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Freshfields Sustainability

| 3 minutes read

Marine LNG as shipping fuel: a new market

As the world seeks to deliver the Paris Agreement, every industry will be transitioning to lower-carbon operations. Shipping has traditionally been seen as slow to move away from carbon-intensive bunker fuel. R&D continues into developing vessels powered by hydrogen and electric power, but at this stage those technologies are neither practical nor cost-effective for marine transport. However, LNG (liquified natural gas) is emerging as a lower-carbon alternative fuel during a period of expected transition to lower- or zero-emission vessels. A number of shipping lines including MOL, Hapag-Lloyd and ZIM Shipping have all recently purchased LNG-powered vessels.

As a consequence, shipping lines are now looking to lock in long term LNG supply arrangements to ensure reliable fuel sources, and LNG fuel suppliers are looking for keystone long-term customers to justify investing in the LNG bunkering vessels and related infrastructure needed to fuel these ships.

It will take time for the market to develop standard positions on the key risk allocation issues in the supply of LNG as vessel fuel, both for these long-term contracts and what is likely to develop into a spot market for more flexible supplies. Some of these positions will naturally follow the LNG SPA market quite closely, especially on the more mechanical procedures such as nominations for specific delivery dates. However, based on the nature of the technology and the way in which the LNG SPA market has evolved, some of the key areas for negotiation and consideration in these new marine LNG bunker fuel arrangements will be as follows:

  • Price. Given the regional nature of LNG pricing and the global nature of shipping, what is the right index to use for fuel supply? What is the appropriate margin to reflect the supplier’s costs of providing and maintaining bunkering-specific infrastructure? How will periodic price reviews feature in this market?
  • Compatibility of vessels. The infrastructure for delivering fuel from the bunkering vessel will need to be compatible with the receiving vessel. As international standards for compatibility evolve, the responsibility for adapting either vessel to maintain this compatibility will need to be clearly allocated.
  • Bunkering location. Is there flexibility for either the supplier to supply from different locations along a shipping route, or for the purchaser to nominate different delivery locations?
  • Failure to supply. What is the supplier’s liability if it fails to provide fuel as nominated by the buyer, and what are its mitigation options? The shipping market is so dependent on being able to deliver cargo on schedule, and the availability of LNG fuel bunkering locations is likely to remain limited until the market develops further, so establishing a fair allocation of liability for supplier failure will be crucial.
  • Failure to take. If a ship is delayed past the nominated arrival window, is there a sufficiently liquid market in potential buyers, or adequate flexibility in bunker storage management, for the supplier to take the risk of the buyer not taking a particular delivery? What form of  buyer penalty or compensation regime would be appropriate given the relevant market dynamics?
  • Flexibility. How do the buyer and supplier flex the volumes delivered/received – for operational reasons in each delivery, for logistical reasons as shipping routes and plans change, for economic reasons as shipping demand and fuel prices fluctuate? Is there an ability to make up/carry over volumes not taken, or any obligation to supply additional volumes when requested?
  • Force majeure. To what extent is a supplier reliant on a specific supply chain and so entitled to relief if that supply chain is disrupted? As is the case in the existing LNG SPA market, this tends to depend on the circumstances: whether the pricing is conducive to the supplier taking this risk and sourcing LNG from elsewhere if required, the supplier’s portfolio, and the availability of alternative sources close to the bunkering location, among other factors.
  • Future fuels. As the decarbonised fuel market develops, what are the arrangements for transitioning from LNG to even cleaner fuels (e.g. green methanol)?

As new fuels, from marine LNG to hydrogen and hydrogen derivatives, start to become sufficiently widely used to justify new markets, it is an exciting time for both suppliers and consumers to establish commercial positions which will make their ongoing participation in the energy transition sustainable. We are looking forward to continuing to work with our clients and their counterparties to help develop these new markets.


energy and natural resources, climate change