Qatar’s huge potential LNG carrier order flatters newbuilding orderbooks, but the outlook is far from rosy in the short term, writes Maritime Strategies International director Stuart Nicoll
News that Qatar Petroleum (QP) has reserved newbuilding berths for more than 100 LNG carriers from South Korean shipyards by 2027 has generated debate within LNG shipping and the shipbuilding industry regarding the implications of the potential deal.
This is especially so given the quote from Qatar’s energy minister that this would represent 60% of global LNG carrier shipbuilding capacity. The South Korean orders are in addition to the reservation of up to eight firm and eight optional newbuilding slots at China’s Hudong Zhonghua for delivery from 2024. The latter depends on a number of conditions being met, such as Chinese purchases of Qatari LNG.
The implications of the deal for other LNG market players seeking to order ships and shipbuilders are potentially significant. The ramifications could extend to those in other shipping sectors that may be looking to secure tonnage for delivery in the middle of the current decade.
The Qatari order has been under consideration for some time and the latest announcement is another step on the road to actual newbuilding contracts. The current stage involves ‘berth reservation’, believed to involve a small fee, but short of the commitments of a full contract.
The ships are required to move the substantial volumes generated by Qatar’s North Field expansion and from the Golden Pass LNG export project in the US. As envisioned, QP plans to increase LNG production capacity from Ras Laffran, from 77 mta to around 125 mta by 2027.
Golden Pass, jointly owned by QP (70%) and ExxonMobil (30%), was initially to have a capacity of 15.6 mta, but could be as much as 18.1 mta following a request to regulators.
Based on what we know of Qatar’s expansion plans, we can assess how the headline trade numbers dovetail with the newbuilding plans. In the first phase of the expansion – adding 32 mta nameplate capacity – MSI estimates that up to 37 dedicated vessels could be required to service these volumes, on the basis of a 30-day average round voyage to China on a vessel carrying about 75,000 tonnes of cargo. These estimates are based on 174,000-m3 LNG carriers.
On the same basis, an additional 18 LNG carriers would be required to serve Phase 2 of the North Field ramp-up (adding another 16 mta). To address the Qatari share in Golden Pass (about 11 mta), 21 vessels would be required, assuming a 50-day round voyage to Tokyo via the Panama Canal.
“The implications for LNG market players seeking to order or build ships are potentially significant”
In aggregate, incremental Qatari volumes could require 76 new LNG carriers, if we assume all cargoes will be shipped long-haul to Asia. However, the possibility that Qatar might reprise orders for larger vessels, and some cargoes might be shipped on shorter routes, would lower these requirements.
This total does not take into account additional newbuildings to renew the existing Qatari fleet of owned/chartered LNG carriers. Reports suggest all 45 existing Q-Max and Q-Flex vessels will be re-engined with fuel-efficient gas injection units, suggesting that any likely replacement demand for these vessels will not emerge until the middle of the next decade, given the capex involved.
That leaves a further 19 ships under charter to Qatargas and generally built in 2007 or earlier. Most of these will be between 20- and 30-years old by the middle of the current decade and could be candidates to release from their charter, especially as all are powered by steam turbine engines. While technically LNG carriers have a life expectancy of 40 years or more, 30 years or less is likely to become the commercial reality for fuel-inefficient steam turbine vessels. Assuming these are replaced, then the total newbuilding requirement would be close to 100 ships.
However, the LNG market landscape has changed since plans for the newbuildings were first outlined. Expectations were that 2020 was to be another landmark year for the LNG sector. These expectations have been shattered by the Covid-19 pandemic, which hit an already fragile LNG sector. In the initial phase, the outbreak compounded an oversupplied market, following a surge in production in previous quarters and a warm northern hemisphere winter.
The gas glut is expected to continue for the remainder of 2020 at least and the repercussions of current market conditions will be profound. Exacerbated by the volatile oil price environment, gas prices collapsed to previously unthinkable levels in Q2, with the National Balancing Point (NBP) in the UK trading below Henry Hub, and north east Asian spot prices offering only a modest premium. In this context, it is not surprising that cargo cancellations could halve US exports over the summer.
The LNG shipping spot market collapsed during H1 2020, to a degree greater than the normal seasonal pattern and rates were quoted at around US$30,000/day by brokers in June. Actual returns are likely to be lower, given that in weak markets charterers will only pay for the laden voyages, while broker rate assessments assume the full round voyage. While the majority of the fleet is not exposed to the spot market, being on some form of time charter, the impact on industry confidence is profound.
MSI expects a high degree of volatility in the freight market, as the pandemic plays out amid a continuing supply glut. But overall, market balances will remain weak and we now forecast a continuation of the weak market through 2021 and 2022, as supply growth runs ahead of demand.
As the crisis bites, all previous assumptions on LNG carrier supply developments have gone out of the window. Long-term LNG supply may be undermined as new liquefaction plants are cancelled or postponed in the interim. Those projects achieving FID post 2020 will not generate demand growth until they enter the market in 2024 or beyond.
Before the crisis, MSI had identified 170 mta of new LNG capacity from new liquefaction trains in the US, Qatar and East Africa that could have proceeded to FID this year, or in 2021. Industry reports indicate that only Qatargas’ Expansion, Sempra’s Costa Azul, and Novatek’s Obsky LNG are likely to reach FID in 2020.
Shipping market implications
The net result of the deferral of projects and the reduced demand for shipping capacity implies a sharp reduction in newbuilding requirements in the near term. Accordingly, while gas producers and traders are feeling extreme pain at present from the global pandemic, among the greatest near-term losers could be shipowners and shipbuilders.
For shipowners, the reduction in newbuilding requirements represents lost opportunity. For the shipbuilders, MSI estimates a loss of up to 10% of global shipbuilding demand in the period to 2023 when compared with our pre-crisis forecast. The impact on South Korean shipbuilders, which dominate LNG carrier construction, will be even more severe.
This might seem a surprising conclusion given the Qatar-South Korean deal has been hailed as the saviour of the country’s shipbuilding sector, used as a bargaining chip by shipyards when dealing with owners of large tankers and container ships seeking to place orders over the coming months.
To put this in context, prior to the current crisis we calculated that incremental LNG exports would generate a requirement for an additional 145 ships that need to be ordered and delivered before the end of 2025, over and above the existing orderbook in late 2019 (approximately 125 ships over 100,000 m3). This includes those needed for the Qatar expansion, alongside projects in the US, Russia and Mozambique. With the latest revisions to our supply and demand outlook for LNG, the requirement for new ships has shifted dramatically.
“As the crisis bites, all assumptions on LNG carrier supply developments have gone out of the window”
Under our new base case, we assume that in addition to the existing LNG carrier orderbook (around 110 at the end of June) a similar number of ships above the current orderbook will be needed – but not until the end of 2027. These numbers do not include any allowance for fleet renewal and therefore only explicitly include the 75 Qatari ships tied to trade growth.
During 2020/21, LNG carrier deliveries will be around 45 vessels per year. By the middle of the decade, global capacity could approach 65 ships/year, if Hudong Zhonghua achieves its expansion aims and Russia’s Zvedza yard develops as planned, even if we assume that building in Japan is now effectively at an end.
More conservatively, we would assume global capacity of 55 ships/year. If 75 Qatari ships are only needed from 2024 onwards and are spread over four years, then they would represent around one-third of global LNG shipbuilding capacity. Should 100 ships be demanded in three years, then this would indeed account for 60% of our conservative capacity estimate and 50% of the most optimistic assessment.
This would theoretically place other project sponsors under pressure to secure berths soon. It also raises the prospects of ships being built before they are required – to be delivered in 2023 for example, when yards are short of work. It should also be pointed out that around 45 ships currently on order have not secured a charter.
Impact on shipbuilders
To quantify the impact on the shipbuilding industry in general, 75 modern LNG carriers represent around 6.6M compensated gross tonnes (CGT). Should deliveries of these vessels be spread out over four years, that implies about 1.65M CGT/yr, compared to average South Korean deliveries of close to 10M CGT/yr over the last five years. This is significant; it could represent as much as 20% of South Korean shipbuilding capacity if further cuts are implemented during the current market crisis. But it suggests yards will still have substantial capacity to target other sectors.
For shipowners and shipbuilders, the real paradox of the Qatari order is that it is significant, but not yet. It is unusual for ship orders to be placed up to seven years in advance (with the exception of the cruise ship sector). Though forward demand is being booked, the mega-order will not fill the black hole in global shipbuilding demand in 2023, when we forecast total deliveries across all shipping sectors will be at their lowest level since 2001.
So, while South Korean yards may end up sitting on a comfortable looking orderbook in aggregate, the delivery schedule will leave an awful lot of work to do to ensure a decent workload in 2023 in particular.
Conversely, other project sponsors may scramble to get the tonnage they need early (ie 2023), which will help the shipbuilders, but could increase oversupply in the LNG shipping market in that period.