Commissioner William P. Doyle’s remarks on LNG as marine fuel to the American Society of Transportation and Logistics (ASTL) and ASTL-China 2013 Annual Conference, October 29, 2013, Chicago, Illinois

Contact: David Tubman, Counsel, DTubman@fmc.gov.

FMC Commissioner William P. Doyle
Morning Remarks
American Society of Transportation and Logistics (ASTL) and ASTL-China
2013 ASTL Annual Conference – Sino-American Logistics Conference
October 29, 2013

Topic: LNG as an Alternative Fuel for Vessels to Reduce Fuel Costs and Emissions
With the high cost of traditional diesel based marine fuels, and the abundance of natural gas coupled with its environmental benefits, liquefied natural gas (LNG) is increasingly gaining traction as a source of fuel in the maritime industry.

Good morning. I would like to thank the ASTL for inviting me to speak with you this morning.

I am a Commissioner with the U.S. Federal Maritime Commission. The Federal Maritime Commission is an independent regulatory agency responsible for regulating the nation’s international ocean transportation for the benefit of exporters, importers, and the American consumer. The FMC’s mission is to foster a fair, efficient, and reliable international ocean transportation system while protecting the public from unfair and deceptive practices. With that said, I should emphasize that my thoughts and comments here are mine and mine alone – they do not reflect the position of the Commission, and they should not be construed to represent the positions of any of my fellow Commissioners.

Liquefied Natural Gas (LNG) is increasingly gaining traction in the United States as a source of marine fuel in the maritime industry. There is an abundant supply of natural gas in America and it is being produced in substantial amounts from shale formations such as the Marcellus in Pennsylvania and West Virginia. Natural gas has some positive environmental benefits when compared to traditional marine fuels. Considering the economics, natural gas is a more cost effective fuel source than marine residual and distillate fuels. For more than a decade Norway has led the way in LNG marine fuel usage in its passenger ferry systems. China is three years into an impressive long-term program with respect to using LNG as a marine fuel in its domestic trade. In the United States, the Obama Administration is embracing the concept of LNG as a marine fuel, and the maritime industry is in the process of developing, converting and constructing LNG powered vessels. With all transportation modes, there needs to be an adequate supply of fuel sources by which these modes can fuel and refuel their assets.

This morning I will address these points.

Abundance of Natural Gas

The United States has abundant supplies of natural gas. The U.S. leads the world in producing natural gas from shale formations. The United States and Canada are the only major producers of commercially viable natural gas from shale formations in the world. China is the only nation outside of North America that has identified commercially viable production of shale gas. Shale gas accounted for 39% of all natural gas produced in the U.S. China today derives less than 1% of its natural gas from shale formations. That said, China is ranked as the largest holder of shale gas resources among the 41 countries assessed for technically recoverable shale resources in the study released by EIA/ARI this past June.

Natural gas production in Appalachia has significantly increased this past year. Natural gas production in the Marcellus Shale has significantly increased, especially in parts of Pennsylvania and West Virginia. The Marcellus Shale formation extends across Pennsylvania, West Virginia, New York, Ohio and Maryland, but most of the production is in Pennsylvania and West Virginia.

According to Bentek, an energy consultancy, natural gas production in both Pennsylvania and West Virginia has risen 50% since the beginning of 2013. In the first six months of the year, Pennsylvania saw 1.5 trillion cubic feet of gas come out of the Marcellus Shale, and that number is expected to reach about 3.2 trillion cubic feet by year’s end. The Marcellus Shale is even beginning to displace activity in the Gulf of Mexico.

In 2008, Pennsylvania hardly registered as an output source on the national energy level. In a mere four years since then, the Marcellus is supplying the bulk of energy to Pennsylvania and other northeastern states. Arguably, the Marcellus has become the most productive gas reserve in the nation. And, Ohio shale gas production is in its beginning stages but is expected to grow substantially in 2014 and 2015.

Environmental Benefits of Natural Gas

International shipping is a significant source of sulfur, nitrogen oxide and carbon dioxide emissions. Replacing conventional shipping fuel with LNG makes it possible to greatly reduce the environmental impact of shipping.

The use of LNG reduces sulfur oxide (SOx) emissions by between 90% and 95%. SOx is the major contributor to acid deposition otherwise known as acid rain. This reduction in emissions brings SOx emissions within limits mandated by the Emission Control Areas designated by the IMO. Using LNG reduces nitrous oxide (NOx) emissions by approximately 90%. NOx is a major contributor to smog. Finally, LNG has a lower carbon content than traditional bunker fuels, giving off up to 25% less CO2 emissions.

Under MARPOL’s Annex VI, progressively more limits for NOx and SOx emissions are being placed on the global shipping industry over the next decade. Within U.S. waters, these requirements are implemented through the Act to Prevent Pollution from Ships (APPS). NOx emission limits are being imposed in a tiered approach, based on engine speed, while SOx is being limited primarily by regulating sulfur content in fuel.

Economics

Based on the current forecasts, natural gas delivered for production of LNG in the U.S. is now at least 70% less expensive on an energy equivalent basis than marine residual fuel and 85% less expensive than marine distillate fuel. EIA currently projects that this relative price advantage will continue, and even increase, through 2035. This has opened up an opportunity for significant annual fuel cost savings when converting marine vessels that use petroleum fuel to natural gas operation.

About 70% of domestic shipping relies on distillate fuel oil and the remaining 30% relies on residual fuel oil. By contrast, over 90% of international shipping is fueled by residual fuel oil. In comparison to distillate fuel, residual fuel is much more viscous – and is essentially a solid at room temperature. Residual fuel must be heated to keep it in liquid form for transport and storage as a marine fuel. Residual fuel also has significantly higher sulfur content than distillate fuel – 1% sulfur or more – and much higher heavy metal content. Residual fuel is less expensive than distillate fuel.

Historical Use of LNG as a Marine Fuel

The use of LNG as a marine fuel is not a new concept. Since the first generation LNG tankers in the 1960s, the “boil off” of LNG cargo would be used as a fuel source for boilers that produced the steam for the ships’ turbines.

Prior to 2000, a limited amount of relatively small vessels like small ferries used natural gas for propulsion. Most of these vessels used dual- fuel diesel/natural gas engines and carried their fuel as compressed natural gas (CNG) while operating in Canada, the Netherlands, and Russia. The first modern vessel built to operate exclusively on LNG fuel went into operation in Norway at the beginning of 2000. Since then, approximately 30 additional LNG powered vessels have been placed into service worldwide.

The majority of current LNG vessels in service are car and passenger ferries and virtually all of these operate in Norway. The second largest group of LNG vessels in service is offshore supply vessels operating in the North and Baltic Seas. There are also three Norwegian coast guard vessels that operate on LNG.

China’s LNG Marine Fuel Program

Yesterday, during the U.S. – China bilateral maritime consultations, representatives from China’s Ministry of Transport briefed the U.S. on their LNG marine fuel program. In 2010 China implemented a pilot program on a single vessel whereby it would utilize LNG – diesel dual fuel technology. The goal was to harness the economic and environmental benefits of LNG. Since then, China has placed into service 30 dual fuel vessels—including tugs, bulkers and a dredging vessel. Looking forward, China intends to have 2% of their domestic inland fleet operating on LNG dual fuel vessels by 2015, and 10% by 2020. Further still, last week, China discussed setting a goal for building 200-500 solely fueled LNG vessels.

The United States Begins to Embrace LNG as a Marine Fuel

The Obama Administration is embracing the concept of LNG as a marine fuel. The Department of Transportation through the Maritime Administration is sponsoring a demonstration project involving an ocean-going container ship that will be repowered to use LNG as a propulsion fuel. The Maritime Administration is also funding research related to LNG fuel transfer, infrastructure and training. This research is slated to be completed in 2014.

In addition to these two programs, let me provide you with some updates on LNG fuel projects in the United States:

This month, Ocean Tug & Barge Engineering Corp., of Milford, Massachusetts announced that it has been selected to design a new high speed, LNG-fueled articulated tug and barge (AT/B) container carrier for Minyan Marine LLC, of Houston, TX. It will be the world’s first LNG-powered AT/B.

Minyan Marine LLC is planning to operate high speed U.S. coastwise AT/B cellular container vessels on the East, Gulf and West Coasts of the United States. The AT/B’s barge portion will have a capacity of 1,056 TEUs. The barge will feature a set of LNG fuel tanks adjacent to the tug notch and will employ a barge to tug gas fuel transfer system. The barge will carry enough LNG to provide a round trip capability in gas fuel over the primary intended trade route.

New Orleans-based Harvey Gulf International Marine is preparing to launch the first U.S. flag vessel, an offshore vessel (OSV), to be operated primarily on natural gas. The LNG dual fuel Harvey Energy is to be rolled out very soon and is the first of at least six LNG-diesel dual fuel offshore supply vessels for Harvey Gulf. Harvey Gulf recently stated that it may order has many as ten of these vessels. Harvey Gulf estimates that the use of LNG will potentially save as much as $2.4 million per ship per year on fuel costs.

Less than a year ago, Totem Ocean Trailer Express (TOTE), a leading marine transportation company in the U.S., announced its commitment to construct two new LNG-powered container ships for the Puerto Rico trade, with options for three more vessels for additional domestic service. The agreement is with General Dynamics NASSCO shipyard in San Diego, California.
Once completed, the 764-foot-long containerships are expected to be the largest ships to be primarily powered by liquefied natural gas (LNG). Delivery is expected in 2015 and 2016.

In January of this year, NASSCO announced that it had finalized a contract with TOTE to design the conversion of the company’s two existing Orca Class, diesel-electric trailerships to liquefied natural gas (LNG) propulsion.

In September, Seabulk Tankers, Inc. announced that it had entered into a contract for the design and construction of two LNG-conversion ready product tankers. In addition, this past May, NASSCO announced that it had entered into a contract with American Petroleum Tankers for the design and construction of at least four product tankers that will be ready for conversion to use LNG as a marine fuel.

The Interlake Steamship Company, a Great Lakes carrier, announced that it is going to convert its vessels to LNG as the main propulsion fuel, with a goal of converting the first vessel by the spring of 2015. Interlake announced that it has reached an agreement in principle with Shell to supply liquefied natural gas (LNG) to support Interlake’s LNG-fueled vessels. When converted, these ships are expected to be the first LNG-powered ships on the Great Lakes and among the first in the U.S.

Ferry systems in the U.S. are also taking a serious look at constructing or retrofitting their vessels to accommodate LNG fuel.

The Washington State Ferry System is North America’s largest ferry operator and the third largest in the world. It has been reported that WSF burns more than 17 million gallons of ultra-low sulfur diesel a year. They are considering retrofitting up to six of their vessels to operate on LNG. Although the capital cost of the gas engines and gas storage tanks is higher compared to conventional diesel equipment and fuel storage tanks, they have concluded fuel cost savings can quickly pay back that capital investment.

According to WSF officials, fitting six ferries would cost $75 million and save nearly $8 million a year. The return on investment would take about a decade, with 20 years of service after that. If those six ferries are successful, others could convert to LNG as well. WSF has received conceptual approval from the U.S. Coast Guard to retrofit the propulsion system with new engines on the six Issaquah Class ferries to use LNG as a source of fuel.

The Staten Island Ferry System, run by New York City Department of Transportation, provides 20 million people a year with ferry service between Staten Island and lower Manhattan. They received a $2.34 million federal grant to help pay for a conversion of one of their ferries to operate on LNG. NY DOT estimates saving 50% on fuel costs as compared to using low-sulfur diesel.

Bunkering

With all transportation modes, there needs to be an adequate supply of fueling stations by which these modes can fuel and refuel their assets.

Vessel bunkering, natural gas-fueled vessels may, in concept, receive fuel in a number of ways. Methods used in Norway consist of a direct supply from LNG storage tanks located onshore, where vessels can refuel at their convenience, and using LNG tank trucks that deliver LNG similar to the method used to deliver diesel fuel. Additionally, vessel-to-vessel transfers whereby LNG is offloaded from a barge alongside a vessel also are being considered.

The Antwerp Port Authority recently announced that it had appointed EXMAR as its strategic partner for LNG bunkering in the port of Antwerp. Both partners have teamed up for the development of an LNG bunkership. They plan to start construction of the LNG bunkership early 2014.

Earlier this year, Houston, Texas-based Waller Marine announced it would build a small-scale LNG facility at the Port of Greater Baton Rouge, Louisiana, to fuel vessels. Waller plans to spend $200 million initially, though that amount could double as it adds capacity. Waller will work with existing port tenant Kanorado Corp. to turn Kanorado’s 11-acre facility into a 25-acre joint effort, with both realizing it would be mutually beneficial if they teamed up at the site. Kanorado’s terminal moves sand, rocks and other aggregate.

I hope that I have presented you with some meaningful insight on LNG marine fuel projects and developments. This sector is blossoming before our eyes and I am sure that there are so many more projects on the horizon.

I thank the Chinese maritime delegation and all the representatives from China who have participated in the transportation forum this week.

Thank you all and have a wonderful week.

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