CERI Commodity Report Natural Gas

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1 CERI Commodity Report Natural Gas October Emissions Compliance Options for the Global Shipping Industry The vast majority of the world s ships currently operate on high sulphur heavy fuel oil. However, increasingly strict emission regulations affecting the global shipping industry are likely to alter the current bunker fuel market. This article provides an overview of existing and pending international emissions regulations on sulphur oxides, nitrogen oxides, and carbon dioxide, and reviews three compliance options, including the use of LNG as a bunker fuel. The International Maritime Organization (IMO) is the United Nations agency responsible for the safety and security of shipping, and the prevention of marine pollution by ships from operation or accident. Since the International Convention for the Prevention of Pollution from Ships (MARPOL) was adopted by the IMO in 9, several amendments have been made. The Protocol of 99, including Annex VI Regulations for the Prevention of Air Pollution from Ships (MARPOL Annex VI), entered into force in and places firm limits on the emissions of sulphur oxides (SOx) and nitrogen oxides (NOx) from ship exhausts, and prohibits deliberate emissions of ozone depleting substances. Global SOx emission limits under MARPOL Annex VI decreased from. percent m/m (, ppm) to. percent m/m (, ppm) in, and will continue to decrease progressively to. percent m/m (, ppm) by or, depending on the results of a review of low sulphur fuel oil availability, which will be completed by. CERI Commodity Report Natural Gas Editor-in-Chief: Mellisa Mei (mmei@ceri.ca) In the Baltic Sea Emission Control Area (ECA), and the North Sea ECA, the limit on SOx emissions decreased from. percent m/m (, ppm) to percent m/m (, ppm) in. An amendment to the Annex of the Protocol of 99 was adopted in to create a North American ECA, illustrated in Figure. As of August,, the SOx content of bunker fuels used in all ships operating in the North American ECA must not exceed the limit of percent m/m (, ppm). Figure : North American ECA Source: United States Environmental Protection Agency Emission limits will apply to Puerto Rico and the United States Virgin Islands (the United States Caribbean Sea ECA) in January. Beginning January,, the SOx emission limit will be reduced to. percent m/m (, ppm) in all four of the established ECAs. Table summarizes the ECAs designated by the IMO under Annex VI. Additional ECAs around the world are also being considered. Contents Featured Article... Natural Gas Prices... Weather... Consumption and Production... Transportation... Storage... Liquefied Natural Gas... Drilling Activity... Relevant Independent Objective

2 Page Table : Annex VI Prevention of Air Pollution from Ships Emission Control Area Baltic Sea (SOx) North Sea (SOx) North American (SOx, and NOx and PM) United States Caribbean Sea ECA (SOx, NOx and PM) Adopted Date of Entry into Force In Effect From September, May 9, May 9, 99 July, November, November, March, August, August, July, January, Source: International Maritime Organization January, In addition to limits on SOx emissions, MARPOL VI also sets global limits for NOx emissions from installed marine diesel engines over kv. NOx emission limits, which depend on both a ships construction date and its engine speed, are defined in Tiers. Current Tier II NOx emission limits, for new engines constructed on or after January,, and Tier III NOx emission limits, for new engines constructed on or after January,, represent a percent and percent decrease in NOx emissions, respectively, compared to Tier I emission limits. Tier III NOx emission limits will only apply to specified areas with NOx emission controls, beginning on January,, while Tier II limits will apply outside of these areas. Table summarizes the IMO s NOx limits. EEDI reductions relative to a reference EEDI will be based on the ship type and dead weight tonnage (DWT), and will increase from in Phase (January, to December, ) to between and percent in Phase (January, to December, 9), to percent in Phase (January, to December, ), and to percent in Phase (January, onward), with the lower reduction factor applying to smaller ships. The annual reduction in CO emissions is projected by the IMO to reach up to million tonnes by, and million tonnes by compared to the business as usual scenario. In, high sulphur HFO accounted for percent of the total demand for marine bunker fuel. Ship owners may choose to continue operating on HFO if approved sulphur emission abatement technologies, such as exhaust gas cleaning systems (see Figure ), are installed to decrease the level of emissions to that prescribed under MARPOL Annex VI. Figure : Exhaust Gas Cleaning System Table : MARPOL Annex VI NOx Limits Total Weighted Cycle Emission Limit (g/kwh) Ship Construction n=engine's rated speed (rpm) Tier Date on or After n< n= to 999 n I January,.n -. (e.g., rpm.) 9. II January,..n -. (e.g., rpm 9.). III January,. 9.n -. (e.g., rpm.) Source: International Maritime Organization Industry wide CO emission reduction targets have also been created under MARPOL Annex VI. In July, 9 of the Parties to MARPOL Annex VI, including Canada and the US, voted in favour of amending the Convention to include new regulations on energy efficiency standards for ships. Together these countries represent approximately percent of CO emissions from the global shipping sector. Beginning on January,, energy efficiency measures will apply to merchant ships of gross tonnes and above, including the Energy Efficiency Design Index (EEDI) for newly designed ships, and the Ship Energy Efficiency Management Plan (SEEMP) for all ship operations. Source: Det Norske Veritas 9 Although the installation of exhaust gas scrubbers requires a substantial initial capital investment, this compliance option would result in lower operating costs, as HFO is relatively inexpensive compared to low sulphur fuel oils. Exhaust scrubbers, using water and/or a dry chemical, have the ability to reduce sulphur emissions by nearly percent, and particulate matter emissions by percent to 9 percent. However, the following concerns have been identified: the disposal of scrubber effluent in ECAs, the inability of conventional scrubbers to meet emission standards at high exhaust gas discharge flows, corrosion of inert gas scrubbers and associated piping systems, large space requirement, and greater power consumption and CO emissions., CERI Commodity Report - Natural Gas

3 Page Because exhaust gas scrubbers have little impact on NOx emissions, investments in NOx reducing technologies, such as selective catalytic reduction systems (SCR), would also be required in order to comply with the IMO s NOx emission limits. This technology has the ability to decrease the emission of NOx by to 9 percent to less than g/kwh. Additionally, SCR systems allow engine settings to be adjusted to reduce fuel consumption, resulting in lower CO emissions. A reduction in SOx emissions can be achieved by switching from HFO to lower sulphur fuel oils, such as marine gas oil or marine diesel oil, with a SOx content equal to or below the MARPOL Annex VI SOx limit. This method requires little to no modifications to existing fuel systems. According to a ship owners survey conducted by Lloyd s Register, switching to low-sox fuel oil is viewed as a short-term compliance option. The supply of compliant fuels is already limited. As emission limits decrease over time, the global supply of low-sox distillate fuels may be inadequate for meeting the demands of the shipping industry, leading to fuel shortages and higher operating costs for ship owners. Natural gas is the cleanest burning hydrocarbon, and interest in its use as a bunker fuel has increased dramatically over the last few years. LNG carriers have used boil-off gas from LNG cargoes (. percent per day) as fuel for more than four decades. In order to comply with existing and pending emission regulations, other ship types have been converted to operate on LNG or allow dual fuel use (diesel/lng), and the use of LNG bunkering fuel is expected to expand over the long term. During the last two years, the number of ships operating on LNG has more than doubled. Currently, there are LNG-fueled ships operating around the world, and another confirmed newbuild orders, excluding LNG carriers. Passenger ferries currently account for the largest share of LNG-fueled ships, excluding LNG carriers. Tarbit Shipping s Bit Viking ship was the world s first chemical tanker to be converted from HFO-fueled to LNG -fueled in October. Since the conversion to LNG, the, DWT tanker has been able to achieve a percent to percent reduction in GHG emissions, percent reduction in sulphur emissions, 9 percent reduction in nitrogen oxide emissions, and 99 percent reduction in particulate matter emissions. A recent study by Lloyd s Register identified potential ports for LNG bunkering infrastructure, and estimated the demand for new orders of LNG-fueled ships, as well as the demand for LNG for deep sea shipping to, under three scenarios. The demand for new LNG-fueled ships ranged from to,9 ships constructed between and, and LNG demand for deep sea trade ranged from. million tonnes per year to million tonnes per year by, depending on the scenario analyzed. Under the Base Scenario, which assumes that no additional ECAs, beyond the four existing/pending ECAs, are assigned, and a global sulphur emission limit of. percent is set in, new LNG-fueled ships (. percent of global deliveries) are constructed between and. The same scenario predicts that the demand for LNG for deep sea trades will increase to million tonnes by. This volume is approximately equal to the combined LNG imports of China and India in. The two major challenges facing the LNG bunkering market are the lack of LNG refueling infrastructure, and the need to develop regulations on LNG bunkering. Addressing these issues will take many years, but progress is being made. In anticipation of growing demand for LNG in the shipping industry, the Port of Rotterdam in the Netherlands, the Ports of Gothenburg and Nynashamn, the Port of Zeebrugge in Belgium, and the Port of Singapore have all announced plans to invest in LNG bunkering infrastructure. These ports are anticipated to begin offering LNG bunker fuel by. In, Resolution MSC (), "Interim Guidelines on Safety for Natural Gas-Fueled Engine Installations in Ships" was adopted by the IMO's Maritime Safety Committee. The IMO s International Code of Safety for Ships using Gases or other Low Flashpoint Fuels Gas as Ship Fuel (IGF-Code) is expected to be finalized in. Ship owners preparing for increasingly stringent international emission regulations are weighing the costs and benefits of each compliance option. Emission reductions can be achieved through the use of exhaust cleaning systems, switching to low SOx marine distillate fuels, or using LNG bunker fuel. Interest in the use of LNG as a bunker fuel has been growing in the shipping industry due to the abundant global supply, and lower price of natural gas, relative to other fuel options. Over the long run, regulatory changes and shipping economics will likely incentivize the use of LNG as a shipping fuel, replacing a portion of the current bunker fuel market. Relevant Independent Objective

4 Page Endnotes Designation of North American Emission Control Area to Reduce Emissions from Ships, United States Environmental Protection Agency, March, regs/nonroad/marine/ci/f.pdf Special Areas under MARPOL, International Maritime Organization, pollutionprevention/specialareasundermarpol/pages/ Default.aspx Designation of North American Emission Control Area to Reduce Emissions from Ships, United States Environmental Protection Agency, March, regs/nonroad/marine/ci/f.pdf Nitrogen Oxides (NOx) Regulation, International Maritime Organization, environment/pollutionprevention/airpollution/pages/nitrogen -oxides-%nox%9-%e%%9-regulation-.aspx Breakthrough at MEPC, International Maritime Organization, pollutionprevention/airpollution/pages/breakthrought-atmepc-.aspx Resolution MEPC. () International Maritime Organization, July,, Conventionhttp:// MediaCentre/HotTopics/GHG/Documents/eedi% amendments%resolution%mepc%.pdf Breakthrough at MEPC, International Maritime Organization, pollutionprevention/airpollution/pages/breakthrought-atmepc-.aspx LNG-fuelled deep sea shipping The outlook for LNG bunker and LNG-fuelled newbuild demand up to, August, Lloyd s Register. 9 Marpol / Annex VI Regulations for the Prevention of Air Pollution from Ships Technical and Operational Implications, DNV Understanding Exhaust Gas Treatment Systems Guidance for Ship Owners and Operators, Lloyd s Register, June. Marpol / Annex VI Regulations for the Prevention of Air Pollution from Ships Technical and Operational Implications, DNV SOx, Det Norske Veritas, maritime/servicessolutions/maritime_environment/sox/ Understanding Exhaust Gas Treatment Systems Guidance for Ship Owners and Operators, Lloyd s Register, June. LNG-fuelled deep sea shipping The outlook for LNG bunker and LNG-fuelled newbuild demand up to, August, Lloyd s Register. Blikom, Lars Petter, World LNG Fueled Fleet, DNV, December,, Bit Viking - World s First LNG Product Tanker Enters into Service, g Captain, November,, viking-worlds-product-tanker/ Relevant Independent Objective

5 Page US$/MMBtu Henry Hub/AECO Beginning of Next Month Spot Price Henry Hub 9 AECO-C Differential - Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- Jan- US$/MMBtu Henry Hub/Chicago Beginning of Next Month Spot Price Henry Hub Chicago Differential Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- Jan- SOURCE: CERI, Pla s Gas Daily Price Guide. SOURCE: CERI, Pla s Gas Daily Price Guide. US$/MMBtu Henry Hub/Rockies Beginning of Next Month Spot Price Henry Hub 9 Rockies Differential - Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- Jan- US$/MMBtu 9 - Henry Hub/Southern California Beginning of Next Month Spot Price Henry Hub Southern California Differential Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- Jan- SOURCE: CERI, Pla s Gas Daily Price Guide. SOURCE: CERI, Pla s Gas Daily Price Guide. Relevant Independent Objec ve

6 Page Canadian Heating Degree Days -Year Avg. Canadian Heating Degree Days vs Residential and Commercial Consumption Degree Days, Degree Days Consumption CERI Estimate, Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul- Jan- Jul- SOURCE: Canadian Gas Associa on. SOURCE: CERI, Canadian Gas Associa on, Sta s cs Canada. US Heating Degree Days US Heating Degree Days vs Residential and Commercial Consumption, -Year Avg. 9 Degree Days, Degree Days Consumption CERI Estimate, Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul- Jan- Jul- SOURCE: Canadian Gas Associa on, NOAA. SOURCE: CERI, NOAA, EIA. CERI Commodity Report Natural Gas

7 Page SOURCE: Environment Canada. SOURCE: Environment Canada. SOURCE: NOAA. SOURCE: NOAA. Relevant Independent Objec ve

8 Page SOURCE: NOAA. SOURCE: Environment Canada. SOURCE: NOAA. CERI Commodity Report Natural Gas

9 Page 9 Canadian Consumption Canadian Marketable Production By Sector By Province/Region Industrial & Power Commercial Residential BC, Yukon, NWT AB SK E. Coast Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul- Jan- Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul- Jan- SOURCE: Sta s cs Canada. SOURCE: Sta s cs Canada, NEB. US Consumption By Sector Industrial Electric Power Commercial Residential US Marketable Production US Total Louisiana GOM Federal Waters Texas Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul- Jan- Jul- SOURCE: EIA. SOURCE: EIA. Relevant Independent Objec ve

10 Page BC, Yukon, NWT Marketable Production AB Marketable Production SOURCE: Sta s cs Canada, NEB. SOURCE: Sta s cs Canada, NEB. SK Marketable Production East Coast Marketable Production SOURCE: Sta s cs Canada, NEB. SOURCE: Sta s cs Canada, NEB. CERI Commodity Report Natural Gas

11 Page System Field Receipts TransCanada + Westcoast; Monthly Average Alberta System Deliveries Empress McNeil AB-BC Alliance Nov- Jan- Mar- May- Jul- Sep- Nov- SOURCE: CERI. SOURCE: CERI. Canadian Gas Exports to the US Canadian Gas Exports to the US By Export Point - West Kingsgate Monchy Elmore Huntingdon 9 By Export Point - East Emerson Iroquois Others Niagara 9 Oct- Dec- Feb- Apr- Jun- Aug- Oct- Oct- Dec- Feb- Apr- Jun- Aug- Oct- SOURCE: NEB. SOURCE: NEB. Relevant Independent Objec ve

12 Page US Imports of Canadian Gas Average Canadian Export Price By US Region By US Region West MidWest East C$/GJ West MidWest East Oct- Dec- Feb- Apr- Jun- Aug- Oct- Oct- Dec- Feb- Apr- Jun- Aug- Oct- SOURCE: NEB. SOURCE: NEB. Total US Pipeline Gas Imports Canada Mexico Canadian Gas Imports By Import Point Courtright Sarnia St. Clair Other Sep- Nov- Jan- Mar- May- Jul- Sep- Oct- Dec- Feb- Apr- Jun- Aug- Oct- SOURCE: NEB, EIA. SOURCE: NEB. CERI Commodity Report Natural Gas

13 Page Canadian Working Gas Storage Canadian Storage by Region -Year Avg. West East Nov- Jan- Mar- May- Jul- Sep- Nov- SOURCE: CERI, Pla s Gas Daily. SOURCE: CERI, Pla s Gas Daily. US Lower- Working Gas Storage US Storage by Region,,,, -Year Avg., East West Producing Region,,,,,,,,,,, Nov- Jan- Mar- May- Jul- Sep- Nov- SOURCE: CERI, Pla s Gas Daily. SOURCE: CERI, Pla s Gas Daily. Relevant Independent Objec ve

14 Page Western WC_IJ_WD Canada Storage Injections/Withdrawals -Year Avg. - - Eastern Canadian Storage Injections/Withdrawals -Year Avg SOURCE: CERI, Pla s Gas Daily. SOURCE: CERI, Pla s Gas Daily. Canadian Storage -Year Avg SOURCE: CERI, Pla s Gas Daily. CERI Commodity Report Natural Gas

15 Page US Western Consuming Region Storage US Eastern Storage Year Avg Year Avg. SOURCE: CERI, Pla s Gas Daily. SOURCE: CERI, Pla s Gas Daily. US Producing Region Storage -Year Avg. US Storage Injections/Withdrwals -Year Avg SOURCE: CERI, Pla s Gas Daily. SOURCE: CERI, Pla s Gas Daily. Relevant Independent Objec ve

16 Page Eastern US LNG Imports By Facility US GOM LNG Imports By Facility BCF Cove Point Elba Island Everett NE Gateway Neptune Oct- Dec- Feb- Apr- Jun- Aug- Oct- BCF Freeport Lake Charles Sabine Pass Cameron Golden Pass Gulf LNG Oct- Dec- Feb- Apr- Jun- Aug- Oct- SOURCE: US DOE. SOURCE: US DOE. US LNG Imports By Origin Volume-Weighted Average LNG Price BCF Egypt Nigeria Trinidad Norway Qatar Yemen Peru US$/MMBtu Oct- Dec- Feb- Apr- Jun- Aug- Oct- SOURCE: US DOE. SOURCE: US DOE. CERI Commodity Report Natural Gas

17 Page SOURCE: US DOE, NEB. SOURCE: US DOE. Japan US LNG Exports to Japan US LNG Exports By Exporter BCF BCF ConocoPhillips Marathon Oct- Dec- Feb- Apr- Jun- Aug- Oct- Oct- Dec- Feb- Apr- Jun- Aug- Oct- SOURCE: EIA, US DOE. SOURCE: US DOE. Relevant Independent Objec ve

18 Page North American Active Rigs Rigs, US WCSB, Canadian Rig Fleet Utilization Weekly Average Active Rigs Rigs, Active Rigs Total Rig Drilling Fleet 9,,, Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- Jan- SOURCE: CERI, CAODC, Baker Hughes. SOURCE: CERI, CAODC. WCSB Active Rigs by Province Western Canada Active Rigs Weekly Average Rigs SK AB BC Weekly Average Rigs -Year Avg. Jan-9 Jul-9 Jan- Jul- Jan- Jul- Jan- Jul Week Number SOURCE: CERI, CAODC. SOURCE: CERI, CAODC. CERI Commodity Report Natural Gas

19 Page 9 US Total Active Rigs US Total Active Rigs Rigs,, Oil-Directed Gas-Directed Gas-Directed %,,,,,, Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- Jan- % 9% % % % % % % % % % Rigs, Total Oil-Directed GOM Gas-Directed Onshore Gas-Directed,,, Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- Jan- SOURCE: CERI, Baker Hughes. SOURCE: CERI, Baker Hughes. US Gulf of Mexico Active Rigs Rigs Oil-Directed Gas-Directed Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- Jan- SOURCE: CERI, Baker Hughes. Relevant Independent Objec ve