Introduction of Blockchain to LNG Shipping (by Dr. Vladimir Udalov & Vladislav Pertsovich)
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- Dec 12, 2019 12:34 pm GMT
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This is the second article of our blog series on utilization of blockchain technology in commodity trading. As we have shown in our first article, within commodity trading development of blockchain-based applications seems to be quite promising if talking about post-trade processes. In this article we will elaborate on a potential use case for blockchain application in LNG shipping. In particular, we will show how blockchain can help LNG shippers handle discrepancies between quantities detailed on the bill of lading and those actually discharged.
During maritime transportation LNG is stored as a cryogenic liquid at -162°C in heavily insulated tanks. Due to large temperature differential between the tank and the ambient air, a part of the LNG absorbs heat and continuously evaporates creating Boil-Off Gas (BOG). BOG can be either burned in a controlled manner in a gas combustion unit or used for the ship propulsion. If insufficient BOG volumes are available for propulsion, additional LNG can be force vaporized, which is called forced BOG. Various market players are affected by BOG, because it reduces quantity and changes quality of LNG cargo delivered to regasification terminal. One of these market players is customs authority, which might face reduction in customs duties due to less LNG being discharged than indicated on the bill of lading.
Usually customs authorities around the world acknowledge the fact that LNG quantity to be discharged is less than that at the completion of loading because of boil-off. However, there are also few exceptions to this rule.
- Indian authorities assume that operators of LNG carriers force boil-off on purpose in order to decrease cargo and reduce the amount in customs duty that would otherwise have been applicable for the full cargo. Consequently, customs fines should be imposed on LNG carriers that do not discharge the entire quantity of LNG cargo detailed on the bill of lading. In claiming this, Indian authorities refer to Section 115 of the Indian Customs Act 1962, which states that local agents must explain why the full bill of lading quantity has not been discharged.
- Referring to a similar regulation, Pakistan customs authorities impose charges on LNG vessels if there is an under-payment of duties due to any differences in LNG quantities indicated on the bill of lading and off-loaded in reality.
- Similar precedent took also place in South Korea, where tax authorities had imposed additional customs duty on the importer of the LNG for not including the value of BOG as freight charges in determining the dutiable value of the imported LNG1.
Flaring or use of BOG as fuel is from technical and economical perspective an essential condition of transporting the LNG. However, due to rapid development of LNG trade in the past decade some countries-importers still lack experience in dealing with its specific features. Hence, they face the BOG issue with caution and mistrust.
Indian authorities suggest using a system similar to the one applied in Argentina and Turkey. In this particular system there is a separate bill of lading for the agreed heel2, boil-off gas used during the voyage and the LNG quantity off-loaded. Splitting the original bill of lading into three sets complies with the carriers’ liability to discharge the full bill of lading quantity. However, this system implies some disadvantages. First, in order to guarantee that the corresponding sets of bills of lading are correctly issued, this system requires a precise determination of the cargo quantity off-loaded and the quantity of BOG during the voyage. Second, with three sets of bills of lading instead of one cost of paper-based documentation, which has to be circulated around the world, increases exorbitantly. Third, fraud is another problem which traditional bills of lading suffer from. Splitting the original bill of lading into three sets would make fraud easier to pursue.
Thus, there is a need for an alternative solution, that should function ideally without cumbersome paper-based processes. This solution should provide more transparency and establish a single shared view of information regarding the use of BOG, including distinction between natural and forced BOG as well as BOG related ambient conditions (e.g. air temperature, sea temperature, sea roughness and cargo tank’s contents). This information should be exchanged between LNG carriers and customs authorities in a trustable, transparent and tamper-proof way. A solution that combines sensors and monitoring equipment onboard which would constantly register their data on a blockchain suits well to fulfill these requirements, since it benefits from attributes, such as immutability, transparency and decentralized nature. Customs authorities and LNG shippers would benefit from this solution in two ways:
- First, since LNG carriers are equipped with continuous BOG metering devices and sensors, BOG specific data can be collected, immutably recorded in the blockchain and trustworthy exchanged between operators of LNG carriers and customs authorities. This allows a near real-time monitoring of BOG as well as BOG influencing external conditions. Using this immutable information, customs authorities gain transparency regarding the history of BOG handling and a better understanding of reasons why the full bill of lading quantity has not been discharged.
- Second, as a positive side effect, other relevant participants involved in LNG shipping can have access to digitalized and immutably recorded documents accompanying LNG cargo. This could facilitate information sharing, simplify paperwork and contribute to more visibility.
Blockchain-based solution for LNG shipping and BOG handling
There already exist use cases, which contain some elements of the proposed solution. Thus, a blockchain-based ecosystem for crude oil trading called VAKT provides a mechanism for digitalization and transfer of post-trade documents among its members. The Intel® Connected Logistics Platform for consumers and distributors of perishable goods uses an integrated Internet of Things solution, which records environmental and location data in the blockchain and creates an immutable digital trail.
To conclude, a blockchain based solution combined with the Internet of Things equipment seems to be promising technology to help all relevant parties involved in LNG shipping handle BOG issues in international LNG trade.
1 - However, the Supreme Court ruled that the importer was not bound to add the value of BOG in calculating freight charges because LNG transporting vessels are specifically designed and built to burn off the BOG or use it as fuel during the ocean voyage in order to address the risk of BOG explosion.
2 - Heel is part of the cargo required to maintain the tanks in cryogenic condition until arrival at the next load port.