Global production of and demand for LNG is rising, driving expansion of the LNG shipping industry. The number of LNG exporters continues to increase with many countries including the US and Canada currently planning to monetise their gas reserves, and access global gas markets, using LNG. According to the International Energy Agency, LNG plants with capacity to produce a total of 108 billion m3 of LNG are under construction and another 647 billion m3 of capacity is planned. Chevron sees LNG demand growing to approximately 450 million tpy by 2025 and Shell estimates that global demand for gas in 2050 (mainly served by LNG rather than pipeline gas) will be double that of 2010.
This growth in LNG production will require further significant expansion of the world’s LNG carrier fleet. Reports suggest that in addition to the 97 LNG carriers currently on order, a further 120 carriers may need to be constructed by the end of the decade to cater for the new LNG volumes predicted to come on stream in Australia, Indonesia, East Africa, Eastern Mediterranean, Russia, US, Canada and other parts of the world.
Tight market continues to hamper trading
The continued development of the LNG spot and short term physical trading market additionally requires flexibility in the deployment of LNG carriers. However, following the slow down in supply growth and significant increase in Asian demand there is currently a shortage of LNG available for spot and short term physical trading.
Production in 2012 (reported at approximately 239 million t) was slightly down on 2011 (reported at approximately 242 million t). Last year, in addition to scheduled maintenance in Australia, Trinidad and Qatar, there were unplanned outages due to flooding at Nigeria LNG, a fire at train 2 of Tangguh LNG and sabotage of the gas pipeline at Yemen LNG. There are also delays in start up of a number of major LNG projects. For example, Angola LNG, originally scheduled to start up in early 2012, is now expected to start up in the second quarter of 2013.
This shortage of LNG availability is restricting the development of the LNG trading market, despite good arbitrage opportunities and availability of LNG shipping capacity. According to Arctic Securities and Fearnleys, this lack of volume in the market is currently causing freight rates to decrease with spot modern steam vessels now at US$ 110 000/d with potential to reduce further towards the summer. Experts including BG are predicting that LNG supply will remain tight in 2013.
Financing requirements and impact of shorter charters
Historically, LNG was sold under long term (20 year plus) LNG sale and purchase agreements (LNG SPAs), typically on a ‘tram line’ basis with the LNG being shipped to a specific destination during the term of the LNG SPA. Consequently, LNG carriers were chartered on a long term basis (often closely associated with the term of the LNG SPA) and deployed on the same tram line basis to ship LNG from export terminal to destination market. Owners of LNG carriers relied on long term charter commitments to support their investment decision and obtain financing for the construction of the LNG carriers. Lenders regarded such long term charters as attractive investments given the long term nature and stability of cash flows. Today’s LNG industry has moved a long way from the traditional model. For example, the term of many recent charters has been reduced to five to eight years. Shorter charters means shorter loan tenors. In addition, today’s lenders may also require a more robust security package, more extensive parent company support and possibly increased equity contributions.
Reduced boil off rates for new LNG carriers
Boil off is the process whereby the LNG cargo regasifies during a voyage and then escapes into the atmosphere through valves designed to prevent excessive pressure building up in LNG cargo tanks. Boil off rates of 0.15% of the LNG cargo volume per day are common. However, new LNG carriers utilising the latest cargo containment technology can reduce the boil off rate to 0.1%. This is a significant commercial advantage. For an LNG carrier with a cargo capacity of 170 000 m3, a reduction in the boil off rate from 0.15% to 0.1% is equivalent to saving approximately 85 m3 or 36 tpd of LNG, making such vessels highly attractive.
Given the opportunities outlined above, a number of shipowners have placed orders for newbuild LNG carriers on a speculative basis, aiming to benefit from the expected demand for new vessels.
Continued expansion of the world’s FLNG vessel and FSRU fleet
Shell’s first floating LNG (FLNG) vessel is currently under construction. It will be deployed at the Prelude field offshore Australia and will be the largest offshore floating facility ever built (488 m long x 74 m wide, with a production capacity of at least 5.3 million tpy of liquids, 3.6 million tpy of LNG, 0.4 million tpy of LPG and 1.3 million tpy of condensate). Some players such as Golar LNG are adopting a different approach, intending to convert LNG carriers to FLNG vessels. Other IOCs, NOCs and participants in the LNG industry are looking to follow these leads and develop offshore gas fields using FLNG vessels.
Infrastructure in destination markets is also moving offshore, with a vast increase in the number of LNG floating storage and regasification units (FSRUs) now in operation or under development in many import markets. This increased trend towards use of FSRUs is attributed to their flexibility of deployment, relatively low cost and potentially quick timeframe in which FSRUs can be in service. These are attractive attributes for companies seeking to import LNG. Shipowners operating in this relatively new FSRU market include Golar LNG, Höegh LNG, Excelerate and BW. With ‘new build’ FSRUs having greater storage capacity and using latest technology, shipowners with new build FSRUs may have a competitive advantage when tendering for LNG projects compared to those planning on using older, converted FSRUs.
The LNG industry is set to continue to grow significantly in the future. With more LNG carriers required to cater for increased global LNG production and further growth in the LNG spot and short term trading market, as well as increasing demand for FLNG vessels and FSRUs, there are exciting opportunities ahead for shipowners and others in the LNG shipping industry as the LNG sector continues to grow, evolve and respond to the rapidly changing dynamics of global gas markets.
Written by Nick Prowse, Scott McCabe and Rod Chooramun, Norton Rose.The full article can be found in the May/June issue of LNG Industry.
Read the article online at: https://www.oilfieldtechnology.com/drilling-and-production/12072013/sea_change018/