LNG carrier industry a climate and financial risk — new report

Despite International Energy Agency (IEA) warnings over more fossil fuels usage, the global LNG carrier industry is pushing ahead with a record number of new ship builds to meet increased global LNG demand.

This development is also being called out by Seoul-based Solutions for Our Climate (SFOC). In a new report, it concluded that LNG carriers are both a climate and financial risk. It said that the global energy landscape stands at “a critical juncture, marked by three converging challenges.”

These include the escalating climate crisis, which the report said demanded immediate action to reduce greenhouse gas (GHG) emissions in light of the most recent scientific evidence. Moreover, current global warming trajectories threaten to exceed critical environmental tipping points.

The second challenge: despite “groundbreaking COP28 agreements in 2023,” the LNG industry continues its expansionary trajectory, undermining these crucial climate commitments. 

Third, the global LNG shipping sector has witnessed unprecedented growth, with fleet capacity nearly tripling over the past decade. This in turn represents what the report called “a fundamental contradiction between committed climate mitigation goals and industry reality.”

Clarksons Securities, a maritime investment group, projected that new LNG carrier orders could reach as high as 129 vessels by 2029, representing around US$35 billion in market share. A Climate Analytics report said that by 2030, LNG carrier surplus is expected to grow to 40% beyond what is required of the industry’s operating capacity — the equivalent of 275 modern carriers.

Added to the fray, the global LNG fleet already emits 12.7 billion tonnes of CO₂e annually, the SFOC report found. “Given clear signs of market overcapacity and long infrastructure lock-in-periods, no additional carriers should be built. This conclusion mirrors the logic applied to LNG terminals and upstream infrastructure and must be reflected in both private and public financial decision-making,” it said.

The SFOC report also outlined a number of strategic, yet arguably difficult to implement recommendations. These include a requirement that shipowners disclose emissions and develop fleet transition plans with specific reduction targets. It also recommends that financial institutions set clear phase-out timelines for LNG carrier financing by 2025. Perhaps even more difficult to reach is the suggestion that public finance entities terminate support for new construction and develop transition programmes.

Eco-friendly counterpoint

The problem is that LNG carrier builders see things differently. Case in point, South-Korea-based Hanwha Group in February touted that it had successfully delivered its 200^th LNG carrier, becoming the world’s first shipbuilder to reach that milestone.

The legacy shipbuilder added that the carrier was “an eco-friendly vessel that utilizes a low pressure dual fuel propulsion engine, a reliquefaction system and its own smart ship solution, to significantly reduce emissions of air pollutants.”

Hanwha Ocean has now received the most orders for LNG carriers worldwide, with a near quarter (23.45%) market share. With such large market share and with its entrenched belief that LNG carriers are eco-friendly, environmental groups have their work cut out trying to sway their operational plans. Notably, a large number of LNG carriers are being built with dual-fuel engines that can run on either boil-off-gas, LNG, or a combination of both.

In lockstep, three weeks ago Qatar Gas Transport Co. (Nakilat) started construction on 17 more new LNG carriers at Hyundai Heavy Industries’ shipyard in Ulsan, South Korea. These newbuilds will add to its fleet of 69 LNG carriers already in operation. Many of their newbuild vessels are equipped with advanced propulsion systems which also allow them to run on LNG.

Financial risks

Notwithstanding, the SFOC report upped the ante even further. It said that not only do LNG carriers cause environmental degradation, but evidence is “unequivocal” that “continued investment in LNG shipping directly conflicts with global climate targets while creating immediate financial risks.”

These risks occur because the continued expansion of LNG shipping capacity has created what the report called “signs of overcapacity from unprecedented orders for new LNG carriers.” What the report referred to as “concentrated financial control” is also a problem since only 10 banks control nearly half (US$127 billion) of all LNG shipping finance. Japanese banks MUFG, Mizuho and U.S. bank JPMorgan Chase have taken the lead.

“Public finance contradiction,” is also problematic, the report found. Government entities undermine national and international climate goals, including respective net zero emission pledges, it said. South Korea alone has provided US$44.1 billion in LNG carrier financial support over the past decade.

The South Korean government, however, also has a different take. It recently offered subsidies of up to 30% for the construction of what it deemed eco-friendly ships, including LNG carriers. As such, the argument pivots back to what constitutes an “eco-friendly” vessel. The shipping sector considers the use of fuels like LNG, hydrogen and biofuels as less emitting options over traditional bunker fuel which has significant emissions.

LNG-powered ships, however, still pollute, particularly due to methane slippage. Methane escapes into the atmosphere during fuel combustion and throughout the entire LNG supply chain. Emilian Buksak, VPS Decarbonization Advisor, wrote in Ship & Bunker that “if you’re using — or considering — LNG as a fuel, tackling methane slip should be your top priority.” Hanwha Ocean’s Claire Wright also admitted that measuring onboard methane slip accurately is a challenge for the industry,

The SFOC report added that there also remains an emissions accountability gap with LNG shipping companies. “While LNG shipping companies report their operational emissions, they do not account for the much larger lifecycle emissions of the fossil fuel, LNG, they transport,” it found.

In light of this, a requirement should be put in place that financial support for LNG carriers should be considered equivalent to financing LNG terminals and pipelines in terms of contributing to GHG emissions through fossil fuel utilisation, it suggested.

“This accountability gap allows industry to drastically understate its total climate impact and misrepresents its compatibility with global climate goals,” it said.

(Writing by Tim Daiss; editing by Sophie Davies)