"I will survive": LNG attracts shipowners despite ongoing scrutiny

Maersk pivots towards LNG

The recent shift by Maersk towards LNG-fuelled container vessels while deferring its order for methanol-powered ships indicates that the shipping companies are circumventing their bets on alternative fuels by investing in LNG.

The slowdown in green methanol production due to high processing costs, the absence of economies of scale and technological bottlenecks led Maersk to defer its previous order for about 15 methanol-fuelled ships. Reportedly, the company is in talks with Seaspan to build about 23 LNG dual-fuel container ships. Moreover, the commitments to green-methanol supply into the market by 2025 seem overpromising amid persistent economic and technological barriers (specifically for biomass gasification), leading to slower-than-expected growth.

Maersk’s pivot has created a butterfly effect in the industry, with other companies also evaluating their options and could follow suit. Shipyards and engine manufacturers have also spent extensive resources on R&D for the technology. The current orderbook also indicates the growing traction for LNG among shipowners as 560 LNG-fuelled vessels are on order, constituting 57% of the alternative-fuelled fleet, adding over 1,100 LNG-fuelled vessels to be in service by 2029.

On the contrary, the readily available LNG is enticing shipowners to bank upon it over alternative fuels as, in the end, it all comes down to cost and economics. Despite the growing scrutiny over emissions, LNG appears to be a reliable fuel for the transition, backed by technological breakthroughs, fuel availability and stable pricing, which is expected with the addition of high incremental capacity.

While LNG alone cannot achieve the zero-carbon shipping ambition, it will play a pivotal role in reducing emissions until other fuels and technologies develop. Efforts to minimise the methane slippage are underway, with vessels opting for reliquefaction system retrofits and installing Exhaust Gas Recirculation (EGR) and Selective Catalytic Reduction (SCR) systems. Shore power is also a high-potential concept that can eliminate vessel emissions at ports. Eventually, an increase in low-carbon bio-LNG or renewable synthetic e-LNG in the future will further reduce the emissions in LNG-fuelled vessels, proving that LNG as an alternative fuel is an attractive bet to tackle regulatory hurdles, provided that shipowners can ensure a guaranteed supply of bio-LNG and synthetic LNG.

Talking of regulations, the EU ETS and FEM aim to curtail GHG emissions from the shipping industry. While the EU ETS has already been enforced on 1 January 2024, the FEM, which will be implemented in 2025, is becoming a point of concern for shipowners as it targets ‘methane slip’ from LNG-fuelled ships (release of unburnt methane from engines and methane leakage during loading/discharge of cargoes). 

EU ETS impact analysis: LNG shipping readjusting under regulatory regime 

According to Drewry’s analysis of 2023 MRV data, the emission compliance costs for LNGCs under the EU ETS reduced 20% in 2023 compared to 2022. The decline contradicts earlier expectations for costs to rise, in line with growing emissions in Europe, especially with the region switching to LNG from piped gas supply since the Russian-Ukraine war.

Phasing out steam turbine LNGCs from European trade is the primary driver for a reduction in EU ETS compliance costs. Among LNGCs engaged for European imports, the share of steam turbine carriers declined to 17% in 2023, while the share of XDF/MEGA carriers increased to 27%. 

The contracting share indicates the gradual phase-out of steam carriers in Europe as the operational plant efficiency of these vessels has become a cause of concern with the launch of CII and EU ETS, primarily due to their high GHG intensity. No significant impact was seen on the Diesel-electric carriers (DFDE) due to the EU ETS, but they will be under threat, especially from 2025, when FEM will impose stricter restrictions on ‘methane slip’.