1. The Brookings Institution
Fueling the Maritime Shipping Industry:
A Promising new market for LNG?
March 3, 2015
Remarks of John E. Graykowski
Good morning and thank you for that introduction.
I’ve been asked to give you my “elevator pitch” on why LNG can and should transform the global marine
and transportation industries.
First: Why LNG for Marine?
Before 2010, ships were essentially the last unregulated emissions sources Ships consume enormous
amounts of fuel, and while on a per freight ton mile basis, ships are very efficient in terms of consumption
and emissions, the aggregate of some 50,000 vessels worldwide burning high sulfur fuels is significant.
Prior to 2010, ships throughout the world could burn fuel with a sulfur content of 4.5%; very cheap but
very dirty By comparison, in 2010 EPA limited on road diesel fuel to 0.15%, which partially explains
the improvement in air quality in the United States that we have seen.
Starting in 2012, the International Maritime Organization (IMO) required ships to reduce fuel sulfur
content to 3.5% with a further reduction to 0.50% in 2020. At the same time, the IMO allowed member
states to implement special Emissions Control Areas (ECAs) which imposed even more stringent
standards of 1.0% in 2012 and 0.1% in 2015. North America and Northern Europe were the first to
establish ECAs, but other nations are expected to follow in the next several years.
These regulatory actions were a wakeup call for the maritime industries in these two regions. Ship
owners had just three compliance options: (1) purchase higher cost compliant fuel; (2) install emissions
scrubber systems; OR (3) convert and/or build ships that use an alternative compliant fuel such as LNG.
Purchasing compliant diesel fuels meant a 30% increase in 2012, and a similar increase in 2015.
Scrubbers remain an unproven technology; are expensive to install and maintain and they create an
entirely new waste stream that requires special handling. Moreover, these two options merely provide
minimum compliance with the SOx rules, and do nothing to address nitrogen oxide emissions (NOx),

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2728 18th Street N.Arlington, VA 22201 321.394.5099 JohnG@Maritimeconsults.com
which are next up on the regulatory agenda. LNG, on the other hand, offers long term fuel cost savings
and will enable owners to not only meet, but exceed, current and projected emissions standards for SOx,
NOx, PM as well as achieving significant reductions in CO2 emissions.
So, the fortuitous confluence of growing domestic supplies – I hesitate to use the word “BOOM” in the
context of LNG -- falling prices for natural gas and inescapable regulatory mandates has engendered the
serious interest in LNG as a marine fuel we see today.
Second: Where are we now?
Development of LNG in the United States has been led by first adopters and there are now some 36 ships
under construction that will either use LNG on delivery or can be easily modified to use LNG once
infrastructure is available. The first LNG fueled vessels, serving the Gulf of Mexico oil fields, just went
into commercial operation; the first large container vessel will be operating on LNG between Jacksonville
and Puerto Rico at the end of 2015. And, by 2019, there will likely be LNG-fuelled ships operating in all
of the U.S. domestic offshore markets.
To date, only one major international carrier, United Arab Shipping Company, is building vessels that
will operate on LNG when they are delivered. Mitsui O.S.K. Lines (MOL) just signed a contract to
construct 4 large container vessels with dual fuel engines for LNG operations at a later date; but the rest
of the global maritime industry appears to be hanging back and waiting until there is more certainty about
the infrastructure and whether the IMO will delay the 2020 standards.
In contrast to the United States, where LNG development has been “market drive,” and LNG projects are
proceeding in disparate regions of the country, the European Union (EU) has been pursuing an aggressive
“carrot and stick” strategy to accelerate the transition to LNG. The EU has combined increasingly more
stringent emissions regulations with substantial financial incentives targeted at both vessel development
and supply infrastructure. All 26 EU member states have endorsed a formal EU policy to require LNG
fuel bunkering infrastructure in all deep sea and inland EU ports by 2025; and so far, over $150 million
has been spent to support the development. By the end of this year, several of the major ports in the EU
will have operating LNG bunkering stations. China also has a national policy to convert its marine
industry to LNG by 2020. Singapore, the world’s largest bunkering port, will have LNG infrastructure by
2020 and just recently, Canada announced a tax incentive plan to support the construction of LNG
facilities.
So, in my view, LNG is already here; the question for us is how we can accelerate its adoption in the
United States?

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2728 18th Street N.Arlington, VA 22201 321.394.5099 JohnG@Maritimeconsults.com
What are the challenges to adoption?
LNG is new to everyone; there is no existing template to follow in terms of market relationships;
contracts; regulations. While there are no real technological challenges to either making or using LNG as
a fuel, the real constraints exist on building a market between gas suppliers and marine and transportation
sector where there are no historical relationships. Adding to the complexity is the fact that the diversity
of the potential stakeholders in LNG development: ship owners, gas suppliers, ports, federal, state and
local regulatory agencies and others, are not traditionally aligned; yet each one will be involved in the
establishment of the infrastructure..
Consider this: the marine industry for 150 years has purchased fuel on a spot basis; it’s widely available
and prices and quality are transparent and understood. Ships buy fuel on the basis of either barrels of oil
or metric tons. And, owners have never given much thought to where and whether fuel will be available.
With LNG, however, the most frequent question among ship owners is: “If I build a ship, will the LNG
be available?”
On the other hand, the gas industry operates on the basis of long term “take or pay” contracts which
provide the support to finance the cost of building and operating supply infrastructure; and gas is largely
traded on the basis of MMBTU and cubic meters. Throw in the fact that LNG is less energy dense than
diesel which means ship owners have to buy more fuel to get the same amount of energy, and larger
tanks, particularly on deck, mean a potential loss in revenue cargo space on a container ship. So the
apparent hesitation among ship owners is understandable despite the intrinsic advantages of LNG as a
fuel.
Compounding the uncertainty is the fact that there are no uniform federal, state, or local regulations that
govern small scale marine LNG terminals or bunkering operations. As I said, LNG as a fuel is “new” to
everyone, including the regulators.
Generally, existing federal regulation is divided between the United States Coast Guard (USCG) and U.S.
Department of Transportation (USDOT) under a 1986 memorandum of agreement. The regulations are
predicated on large import (at the time) and export facilities which involve hundreds of acres, millions of
tons of LNG per year and flow rates of LNG greater than 12,000 cubic meters/hr. By comparison, a small
scale LNG terminal, to serve ships and transportation, involves maybe 200,000 to 400,000 tons of LNG
per year; can be sited on 30 acres, and involves flow rates 95% less than those found in larger facilities.
Ports are congested and land is at a high premium, especially waterside access. Clearly, it is difficult for

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2728 18th Street N.Arlington, VA 22201 321.394.5099 JohnG@Maritimeconsults.com
regulators to apply current rules to these smaller facilities particularly in the question of siting
requirements.
USCG has moved out very quickly and in a terrifically forward leaning fashion to address the LNG
questions from a safety, security and ship design standpoint, and my hats off to Captain Mauger, Jason
Tama, and their colleagues for the work they’ve done and are doing. But, much as I wish it were the case,
the USCG cannot do it all themselves. USDOT has not moved forward in a similar fashion to design
regulatory structures to support marine LNG terminals and, let’s not forget that every one of these plants
will have to undergo state and local permitting. Each of these regulatory layers, and they can be
numerous, adds potential delays and costs to a project.
So, what can be done?
I believe that through a collaborative effort among all stakeholders, LNG has the potential to
fundamentally transform the transportation industry in the United States. In my view, the marine
industry, through its intermodal structures, can provide the means to facilitate the broad adoption of LNG
by other transportation modes. The overwhelming benefits of LNG provide a clear foundation for a
national initiative to promote, advance, and accelerate the adoption of LNG on the basis of energy
independence, emissions reductions, and economic benefits. Other nations are clearly moving in that
direction, the questions is: will we have a similar national will and commitment to seize this opportunity.
Thank You!