BHP – making LNG fuelled ships competitive

Sep 09 2021


BHP signed a 5 year contract for 5 LNG fuelled ore carriers – at a cost lower than using new vessels fuelled with VLSFO. Head of maritime Rashpal Singh Bhatti explained how it was done.

Vessel charterer BHP of Australia signed a five year time charter contract for five LNG fuelled “Newcastlemax” very large ore carriers (VLOCs), carrying iron ore between Western Australia and China from 2022.

 

Rashpal Singh Bhatti, Vice President, Maritime & Supply Chain Excellence, BHP, explained how the business case for the vessels worked, in an International Chamber of Shipping webinar on March 10, “Legal, Stakeholder and Commercial Forces of Change - Lessons for Maritime”.

 

BHP defines itself as “a world-leading resources company”, formerly known as BHP Billiton. It is one of the largest bulk charterers in the world.

 

Mr Bhatti is effectively head of chartering, being accountable for BHP’s marine freight requirements.

 

The Newcastlemax is a category of bulk carrier which is the largest size able to enter the port of Newcastle, Australia, with about 185,000 dwt, max beam 50m and max length 300m.

 

“The crux of this is that a LNG fuelled Newcastlemax will deliver a 35 per cent reduction in carbon, almost eliminate NOx and SOx,” he said.

 

“We will do this at a cost lower than the reference case, the cost of a brand new Newcastlemax fuelled with VLSFO (very low sulphur fuel oil). This is a very important point.”

 

“This is not just about the social value of reduction, this is about emission reduction and doing it economically and delivering shareholder value at the same time.”

 

Project development

Work on the project began in 2018. At the time, companies in the shipping ‘ecosystem’, including banks, owners, managers and class, were thinking about LNG fuel. “But no-one was taking the bull by the horns, saying, ‘what could this look like from an ecosystem perspective’. There was too much rhetoric about economics and emissions impact,” he said.

 

A first question was whether it could be done from an engineering perspective. To answer this, “we took an ecosystem approach,” he explained.  “As BHP we don't have all the expertise in this area. We know what we want but we're not specialist LNG players, shipbuilders. We have to bring together many parts of the ecosystem, understand we're not the experts, and take a humble approach.”

 

“We brought together class, shipyards, charterers, financiers. We said we'll put together a ‘Green Corridor Joint Industry Project’ to find out, can this be technically done.”

 

“To our surprise, what we got back was technical data, commercial data, that took us the best part of nine months to decipher.”

 

And the second question was what the economics would look like. The only way was to see what prices would actually be available from the market, both for vessels and for fuel.

 

BHP released a tender for a carrier for the vessels in July 2019. “We went out to many parts of the globe. We were overwhelmed by the response,” he said.

 

The ship operations contract went to Eastern Pacific Shipping (EPS). Mr Bhatti said EPS "offered a competitive bid and an efficient vessel design with superior fuel efficiency and GHG emissions reductions.”

 

The contract to supply the fuel went to Shell. “Shell has been fantastic in putting together the solution.”

 

“We've taken an ecosystem approach in partnership with EPS and Shell, it is very well thought through,” he said.

 

“MPA (Maritime and Port Authority) Singapore has been phenomenal in allowing us a significant amount of infrastructure and data to make this happen.”

 

Moving forward

BHP’s competitors have since followed. Dry bulk charterers FMG, Rio Tinto and Anglo American have since announced plans for dual fuel vessels. “That makes us very happy,” he said.  

 

“We feel we'll have a competitive advantage from a time perspective. But that's not what this is about. This is about taking this forward. As the largest bulk charterer in the world we feel we have a responsibility.”

 

“Most importantly, this has been about capability and mindset change.

 

saying we think this can happen, but we know we can't do this alone. We will reach out to the market at large, bring the best players to the table and we will share value.”

 

“The five Newcastlemaxes we will deliver early next year will become 10, 15, 20 and many more. That will be an industry phenomenon.”

 

Is LNG the future?

Mr Bhatti was asked whether he was confident that the LNG fuelled ships would be viable for the typical life time of a ship, 20-30 years, when we may have zero carbon fuels coming onto the market by then.

 

“I think LNG will form part of the mix, what percent of the mix, I don't know, I don't think anybody knows,” he replied. “I don't agree with the terminology ‘transition fuel’.”

 

“Until such time as the homogeneous fuel of choice is known, we'll have a heterogeneous set of fuels through the next couple of decades.”

 

“To be the early adopters of LNG, to understand the fuel from a safety and economic perspective, can only be good.”

 

“From a risk perspective, EPS is taking a very firm view that this fuel is here not as a transitional fuel but here for a long time to come.”

 

“LNG we know is not the final solution. We'll have to find 3, 4, 5 solutions, work them in parallel, see in the 2030s which is the winner.”

 

“These are dual fuel engines don't forget. If ammonia or hydrogen do become the fuel of choice, it is not that these vessels cannot be later retrofitted to use those fuels.”

 

“People have really thought through the optionality and the risks, and made these vessels very fungible [interchangeable].”

 

Mr Bhatti believes that infrastructure will gradually be developed in ports around the world, to supply whichever fuel the maritime industry eventually chooses.

 

This is similar to how ports around the world developed berths and drafts capable of accepting capesize vessels, when these vessels became the norm around the world.

 

“Between public and private mechanisms that infrastructure does become the norm. I’m optimistic that will happen with LNG.”

 

What charterers should do

Mr Bhatti was asked whether charterers like BHP would be willing to pay more than the minimum required, for decarbonised fuels.

 

“It is a great question and one I get asked a lot. I think that's probably the wrong way to look at it. It’s a bit myopic to think, ‘BHP are you going to pay’. It’s about taking a broader approach to innovation,” he replied.

 

“Ultimately it’s a supply chain. If we're paying for something, the delivered cost [of transporting iron ore] will go to the steelmaker, the steelmaker will go to the automaker, the automaker will go to the consumer. It is not about who will pick up the cost.”

 

“As the largest charterers in the world what is our responsibility set? To bring the best capabilities in the world together and deliver solution ahead of the game, which is what we've done with LNG ships.”

 

“What is really important is to take an approach, analyse it with depth and with conviction, take that forward and manage your downside risk as much as you can.”

 

“I don't think anybody would say there's no downside risk.”

 

Mr Bhatti believes that the environmental incentive in itself should be enough to make it worthwhile investing in decarbonisation. “My view is,  what more incentives do organisations, government and supply chains need than we have already, than to give the social endowment to people who come after us. I don't think a bigger incentive is required.”

 

“Investors are looking for organisations that are taking a front-running approach to emissions reduction.”

 

“We're about to work with a biofuel company in Singapore and Holland and think about how used cooking oil, which is very mixable with fuel oil, could become part of the supply chain solution.”

 

“We're working with MPA in Singapore as part of R+D fund to think about how we take ammonia and some other fuel choices forward.”

 

The developments are not just fuel related. “The number of vessels in shipyards looking at wind power as an assist is significant. Other vessel owners are looking at enhanced paint mechanisms that allow them to go through water with less friction.”

 

New business models

“I certainly believe that the old model amortising a cape over 25 years and understanding the residual value, and your earnings assessment, that’s a model which is well past us,” Mr Bhatti added. “Any owners looking at that model as their investment criteria will probably have a surprise ahead of them.”

 

“What is very clear, newbuilds they are thinking about need to be as option-friendly as possible. They need to build fungibility into their assets. That requires innovation, lateral thought.”

 

“BHP works with some of the largest vessel owners in the world, we have this discussion with many of them. You won't be surprised to hear many have started to re-price their assets. They're not looking at 25 years anymore.”

 

Market drivers

In terms of broader market drivers, “A carbon levy would be the right thing to do, as long as the governance of funds [means that they] would find themselves back into the right hands, [such as] organisations that are in R+D. We feel any kind of carbon levy needs to be well regulated and fair,” Mr Bhatti said.

 

“If the European tax [ETS] scheme goes first, it could well be a fantastic ground for understanding how this could work, learning from that and taking that to a global model.”

 

“The preference is that it is a global model and regulated by the IMO or another such body.”

 

Another market driver is vessel rating schemes, such as RightShip, an organisation where Mr Bhatti serves as chairman. It is partly owned by BHP.

 

“RightShip takes a very standardised approach,” he said. “In that space, we see far too many bespoke, fragmented ways of taking data to become information.

 

But to function as an effective market driver, there will need to be standard ways to measure energy efficiency of ships, he said. “If I think about simple things like sensors on vessels and data which comes from it, it will require a standard which will deliver a uniform approach, across tankers, containers. And that's not far away. I think there’s a tipping point coming, and standards will be driven by private industry.”

 

Danish Ship Finance

Also in the ICS webinar, Christopher Rex, Head of Innovation & Research at Danish Ship Finance, explained how decarbonisation could lead to a different financial model for owning vessels.

 

Today, many ship owning business models are based on making a margin from selling a vessel for more than you bought it for. The returns just from operating a vessel often do not provide a good enough cash flow to justify the investment.

 

This means that companies are not making money based on how well the vessels are being operated, but from how well they trade the vessels, he said.

 

But the move to decarbonisation may change this, since it is raising the costs of owning and operating ships.

 

“The big win is when we look at the next generation of vessels,” he said.

 

Perhaps there will be opportunities to make money as the costs of “zero carbon fuels of the future” gradually reduce, as their scale increases.

 

“I believe we can re-introduce vessels as an attractive asset class when we digitalise and decarbonise our industry.”

 

Perhaps the cost of owning vessels could be reduced by further standardisation of ships, allowing more economies of scale, and reducing maintenance costs.

 

The shipping industry might see a “new type of player”, which “will not have the same attitude towards a legacy fleet.”

 



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