A lack of newbuilding orders, the failure of Qatar and others to sign up vessels for new contracts, and the Covid-19 pandemic are all proving problematic for shipbuilders
The LNG carrier (LNGC) orderbook at the start of Q2 2020 stood at 161 vessels, with just two LNGC contracted so far in 2020. By comparison, in the whole of 2019, 60 LNGCs were contracted by owners for newbuilding construction. Clarkson Research Services (CRS) reports that LNG newbuilding contracting is down by 87% in the first 12 weeks of 2020 compared to the same period in 2019.
The two contracts were placed by K Line of Japan for two 80,000 m3 mid-size LNGCs to be constructed at Hudong Zhonghua for a reported US$120 each, according to VesselsValue. CRS estimates that the newbuilding price of a 174,000 m3 LNG carrier is US$186M, the same as the average price in 2019 although higher than the US$182M of 2018. Shipbroker Fearnleys nominates the price of a ME-GI engined 170,000-m3 LNGC at the end of March 2020 at a slightly higher US$189M.
“If Hyundai and Daewoo merge, 65% of the large LNGC orderbook will be held by the mega group”
As has been the case for many years, the LNGC orderbook is dominated by larger vessels. That said, there are no Q-Max (230,000-m3 to 300,000-m3 capacity) or Q-Flex (200,000-m3 to 229,999-m3 capacity) LNGCs on order, although there have been hints that these are coming. The orderbook is dominated by the 142 LNGCs between 100,000-m3 and 199,999 m3 capacity. The propulsion system of 121 of these contracts is known to be based on low-speed diesels. Dual-fuel engines have been specified on 21 of the large size LNGCs on the orderbook. The propulsion systems of the remainder of the large-size LNGCs on order is not recorded.
Large LNGCs on order represent over 80% of the current fleet, which in any other shipping sector would be an extremely worrying situation, but the development of the LNGC fleet is still at a very early stage and comparisons should not be made with other sectors. In the crude oil tanker sector, the largest currently active size range on the orderbook is the two million barrel very large crude oil carrier (VLCC), a size that has been a standard since the 1970s.
The equivalent size range in the LNGC fleet was only established very recently. Outside the large LNGC sector, the orderbook is modest. The mid-size 30,000 m3 to 99,999 m3 range orderbook contains nine vessels and the sub-30,000-m3 sector is represented by 19 newbuilding contracts. This includes the sole compressed natural gas carrier on the orderbook and several LNG bunkering vessels.
The youngest Q-Max and Q-Flex LNGCs in the fleet will be celebrating their tenth anniversary in 2020. In LNGC terms, this makes them positively ancient. The Q-Max and Q-Flex vessels were built in South Korea to carry Qatar’s LNG to market. Qatar has hinted at replacement and expansion of the fleet, in line with LNG projects in Qatar and elsewhere. Qatar’s North Field Expansion project, which will increase the country’s LNG production capacity from 77 mta to 110 mta by 2024, and the Golden Pass LNG export project in Sabine, Texas would require a significant number of newbuildings. Qatar Minister of Energy Affairs and Qatar Petroleum president and chief executive Saad Sherida Al-Kaabi spoke recently of a “major LNG shipbuilding campaign expected to initially deliver 60 LNGCs …. with a potential to exceed 100 new LNGCs over the next decade.” So far, those orders have not been placed.
“The youngest Q-Max and Q-Flex LNGCs in the fleet will be celebrating their tenth anniversary in 2020; in LNGC terms, this makes them positively ancient”
So far, no firm contracts have been placed and the bulk of the orderbook is composed of large LNGCs. South Korea dominates the orderbook with 124 of the 142 large LNGCs on order. The Hyundai group holds 40% of large LNGC newbuilding contracts, split between Hyundai Heavy Industry and Hyundai Samho; Daewoo group also has 31 contracts and Samsung 33. This means that if Hyundai and Daewoo merge, as has been proposed, 65% of the large LNGC orderbook will be held by the mega group.
GasLog has a large LNGC under construction at Samsung. Hull No 2274, which will work under the name GasLog Wales, is equipped with WinGD X-DF propulsion, and was undergoing sea trials in March 2020. The newbuild is one of 35 LNGCs in GasLog’s consolidated fleet. Of these vessels, 19 (12 on the water and seven on order) are owned by GasLog, one has been sold to a subsidiary of Japan’s Mitsui & Co Ltd and leased back to GasLog under a long-term bareboat charter and the remaining 15 are owned by the company’s subsidiary, GasLog Partners.
“Our orderbook of new LNGCs has staggered delivery dates, facilitating a smooth integration of the ships into our fleet as well as significant annual growth through 2021,” said GasLog in a filing. “This has the additional advantage of spreading our exposure to the re-delivery of these ships over several years upon expiration of their current charters. Each of our 28 owned and bareboat LNGCs and seven LNGCs under construction is designed with a capacity of between approximately 145,000 m3 and 180,000 m3. We believe this size range maximises their operational flexibility, as these ships are compatible with most existing LNG terminals around the world.”
On the sales side, only two LNGCs have been reported sold so far in 2020. The pair of 2013-built 156,000-m3 sisterships, Wilforce and Wilpride, were built by South Korea’s Daewoo Shipbuilding & Marine Engineering. Each of the LNGCs has a capacity of 156,000 m3 and an efficient tri-fuel diesel-electric (TFDE)propulsion system. In TFDE propulsion, there are no main diesel engines, but rather electric motors, minimising space requirements, while increasing cargo carrying capacity and lowering maintenance. China’s CCB Financial Leasing Co, a subsidiary of China Construction Bank, provided the sale and lease back facility and is expected to enable a full take out of the company’s current financing scheme at favourable terms. The facility bears a 14-year straight line amortisation profile, a tenor of 10 years and carries a floating interest rate structure. The bareboat charter tenor is 10 years, with reported charter rate of US$45,000/day. Awilco LNG chief executive Jon Skule Storheill said the terms were “attractive and supportive of the company’s commercial strategy.”
The Awilco deal was one of four normally secretive long-term time charters that leaked out into the market in the first three months of 2020. Swan Energy Ltd of India chartered the 2004-built, 140,000 m3 Dukhan for 19 years from the commercial manager MOL.
Also on the chartering side, Qatargas Operating Company Limited (Qatargas) has successfully initiated a programme to utilise LNG boil-off gas to power its chartered conventional LNG vessels during unloading operations at Japanese LNG terminals. The programme is being implemented with the co-operation of Qatargas’ Japanese buyers. The 2000-built, LNGC Al Jasra is commercially managed by the J4 consortium. The vessel has successfully conducted the first such operation, while discharging at the Niigata LNG Terminal.
Covid-19 update – Crew relief “impossible”
The impact of the Covid-19 coronavirus is a dynamic situation. The World Health Organisation recognised Covid-19 coronavirus as a global issue in early 2020, but it took until March for some sponsors of LNG projects to begin voicing concerns that demand for LNG may have fallen substantially. Some have gone so far as to declare force majeure.
Force majeure and arbitration are long-term business issues; a more pressing concern for owners and operators is the matter of crew change. Teekay Gas Group president and chief executive officer Mark Kremin, speaking at the 14th Annual Capital Link International Forum warned: “Crew relief is petty much impossible right now. We can get fresh provisions and spares onboard, but we cannot get crew off and on. In some ways it is helpful. Not allowing people onboard keeps the ship safe, but it will be a problem over time.”
On the revenue side, Flex LNG chief executive officer Oystein Kalleklev noted that in the past, when LNGCs almost exclusively traded on fixed routes, a force majeure clause was required in the contract if one of the ports on the fixed route declared force majeure. In the modern age of chartering out vessels to trade worldwide on the spot market, such a clause no longer makes sense. “We have not seen any signs that charterers will try to renegotiate and cancel,” he said. “We have reviewed our charters for force majeure clauses and typically in LNG the [contracts] do not have any. That includes those done under SHELLTIME. Those contracts that do have a force majeure clause state that they must run for another 12 months.” Highlighting some cargo delays, Mr Kalleklev said: “We are on time charter and the clock is ticking. We still get paid.”
He also noted: “A country importing LNG does not suddenly stop. At the height of the [Covid-19 coronavirus] crisis in China, LNG imports only dropped by 5%. India is now in lockdown, but it is hard to estimate how the situation there will affect shipping.”
One discernible impact has been the increase in the use of LNGCs for storage. Mr Kalleklev said: “The use of LNGCs for storage had grown from zero to 25 ships at the end of February. It then dropped at the end of March and is now creeping back to 15 ships.” Golar LNG chief executive Iain Ross added: “On the storage, it is less about stock piling and more about slow-steaming.”
Poten & Partners managing director of LNG Jefferson Clarke said: “This will have a positive impact on the spot market; spot rates will climb quickly.”
The spot market rate for a large LNGC to work east of Suez was US$42,000/day at the beginning of April 2020 and had fallen by only US$1,000/day by the middle of April 2020, according to Fearnleys.