Author: Dr. Jean-Paul Rodrigue
The global economy rests on the consumption of large energy supplies that need to be provided, transformed and transported. Ports have been important complexes supplying and distributing energy.
1. The Origin of Energy Markets
Historically, there was no energy market in maritime shipping. Energy in pre-industrial societies faced limited demand, was produced locally, and was not traded. Limited economic benefits could result in trading bulky and low-energy content commodities such as firewood. Maritime shipping was a breakbulk endeavor not able to support bulk trades effectively. A notable exception was the fuel trade associated with oil lamps relying on animal fats and olive oil, which could be carried over long distances. The extensive trade network of olive oil carried in amphoras during the time of the Roman Empire can be considered one of the early forms of maritime shipping energy trade.
It is not until the industrial revolution that energy began to be extensively traded. The rapid growth in energy consumption and a fundamental change in energy supply systems with the introduction of coal incited the setting up of new supply routes. Coal became a convenient fuel as it could release about four times more energy than a similar mass of wood, did not decay, and could easily be handled and stored. Further, it could be distilled into fuels such as kerosene. The shift from biological energy supply to mineral energy supply entailed locational changes in energy production and consumption and the associated trade flows.
Early coal trades were a strong driver in transport infrastructure development and the classification of shipping. In the late 18th century, the onset of the industrial revolution saw the construction of a series of canals in Europe and the United States, with coal shipping as the main driving factor. The Bridgewater Canal was the first notable purposely-built infrastructure to carry energy in an attempt to respond to the imperatives of the industrial revolution, which began in Britain during that time. The no locks canal linked the coal mines of Worsley to Manchester, 16 km away. Upon its completion in 1761, the cost of coal in Manchester was more than halved, favoring its wider use in burgeoning industrial activities. This sparked a wave of canal infrastructure investments in Europe and North America.
The first energy trades were over short distances and mainly involved barges loaded and unloaded with rudimentary equipment. As the coal demand increased for industrial use, transportation fuel, and power generations, specialized bulk carriers for solids and liquids were required. Collier ships were designed to carry coal either to supply factories or to supply navy fleets. In the 19th century, the development of steamships and railways created a self-reinforcing cycle for both the supply and the demand for coal. For long-distance navigation, the transition towards coal-powered steamships favored the setting of coaling stations such as Aden and Cape Town, where ships could be refueled from locally extracted coal. This created the need for local energy supply systems.
In 1912 the British Admiralty decided to convert its fleet of warships from coal to oil propulsion because of the speed and range advantages oil engines conferred. Coal-powered ships required a network of coaling stations, limiting their operational flexibility through the need to secure adequate coal supplies at strategic locations. Further, coaling was a cumbersome and labor-intensive process taking at least a day to fill a ship’s coal hold. Since Britain had no oil resources, it nationalized the Anglo-Persian Oil Company and committed itself to protect this resource in Persia (Iran after 1934), where most supplies were coming from.
The setting up of the petroleum trade required the design of a new ship class by the late 19th century, the oil tanker. Since the first oil tanker began shipping oil in 1878 in the Caspian Sea, the capacity of the world’s maritime tanker fleet has grown substantially. From that point, petroleum energy markets expanded to include a network of pipelines, storage areas, port facilities, tanker ships, and refineries. The growing energy demand expanded ports in industrial areas and favored the setting up of new specialized ports near energy extraction areas (coal fields and oil fields).
2. Main Port Energy Markets
Contemporary energy markets supply two complementary transportation systems; fueling ships (also called bunkering) and fueling industrial demand (plus power generation). The first important characteristic of energy markets is the concentration of production and a more geographically dispersed consumption. This concentration of production is a direct function of economies of scale characterizing the energy sector, more than it does many manufacturing sectors. For energy extraction, processing, and transportation, substantial benefits are realized when additional volumes are handled. Energy represents a significant share of the global shipping markets and accounts for large port volumes.
A. Coal
Coal is a convenient fuel that is easily combustible to store and transport. It remains an inexpensive and widely available resource that is technically simpler to use but is associated with carbon emissions and pollutants such as sulfur dioxide. Since the Industrial Revolution, coal has been the preferred fuel, supporting the massive development of energy and industrial systems. Still, its consumption is declining, particularly in advanced economies transitioning to more advanced fuel sources such as natural gas and alternative energy (solar, wind).
Coal serves two major markets, and thermal coal dominates with 90% of the demand. It is used mainly in power stations to produce high-pressure steam, which then drives turbines to generate electricity. It is also used to fire cement and lime kilns, supporting the construction industry. This implies that the location of large coal electric plants is associated with transportation capabilities, particularly port infrastructure. Until the middle of the 20th century, coal was also used in steam engines, with an active steam coal market, which is no longer present. The second coal market is coking coal (10% of the demand), a specific type of metallurgical coal derived from bituminous coal and used as a source of carbon for converting metal ore to metal. Cooking coal allows blast furnaces to remove oxygen in the ore by forcing its combination with the carbon in the coal.
The coal industry and its market are facing several challenges and redevelopments. Coal is becoming less competitive in relation to other energy sources, and its production is on the decline. The industry is subject to a string of environmental regulations and negative public opinion creating pressure to transition away from coal. The efficiency of coal power plants is improving with reduced emissions of ashes and, sulfur, and attempts at carbon capture. “Clean Coal” technologies have been put forward, emitting fewer ashes but releasing the same amount of CO2. Since the 1990s, technology has allowed a reduction of coal-related emissions by a factor of 90%. In many areas in North America and Europe, environmental issues associated with coals, such as acid rains, have ceased to be a major environmental concern. The coal market is subject to comparative prices concerning other energy markets, which can create regional discrepancies. For instance, the Fukushima nuclear accident in 2011 forced Japan to reinvest in coal-based power generation to cope with the lack of alternatives in electric power generation.
B. Petroleum
Petroleum is the foremost transportation fuel. Transportation is almost entirely reliant on refined petroleum products, such as gasoline for automobiles, diesel for trucks, inland barges and non-electric locomotives, bunker fuel for maritime shipping, and Jet-A fuel for air transportation. While the use of petroleum for other economic sectors, such as industrial and electricity generation, has remained relatively stable, the growth in oil demand is mainly attributed to the growth in transportation demand. The share of transportation in total oil consumption has increased and accounts for more than 55% of the oil used, with a share of more than 70% in advanced economies such as the United States. Other important uses for petroleum include lubricants, plastics, and fertilizers. The demand for oil has helped shape port development in areas near oil resources, at times introducing entirely new ports and the associated infrastructures. This notably took place in developing economies in the Middle East, such as Damman, Kuwait, Doha, Abu Dhabi, and Dubai.
There are limited options for substitution in the medium term, except for the emergence of electric vehicles and a substitution in maritime shipping towards lower sulfur bunker fuels, including natural gas. The largest oil consumers remain in the world’s industrialized economies, such as the United States, Western Europe, China, and Japan, which accounted for about 70% of global crude oil imports. Massive port-centric petrochemical complexes such as Houston, Rotterdam, Singapore, and Ulsan have been developed and supply these markets. Still, the share of developing economies is increasing as their transportation systems modernize. Since oil consumption and production are characterized by acute differences in the geography of its supply and demand, international oil transportation is necessary to compensate for these imbalances. The market is divided across crude and refined product tankers, mainly depending on whether oil refining occurs near the source or near the markets.
C. Natural gas
Natural gas is composed primarily of fossil methane and other light hydrocarbons. It is a mixture of 50 to 90% by volume of methane, propane, and butane and is characterized as “dry” or “wet” based on its methane content and as “sweet” and “sour” based on its sulfur content. Natural gas is usually found in association with oil, implying a correspondence between oil and gas fields and the opportunity to combine extraction. The global production of natural gas has been growing with the net result that it is increasingly cost-competitive with petroleum.
Natural gas is considered the cleanest fossil fuel to use, particularly for energy generation, and has become a key fuel in electric power plants. Gas turbine technology allows natural gas to produce electricity more cheaply than using coal, implying that the global electric generation market relying on fossil fuels is shifting towards natural gas supply chains. Further, natural gas is increasingly competitive in relation to low-sulfur bunker fuels, particularly in light of ongoing regulations in maritime shipping concerning the sulfur content of bunker fuels. A major challenge concerns the distribution of natural gas, which relies on more complex technologies such as pipelines and their liquefaction.
The growth of the global demand has created requirements to move natural gas over long distances. Liquefied natural gas (LNG) is an ideal form in which to transport natural gas but requires complex technical tasks. Once natural gas is extracted, it is brought by pipeline to a liquefaction plant in the vicinity of a port terminal. Through a cryogenic process, natural gas is brought down to -160oC, implying a volume compression by a factor of 610 times. The LNG product can then be shipped by a fleet of specialized LNG carriers. At the destination port, LNG is stored and re-gasified to be distributed through pipelines.
D. Bunker fuel
Bunkering is an important energy market for maritime shipping as it involves refueling ships at selected locations. Bunker fuels are the lower cuts from the vacuum distillation tower (higher grade fuels such as gasoline are higher cuts), meaning that they are heavy, low-quality fuels of high viscosity requiring to be preheated to be used for combustion. While bunkering can occur at port docks, the most common process involves a bunkering ship docking alongside the ship to be refueled. Because of the characteristics of the global shipping network, bunkering tends to occur at major commercial gateways or intermediary locations where refueling represents an opportunity with minimal disruptions in a ship’s path and schedule.
The bunker fuel market is experiencing significant changes as international regulations supported by the IMO (International Maritime Organization) impose restrictions limiting the sulfur content of bunker fuels, from 3.5% to 0.5%. This global implementation has been phased in since 2010 and became fully active in 2020. Existing regulation has pushed a shift to the use of low sulfur fuels, such as LNG, very-low sulfur fuel oil (VLSFO, maximum 0.5% sulfur), ultra-low sulfur fuel oil (ULSFO, max 0.1%), and low sulfur marine gas oil (LSMGO). Alternatively, shipowners can opt to install emission control devices such as scrubbers and selective catalytic reduction (SCR) systems. For the medium term, alternative ship fuels are being considered, such as hydrogen, ammonia, and biofuels.
Singapore remains the most important bunkering market globally, handling around 50 million tons of bunker fuel on an annual basis. This dominance is related to the intensity of the maritime traffic forced to transit through the Strait of Malacca and the important role Singapore has developed as a major oil refining center. The bunker refueling market has a high level of concentration, with six countries accounting for 60% of global bunker fuel sales.
3. The Maritime Shipping of Energy
The energy transportation market is fragmented, but the dominant modes of energy transportation are complimentary, notably when the origins or destinations are landlocked or when land routes can reduce distances. Like other forms of transportation, energy transportation is often a sequence of modes, with maritime transport and pipelines the most used for large volumes. Such volumes underline the need for economies of scale and the importance of load breakpoints in energy transport chains. The transportation of energy is the activity that is the most prone to economies of scale in the transportation industry because of the relatively low value to mass ratio of fuels and the high demand. Therefore, locations adjacent to harbors are usually the primary location of energy storage and processing activities, such as oil refineries, enabling them to access global markets either as an input (crude oil imports) or as an output (refined oil products).
In 2015, about 2.9 billion tons of oil and natural gas products were shipped by maritime transportation, roughly 62% of all the petroleum produced. The remaining 38% is either using pipelines (predominantly), trains, or trucks. Crude oil alone accounted for 1.77 billion tons. The maritime circulation of petroleum follows a set of maritime routes between regions where it has been extracted and regions where it will be refined and consumed. More than 100 million tons of oil are shipped each day by tankers. About half the petroleum shipped is loaded in the Middle East and then shipped to Japan, the United States, and Europe. Tankers bound to Japan use the Strait of Malacca while tankers bound to Europe and the United States either use the Suez Canal or the Cape of Good Hope, depending on the tanker’s size and specific destination.
The world tanker fleet capacity (excluding tankers owned or chartered on a long-term basis for military use by governments) was about 488 million deadweight tons in 2015, representing about 28% of the world’s shipping tonnage. There are roughly 7,000 tankers available in the international oil transportation market. The cost of hiring a tanker is known as the charter rate. It varies according to the size and characteristics of the tanker, its origin, destination, and the availability of ships. However, larger ships are preferred due to the economies of scale they confer. About 638 VLCCs (Very Large Crude Carriers) account for a third of the oil being carried. Transportation costs account for a small percentage of the total cost of gasoline at the pump. For instance, oil carried from the Middle East to the United States accounts for about one cent per liter at the pump. Transportation costs have conventionally accounted for between 5% and 10% of the added oil value, depending on the market being serviced. The growth in oil prices since 2000 makes the transport costs an even lower component of the total costs, sometimes lower than 5%. Thus, oil demand is not related (is inelastic) to its transport costs but is a factor of effective tanker capacity.
Due to distance and port access constraints, tanker flows have a high concentration level with different tanker sizes used for different routes. Larger tanker ships have required the setting up of offshore terminals and even the usage of tanker ships for storage. Tanker ships can also be used as semi-permanent storage tanks. There is thus a specialization of maritime oil transportation in terms of ship size according to markets. VLCCs are used primarily from the Middle East in high volumes (more than 2 million barrels per ship) and over long distances (Europe and Pacific Asia). Shorter journeys are generally serviced by smaller tanker ships, such as from Latin America (Venezuela and Mexico) to the United States. Transport capacity has a significant impact on market selection. For instance, three-quarters of American oil imports come from the Atlantic Basin (including Western Africa) with journeys of less than 20 days. Most Asian oil imports come from the Middle East, a three-week journey with the halfway location of Singapore being one of the world’s largest refining centers. Due to environmental and security considerations, single-hulled tankers have been gradually phased out to be replaced by double-hulled tankers.
The LNG industry was originally developed as a niche. It is a highly structured business characterized by dedicated long-term contracts, and regionally-based trade flows with shipping tied into special projects for the life of the contract. Due to the large capital requirement of LNG projects and the high risks involved, the leading market participants in the LNG shipping segment used to be limited to the so-called super majors, namely major oil companies. After the 1990s, gas buyers wanted more flexibility in their supplies and started to move upstream, participating in activities such as shipping. Gas sellers also started to move along the chain, becoming minority owners in shipping and occasionally in regasification plants. As a result, LNG shipping came under the control of different parties. In line with the global trend towards the privatization of energy markets, the transformations taking place in the LNG market are heavily influenced by deregulation and liberalization in both the upstream and downstream gas markets.
Nowadays, some independent shipowners are starting middle stream activities to integrate their LNG value chain by either cooperating with upstream gas sellers in liquefaction projects or investing with downstream buyers in import terminals. They can also take the role of refrigeration terminals by converting ships to floating gas production or regasification units. Additionally, one of the most noticeable changes in the market structure, which has both contributed to and benefited from a short-term marketplace, has been the emergence of companies that invest throughout the LNG supply chain. These portfolio players have a portfolio of liquefaction interests which they use to supply a portfolio of import terminals using vessels they control specifically for this purpose. This group mainly includes a number of international oil majors (e.g., Shell, BP, ExxonMobil), utility companies (e.g., Suez de GDF, ENI), private companies (e.g., Mitsui), and quasi-government companies (e.g., Sonatrach, Qatar Petroleum and Statoil).
Ship-owners can be classified into four categories:
- LNG integrated projects with gas suppliers, including national oil companies and their partners.
- Gas buyers, like Japan and Korea who are dependent on LNG imports. They own and operate some shipping capacities for diversifying gas suppliers to secure market demand.
- International oil majors, who are portfolio players, who use their own vessels to sail between the liquefaction and regasification plants where they have portfolio interests.
- Independent ship owners who previously secured long-term contracts from LNG integrated suppliers or buyers.
With the growth of the LNG trade, additional LNG projects are launched with shipping capacity tied in, and new tankers are then ordered accordingly.
Related Topics
References
- DNV-GL (2020). Ports: Green gateways to Europe.
- International Transportation Forum (2020). Navigating Towards Cleaner Maritime Shipping: Lessons From the Nordic Region. Paris: OECD.
- Poulsen R.T., S. Ponte, H. Sornn-Friese (2018) “Environmental upgrading in global value chains: The potential and limitations of ports in the greening of maritime transport”, Geoforum, Volume 89, Pages 83-95. https://doi.org/10.1016/j.geoforum.2018.01.011.
- Wang, S., Notteboom, T. (2014). Shipowners’ structure and fleet distribution in the LNG shipping market, International Journal of Shipping and Transport Logistics, 6 (5), 488-512.