With the FuelEU Maritime Regulation now in effect, LNG-powered vessels are in a unique position. Their lower greenhouse gas (GHG) intensity compared to conventional marine fuels provides an opportunity to generate compliance surpluses at no extra OPEX. But can an LNG vessel rely solely on banking surpluses to stay compliant in the long run? And more importantly, should it?
This week’s newsletter explores whether LNG ships can "bank their way" through FuelEU Maritime compliance and if not, whether they should bank or trade surplus.
LNG and the Banking Mechanism Under FuelEU Maritime
FuelEU Maritime allows compliant vessels to bank compliance surpluses—excess reductions in GHG intensity compared to the regulatory target. These banked surpluses can be used in future years to offset any potential deficits, offering an attractive compliance buffer.
LNG-powered ships, due to their lower GHG intensity than other fuels like HFO or MDO, are projected to generate surpluses in the early years of FuelEU. But as regulatory targets become stricter, the question arises: How long can these vessels profit from banked surpluses before they become non-compliant and should they just sell the surplus each year or bank?
Case Study Assumptions
In order to investigate this question, we have to make a few assumptions and create a number of different case studies. For all case studies, we take the usual sample ships with an annual in-scope consumption of 10,000 t LNG. Further, we assume a vessel lifetime of 25 years.
Regarding the surplus value, two scenarios have been used (a) a stable surplus in which the value is constant at 250 €/t CO2e and (b) a dynamic surplus increasing by 10 €/t CO2e with a starting value of 250 €/t CO2e. All values have been calculated using our free, online FuelEU Calculator following the latest regulatory info with WtT values based on AR5 from 2025 and TtW values based on AR4 in 2024 and AR5 from 2025 onwards.
The LNG Newbuild: Bank or Trade?
For the case study of an LNG newbuild, we have assumed the use of an LNG Diesel (dual fuel slow speed). This is the best option with the lowest GHG intensity out of all LNG versions resulting in over-compliance all the way till 2039. Given the assumed lifetime of 25 years, the vessel will be scrapped in 2050. The study distinguishes between a Sell & Buy strategy, buying and selling surplus every year based on what is needed/generated, and a Bank & Buy strategy, banking surplus as long as possible and then buying once all banked surplus is used.
With a stable surplus value, there is no cost difference between the sell & buy and the bank & buy strategy as the costs of non-compliance at the end or throughout is not of relevance. This is different under the dynamic surplus scenario with a steadily increasing surplus value as depicted in Table 2.
The bank & buy strategy saves about 8.5 million € over the 25-year lifespan of the vessel compared to the sell & buy strategy because the sell & buy strategy makes the vessel profit from over-compliance in early years during which the surplus value is lower in the assumed dynamic surplus scenario, whereas the bank & buy strategy derives value from the surplus only when the vessel becomes non-compliant and the cost of surplus on the market increased.
Therefore, it is recommendable for new LNG ship owners to bank surplus instead of selling it immediately if the long-term strategy assumes increasing surplus values.
The Existing LNG Ship: Bank or Trade?
Not all of the LNG vessels in the global fleet are newbuilds with the most beneficial engine type. The following case study looks at existing LNG ships with an age of 10 and 15 years and considers other (not all) possible engine types, resulting in the following cases:
Stable Surplus, LNG Diesel (dual fuel slow speed), 10 years old
Stable Surplus, LNG Otto (dual fuel slow speed), 10 years old
Stable Surplus, LNG Otto (LBSI), 10 years old
Stable Surplus, LNG Diesel (dual fuel slow speed), 15 years old
Stable Surplus, LNG Otto (dual fuel slow speed), 15 years old
Stable Surplus, LNG Otto (LBSI), 15 years old
The study did not consider LNG Otto (dual fuel medium speed) as vessels with this engine type will anyway be non-compliant by 2026 latest.
The results in Table 3 depict a similar result as in the newbuild study. With a stable surplus value, both strategies result in the same costs/profits, whereas in the dynamic scenario with an increasing surplus the bank & buy strategy always wins. Note that the 10-year-old LNG Diesel (dual fuel slow speed vessel) does not incur any costs as its first non-compliance year is 2040 and therefore previous banked or sold surpluses outweigh the occurring non-compliance. This is not the case for LNG Otto (dual fuel slow speed) and LNG (LBSI) turning non-compliant in 2035 and 2030 respectively. How do the values change for a 15-year-old vessel?
The above Table 4 outlines the same result. The Bank & Buy strategy performs better with a dynamic surplus increasing in price over the FuelEU-relevant period. It also shows that the LNG Otto (dual fuel slow speed) ship has the potential to make profits, in contrast to the 2025 to 2040 timeline, as it only becomes non-compliant in 2035. Further, the LNG Diesel (dual fuel slow speed) vessel is able to make higher profits as it is not facing any under-compliance at all compared to the period till 2040. In this context, note that the analysis assumes that if the banked surplus is not used until the period end it still has the value of the last year's surplus multiplied with the banked surplus amount.
For a more detailed study using your own data, check out BetterSea's free, online FuelEU Maritime Calculator.
Conclusion: Should LNG Ships Bank or Trade FuelEU Surplus?
Under the assumption that the surplus value in the future either remains stable or increases, there is no numerical argument for selling LNG-based surplus. Instead banking proves to be the better option in the long run. If one would assume that the surplus value will decrease with time, the opposite is true.
Beyond numerical arguments, commercial arguments such as charter party agreements may be of relevance. Banking as a long-term strategy mainly becomes relevant to the ship owner rather than the charterer, unless the charter party agreement beneficially sets the value of banked surplus upon redelivery. Similar to charter arrangements, LNG vessels with banked surplus that are to be sold or purchased carry an additional commercial value which must be considered in S&P considerations.
In any case, it is remarkable that under the current regulatory scheme of the FuelEU Maritime Regulation, a LNG Diesel (dual fuel slow speed) ship solely operating on fossil LNG only turns under-compliant in 2040, and with applied banking strategy, only incurs compliance penalties in 2045. Twenty years after the start of the FuelEU Maritime Regulation with its goal to "(...) to increase the share of renewable and low-carbon fuels in the fuel mix of international maritime transport (...)."
For now, LNG remains one of the strongest compliance solutions. Want to explore the best strategy for your LNG-powered fleet? Get in touch to analyze how long banking can work for your vessels and whether trading or alternative fuels should be part of your long-term plan.
BetterSea’s FuelEU Maritime Compliance Platform with integrated marketplace provides you with a fast, streamlined, end-to-end process covering all potential compliance options, including external pooling and surplus trading. It allows you to comprehensively strategize your FuelEU and EU ETS compliance on a ship-specific level amidst volatile markets. Book a demo below!
Stay tuned for more insights on navigating maritime decarbonisation compliance in our upcoming newsletters. If you have any questions or need further guidance, feel free to reach out!
Best regards,
The BetterSea Team
Contact Us: info@bettersea.tech
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Disclaimer: This case study is based on assumptions if not otherwise stated and does not consider the FuelEU Maritime RFNBO sub-target
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