Taking a commercial view of LNG prospects, we’ve heard a lot of talk about a golden age of gas – and in SSY Gas’ opinion, we are getting there, writes Debbie Turner.
By the end of 2020, we expect the volume of traded LNG to top 400M tonnes a year (mta) – based on production, not capacity – up from just over 250 mta in 2016. This points to huge growth between 2015-2020, led by new projects concentrated in the US and Australia. In 2017-2020, we expect new US projects to drive growth.
To match that surge in production requires import markets, and import demand is also rising. There is a popular view that Europe is an empty bucket for LNG. In fact, we are not yet seeing that. Demand growth is still concentrated in the Far East.
China has achieved a 59% increase in LNG imports year-on-year, and this has had a huge impact on the market. Even Japan is holding its own, despite fluctuating volumes month by month. And South Korea, too, is using LNG to replace coal and nuclear power production.
When it comes to India, we have a question mark, however. And the unknown here comes down to import infrastructure – a key element in all new LNG markets.
When it comes to emerging-market demand for floating storage and regasification units (FSRUs) and floating storage units (FSUs), the only thing that matters is infrastructure, infrastructure, infrastructure. Vessels command very different rates depending on whether they are FSRUs or LNG carriers – it’s very costly for a shipowner to have an FSRU waiting around.
Any new import project must be able to discharge gas into a domestic system. Pakistan, Bangladesh and Myanmar all want to charter FSRUs and all are facing challenges. However, Egypt is moving in the opposite direction, on course to become a major exporter again, as early as 2019-2020.
As for LNG shipping, we will see orders peak in 2018. From 2020 the orderbook is low, reflecting a prolonged downturn in new orders. At around US$183M a go, LNG ships are the most expensive tonnage in the world – and among the smartest, most economical ships to run.
Shipowners are still reticent about ordering new tonnage, not least because the future of Japan’s offtake agreements is so uncertain. It is unclear whether additional US volumes will remain in the Atlantic Basin or ship long-distance to the Far East, which would boost tonne-mile demand. That dearth of orders means a supply crunch is coming.
The shipyards in Japan and South Korea are offering additional storage to hold vessels booked against projects that are delayed. In November, some 25 ships were still in the yards. That decision to let them remain there is helping to keep shipping tight.
The dynamics have changed in propulsion technology. LNG shipping has moved from steam to tri-fuel, which includes the use of gas injection systems. After 30 years of using high-pressure water vapour to cause propellers to turn came large, often speculative orders for LNG carriers with dual and tri-fuel diesel-electric engines.
The dual and tri-fuel vessels are quickly being replaced by orders for ships with ME-GI/XDF slow-speed diesel engines. All engine types have advantages and disadvantages, but changes in ordering reflect a constant need to improve efficiency and reduce performance costs.
By the end of September, LNG carriers had made 159 transits through the Panama Canal. The waterway was not designed for LNG carriers. All the slots available in 2018 to LNG carriers are fully booked; unused slots revert to other tonnage.
It will prove expensive to negotiate additional slots, forcing unbooked vessels to sail around Cape Horn and the Cape of Good Hope. This is set to boost tonne-mile demand in 2018.
However, this also presents a problem for ships that cannot secure return slots. Today, no US port supports cargo cool-down services, forcing LNG carriers to burn off heel. Those that have not booked slots include major South Korean and Japanese buyers – and that will make the coming year very interesting indeed.
The LNG fleet at year-end 2017
Ship type existing on order total
LNG carrier 445 102 547
FSRU/FSU 32 14 46
Small/multipurpose 28 8** 36
FLNG 6* 2 8
Total 511 126 637
Source: SSY Gas, November 2017
*includes vessels being converted
** includes LNG bunker-supply ships
Debbie Turner is director of SSY Gas. She was speaking at the LNG World Shipping ship-shore interface conference