Shipowners have delayed delivery dates for their newbuildings, as fears of oversupply have slowed start dates for new LNG-export projects.
This year, 41 new LNG carriers are due for completion and the fleet is on course to hit the 500-ship landmark as early as April. Balancing LNG carrier demand against available cargoes is tricky in an oversupplied market. But will things get better this decade for tonne-mile demand?
LNG World Shipping asked the experts.
Simpson Spence Young (SSY) Gas director Debbie Turner
LNG carrier propulsion has moved from traditional steam-driven engines to gas injection, ME-GI or X-DF, and containment systems have become ever more economical. Vessel sizes have also increased, reducing the cost of transportation of LNG molecules.
Production of LNG is also changing. Historically the main sources of production were close to their markets; spot cargoes were only available when volumes exceeded contractual demand. This has altered, with more fluidity, driven by the new supply sources and end users’ desire for more flexible contracts.
LNG production will grow, from around 222 million tonnes (mt) in 2010 to an estimated 420-430 mt in 2020. This is due to consistent volumes from the largest exporter, Qatar, and by additional volumes from Australia and the US.
Many believe this dramatic increase in production could make moving these volumes more inter-regional, reducing – in theory – demand for tonne-miles.
With production must come demand. One view is that this market will remain long in volume to 2020, although plants are unlikely to be mothballed, given their high capital investment. Therefore the LNG must be absorbed.
Although many believed these volumes would hit home in 2016, a large part of the year was tight in product, hit by outages at plants coupled with increasing demand from new import areas.
One of the main driving forces is the price of LNG. Competition from new volumes will be felt strongly across the market and we are now beginning to see more divergence from crude oil prices.
We have not yet felt the real impact of US shale gas volumes and Australian production continues to increase. Both will have a crucial effect on future pricing. A breakdown at any significant product facility will affect regional pricing, particularly where contractual volumes are significant.
This was evidenced at the end of 2016 when Far Eastern price rises due to outages opened arbitrage play between west and east. This increased tonne-miles and freight rates as tonnage was pulled into more attractive markets.
There are concerns, too, over whether some Far Eastern shale gas will head to its contracted markets or become trading plays in the Atlantic Basin, with volumes from Indian and western players.
This throws some uncertainty into these markets towards the end of the decade that could affect the number of vessels ordered, reflected in today’s depressed orderbook, with few speculative orders beyond 2018.
We will see this inter-basin product predominantly remain. But this is shipping. The opportunities to be had will be taken – oblivious to the tonne-miles – if the deal works!
GasLog chief executive Paul Wogan
GasLog retains a bullish outlook for future LNG tonne-mile demand. Rising exports until 2020, particularly in the US, should drive tonne-mile expansion. New exporters are shipping LNG to new customers, expanding the number of LNG trade routes.
The period 2016-2020 will see build-out of approximately 150 million tonnes a year (mta) of new LNG supply, driving a substantial increase in demand for gas.
Recent cargoes from Cheniere’s Sabine Pass terminal have been shipped through the Panama Canal to China, Japan and Korea, 9,000-10,000 miles (14,500-16,100km) in total. This is more than double the historical average trading distance for LNG voyages, of around 4,000 miles (6,500km).
Poten recently calculated, based on completed voyages from Sabine Pass, that every million tonnes of LNG will require about 1.7 ships, significantly more than historical averages.
Of the first 60-plus Sabine Pass cargoes, others travelled some 10,000 miles (16,100km) to the Middle East and India, and South America, where a journey to Rio is about 5,000 miles (8,000km). Just three cargoes went into Europe.
Increased tonne-miles are not the only driver of shipping demand. Speed and efficiency – or, more often, inefficiency – also matter. Commodity traders and gas “aggregators” are playing an important role in developing the growing LNG spot market.
Often, these players’ focus is not shipping optimisation but profit maximisation through price arbitrage.
Destination flexibility for new LNG supply and modern vessels’ more efficient cargo tanks enable ships to travel more slowly or take a less direct route, allowing greater optionality on where to sell the cargo. This increased tonne-time will also drive greater future vessel demand.
Both China, with a 40 per cent increase in LNG demand last year, and India, with a 30 per cent increase, have set aggressive gas-consumption targets to diversify from coal and oil. Many countries also want to use LNG to diversify their gas supplies.
Historically, this supply was often oil-price linked. The US offers a competitive alternative, with LNG often priced off Henry Hub and not oil.
New LNG importers continue to emerge: in the last two years, these include Poland, Pakistan, Lithuania, Jordan, Egypt and Jamaica. Last year, seven floating storage and regasification units (FSRUs) were awarded, providing a cost-effective, quick-to-market solution.
FSRUs continue to open new markets, creating more trade routes and fragmentation, which should drive increased tonne-mile demand. South Africa, Ivory Coast and Bangladesh are all looking to FSRUs to start to import LNG.
With new trade routes and a developing LNG spot market leading to increased fragmentation, we remain very encouraged regarding future tonne-mile expansion.
Poten & Partners LNG and natural gas consultant Amokeye Adede
LNG carrier tonne-mile demand is driven by LNG supply/demand volumes and trade patterns. LNG supply/demand has risen significantly, from just over 100 mta in 2000 to around 260 mta last year.
The average LNG trade distance has also increased, from around 2,900 miles (4,700km) in 2000 to around 3,800 miles (6,100km) today. Therefore, LNG carrier tonne-mile demand increased from around 300 billion in 2000 to around 1 trillion in 2016.
In 2000, there were around 120 LNG carriers, based primarily on long-term regional trades, committed shipping routes to efficiently use the fleet. Although a large portion of today’s LNG trade is regional, LNG is now a global business.
The LNG fleet expanded to 450 ships by year-end 2016. The relatively long shipping distances associated with Qatar/the Middle East and other recent inter-regional trades have driven LNG ship demand growth. And increased short-term trade and diversion opportunities have driven ship-demand growth, putting more emphasis on fleet flexibility.
Aside from the quantity of LNG transported and the distances shipped – ie tonne-mile demand – ship utilisation is also important. This takes time into account – idle time, canal transit time and so on. There is an increase in shipping requirement due to scheduling and utilisation inefficiencies, reflecting trade’s more dynamic, shorter-term nature.
That makes the number of required vesselsper million tonnes of transported LNG (vessels/mt) a useful metric. Current trading patterns indicate a global average shipping requirement of 1.3 vessels/mt.
LNG supply/demand is set to rise to around 350 mta by 2020 – 90 mta of new supply now under construction will come on stream by 2020. Based on an average of 1.3 vessels/mt, this indicates the need for almost 120 new ships.
Growth will be driven mostly by new US exports – an additional 60 mta by 2020 – and by Australia and Russia’s Yamal LNG. The unique nature and location of US exports will make global trading patterns ever more complex.
Today, ex-US trading patterns require 1.75 vessels/mt. However, US liquefaction projects may be delayed, or open with low utilisation, or global trading patterns may revert to being regional. New, longer routes such as Yamal to Asia, via Europe and the Suez Canal or the northern sea route would require more vessels per million tonnesmt.
Clearly, increasing flexibility creates less certainty over future trade patterns. Many newer LNG contracts have shorter terms and destination flexibility. Growing interest in cargo swaps may also reduce overall LNG ship demand as fleet efficiency increases.
Drewry senior research analyst LNG Shresth Sharma
LNG trade will get a big boost from new liquefaction trains, primarily in Australia and the US. However, what matters more for shipowners is the tonne-mile demand, which determines vessel demand.
Drewry expects LNG tonne-mile growth to average 8 per cent annually in 2017-2020. This year, we expect tonne-mile growth of 8 per cent – against trade growth at 7 per cent.
Most liquefaction trains coming online this year will be in Australia, generating more Australia-Far East trade. Growth in trade and tonne-miles is in sync because of the short-haul distance involved.
However, from next year, tonne-mile growth will surpass trade growth. In 2018 and 2019, tonne mile growth should average 9 per cent against a trade growth averaging 5 per cent, as most trains coming online will be in the US.
These trains will increase trade on the US-Asia and US-Europe long-haul routes, which will boost tonne-mile trade. That tonne-mile demand is expanding despite the opening of the new Panama Canal. Without this, growth would have been even higher.
Drewry is therefore maintaining a bullish outlook on long-term prospects for LNG shipping, expecting rates to improve from next year. Although trade and tonne-mile demand will grow this year too, fleet growth will surpass it, keeping pressure on rates.
This year the LNG fleet will grow at its fastest pace in five years, at 13 per cent, keeping rates low.
MSI director Stuart Nicoll
The coming years will transform LNG shipping, redrawing the trade map, which will impact vessel demand by reducing average voyage hauls.
The industry will see a massive increase in trade, primarily from Australia and the US, and several new importers will emerge. MSI expects an additional 100mt of liquefaction capacity and 95mt in trade volume to 2020. This contrasts with minimal growth of 12mt during 2012-2016, heralding a return to the expansionary environment of the latter years of the last decade.
The mechanics of trade are also likely to change substantially. Importers will be freed from the restrictive practices that were necessary in the industry’s early years to provide certainty for investors. These practices have no place in a diversified, global trading network and will be dismantled.
These changes will accompany massive trade expansion, with a substantial increase in shipping demand that will erode today’s massive oversupply.
However, the tonne-mile issue rears its head more negatively too. The increase in vessel demand is likely to be much lower than it could have been, had the industry maintained the trading patterns of the first half of this decade.
MSI estimates that the average number of annual voyages completed by a standard 170,000m³ vessel was close to 11.6 in 2013-2014, when a surge in Asian demand drew LNG from the Atlantic and the Middle East.
Since then, the Atlantic surplus has stayed closer to home and new Australian and Papua New Guinea supplies make the shorter journey to northeast Asia. Most worrying is the idea that Indian importers will swap cargoes with other importers to minimise shipping costs and distances. This would be good for reducing the contribution to global carbon emissions, but bad for shipowner incomes.
A major issue that the wider shipping industry must address is how to reduce CO2 emissions – for which network optimisation will be key.
MSI estimates that trade growth to 2020, accompanied by shortening average hauls in our base case forecast, will add nearly 20 million m³ to ship demand, based on an increase in average voyages to 12.4/year.
If trading patterns mirror those of the early part of this decade, which implies an inefficient arbitrage-driven trading environment with substantial balancing trade, this will boost demand by an additional 3 per cent by 2020, raising our projected earnings for a 170,000m³ duel-fuel diesel-electric vessel by 21 per cent.