AND PERMITTING ISSUES LNG Storage and distribution has been around for 50 years, so the technical challenges have been addressed

many times in many places. However, LNG remains a poorly understood commodity and irrational fear of the

unknown often dictates policy and regulation. Technical consideration is about choices. Safety and

understanding is a mix of fundamental knowledge and understanding plus a sense of which way the wind is

blowing.

LNG FUEL TANKS Any shipowner deciding to adopt LNG for his vessels will need to choose between pressurised storage and

atmospheric storage. Both have advantages and disadvantages.

IMO Type “B” Prismatic LNG Tank (L) and Type "C' Pressurised LNG Tank (R)

Type “B” prismatic tanks are free standing can be moulded into a wide range of spatial configurations,

optimising space. But they are not pressure vessels and management of LNG at atmospheric pressure requires

a higher level of operational discipline. Type “C” tanks are more forgiving, can tolerate a temperature rise, up

to around 128 °C and a maximum of about 10 bar pressure rise. But they are cylinders and, as such, occupy

more space. They can be mounted internally, if space permits, or externally as shown in the dry bulk carrier

concept above.

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 13 February 2013

SAFETY LNG is a cryogenic liquid at around -162°C and will deliver a nasty penetrating burn in touch

with skin. Spillage onto mild steel and other non-suitable materials will cause embrittlement

and craze cracking, for example in deck plates. But as natural gas, it is lighter than air,

dispersing easily and has a relatively narrow combustion envelope, between 5–15% in air,

making it difficult to ignite. In uncontained ignition, it has a slow burning flame front which is

possible to outrun.

PERMITTING Bunkering regulations remain the purview of individual port authorities and thus will remain hostage to the

knowledge, understanding and confidence of governments and port administrators. The balance of probability

suggests that LNG bunkering will need to take place at dedicated berths for fixed route vessels, such as ferries

or at remote bunker berths or dedicated anchorage zones with defined separation from other shipping.

Current separation standards for LNG operations are 500m.

UNRESOLVED COMMERCIAL ISSUES Delivery of LNG as a fuel presents a number of significant differences from standard liquid fuels. This raises

important questions on the creation of a LNG Bunkering Model.

CUSTODY TRANSFER Conventional liquid fuels are sold in mass or volumetric quantities. LNG is normally priced and traded in energy

units (e.g. MMBtu). What will be the standard? For reference, the energy (E) delivered in LNG Custody Transfer

is given in the equation below, where V = volume, D = density and GCV = gross calorific value:

From this, we see that the compositional makeup of the LNG is important to deliver the energy and content

contracted in energy-based deals. The table below illustrates a typical Custody Transfer Specification.

Source: DESFA

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 14 February 2013

THE MANAGEMENT OF BOIL OFF GAS

The management of Boil Off Gas (BOG) also raises some interesting dilemmas. From the above formula to

determine gas displaced (BOG), we can see that the temperature of LNG delivered has a major bearing on the

generation of BOG. There is also a key difference governed by whether delivery is into pressurised or

atmospheric storage. And the pumping rate is directionally proportional to BOG generation. Since no gas

venting to atmosphere is allowed, BOG that cannot be burned in the ships’ engines must either be re-liquefied

or compressed into pressurised storage.

Key questions are:

How will LNG bunkers be traded? Mass, Volume or Energy content?

Who will be responsible for the Custody Transfer? Seller or Buyer?

Who will pay for the BOG and BOG management?

Who will monitor gas quality? Existing bunker surveyors?

Will we develop standards for delivered temperature and pressure?

Does colder gas have a higher commercial value than warmer?

If excess BOG generation is reduced by lowering pumping rate, who pays for the extra bunkering time?

CONCLUSIONS LNG represents a shipowner’s best option today, as sustained oil burning heads to being

increasingly expensive and unsustainable. Emissions limits will be put in place, most likely

earlier than later. Burning ultra low sulphur diesel will remain significantly more expensive

than LNG. Exhaust gas scrubbers are not a solution.

The erstwhile “Chicken and Egg” excuse for inaction is losing validity. LNG infrastructure is being put in place,

faster in some regions than others. In a game of catch-up, the option to run LNG fuelled tonnage globally is

increasingly practical, compliant and economic. Around half the world’s top 10 seaports already have plans

to deliver LNG as a bunker fuel. The other half will not be long coming. Without an urgent response from the

marine industry, we foresee opportunity for those awake. For those still asleep, we see a rude awakening

followed by a scramble for most and self-inflicted disaster for some.

Around 80% of today’s tonnage is unsuitable for conversion to LNG, is technologically redundant and will

need to be replaced or converted over the coming years. This is undoubtedly uncomfortable reading for

many. There will be a rush to the scrapyards, whilst the steel prices hold up. Shipyard capacity will be taken

up by the first comers, leaving others waiting in line. But there is an upside. Global shipyard production

peaked in 2011 at around a billion GT. The world shipping fleet in 2012 was just over one billion GT. So large

scale fleet conversion or replacement over a few years is possible. Indeed, revitalising existing and dormant

yard capacity, with the attendant employment could prove a major political coup, encouraging state funding,

especially in the USA, Europe, Japan and even China following the recent shipbuilding slump. LNG technology

offers the opportunity for yards to differentiate themselves and achieve better margins.

For the existing fleet, market forces will dominate in an increasingly brutal fashion. A 2-tier charter market

will evolve. Those offering compliant vessels, lower fuel and operating costs, lower maintenance bills and

reduced downtime (cleaner gas reduces engine maintenence), will cherry pick the best charters. The “also

rans” will squabble over the scraps, facing less attractive rates and increasingly high operating costs. Gaps in

LNG supply infrastructure globally, will fill rapidly as the gas supply industry wakes up to the opportunity

presented by shipping.

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 15 February 2013

On an historical note, Victorian engineer, Isambard

Kingdom Brunel, built the world’s largest trans-Atlantic

steamship, ss Great Britain, launched in 1845. Her size

(3,675 tons and 322 feet/98m length) was to ensure she

could carry enough coal for the voyage. She was fitted

with sails in an early example of “dual-fuel” and as a

standby in case of coal depletion or engine failure. Sails

soon disappeared from ocean going vessels as confidence

grew in the new engine technology. Over time, as LNG

infrastructure becomes ubiquitous, dual-fuel technology, a

good option in times of supply uncertainty, will become

unnecessary and will be replaced by pure gas engines.

Some have already made the move to LNG. There is still time for shipowners to embrace the new, but the

doors to fast adoption are closing rapidly. History will not be kind to the doubters and procrastinators.

Anybody thinking about commissioning new tonnage today, without factoring in LNG fuelling capability, is

poorly advised.

TRI-ZEN LNG PERSPECTIVE

Coming Out of the Cold Page 16 February 2013

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