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17 July 2019
Using liquefied natural gas (LNG) rather than fuel oil is one of a range of options available to owners seeking to comply with the International Maritime Organisation's 2020 regulations (IMO 2020). Given that shipbrokers have long predicted the emergence of a two-tier shipping market with 'greener' ships commanding a premium over older, less eco-friendly vessels, what is the future for LNG bunkering and what challenges does it present?
The shipping trade press (and lawyers) initially took a somewhat pessimistic view of LNG bunkering as a solution to the IMO 2020 problem,(1) with forecasts suggesting that high costs and technical difficulties would present a commercial barrier to LNG bunkering being adopted across the industry. However, despite the forecasts, in the past year there has been an interesting series of world firsts for new-build and retro-fitted LNG-powered vessels in different sectors, including cruise ships, ferries and more general commercial carriers. For example, in March 2019 Maritime Executive(2) reported on the retrofitting of the Sajir, which will be the first mega-container vessel to be converted to a dual-fuel system. Various innovations are also underway, including Cryo Shipping's conversion of platform supply vessels into LNG tankers for ship-to-ship supplies, which may help to ease congestion at LNG bunker ports or provide supplies in areas that are not serviced by such ports. These reports – together with commitments from large owners (eg, CMA CGM and MSC) – suggest that owners may be more receptive to LNG bunkering than was initially expected. The world fleet of LNG-powered vessels has increased from 118 vessels in 2017 to 143 vessels in 2019, with approximately 135 LNG-powered vessels also on order.(3)
Whether owners choose to adopt LNG bunkering as a solution to the IMO 2020 problem or adopt one of the other available options – such as using low-sulphur fuel or installing scrubbers – depends on a myriad of factors. Thus owners adopt different solutions, sometimes even within their own fleets. This is essentially because there is no perfect solution. Owners have needed to be sensitive to trading patterns and available infrastructure. Using low-sulphur fuel leaves owners at the mercy of oil and freight volatility. Scrubber retrofits may not provide a fully predictable outcome – with new geographical restraints having emerged since their introduction, including the ban on open loop scrubbers in Singapore, China and Fujairah, and the anticipated ban in the Norwegian fjords. Likewise, given the high cost of LNG retrofitting, it would not make sense to undertake it on vessels close to scrapping age or those operating without ready access to LNG bunkering ports. Therefore, LNG bunkering is best suited for owners ready to invest in new vessels, or for retrofitting less elderly vessels which will operate in areas where there is existing LNG bunkering infrastructure, such as Northern Europe.
A 2019 report on LNG bunkering by Jack Sharples of the Oxford Institute for Energy Studies stated that:
the introduction of more stringent environmental regulations can solve the 'chicken and egg' dilemma of energy companies not wishing to invest in LNG bunkering infrastructure until there is substantial demand for LNG as a marine fuel.
This seems to be reflected in the increased activity in projects to support LNG bunkering not only in areas traditionally supplying LNG, but also across many major transport hubs. This means that LNG-fuelled vessels will likely become far more attractive to owners.
But for vessels already on the water, what issues does a retrofit present? One perhaps unforeseen issue is that the IMO 2020 has further tightened availability at shipyards for retrofit solutions. The resulting pressure to move quickly to secure slots leads to negotiating constraints. This affects timing and cost and can also create legal problems. There is often a shift in bargaining power from the owners to the yard in times of high demand and less attention is paid to the finer points of contract drafting. There have been an increasing number of disputes and difficulties under retrofit contracts and related charters. Therefore, owners should remember that a retrofit contract requires consideration of similar issues to a full shipbuilding or conversion contract – with special attention needing to be paid to items that are likely to affect earnings under associated vessel charters, such as:
Clarity, as always, is key. Where there must be flexibility, such as for modifications and regulatory change, this must be supported by appropriately drafted triggers for change, remedies and dispute resolution procedures. Any existing charter obligations must be reviewed and added to as needed – for example, to deal with anticipated unexpected loss of use of the vessel.
There will also be different safety procedures to consider – for example, ISO 20519:2017 (Ships and marine technology – Specification for bunkering of liquefied natural gas fuelled vessels) and the International Code of Safety for Ship Using Gases or Other Low-flashpoint Fuels. Both are designed to provide standards for ships operating using gas (ie, as a fuel), whether newly built or converted, rather than being aimed at more traditional gas carriers.
Finally, owners and charterers must be prepared for reviewing new bunker contracts. Contracts for the sale and purchase of LNG are traditionally more detail oriented than, for example, heavy fuel oil contracts. One option is to adapt existing bunker agreements that owners and charterers are already comfortable with, but this does require specialist drafting. Specifications and tolerances must be updated. Attention must also be paid to LNG-specific terms, such as:
Help may soon be at hand from the Baltic and International Maritime Council, which announced that it would be working on a new LNG Bunker Purchase Contract and LPG voyage charter for the Asian market as of January 2019. This is expected to be ready for publication within 18 months. Whether an owners' organisation can create a form that finds favour with brokers and suppliers has yet to be seen.
Shipping lawyers should watch with interest to see the extent to which LNG bunkering continues to be adopted by the industry and the effect this has on spot trading of LNG and hire rates for LNG carriers and LNG-fuelled vessels.
For further information on this topic please contact Eleanor Midwinter or Ina Lutchmiah at Wikborg Rein by telephone (+44 20 7367 0300) or email (email@example.com or firstname.lastname@example.org). The Wikborg Rein website can be accessed at www.wr.no.
(1) Seatrade Maritime News, "High cost of retrofit slows LNG bunkering uptake", 2015.
(2) The Maritime Executive, "World's First Mega-Container Vessel LNG Retrofit Contracted", 2019.
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