Qatar newbuilding contract changes fleet profile - again

To support its LNG newbuild requirements for its North field expansion and US LNG investments at Sabine, Texas, Qatar Petroleum (QP) has reached agreements with South Korea’s ‘Big Three’ shipyards to build more than 100 LNG carriers valued at QAR70Bn (US$19Bn). Under the agreements, Daewoo Shipbuilding & Marine Engineering (DSME), Hyundai Heavy Industries (HHI) and Samsung Heavy Industries (SHI) will reserve a major portion of their LNG ship construction capacity for QP through 2027.

The agreements follow a deal in April 2020, in which QP inked a contract with China’s Hudong-Zhonghua Shipbuilding worth about US$3Bn for 16 LNG newbuilds. Commenting on the deal, Qatari Minister of Energy Affairs and QP president and chief executive Saad Sherida Al-Kaabi said: “With the conclusion of these milestones agreements, we have everything in place to commence the largest LNG shipbuilding programme in history. We have secured approximately 60% of the global LNG shipbuilding capacity through 2027 to cater for our LNG carrier fleet requirements in the next seven to eight years, which could reach 100+ new vessels with a programme value in excess of QAR70Bn (US$19Bn).”

Mr Al-Kaabi said the new LNG vessels will be equipped with the latest generation slow-speed, dual-fuel engines, utilising LNG as a fuel to “ensure the most efficient performance and compliance with the latest global emissions and environmental regulations.”

“Shipowners take on unimaginable risks against a five- to seven-year charter on an asset of US$200M”

The news of the giant Qatari order comes at the point when some of the original class of Q-Max and Q-Flex vessels reach significant milestones. The Nakilat-owned and Qatargas-chartered Al Mayeda is a Q-Max LNG carrier that in May 2020 completed 88 voyages, covering over 1.1M nautical miles since delivery in February 2009. By the time of the first deliveries of the next generation in 2023, Al Mayeda may have surpassed 100 voyages.

The Qatari order also skews the LNG carrier orderbook. According to BRL, the total orderbook including options is nearly 180 units, but over 80% are in the ‘Large LNG carrier’ category. While the massive order is against the expansion of Qatar’s LNG exports, it also creates a difficult situation for other LNG carrier owners.

Speaking at the Poten & Partners webinar “The Outlook for LNG” in June, Poten’s chairman emeritus Michael Tusiani gave his observations of the expectation of LNG carrier shipowners after many years in the business. “Shipowners usually make money because of inflation,” he said, “They buy for a dollar and it usually costs a dollar twenty-five down the road. That is not the case in LNG. Newbuilding prices have not risen as anticipated.”

One of the reasons for the newbuilding price of LNG carriers not behaving as anticipated is that the shipyards have benefitted from the economies of scale given to them by the large one-off orders.

Shipowners have participated in the process by taking part in the projects. This, according to Mr Tusiani, has been to their own detriment. The model of long-term contracts with capital costs passed through to the charterer was disbanded in the expectation of an LNG spot market. “Shipowners are not going to build ships on the terms that they are expected to accept these days. They are taking on unimaginable risks – residual value risks, technology risks – against a five- to seven-year charter on an asset of US$200M. It does not make any sense,” he said.

He commented that the LNG carrier shipbuilding market will have to return to the long-term contract model with a reasonable rate of return. The volume of LNG carrier newbuildings going on the orderbook will soften second-hand values. The psychology of very new LNG projects is to demand new LNG carriers, he noted. No one focuses on the availability of used tonnage.

The other major problem for shipowners is that the LNG carrier market is not fungible. “LNG carriers are not tankers. The tanker market will go up and it will go down, but at any given time you can sell a tanker,” he said, “In LNG, that is not the case. An LNG carrier built for US$200M today has no buyers at US$180M or US$170M. Why? Because the yards are offering new vessels at that price,” he said.

Poten head of LNG shipping analytics Jefferson Clarke noted that the Qatari North field expansion will impact shipping supply. “This will easily extend the shipping oversupply into 2025,” he said. This will impact older vessels coming off term charters and the uncommitted newbuildings already under construction. He noted that there was potentially one aspect that could be positive for the older vessels; if the decrease in demand from Covid-19 led to a project in the development stage being cancelled and the liquefaction in existing projects being expanded instead, then there may be an increase in utilisation of older vessels.

The increase in demand in Asia could be a driver in this scenario, increasing tonne-mile demand and absorbing some of the older tonnage and uncommitted newbuildings. But this scenario is a long shot compared to how these cycles normally play out, noted Mr Tusiani. He said: “I am on the side of the shipowner. They are saying “Why do you need a newbuilding? I have a new ship, it’s the latest technology, why don’t you use my ship?”

There is no question of the provenance of the shipowners. They are proven operators, but it reduces to a question of cost, he said. “As long as there is a cheaper ship at the time the demand picks up, they (charterers) will choose the newbuilding,” he said. It is a question of timing. “If my ship is coming out (of the yard) in 2021, and your project is coming on stream in 2025, why would you (the charterer) take a four-year old vessel?

Mr Tusiani also warned current and potential contractors of new LNG carriers of relying on the short-term or spot market. While traders needed LNG carriers to trade, what he has seen in his long experience of dealing with LNG shipping is that it is the idle time that has the greatest impact on financials.

Poten senior advisor Gordon Shearer had a different take on the issue of newbuilding supply and the interaction with charterers. “Many of the problems around the long-term contracting of LNG offtake and for shipping might be solved if the industry started to commoditise on pricing,” he said. “The industry is going to have to think hard about pricing, both in the commodity itself and the transportation. We need real liquidity in the (LNG) marketplace.”

Transparent pricing might weaken the psychological desire to have only new ships for long-term projects and allow greater utilisation of the existing fleet.