Oil price fall hits LNG competitiveness as marine fuel

A sharp drop in crude oil prices in early March has decreased LNG competitiveness in the marine fuels market, with LNG bunker prices significantly narrowing their discount to competing marine fuels in recent weeks.

The price differential between IMO-compliant marine fuels and LNG delivered on board though ship-to-ship (STS) transfer tightened in recent weeks, with the Argus northwest European LNG bunker delivered-on-board (dob) price assessed at $5.655/mn Btu on 19 March, around $1.405/mn Btu below the Argus Rotterdam gasoil bunker price, in from $4.92/mn Btu on 5 March.

A sharp drop in crude oil in early March, after Russia and Saudi Arabia failed to agree on a production cut aimed at rebalancing the oil market amid the coronavirus outbreak, has weighed heavily on the prices of IMO-compliant marine gasoil (MGO) and heavy fuel oil. The Argus North Sea Dated price closed at $22.04/bl on 23 March, down from $51.52/bl at the beginning of the month.

Cheaper small-scale LNG prices compared with the price of other marine fuels sparked renewed interest among shipowners in LNG as a solution to comply with the new IMO rules, which require the use of fuels with very low sulphur content. But weaker oil prices, if sustained, could decrease LNG's competitive advantage against compliant fuels or scrubbers, which have smaller capital investment than installing LNG-powered engines.

The differential between the barge price of MGO with a 0.5pc sulphur content in northwest Europe and the Argus northwest Europe free-on-truck (fot) MGO equivalent price was $91/t on 19 March, in from $126/t a week earlier and $247/t on 5 March. The differential was assessed at $292/t on average in February, $334/t in January and around $309/t in 2019.

A tighter differential between the price of IMO-compliant marine fuels and small-scale LNG prices may not be enough to cover higher logistical costs for bunkering operations for LNG compared with other marine fuels, which typically absorb an ample portion of the differential between the two prices.

An STS operation requires chartering a bunkering vessel, which may cost as much as $20,000-30,000/d based on existing long-term charter contracts, market participants said. But the long-term charter rate is effectively a sunk cost, and some firms may opt to sub-charter a vessel below that price for optimisation purposes, some said.

Assuming the refuelling requires no more than one day and the bunkering operation is for at least 500m³ of LNG, this would be equivalent to STS logistical costs adding as much as €6-9/MWh to the fot price, based on currency exchange rates at present and excluding reloading fees at the terminal.

By Livia Gallarati

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