Outfitting the world with small-scale LNG and bunkering vessels

Liquefied natural gas (LNG) has long been the frontrunner among marine transitions fuels, helping ship owners and operators comply with international regulations and limit their CO₂ emissions.

While most LNG is produced in the Middle East, Australia, Russia, Southeast Asia and the United States, and exported to Asia and Europe, demand is growing worldwide. This has made the question of LNG transportation central to the market’s development.

Liquefied natural gas carriers are the most common form of transportation, delivering LNG from export terminals to import terminals. Two further solutions have gained traction: small-scale delivery and bunkering vessels.

However, the economic realities of complementary LNG transportation methods loom large, as ship owners weigh the costs and benefits of investing in new vessels. 

Defining small-scale and LNG bunkering

While large LNG carriers can carry up to 266,000 m³ of cargo – with 174,000 m³ being the most standard capacity – small-scale LNG vessels typically transport no more than 30,000 m³. These ships take small parcels of LNG from import terminals – a process known as “break-bulk” – and transport them to areas with no access to natural gas.

This enables users in remote locations and on small islands to obtain LNG without building expensive or impractical infrastructure, and thereby benefit from lower regional emissions.

LNG bunkering vessels are designed to facilitate ship-to-ship transfer of LNG as marine fuel, allowing LNG-powered vessels to refuel in port or at anchorage.

Major bunkering hubs already exist in Northern Europe, North America and East Asia, with new hubs being developed in Southeast Asia. Bunkering vessels represent 1.5% of the growing LNG carrier fleet, with increasing numbers of newbuilds and conversions underway.

A slate of economic questions

Small-scale LNG and bunkering vessels represent a significant area of opportunity for ship owners and operators, as the global LNG trade continues to grow despite setbacks in 2020. Marine stakeholders, however, face financial uncertainty when investing in vessels for this as-yet underdeveloped section of the LNG market.

A primary point of hesitation for marine stakeholders is the expense of building small-scale LNG and bunkering vessels, as compared to standard LNG carriers. An LNG bunkering vessel with 7,000 m³ storage capacity can cost upwards of $58 million USD, with a long return on investment (ROI) period.

While most onboard technology for LNG transportation is mature, it is not uniform across manufacturers, making it difficult to efficiently construct multiple small-scale and bunkering vessels at once. Further, the materials shipyards can use on newbuilds are strictly regulated, in order to ensure ship safety and compliance with international standards. 

Conversions into small-scale LNG and bunkering vessels can also represent a significant investment, depending on the type, age and size of a vessel. Some ships are well-adapted to conversion. For example, oil tankers only require the addition of cargo containment tanks and an LNG transfer system on the main deck to provide LNG bunkering.

Other ship types, however, require costly modifications to add the necessary containment, propulsion and transfer systems. There are also challenges with converting smaller vessels: they have limited space for the addition of tanks, and they raise significant questions of maintaining ship stability and structural soundness.

Finally, older vessels are more expensive to adapt to LNG transportation, requiring more modifications and sometimes the replacement of outdated technology.

From a market perspective, ship owners, operators and charterers are further considering the future of LNG supply and demand when taking on small-scale and bunkering vessel projects. Substantial increases in global LNG supply have steadily lowered LNG prices for years, with the exceptional circumstances of 2020 causing further drops in price.

Despite this, industry analysts currently predict an increase in demand for LNG^[1], with gas prices rising incrementally as oil prices recover. Key players in Asia, the Middle East and North America are predicting continued regional growth in the coming years, with global LNG trade expected to increase by 21% from 2019-2025. Still, market conditions and gas prices can fluctuate rapidly, leaving many owners cautious when approaching LNG transportation projects.

The future of small-scale LNG and bunkering vessels

The development of the LNG supply chain has long been a challenge for the shipping industry, as maritime stakeholders set out to build a market from the ground up. LNG transportation is using the foundations laid by standard gas carriers and distribution networks to build the small-scale and bunkering vessels that will increase LNG availability worldwide.

To take advantage of increasing demand for LNG – and reduce economic roadblocks – marine actors will need to act collectively. By standardizing equipment, improving distribution networks and increasing vessel efficiency, the shipping industry can drive down the cost of LNG transportation vessels and make the most of a burgeoning market.

^[1]Gas 2020: Analysing the impact of the Covid-19 pandemic on global natural gas markets, International Energy Agency, June 2020.