The shipping sector has been overlooked for too long as a ‘floating pipeline’ in the broader LNG supply chain says CS LNG's founder and managing director Keith Bainbridge
This overly simplistic characterisation should have been confined to history’s archives when the industry’s business model changed from fixed routes to flexible trade many years ago.
Shipping is fundamental to the LNG trade. In fact, I would advocate that it is the most important link in the supply chain. After all, historically, gas has been liquefied for one reason only: to be put on ships.
However, as the LNG market has become increasingly price sensitive and faced a constant drive to reduce costs, shipping has been forced to shoulder many of the cost-reduction measures the market has prescribed.
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LNG carriers being built today are more than twice as efficient in terms of fuel consumption than the carrier vessels built only 10 years ago, and in-transit boil off quantities are now about a third of what they were 30 years ago, on average.
Adding those two statistics together with the fact that LNG carriers’ capacities have grown by an average of more than 40% shows clearly how quantities of LNG delivered per vessel have risen significantly during the last few decades.
In real terms, the transportation cost per MMBtu is roughly 20% less now than it was 20 years ago.
Here’s an example. A 3000-mile voyage that cost around US$0.90 MMBtu in 1995 would today cost US$0.70 MMBtu. In 1995, the spot prices of gas in Asia averaged US$5 per MMBtu. Today those prices are in the vicinity of US$10. Thus, we see the influence of transportation cost on the landed LNG price. Costs have reduced considerably.
And still, despite these improvements on cost effectiveness coming from the shipping side, shipowners are repeatedly being asked to assume more risk with fewer returns.
Given the market landscape, owners are not saying 'no' to lowered rates but instead have to take smaller margins with a dim hope that the market may be different in five or seven years’ time when their current charters expire.
Is there cause for concern? Surely low cost makes LNG competitive with other commodities?
The simple answer is: it would be, but we must take into account the fact that LNG shipping’s continuation depends on its safety record.
Current low charter rates will inevitably translate to a drawdown in shipowner investment, both in ship maintenance and personnel. Both of those outcomes pose a threat to safety.
For an industry that prides itself on its excellent safety record, this should be unacceptable.
Any degradation of the industry’s safety record makes it more difficult for every other part of the supply chain to find success, from permitting through to local objections for both new and existing projects.
The current LNG carrier fleet is comprised of about 500 ships on the water with a further 100 ships on order. Shipowners will probably add a further 100 ships by 2025, representing about a seven-fold growth in just 25 years.
Discussed ad nauseum by LNG analysts, the reality is no one really knows how the supply and demand picture will shift in the future.
With 30% of LNG production being traded in spot/short-term markets with destination flexibility, it is impossible to predict, which is one reason why we have seen ‘stellar’ spot charter rates over recent weeks.
Can anyone predict the amount of LNG that could be in floating storage? Tonne miles – the distance cargoes need to be moved – have risen, but will those distances continue to increase as more LNG production comes on stream?
Many think the majority of LNG produced in the US Gulf will end up in Asia, some 11,000 miles away. But they will be wrong. Much of the US production will head to South America or Europe which in turn will reduce tonne miles.
2018 has been a record year for non-project LNG orders, and we could see a further 100 orders in the next two years.
So we do not foresee a shortage of tonnage going forward. LNG ship prices have remained steady for the past 18 months and this stability could encourage more speculative orders.