From The Wall Street Journal

The global shipping industry could become a new market for liquefied natural gas, thanks to a drastic change in maritime law that aims to curb air pollution.

Major cruise liners and the world’s biggest freight companies have ordered 125 new LNG-powered vessels and another 119 are already in operation, according to current figures from maritime consultancy DNV GL. That is partly because new regulations taking effect in 2020 will reduce the maximum amount of sulfur permitted in the oil used by ships from 3.5% to 0.5%.

LNG is gas that is supercooled until it turns into liquid. While LNG use as a shipping fuel is still too small to affect its prices, the projected uptake is supporting the outlook of companies like Royal Dutch Shell RDS.A -0.15% PLC that LNG demand will continue to grow.

The shipping industry currently consumes about 5 million barrels a day of oil, and most of the industry is expected to meet the new obligations by either switching to more expensive low-sulfur fuels or installing ”scrubbers” that clean sulfur out of exhaust fumes.

But the rule changes will make LNG a cost-competitive option for shipping fuel. Analysts say that just converting 5% of the global fleet to run on LNG would create a new market equivalent to the fifth-largest in the world, behind major consumers Japan, China, Korea and India.

Carnival Corp.’s CCL -0.81% AIDAnova is currently under construction at a shipyard in Papenburg, Germany. When the 1,106-foot vessel launches later this year, it will be the first cruise ship fully powered by LNG. Carnival, the world’s largest cruise company, plans to take delivery of 11 new LNG-powered ships between now and 2025.

Cruise passengers will be able to enjoy the difference of journeying under LNG power, Steve Hill, a vice president at Shell, said in an interview earlier this year.

“If your customer proposition is to have people lying on the deck and enjoying the sun, it’s much nicer to not have pollution from fuel oil being spread all over them all day,” he said.

Carnival isn’t alone: Swiss-based MSC Cruises said in June it ordered what will be its fifth LNG-powered vessel. Royal Caribbean also said this year that it has two LNG-powered cruise liners on order.

In freight, Siem Industries is building LNG-fueled car carriers for Volkswagen AG . France’s CMA CGM SA has ordered nine new ultra-large LNG-powered container ships and has struck a 10-year LNG supply deal with French oil and gas producer Total. TeekayCorp. , one of the biggest shipowners, and Sovcomflot, Russia’s largest shipping company, also have LNG vessels in order.

LNG does faces challenges in the maritime industry. Credit Suisse oil and gas analyst Saul Kavonic said many shipping companies would meet the emissions rules by fitting their vessels with scrubbers. Carnival, for example, will use scrubbers on 69 of its 103 ships.

“Only a very small percentage of the international shipping fleet will adopt LNG as a fuel over the next five years,” Mr. Kavonic said.

The lack of ”bunkering”—the infrastructure for storing and refueling LNG—is likely the biggest hurdle. LNG requires dedicated facilities to store the fuel at the temperatures needed to maintain its liquid form and load it onto vessels.

LNG fuel tanks also take up almost twice as much space as their oil equivalents, which would impact the design of new vessels. Ships powered by LNG are also more expensive than traditional vessels. Introducing LNG to a fleet requires retraining of engineers and crews.

Shipping companies are also used to working in the highly liquid oil market, where supply is easy to source and deep futures and hedging markets help manage their exposure. In contrast, until recently LNG has been dominated by decadeslong contracts and its futures market is still nascent.

But short-term, more flexible LNG sales are becoming more common. Producers are increasingly willing to trade single LNG cargoes. The percentage of LNG cargoes sold on the spot market has grown from just over 10% in 2010 to almost 25% in 2017, according to Shell.

Tom Strang, who has been leading Carnival’s LNG strategy, said the nature of the LNG market requires longer-term contracting and planning.

Still, LNG producers are eyeing the industry as a promising new source of demand. Shell’s Mr. Hill said the energy giant is betting LNG will grow at a faster pace than oil. Shell is working with Carnival to source LNG and developing bunkering facilities for its cruise ships.

“Historically LNG has struggled to compete with heavy fuel oil which is cheap,” said Mr. Hill. “But in this new world, where the costs of the alternatives are a lot more expensive, LNG will be a lot more competitive. We’re starting to see a lot of interest and a lot of activity.”


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