Lack of timely investment in the LNG carrier fleet could pose a threat to market development and security of supply, which could materialize even earlier than the risk of insufficient liquefaction capacity, according to the International Energy Agency (IEA).
LNG carriers are expensive vessels compared to other classes of commercial ships, due to the higher level of technical complexity required to handle and re-liquefy their cargo. As a result, previous ordering has been triggered by securing long-term charter contracts for the vessels ranging from 10 to 30 years.
However, such patterns have been challenged in recent years by the transformation of the LNG market, with the development of commercial flexibility and shorter-term transactions leading to an increase in subchartering for short durations or even by voyage. Nonetheless, the LNG shipping market remains dominated by long-term charters.
“Such changes challenge the traditional LNG shipping business model, with greater uncertainty in medium-term fleet development and availability, and potential impacts on shipping price levels and volatility,” IEA said in a report.
The proportion of LNGCs available for chartering (excluding subchartering of vessels already under contract) accounted for about 14% of the fleet in 2017, and could rise to a maximum of 38% of the existing fleet or 33% of the existing and on-order fleet by 2023 should any of the expiring charters not be renewed, the report reads.
Global LNG trade has experienced strong growth in volume over the past decade, with a compound annual average growth rate of 5.6% over the past ten years, more than twice that of global international seaborne trade, which stood at 2.5% over the same period, UNCTAD’s data shows.
However, with 391 million tonnes (Mt) traded in 2017 and 467 active vessels as of mid-2018, LNG remains a niche market within global seaborne trade, which amounted to 10.7 billion tonnes in 2016, according to UNCTAD.
After experiencing two successive periods of strong investment in the mid-2000s and early 2010s, orders for new-build LNGCs have dropped since 2016 as the LNG market entered a period of demand uncertainty, confronted with the prospect of ample supply and lower natural gas prices compared to the high benchmark of the early 2010s, the report said.
The global LNGC fleet is relatively young, with vessels less than 10 years old accounting for 49% of tonnage and 47% of the vessel count respectively. Six major shipping companies control about half of the independently owned fleet – GasLog, Kawasaki Kinsen Kaisha (K Line), Maran Gas Maritime, Mitsui OSK Lines (MOL), Nippon Yusen Kaisha (NYK) and Teekay Shipping.
Most recent vessels were built in conjunction with the wave of investment in liquefaction capacity that occurred in the late 2000s.
The LNGC order book as of mid-2018 amounted to 104 vessels and 15.3 mcm of LNG, or an increase of 29% to the total fleet tonnage. Most of the vessels under construction are due for delivery in 2018 and 2019, with some deliveries deferred to 2019 and 2020, corresponding to orders placed in or before 2015 when the LNG market was still experiencing tight supply with high price levels.
The number of new orders placed with shipyards has fallen since 2015 – orders rebounded in 2017 compared to the lows of 2016, but remain at about half the average level observed in the past decade.
Lack of fungibility, portfolio barriers to fleet optimization and aging vessel management and regulatory framework could result in a tighter LNG shipping market happening sooner, especially in winter when most buyers compete for spot LNG cargoes.
“Considering that LNGC construction takes between two and three years, fleet capacity is expected to remain almost flat in 2021 (and possibly 2022) unless new orders are placed in the coming months. This absence of available shipping capacity in a fast-growing LNG market could be a serious issue for flexibility and security of supply,” IEA adds.
Additional LNGC orders are therefore needed in the short term in order to avoid shipping scarcity issues.
During the first six months of 2018 some 26 firm orders have been placed (LNG Journal, 2018), helped by more attractive yard pricing. This may prove insufficient to keep the global LNGC market in balance, taking lead times
into consideration – the earliest a new build can now be delivered is 2021.
“The impacts of a tight LNGC market would be higher and more volatile spot charter rates, as well greater risk of vessels being unavailable in the short term, especially in the Atlantic Basin where LNG prices are usually less attractive than in the Pacific,” IEA said.
“LNGC availability and volatility in charter rates could therefore become a medium-term concern for the security of natural gas supply. To mitigate this risk – and in addition to investment in new-build capacity – further liquidity and transparency are required to alleviate some of the inflexibilities in the current LNGC trade.”
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