Despite the pandemic, LNG shipping remains resilient, employing digitalisation, new technologies and practices to increase efficiency and protect workers
While Covid-19 has combined with low gas prices and an oversupply of LNG to create unprecedented challenges for shipping, LNG industry leaders believe it may serve as a catalyst for changing their traditional practices.
“This crisis has given us an opportunity to reimagine our business,” said BW LNG head of operations Riju Cherian. “This is a moment when winning companies can differentiate themselves from the pack.”
AEX LNG operations and commercial director Sachin Mohan agreed. “As leaders it is up to us to provide the way forward,” said Mr Mohan. “The industry will rebound, but with a new thinking.”
Mr Cherian and Mr Mohan were joined by Howe Robinson Partners senior broker LNG Debbie Turner as part of a high-powered panel during an LNG Shipping Leaders webinar held in June.
Produced by Riviera Maritime Media as part of its Maritime Leaders Webinar Week, the session explored the current market trends and dynamics, near-term market outlook and how LNG shipping companies are responding to the current volatile shipping market.
“The crisis has given us an opportunity to reimagine our business”
Ms Turner gave a candid perspective on the market. “There has been a change in demand in LNG, mostly from industrial users,” she said. “Cargoes are becoming more fluid and not necessarily sold into the markets they were originally destined for. In the US, where there is huge supply, cargoes are not being taken. This is a new event for the LNG market,” said Ms Turner.
She added that onshore storages throughout the world are full, and that some vessels were ‘holding’ cargo, while others were ‘storing’ cargo. Additionally, she said that the market is now beginning to see more slow steaming.
Demand destruction caused by national lockdowns due to the pandemic and low international gas prices caused more than 120 US LNG cargoes to be cancelled from June to August. S&P Global Platts reported the monthly cancellations at 44 in June, 45 in July and 40 in August.
“Suddenly, you are seeing … contractees who do not want to lift their cargoes because there is no home or demand,” Ms Turner said. “For every cargo that is not lifted, there is a ship. What happens to those ships? They primarily reside in the hands of the portfolio players, but do they put these ships back on the spot market? Not necessarily.”
Ms Turner was more optimistic about market prospects beginning in September. “We are beginning to see the market pick up as the world gets back to normal, and demand is starting to increase.” She pointed to a slow recovery in demand in China which “has now overtaken Japan in LNG demand on a monthly basis,” she said.
She also cited the reawakening of the LNG market in India. “India was shutdown, cargoes were stored, and vessels waited outside of ports,” she said. “With the country reopening, in go the vessels, in go the cargoes and up goes the demand.”
She said, however, that it was unlikely that the LNG market would make a full recovery in demand for the rest of the year.
Covid-19 has put “the world in unchartered territory,” said Mr Cherian. “This crisis has been a catalyst for change,” he said, giving the industry an opportunity to “reimagine our world.”
Mr Cherian noted that the market fundamentals were already changing prior to the pandemic. He said global natural gas consumption slowed in 2019 as compared with 2017-2018, there was a surge of output from the US and Australia and rapidly falling spot prices in Asia and Europe as LNG supply outstripped demand.
He also noted that 2019 was a record year for LNG export projects, with almost 95 bcm/annual of new capacity confirmed.
“Price is the key. Gas prices are at historic lows”
In the short term, these factors, he pointed out, led to cargo cancellations and put freight rates under pressure.
On the flip side, however, the medium- and long-term fundamentals for the market remain strong. Mr Cherian said low gas prices will stimulate more demand, making LNG well positioned to replace coal. He said LNG is viewed as a ‘bridging fuel’ that would transition the energy markets from carbon-intensive fuels to renewable energy. Sustainability, climate change and the Paris agreement remain drivers in the market.
He pointed out that coal to natural gas switching was the largest single contributor of consumption growth. “With LNG and gas at historic lows, new markets will open further displacing coal,” he said.
Influx of newbuilds
Ms Turner agreed, saying, the demand for gas – “the only ‘green’ carbon fuel” – would come from where there is a desire to replace coal or oil. “Price is the key,” she said. “Gas prices are at historic lows, with additional volumes coming out of the US, Arctic region, Mozambique and Qatar. We are going to continue to see a low gas-price scenario.”
The days of pricing in the US$18 to US$20 range might be behind us, Ms Turner pointed out.
“Are we going to see US$6? We may. But [the market] is going to be on a very fluid and volatile basis.”
While she was optimistic of a demand recovery, she offered words of caution for LNG shipowners. “The shipowner is always the one that suffers and in today’s market they are suffering. You cannot sustain an expensive, US$180M ship on a charter rate of US$40,000 per day. Tenders today are pushing rates further and further down and it is at what price the LNG owner will pay.”
Mr Mohan said, with the price of LNG so low, it meant that profit margins were even lower. “We have to bring down opex costs and improve efficiencies,” he warned.
Near term, panellists were most concerned at the influx of newbuild LNG carriers scheduled to be delivered over the next two years. Mr Cherian said this would put “huge downward pressure on the market.”
Ms Turner concurred, saying: “When you have 40 uncommitted newbuilds coming out between now and early 2022, there is a concern about where freight rates are going and also what effect it will have … on older steam vessels which are coming off charter and going into a short-term market.”
Despite the volatility in the market and the challenges posed by Covid-19 restrictions, Mr Cherian said it was “remarkable how resilient the market has been.”
He said one of the biggest challenges now was crew changes, which BW LNG had started under strict guidelines and procedures. Among the chief concerns for shipping has been ensuring safety of operations and the wellbeing and health of crews. “We’ve been focused on developing guidelines and outbreak management plans,” he said. “The ship is the safest place, but [we must] ensure there is not an outbreak when somebody comes on board. Safety is the keystone of our industry,” he said.
As a ship management company, AEX LNG is “a people-oriented company,” said Mr Mohan. He said: “Even if a ship is not trading, it is stopped somewhere with people onboard.”
Mr Cherian added: “The new quarantine requirements will be the new normal.”
New reality of working
Covid-19 mitigation action has also laid the groundwork for a number of operational innovations.
“We are in a new reality of working,” said Mr Cherian. “We have conducted ship-to-ship transfers without anyone coming onboard our vessels. We have had ‘no contact’ operations at terminals, for discharging and loading, including cargo operations and custody transfers, with no one coming onboard.”
He cited other innovations, including carrying out remote services of the company’s vessels. Covid-19 has heavily impacted shipyards, service providers and the supply chain. “Ships need drydocking,” he said, explaining that national lockdowns impacted shipyards but “markets are now open to remote service of vessels.” He also pointed out that class is working to perform remote inspections, noting another major challenge has been SIRE inspectors coming onboard vessels. “Shipowners have coped quite well,” he said.
Mr Mohan said AEX had just completed a drydocking in Malaysia that was performed “all on a remote basis”.
Mr Cherian made the point that LNG shipping must find “smarter ways of working”. He discussed ‘connected ships’ to allow vessels and vessel equipment to be monitored. “It is not about being ‘Big Brother’, but actually looking at data and deriving learnings from that,” he said, noting that digitalisation would drive efficiency, safety, and improved risk assessment.
“Operational excellence matters now more than ever before,” said Mr Cherian. He concluded: “Every crisis teaches us a few things. As the result of cyberattacks on a number of shipping lines a few years ago, companies developed business contingency plans. Never would we have imagined that all of our offices would be closed, and people would have to work from home. Covid-19 will teach us; not just in shipping, but I think it’s causing a permanent shift in the behaviour of societies.”