Singapore In Pole Position To Cash In On Marine Fuel Market Disruption

Updated: Apr 13, 2020

With new rules on fuel emissions from ships poised to come into effect in 2020, Singapore is developing LNG infrastructure to reinforce its position as the world’s largest bunkering location.

New emissions regulations due to take effect in 2020 will spur a sea-change in the global marine fuel market.

As shipowners scramble to modify their fleets to comply with the new rules, several countries are gearing up to tap into the lucrative opportunities that are sailing into view.

Amongst those leading the revolution is Singapore, which has stolen a march on its regional rivals to reinforce its status as the world’s pre-eminent bunkering hub.

LNG has been penetrating deeper into the country’s energy mix for several years. Singapore’s LNG regasification terminal on Jurong Island came into operation in 2013 and has been expanded to 6 million tonnes per year of capacity in 2014, with work under way on a fourth storage tank.

Now the Asian city state is rapidly rolling out infrastructure that will make it the leading LNG bunkering facility in Southeast Asia by the start of the next decade.

The country’s evolution in this new sphere has been hailed by the industry. “With typical vision, Singapore is set to enhance its position as the world’s largest bunkering hub with its creation of LNG capacity since 2013,” said Cameron Ford, Partner at Squire Patton Boggs. “LNG would appear to be the beneficiary of the International Maritime Organization’s [IMO’s] sulphur cap on marine fuel, taking effect from 2020, and it seems only natural that Singapore would become a LNG hub.”

Shipping companies are looking to LNG as a suitable option to comply with the International Maritime Organization’s (IMO) global 0.5% sulphur cap for marine fuel, which comes into effect on January 1, 2020.

LNG use produces zero sulphur oxides (SOx), and substantially reduced particulate matter and nitrogen oxide (NOx). In addition to these environmental benefits it is a technology that is available and competitive, which contributes to the IMO’s long-term strategy for the reduction of greenhouse gas (GHG) emissions from ships that was announced in April 2018.

“LNG has been penetrating deeper into the country’s energy mix for several years. Singapore’s LNG regasification terminal on Jurong Island came into operation in 2013 and has been expanded to 6 million tonnes per year of capacity in 2014, with work under way on a fourth storage tank.”

First movers

Singapore’s first-mover status in the field looks to be savvy and potentially extremely lucrative. While there are only a few LNG-fuelled ships at present, there has been a clear shift towards the use of this fuel.

Analysis by NewsBase Research (NBR), a UK-based consultancy, projects that while LNG propulsion will only account for 3% of new ship builds until the end of 2020, it could reach up to 60% of new builds in 2035. By then, LNG would be the main fuel for just over 25% of the world’s cargo fleet, consuming approximately 73 billion cubic metres (54 million tonnes) of gas.

“Almost half the world’s total annual seaborne trade tonnage passes Singapore’s doorstep through the Strait of Malacca and the Straits of Sunda and Lombok,” Ford noted. “Singapore averages 130,000 vessel calls each year and has been ranked the world’s top port in the three Menon Reports since 2012. Leading the way in LNG bunkering seems set to entrench Singapore in that position.”

In addition to the benefits for local shipyards involved in new construction, this is also good news for the companies leading the deployment of LNG bunker infrastructure in Singapore.

“English laws tend to be the default choice, as they offer familiarity, predictability and certainty, creating a pathway to a perceived ‘safer’ decision”

Clarence Lun, Head of Dispute Resolution, Foxwood LLC

FueLNG – a joint venture between Keppel and Royal Dutch Shell – announced in June it had ordered a LNG bunkering vessel from Keppel Offshore & Marine, to enable it to offer ship-to-ship LNG refuelling starting in the third quarter of 2020 in the port of Singapore.

The dual-fuel LNG bunkering vessel will have a capacity of 7,500 cubic metres and will be partially grant-funded through the Maritime and Port Authority of Singapore’s LNG Bunkering Pilot Programme (LBPP).

Capable of running on both LNG and marine diesel, the vessel is able to harness boil-off gas – a by-product of bunkering operations – as well as continuously evaporating LNG in the cryogenic tank, which would otherwise be flared off.

Singapore’s Pavilion Energy and French supermajor Total have also signed a heads of agreement (HoA) to develop jointly a LNG bunker supply chain in the port of Singapore. The agreement covers the shared long-term time charter of a new generation LNG bunker vessel (LNGBV) to be commissioned by Pavilion Gas by 2020. It also includes a LNG supply arrangement between the two companies, enabling Total to deliver LNG bunker to its customers.

Both FueLNG and Pavilion Gas received funding from Singapore’s Maritime and Port Authority amounting to US$4.5 million to put towards the construction of the LNGBVs. The port is promoting ship-to-ship LNG bunkering as part as its overall LNG facility development goal.

In April 2017, work was completed on the first truck-to-ship loading facility in Singapore. Then in September of the same year, gas was moved on to a floating LNG (FLNG) vessel.

The ship-to-ship technology being driven by FueLNG and Pavilion marks an escalation of this trend.

“Singapore has established itself as a hub for business, innovation, technology, entrepreneurship and legal services, both transactions and disputes”

Cameron Ford

Partner, Squire Patton Boggs

Dispute resolution

As the clock ticks down to the new regulations coming into force in 2020, attention is turning to the disruptive effect they will have on the market. And market disruption inevitably throws up questions about compliance, enforcement and dispute resolution.

While the industry has been broadly supportive of the IMO’s moves, there is a risk that some shippers will not comply with the new norms at all. This is potentially a problem, as the IMO does not have a proper enforcement mechanism in place.

However, bigger and more established shipping companies are more likely to comply and may well push for tighter enforcement, as well as development of technologies that identify non-compliant vessels.

Aside from the IMO, there are other regulations with which companies must comply. These include: the International Safety Management (ISM) Code; the International Convention for the Safety of Life at Sea (SOLAS) for standards in construction and operation; the International Convention for the Prevention of Pollution from Ships (MARPOL); Standards of Training, Certification and Watchkeeping for Seafarers (STCW); the International Ship and Port Facility Security Code (ISPS); the Maritime Labour Convention (MLC); and the International Load Line Convention (ILLC) for minimum permissible free board.

Shipowners also have to ensure compliance with flag state, port and classification requirements.

While the move towards LNG has been rapid, progress to that end has not always been smooth sailing. The oil price crash in 2014 was the catalyst for a wave of creative financing arrangements and varied contracting structures that have resulted in transactions that are significantly more complex than traditional LNG arrangements.

Most countries that venture into LNG plant tend towards a build-operate-transfer (BOT) model or public-private partnership (PPP). The same challenges are met downstream, where, unlike the typical lump-sum contracts that are awarded for construction of a project, EPC contractors have to find financiers who are able to invest in return for a long-term profit-sharing arrangement.

An off-take agreement may not be a viable arrangement for buyers wanting to dictate their own terms, which has given the spot market more prominence. Spot contracts have also become attractive for sellers willing to take on a greater degree of risk, in exchange for potentially higher profits.

Given Asia’s dominant position as a demand centre for LNG, appetite for local dispute resolution is growing with institutions such as the Singapore International Arbitration Centre (SIAC) and the Asian International Arbitration Centre (AIAC).

Typically, unless the dominant party demands the use of laws from a specific country, parties tend to incorporate English law as the governing law into the contracts, noted Clarence Lun, Head of Dispute Resolution from Foxwood LLC in Singapore.

“English laws tend to be the default choice, as they offer familiarity, predictability and certainty, creating a pathway to a perceived ‘safer’ decision,” he said. “Multinational companies often desire this level of ‘comfort’ when dealing with local companies or state-owned companies where the laws of the country bring about uncertainty and discomfort.

“For instance, where disputes have arisen in Vietnam and Laos, parties tend to veer towards SIAC as a hub of choice and English law where one of the contracting parties is a non-Vietnamese or Laotian incorporated entity.”

Lun also said that on a practical level, where LNG bunkering requires additional tank space, the bunker clauses should contain the necessary robust clauses in relation to provisions that relate to sampling and testing of bunkers, as well as key notice to any delays or fines incurred owing to non-compliance of Emissions Control Area (ECA) rules.

He added that care should also be taken to detect contaminants. Such claims, if developed, will give rise to complex legal disputes involving expert witnesses, evidence on negligence, as well as significant losses arising from machinery damage, loss of charter and opportunity cost.

“New bunker supplies should only be consumed when the samples have been tested and confirmed as having no contaminants, otherwise this could lead to potential breaches of regulations such as MARPOL and ISM, amongst others,” Lun said. “In this regard, care needs to be taken by the crew and master that the relevant procedures were adhered to and the necessary checklists and records kept properly as evidentiary proof.”

Playing the long game

The move into LNG bunkering is a natural step forward for Singapore. As well as being the world’s biggest bunkering location, the country plays a central role in global LNG trading.

This position has been enhanced by expanding infrastructure, primarily at the Singapore LNG (SLNG) terminal on Jurong Island, along with the country’s business-friendly regulation and strong pool of industry talent.

The rise of bunkering will drive a move towards smaller cargoes and spot trading. Liquidity is increasing and the LNG sector is moving – slowly – away from oil-linked prices. Helping drive this shift have been Singapore’s efforts to improve price transparency, via the SGX LNG Index Group (Sling), with derivatives contracts launched in early 2016. This mechanism, which has Singapore and north Asian aspects, can be used as a price reference for spot trades, longer contracts and hedging.

Singapore benefits from clear government support for its LNG plans, with bunkering playing a part alongside storage, trading and regasification – with each aspect reinforcing the other, and cashing in on the state’s role as a business hub in the region.

“It has established itself as a hub for business, innovation, technology, entrepreneurship and legal services, both transactions and disputes,” said Rio Tinto’s Ford. “Not only does it have the physical infrastructure to support the bunkering but it has the business and governance infrastructure to make it work efficiently.”

Now Singapore’s long-view planning to become an LNG bunkering hub has put it in pole position to tap into the lucrative opportunities that will emerge when the IMO’s new emissions regulations take effect in two years’ time. You could call it 2020 vision.

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