The Economics of Converting Existing Ships to LNG
Shipping companies today face a twofold challenge: meeting increasingly stringent environmental regulations while maintaining profitability. Liquefied natural gas (LNG) is emerging as a viable solution, offering both sustainability and cost advantages. However, converting ships to LNG fuel comes with a significant upfront expense and technical complexity.
This blog dives into the economics of retrofitting ships for LNG, exploring the costs, benefits, and trade-offs involved. Whether you’re a fleet owner curious about the return on investment (ROI) or a maritime professional seeking insights, this analysis will arm you with the knowledge you need.
What Is LNG Conversion, and Why Does It Matter?
LNG conversion is the process of retrofitting an existing vessel to use LNG as a primary fuel source. Unlike traditional marine fuels such as heavy fuel oil (HFO) or marine gas oil (MGO), LNG offers lower emissions and complies with stringent regulations set by the International Maritime Organization (IMO).
LNG conversion is more than just an environmental upgrade; it’s an operational transformation. From lower fuel costs to reduced maintenance requirements, LNG has the potential to fundamentally reshape a ship’s economic outlook.
Costs and Challenges of LNG Conversion
LNG conversion is not as simple as swapping one fuel for another. It involves extensive structural and engineering changes to your vessel. Here’s a breakdown of the key cost components:
Initial Investment
The upfront costs for converting a ship to LNG can range widely, depending on the vessel type. Here’s an overview of estimated conversion costs per ship type:
- Container Ship (10,000+ TEU): $25–$35 million
- Bulk Carrier (Capesize): $18–$28 million
- Oil Tanker (VLCC): $20–$32 million
- Ro-Ro Vessel: $10–$18 million
- Passenger Ferry: $12–$22 million
These costs typically include LNG tank installation, dual-fuel engine modifications, and additional safety systems for LNG storage and handling.
Downtime Costs
Retrofitting a vessel for LNG typically takes several months, during which the ship is out of service. For shipowners, this downtime represents lost revenue, further increasing the total cost of conversion.
Additional Challenges
From technical requirements to logistical hurdles, LNG conversion presents unique challenges, including:
- Installing cryogenic LNG storage tanks that require more space than traditional fuel tanks
- Retraining the crew to handle LNG safely
- Managing the risks of LNG’s high flammability
Despite these hurdles, many shipowners are still drawn to LNG, thanks to its long-term benefits.
The Payback Period and ROI of LNG Conversion
The question every shipowner asks is, “Is the ROI worth the upfront costs?” The answer depends on several factors, including operational scale, fuel savings, and market incentives.
Fuel Savings
LNG is cheaper than HFO and MGO, leading to substantial annual savings. Here’s an estimate of yearly fuel savings post-conversion:
- Container Ship: $3–$5 million
- Bulk Carrier: $2–$4 million
- Oil Tanker: $2.5–$4.5 million
- Ro-Ro Vessel: $1–$2 million
- Passenger Ferry: $1.5–$3 million
Maintenance Savings
LNG produces fewer sulfur oxides and particulates, reducing engine wear and lowering annual maintenance costs by up to 25%. On average, maintenance savings range from $500,000 to $1 million annually.
Market Incentives
Converting to LNG opens the door to financial incentives such as tax breaks, subsidies, and access to green financing. Additionally, LNG-powered vessels often qualify for carbon credits, creating another revenue stream.
Estimated Payback Period
For most LNG conversions, the payback period ranges from 5 to 15 years. Larger, high-consumption vessels tend to recoup conversion costs faster, with payback often achieved within 4–8 years.
The Long-Term Benefits of LNG Conversion
Beyond short-term ROI, LNG conversion offers long-term operational, environmental, and regulatory advantages.
Compliance with IMO Regulations
The IMO’s 2020 sulfur cap requires ships to reduce sulfur emissions significantly. LNG offers nearly 100% sulfur reduction and up to 28% CO₂ reduction, ensuring compliance with all current regulations while mitigating the risk of penalties or fines.
Competitive Advantage
Modern consumers and businesses seek environmentally responsible solutions. An LNG-powered fleet stands out in a competitive market, providing an edge to operators who prioritize sustainability.
Increased Resale Value
Ships retrofitted for LNG often see a bump in resale value, as eco-friendly vessels are more attractive to buyers.
LNG Conversion vs. New LNG-Built Ships
For shipowners considering LNG, the choice often boils down to retrofitting existing ships or investing in new LNG-built vessels. Here’s a comparative analysis:
| Factor | LNG Conversion | New LNG-Built Ship |
|---|---|---|
| Upfront Cost | $10–$35 million | $100–$150 million |
| Timeline | 3–6 months | 12–24 months |
| Fuel Efficiency | Improved, but less than new builds | High efficiency, optimized for LNG |
| Environmental Compliance | Meets IMO standards | Exceeds IMO standards |
| Resale Value | Moderate increase | Significant increase |
While conversions are quicker and cost less upfront, new LNG ships offer superior efficiency and compliance, often making them a more attractive option for long-term investment.
Is LNG Conversion Right for Your Fleet?
Ultimately, the decision to convert existing ships to LNG depends on your operational needs, budget, and timeline. Shipowners with high-consumption vessels operating on long-haul routes stand to gain the most from LNG conversion. However, factors such as available incentives, bunkering infrastructure, and fleet composition also play a role.
For companies looking to modernize their fleet while meeting sustainability goals, LNG presents a practical, forward-thinking solution. While the upfront costs may seem steep, the long-term savings and environmental benefits make LNG conversion a worthwhile investment for many operators.
The Benefits of LNG as Fuel
1. Lower Greenhouse Gas (GHG) Emissions
Switching to LNG significantly reduces harmful emissions. According to industry studies, using LNG as a marine fuel results in the following reductions compared to traditional fossil fuels, such as HFO and diesel:
- 20–30% less CO2 emissions.
- 15–25% less total GHG emissions.
- 90% less Nitrogen Oxides (NOx).
- 99% less Sulfur Oxides (SOx).
- Almost no particulate matter (PM).
These characteristics make LNG a valuable tool for meeting the International Maritime Organization’s (IMO) emissions standards and global climate targets.
2. Cost Competitiveness
Although LNG requires investment in specialized infrastructure like fuel systems and storage tanks, its cost per energy unit is generally lower than that of traditional fuels. With growing global demand and increasing availability at bunkering ports, LNG promises long-term financial benefits for operators.
3. Market Availability and Growing Infrastructure
The LNG bunkering network has expanded rapidly. By 2025, more than 235 global ports are expected to offer LNG refueling facilities, up from just 141 ports in recent years. This growth makes it increasingly convenient for shipowners to access LNG.
4. Versatility of Dual-Fuel Engines
Modern LNG-powered ships often feature dual-fuel engines that can alternate between LNG and conventional fuels like HFO or diesel. This flexibility is ideal for regions where LNG infrastructure is still limited, allowing operators to optimize fuel usage for cost and availability.
5. BioLNG as a Future Option
BioLNG, derived from organic waste such as agricultural residue and manure, is emerging as a renewable alternative to conventional LNG. Ships able to use bioLNG could further reduce their carbon footprints while leveraging the same infrastructure and engines designed for LNG.
Challenges of LNG Adoption
While LNG is beneficial, it comes with challenges that must be addressed.
1. Methane Slip
Methane slip occurs when unburned methane escapes into the atmosphere during fuel combustion or transportation. Methane is a potent greenhouse gas, over 25 times more effective at trapping heat in the atmosphere than CO2. Modern dual-fuel engines are designed to minimize methane slip, with leading manufacturers like Wärtsilä reducing methane slip by about 90% in their engines over the last 30 years.
2. Infrastructure Investment
Switching to LNG requires significant financial investment. Specialized fuel tanks, cryogenic equipment for LNG storage, and safety systems are necessary for LNG-powered ships. Additionally, crew members need specialized training to handle LNG safely.
3. Energy Density
LNG has a lower energy density compared to diesel, meaning ships need larger volumes to achieve the same range. This often results in reduced cargo space or the need for additional fuel tanks.