TRANSCRIPT: LNG Conversion - "Do Your Homework, Play The Fundamentals Of The Game"

Why should you convert your marine fleet to LNG, and is it even feasible for LNG bunkering to exist in North America without the shale boom? Find out here in this exclusive interview with Peter Keller, Executive Vice President of Tote Inc.

TH Tim Haðdar, Editor In Chief, Oil & Gas IQ

PK Peter Keller, Executive Vice President, TOTE Inc.

TH Hello and welcome. This is Tim Haidar and today I'm speaking with Peter Keller, the Executive Vice President of TOTE Inc. Peter, thanks very much for joining us today.

PK It's my pleasure.

TH Let's into the case of your organisation and why you have gone down the LNG conversion and construction route. What was your organisation's motivation?

PK Well, we operate in two major trade lanes: one, to Puerto Rico from Jacksonville and the other from Tacoma, Washington to Anchorage, Alaska. Both of those trades that we operate in are self-contained, that is the ships just go back and forth from those ports on a weekly basis. In the Florida trade lane to Puerto Rico, the ships are well over 35 years old and needed to be replaced. As we looked at the application of the environmental containment areas and as we looked at our own responsibilities as corporate citizens, in terms of our environmental stewardship, it became very clear that if we were to become the kind of company that we wanted to be, being very conscious of the people we were serving, it was appropriate that we consider alternative fuel sources for our new build between Jacksonville and Puerto Rico.

The more we examined that, the more it became obvious to us that we really needed to address the source of the emission issues, which was the fuel itself. And the only fuel that made sense after going through all those iterations was liquefied natural gas, LNG. So, that's really the genesis of that decision.

In terms of our ships that we operate between Tacoma and Anchorage, those ships are currently about ten years old, so they're fairly good tonnage, but they're also now having to operate in the ECA. So, it became clear that we also needed to change the fuel on those ships, so in those two ships, we are working on a conversion programme where we will be removing the existing engines manufactured by MAN and replacing them with upgraded equipment.

We had, originally, hoped to convert the MAN engines, but the manufacturer was not able to accomplish that task, so we now have to do a complete re-conversion of those vessels and we will be doing that at about the same time as we're building our new Marlin class ships, which are the 3,100 TEU container ships that are going to, then, operate between Jacksonville and Puerto Rico.

TH Is the decision that you've made to go for an LNG solution based on economics?

PK No, not really. We have these ECA requirements that we all understand and we all support. We are also very closely tied, in our businesses, to both the people of Alaska and the people of Puerto Rico. And, as an organisation, we do take our social responsibilities very, very seriously. Now, in terms of the varying levels of fuel pricing right now, yes, there are some economic advantages to the price of LNG at the moment. However, long-term, we all understand the volatility of fuel costs. This is not really about fuel costing, this is really about environmental and conforming to the ECA.

As I always tell people; if I could tell you what the price of any fuel was going to be on a worldwide basis any time over the next three to five years, I likely would not be doing what I'm doing today! I would be a lot more popular and have a lot more people asking me for my advice and happily paying for it if I could do that properly!

TH You and me both, and I'd certainly win the lottery every other week as well.

PK Absolutely. That's why, in these kinds of situations, yes, you always have to look at the economics, but at the end of the day, we have a sustainable business, we have a business that supports the people of Alaska on one coast, a business that supports the people of Puerto Rico on another coast, we've been in those businesses for many, many years, we're tied to those economies, we support those economies, and we also need to support the people environmentally and socially, as well as with a service that allows them to continue to have a viable environment.

TH You've spoken from your organisational point of view, about the adoption of LNG fuelling and, therefore, the infrastructure around that makes sense. Speaking from almost a continental point of view now, what is the case for energy bunkering in North America?

PK At the end of the day, the most compelling issue in all of this, really, is how do you provide the LNG to the ship? We all know that the shipboard technology, ships that have been running on LNG fuel for many, many years. All of the LNG carriers run on their cargo, so the technology of actually using LNG in a maritime engine is not the major challenge. The major challenge is how do you provide the fuel to the planes or the ship and that is what we have been spending a tremendous amount of time on in both Jacksonville and Tacoma, Washington, to create a supply environment, so that we will be able to have liquefied natural gas near the vessel and then to either bunker it directly to the ship or bunker it through a bunker barge in the port area.

We believe that we have now the necessary supply. We have made announcements at Jacksonville and have supply partners. We're very close to making announcements in Tacoma, Washington, and by the time this conference takes place in June, we will have done that. And we are now working on the regulatory and technical issues associated with them bringing that liquefied natural gas from the plant that cools it cryogenically, to the flange of the ship. Quite honestly, when one is looking at these opportunities, it is the supply side that I think, over the course of time, will be the real inhibitor. We are quite fortunate in that in both of these trade lanes, the ships come back to a port every week and that's what they do, they just go back and forth, back and forth.

So, we have the ability to supply in either Anchorage, Tacoma and Washington, Jacksonville, Florida or San Juan, Puerto Rico, as the fuel is available to us and we're working right now, principally, with Tacoma, Washington and Jacksonville, Florida, in order to assure that supply on a weekly basis and are now working on the details, which, hopefully, we'll be able to spend a little more time on in Vancouver later on this year.

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TH With regards to LNG bunkering as a solution for North America, could it actually exist as a viable solution in the hearts and minds of the people in the maritime industry without the shale boom that's happening in North America at the moment?

PK Well, certainly, having the available supply is critical and having the sustainable supply long-term is critical. We never would have made the investment we've made in ships that will have a life of 30 or 40 years if we did not believe that there would be a sustainable supply of gas that we could run through a liquefaction facility, in order to power our ships. Now, the ships are dual fuel and they can run on other fuels, but clearly, they're made to operate on liquefied natural gas.

So, yes, supply is very, very important to us. I think that we believe that, given the environmental benefits of liquefied natural gas, and as the industry gets more accustomed to working with liquefied natural gas, which, by the way, is the safest fuel we know.

It is lighter than air, it dissipates vertically into the air, it is at minus 260°F, so it is a cryogenic fuel, and therefore, is not volatile in its state. I think that once people come to grips with all of that, we will see much more acceptance and, together with that, as we develop these supply sides and as we develop bunkering capabilities and other fuelling capabilities, I think you will see a major switch in those trade lanes that are predominantly inside of ECA to this and other potential alternative fuels.

We're already seeing it in the Jones Act trades in the United States, where at least one of our competitors has announced that they will be building LNG ships much like ours. We anticipate another major Jones Act player will be building LNG ships and the current Jones Act tankers that are being built, many of those are being built to, what they term, LNG ready specifications. So, at least in coast-wide trades in the United States, the Jones Act trades, we're already seeing a lot of activity, just as you're seeing a tremendous amount of activity within the continent of Europe.

TH You make an interesting point about developing the supply side in North America. How do you see that unfolding across the period of the next half-decade?

PK We've seen a tremendous amount of work being done on liquefaction facilities. As we know, these are relatively large, fairly costly facilities, with a tremendous amount of regulatory oversight. But in Jacksonville, for example, there is a potential that there could be as many as three facilities built in the next five to ten years. There is at least one other facility being rumoured in the state of Florida. There is a large facility in Georgia that people are looking at. There are a lot of facilities being built in the Gulf for the United States. There is talk of facilities up at the Philadelphia area to support the Marcellus shale. So, as liquefied natural gas comes forward as a potential fuel, you're going to see much more investment.

We're also seeing it in North America as a more generalised transportation fuel. Every one of the class one railroads in the United States is experimenting, at one level or another, with liquefied natural gas. I talked to the president of a major railroad yesterday and they have actually ordered LNG tenders and are converting locomotives for active tests late this year, so we're going to see that. I've also, over the course of my career, done a lot of work in California and other places with an organisation called the Coalition for Responsible Transportation that converted trucks in port areas to alternative fuels. And we're going to continue to see conversion of road transportation in the United States to alternative fuels, whether it's CNG or LNG.

And, in order to support that, a number of companies, like clean energy and Westport, are actually building LNG gas stations across the United States. Jacksonville has two and there is a whole system of, I believe, about 200 - 250 LNG gas stations that exist today across the United States in support of this movement to alternative transportation fuels.

TH Now, the final question that I had is a question that I expect to be on the lips or, at least, in the minds of people who are thinking very seriously about converting their fleets - be they maritime or land based as well - to LNG. And that is; what kind of advice would you give to those people who are starting out on a journey towards LNG conversion for their business?

PK It's no different than any other activity we take in business. You've got to do your homework. You've got to do the blocking and tackling. You've got to play the fundamentals of the game before you get too fancy. We've spent well over two years just learning about LNG and, obviously, we've only scratched the surface and there are many, many, many years of learning that still needs to take place. But it really is just about not letting the technology scare you. Understanding what LNG really is, which is a cryogenic fuel, and then talking to as many people as you can and learning as much as you can and trying to separate the wheat from the chaff.

TH Peter, thanks very much for you insight into this issue and thanks very much for that advice, which, I'm sure, will be helpful.

PK Great. I look forward to seeing everyone in beautiful Vancouver.