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MEPC 83 affirms LNG’s place as most cost-effective fuel choice through 2035
The International Maritime Organization (IMO) has concluded the 83rd session of its Marine Environment Protection Committee (MEPC 83), marking a significant advancement in maritime decarbonization efforts. A pivotal outcome of this session was the approval of the IMO Net-Zero Framework, despite reservations expressed by certain member states, including the US and several oil production states. Rystad Energy's research highlights that the IMO's direct compliance targets are notably more ambitious compared to those set by FuelEU Maritime. Under the new IMO pricing framework, very-low sulfur fuel oil (VLSFO) faces fewer penalties compared to the penalties imposed by FuelEU Maritime, with costs projected to remain below $1,000 per tonne until 2035, and then rising above $1,100 per tonne. In contrast, liquefied natural gas (LNG) is subject to more favorable conditions under FuelEU Maritime yet encounters heavier penalties according to IMO guidelines. Despite being subject to the EU Emissions Trading System (ETS) tax – which results in a higher total carbon tax under EU regulations compared to IMO – LNG is anticipated to remain the most cost-effective fuel choice under both regulatory frameworks through 2035.
Based on the economic measures, Rystad Energy conducted a comprehensive analysis of the costs associated with using VLSFO under IMO regulations. The analysis considers several components, including the base fuel cost, a Tier 1 RU penalty, and a Tier 2 RU penalty.
The findings indicate that the total cost of VLSFO will remain below $1,000 per tonne until 2035, at which point it is projected to increase significantly to over $1,100 per tonne. The Tier 1 RU penalty, approximately $49 per tonne, is expected to remain stable due to the consistent gap between direct compliance targets and base targets over the years.
In contrast, the Tier 2 RU penalty, which is nearly double the Tier 1 penalty, is estimated at around $90 per tonne prior to 2030. Between 2030 and 2034, this penalty will rise sharply to $150 per tonne, before surging to $463 per tonne in 2035, a figure that represents over 70% of the base fuel cost.
Employing a similar analytical framework, Rystad Energy has extended its examination to the costs associated with using LNG under IMO regulations, particularly when utilized in LNG diesel slow-speed engines. This analysis also involves a cost comparison between LNG and VLSFO under EU regulations (FuelEU Maritime and EU ETS) and the cost of e-ammonia. The findings reveal that LNG maintains its cost competitiveness under various regulatory frameworks from the present through 2035. Notably, VLSFO proves to be more economical under IMO regulations compared to that of the EU, owing to the substantial penalties imposed by the latter. Meanwhile, although LNG complies with the FuelEU Maritime targets until 2039 when used in LNG diesel slow-speed engines and only subject to the EU ETS tax, the total cost under EU regulations is still lower than under the IMO pricing framework.
Moreover, the production cost of e-ammonia struggles to compete with fossil fuels with the current cost structure, even when regulatory penalties and production incentives are considered. The price gap might be narrowed via selling surplus compliance units in pooling and incorporation with the ZNZ rewarding policy after it gets determined. However, both IMO and EU regulations position LNG in a cost-competitive stance for many years, until price parity with e-fuels is eventually achieved. This underscores the importance of establishing appropriate financial incentives for ZNZ fuels and technologies to accelerate the transition.
Authors:
Junlin Yu
Senior Data Analyst, Shipping Research
junlin.yu@rystadenergy.com
Jo Friedmann
Senior Vice President, Supply Chain Research
jo.friedmann@rystadenergy.com