Market, regulatory, and technological developments are acting in concert to accelerate the development of a liquefied natural gas ("LNG") bunker fuel market. U.S. domestic gas production has reached all-time highs with the country becoming the world's number one gas producer, which serves to keep natural gas prices relatively low and stable. U.S. and international regulations have tightened vessel emissions standards by implementing emission control areas ("ECAs") around certain coastal regions. Various U.S. and international shipyards are in the process of designing and building or refitting vessels with LNG-propulsion plants. Together, these evolving changes are giving LNG an inroad in the highly competitive bunker fuel industry. Meanwhile, regulatory programs are in the works to address new risks attendant to LNG-fueling operations.
The U.S. Energy Information Administration's ("EIA") Annual Energy Outlook projects that natural gas production from shale reserves will balloon total annual U.S. domestic production of natural gas from 23 trillion cubic feet in 2012 to approximately 32 trillion cubic feet in 2040. Assuming crude oil prices continue to climb over time, the EIA predicts that the price differential between natural gas and crude will provide a substantial incentive for the direct use of natural gas in transportation. LNG is natural gas converted to liquefied form to facilitate transportation and storage.
As implemented under the International Convention for the Prevention of Pollution from Ships (MARPOL Annex VI), ECAs now govern Northern European waters, coastal zones around the United States and Canada, and the U.S. Caribbean basin, which includes Puerto Rico and the U.S. Virgin Islands. Within these areas, vessels are required to limit emissions of sulfur dioxide (SOx), nitrogen oxide (NOx), and particulate matter (PM). In the North American ECA, by January 1, 2015, SOx must be reduced to 0.10% of exhaust emissions. Additionally, IMO NOx Tier II requirements apply to certain marine engines, and those standards are scheduled to tighten in the coming years.
In 2013, TOTE, which operates Jones Act vessels in the Alaskan and Puerto Rican trades, committed to the construction of two new LNG-fueled containerships and the conversion of two diesel-electric trailerships. These vessels will generate substantially less emissions per container, 100% less sulfur dioxide, 90% less nitrogen oxide, 91% less particulate matter, and 35% less carbon dioxide (CO2). Similar projections pertain to other LNG-powered vessels. These reductions enable LNG to comply with International Maritime Organization's ("IMO") Tier III limits, which apply to the NOx ECAs, while reducing carbon dioxide emissions by 20 to 25%. Meanwhile, other vessel operators are making or considering the switch to LNG power. Crowley is constructing the first U.S. flag, LNG-powered roll-on/ roll-off container (Conro) ships. Harvey Gulf is building the first U.S. flag, LNG-fueled offshore supply vessels (to be serviced by its own LNG-fueling station in Port Fourchon, Louisiana), and ferry services in New York and Washington state are studying whether to retrofit their vessels with LNG-propulsion systems.
Powering vessels with LNG dovetails both the ready availability of this natural resource and compliance with the newly-implemented ECA emissions standards. Classification Society DNV notes that while only 83 LNG-fueled vessels were in service as of October 2013, that number is expected to grow to more than 3,000 by 2025.
The European Union is well underway to developing a coordinated LNG-bunkering system. The EU is striving to install LNG-bunker stations in 139 sea and inland ports. The International Organization for Standardization ("ISO") has issued draft guidelines that set forth functional requirements for LNG-bunkering operations, and DNV has created a Recommended Practice to serve as a practical guide for developing design solutions and operating requirements for such operations.
In the U.S., the LNG-bunkering process is just getting started. No concerted government or industry efforts are in place to construct LNG fueling stations, though a fragmented bulk-LNG infrastructure may serve as a network foundation and a number of LNG-fueling terminals are under construction. Currently, there are no officially promulgated Coast Guard regulations or policy letters addressing LNG-fuel-transfer operations. Existing directives relate to vessels carrying LNG in bulk as cargo. The Coast Guard is currently working to promulgate three new LNG initiatives, the first two of which have resulted in draft policy letters:
1. A policy letter addressing LNG as a fuel standard (CG-OES Policy Letters 01-14);
2. LNG bunkering guidance (CG-OES Policy Letters 01-14, and 02-14); and
3. A Merchant Marine Personnel Advisory Committee ("MERPAC") directive concerning licensing standards for mariners handling LNG.
The Coast Guard's draft LNG-fuel-transfer guidance applies to waterfront facilities handling LNG (currently governed by 33 CFR Part 127, which sets forth LNG transfer procedures for handling LNG in bulk), and commercial vessels transferring LNG as fuel (current vessel guidance is found at 46 CFR Subchapter D, rules and regulations for tank vessels, and 46 CFR Part 154, which addresses safety standards for vessels carrying LNG in bulk and all vessels (foreign and domestic) using fuel in U.S. waters). Contemporaneously, the American Bureau of Shipping ("ABS") has published a study addressing the bunkering of LNG gas-fueled vessels in North America, which addresses, among other things, the variety of overlapping regulations that may apply to LNG-bunkering operations in some measure and the existing infrastructure in North America.
Unlike current diesel-fuel-bunker operations, the Coast Guard's draft guidance requires the facility or vessel from which LNG is transferred to submit proposed transfer procedures for approval to the Coast Guard Captain of the Port ("COTP"), who must also receive advance notice of the transfer operation's time and place. Before LNG-fuel-transfer operations are carried out, the vessel's owner or operator will also be required to submit the vessel's LNG-fuel-transfer system operations, emergency, and maintenance manuals to the COTP for review at least 30 days before transferring LNG. Additionally, the Coast Guard's draft-bunkering policy letter imposes training requirements on the entire crew with respect to gas-related safety, operational, and maintenance training.
As with typical liquid-bulk transfers, a declaration of inspection must be completed by the vessel receiving LNG fuel and the facility or vessel from which the LNG is received. Foreign vessels using LNG as fuel also must submit documentation to the Coast Guard that Class has reviewed and approved the vessel's LNG fuel system and confirmed that it complies with IMO interim guidelines on "Safety for Natural Gas-Fueled Engine Installations in Ships." For U.S. flag vessels, this process will be employed in conjunction with issuing the vessel's certificate of inspection. U.S. vessels must meet the Coast Guard's policy guidance letter No. 01-12 addressing natural gas fuel system design criteria.
Nevertheless, LNG-refueling operations carry a variety of risks, including, among others, LNG spills and leaks (due to a pressure surge in transfer lines, incorrect cooling down and connection procedures, over-filling and over-pressurization of a ship's LNG storage tanks, and possible rollover in a ship's LNG storage tanks caused by loading LNG of different densities), structural failure due to high temperatures, fire and explosions (potential boiling liquid expansion vapor explosion ("BLEVE") event, and possible vapor cloud explosion and blast loads), as well as cryogenic hazards (brittle steel exposed to an LNG spill, and frostbite or asphyxiation from liquid or cold vapor spills). Consequently, risk assessments and procedures for handling these new hazards will be an integral part of the LNG-fueling process.
Additionally, depending upon the supporting modes of transport (tank trucks, rail cars) and facilities (shore tanks, portable tanks), numerous other regulations and agencies may be implicated in the process, both for safety and security reasons.
With tighter air emissions standards, an incredible abundance of natural gas, and increasing economic investment in LNG-propulsion systems, LNG will soon fuel a sizeable portion of the maritime fleet. Regulatory oversight is gradually catching up to these developments and within a few short years, "fill 'er up" will take on a whole new meaning.
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