Natural gas (NG) is a relatively low-cost and environmentally friendly fuel that significantly reduces air pollutants and carbon dioxide (CO2) emissions compared to diesel. Compressed or liquified NG (CNG/LNG) is increasingly considered a viable alternative fuel for compression-ignition (CI) engines in a hybrid electric propulsion system of heavy-duty vehicles and marine vessels. The added battery energy storage system (BESS) overcomes the performance drawbacks of an NG engine. Meanwhile, the two challenges associated with NG-engine hybrid electric propulsion, the increased carbon dioxide equivalent emissions (CO2e) due to methane slip under specific operating conditions and the BESS’s high cost and limited lifespan, need to be addressed. This study employs dynamic programming (DP) to develop an energy management strategy (EMS) based on the ship’s statistical operating profile. The EMS optimizes the trade-off between NG fuel consumption costs, BESS degradation costs, and CO2e emissions, which include CO2, hydrocarbons (HC), carbon monoxide (CO), and nitrogen oxides (NOx). A novel real-time optimal control approach refines the baseline EMS using real-time vessel operation data. This approach allows the NG engine to operate at optimal speed and torque, reducing fuel consumption and CO2e emissions. Additionally, it minimizes over-utilization of the BESS by incorporating a dynamically updated battery state of health (SOH) model, ultimately achieving the lowest possible life cycle cost (LCC) for the NG-hybrid electric propulsion system. The advantages of the real-time optimal control strategy are demonstrated through a case study involving a medium-sized vehicle and passenger ferry.