Liquefied natural gas (LNG), the cleanest-burning fossil fuel, has been hailed as a potential environmental saviour for an increasingly energy-hungry world. Even so, LNG tankers have endured years of low rates and scepticism lingers on recovery timing.
As of the end of last year, the LNG tanker fleet had a capacity of 71 million m³, nearly 20 million m³ of which was added between 2012 and 2017. According to data from the IHS Markit Maritime & Trade (M&T) division, fleet growth will peak this year with the addition of another 6.9 million m³, representing an annual capacity increase of 9.8%, followed by an increase of 5.3 million m³, representing growth of 6.8%, in 2019. In 2020 and 2021, IHS Markit M&T predicts slower growth of 3.8% and 3%, respectively.
Maritime consultancy Drewry expects rates to remain under pressure in 2018, then strengthen beginning in 2019. Credit ratings agency Fitch draws a slightly different conclusion, expecting spot LNG rates to recover this year.
In general, LNG employment is divided into two very different markets: extra-long-term charters, often for periods of up to a decade or more to serve dedicated liquefaction projects, and spot service, for which rates vary enormously based on how many ships vie for business.
For spot rates, a key indicator is how the delivery schedule of project-dedicated LNG newbuildings booked on long-term charters relates to the start-up date of the related liquefaction project. If liquefaction start-up is delayed but the vessels ordered to support that project are delivered on time, those ships hunt for spot employment in the meantime, adding to supply and pushing down rates.
As a result of liquefaction project delays and temporary additions to spot tonnage, LNG spot rates languished at about USD30,000/day throughout 2016 and early 2017, but rose sharply in the second half of last year, to about USD70,000/day, as more liquefaction projects came online.
The largest player in the spot market is the Cool Pool, a pooling venture between Golar, GasLog, and Dynagas. Wells Fargo analyst Michael Webber reported in a client note after discussions with Cool Pool leaders in mid-November that “we’ve been talking to the Cool Pool since its inception, and this is the most bullish we’ve ever heard them on rates”.
In terms of who is providing the cargoes and developing the liquefaction facilities, the field is concentrated into several large players. France’s Total recently acquired the upstream LNG assets of French utility company Engie in a USD1.5 billion deal that will make Total the world’s second-largest owner of LNG assets. Shell, headquartered in the Netherlands, is currently the largest, after merging with BG Group in 2016.
By extension, this concentrates LNG tanker employment into the hands of a few major players. These are portfolio suppliers that cover the entire value chain, from upstream production to gas trading and delivery. These players are not averse to taking out long-term charters to increase trading coverage, and this reduces the pool of vessels available to other hirers.
Liquefaction facility ownership is also concentrated. Three of the five largest owners of existing liquefaction capacity are national oil companies. Qatar Petroleum, Malaysia’s PETRONAS, and Sonatrach in Algeria control 30% of global capacity, while Shell, ExxonMobil, and BP own 21%, according to IHS Markit data.
Additions to liquefaction capacity will slow to 23 million tonnes/year in 2018, having grown by 32.7 million tonnes/year in 2017. Three liquefaction facilities are starting up in 2018: Ichthys and Wheatstone will increase Australia’s capacity by 8.9 million tonnes/year each, and Cove Point LNG will add 5.3 million tonnes/year to US capacity. IHS Markit estimates that in 2019, global liquefaction capacity will increase by 61 million tonnes/year at nine sites across the United States, Russia, and Indonesia.
Analysing capacity by region, the Atlantic Basin and Middle East each had about 100 million tonnes/year in liquefaction capacity as of the end of 2017, while the Pacific Basin had nearly 140 million tonnes/year. More than 90% of the export capacity was being utilised in the Middle East and Pacific Basin, with usage below 70% in the Atlantic Basin.
One of the most important determinants of LNG vessel demand is the extent to which cargo moves cross-basin, leading to much longer voyages than intra-basin trade. The widened Panama Canal has facilitated shipments of Atlantic Basin LNG to Pacific Basin buyers by offering significant reductions in voyage length. However, margins have been eroded by various factors, including toll hikes to LNG vessels transiting the canal and depressed Asian pricing.p
“The Panama Canal expansion has opened up a much shorter trade route for Atlantic Basin – specifically, US Gulf Coast – volumes to reach northeast Asian markets. However, with only one dedicated LNG tanker slot per day, the canal is somewhat constrained in meeting increased Asian demand,” said IHS Markit LNG associate director Andres Rojas.
Furthermore, the need for cross-basin trade has been diminishing as low Asian LNG prices keep the arbitrage window shut and more Pacific Basin capacity comes online.
Australian LNG capacity is poised to ramp up, providing new supplies to Pacific Basin buyers. Qatar is the world’s largest LNG producer and exporter, supplying buyers in the Atlantic and Pacific basins. But Australia is expected to overtake Qatar by 2020, while US supplies will grow to nearly half of Australia’s volumes.
IHS Markit forecasts that Qatari supplies will decline by 1.3 million tonnes year on year to 79.3 million tonnes in 2018. Meanwhile, Australia is expected to boost output by 15.2 million tonnes to 71.1 million tonnes, and the United States will increase production by 9.1 million tonnes to 22.1 million tonnes.
This year, Asia’s import demand is forecast to grow by 10 million tonnes to nearly 220 million tonnes. Broadly speaking, this should be well-covered by the increase in Australian volumes.
In general, waterborne imports of LNG in 2017 favoured localised, intra-basin trade. This pattern is becoming the norm for LNG trade and is increasingly supported by converging spot prices across regions.
On the other hand, there could be market developments that expand voyage distances once again. The LNG market, which is in surplus, is expected to tighten post-2020. Given recent low prices, developments beyond 2020 were put on hold as suppliers could not justify the investments. Conversely, demand is booming on the back of low prices and the move towards cleaner fuel sources.
Qatar announced in April 2017 that it plans to restart development in the North Field, the world’s largest gas field. Qatar expects to increase production capacity by about 30% to 100 million tpa, which will begin in five to seven years. The move may allow Qatar to maintain market share post-2020 against increasing supply from Australia and the United States.
Qatar’s production cost is estimated to be significantly below Australia’s. In terms of the Pacific Basin trade, this may allow Qatari volumes to win out, resulting in longer voyages from the Middle East to Asia Pacific that can boost tonne-mile demand in the future.
Furthermore, the east African nations of Mozambique and Tanzania may eventually ramp up output to serve fast-growing demand in Asia, further adding to the longer-haul eastward trade flow.
So even as the outlook for LNG shipping in 2018 is mixed, there are reasons for optimism looking forward, as Asian buyers fuel demand.
Access the 2018 outlook page