Don't Fear the Reaper, Part 2 - LNG's Role in Decarbonizing the Shipping Industry

IMO 2020, the mandate that ships plying most international waters slash their sulfur emissions starting in January of last year, was only another step in the International Maritime Organization’s long-running effort to ratchet down the shipping industry’s environmental impact. The group’s next focus, as you might expect, is reducing shippers’ carbon footprint — while no specific rules have been set, the IMO in 2018 laid out the goal of cutting ships’ carbon dioxide emissions by 40% from their 2008 levels by 2030. One way to move toward that goal would be fueling more ships with LNG, which emits 20-25% less CO2 than very low sulfur fuel oil. But as we discuss in today’s blog, shippers could augment those emission reductions by moving from the LNG trade’s traditional point-to-point model to optimization through cargo swapping.

In Part 1 of this series, we discussed the global push to decarbonize and the effects that it has been having on the U.S. LNG industry. Put simply, the long-term-contract, “take-or-pay” approach that helped provide financing for the first wave of liquefaction and LNG export facilities — mostly along the Gulf Coast — may need to be reworked for the second wave of projects now under development. Why? A number of factors, including COVID-19 and gas-versus-renewables competition, has made it much harder for buyers to predict how much LNG they will need 10, 15, or 20 years from now. Also, activists are now urging banks to restrict lending to projects that utilize fossil fuels. That may not prevent LNG projects from moving forward, but it does mean that new finance structures are likely to be needed in order for positive final investment decisions (FIDs) to take place.

Today, we look at the future of LNG from a different angle, namely, what role the fuel might play in international shipping, particularly as the IMO moves toward implementing a new rule to reduce emissions of CO2 and other greenhouse gases (GHGs) by 2030. As we said a blog just before IMO 2020’s implementation, the IMO is a specialized agency of the United Nations that sets emissions and other rules for the 50,000-plus tankers, dry bulkers, container ships and other commercial vessels plying international waters. We also noted that, in anticipation of IMO 2020, many refineries had been reworking their facilities, operations, and crude slates to produce more high-value, low-sulfur products to help meet the new demand from shippers for rule-compliant bunker.