As the world moves to greener fuels, LNG will continue to be a major player in the transition, writes Howe Robinson Partners LNG senior broker, Debbie Turner
This has been one of the most tumultuous years in recent times for LNG, with demand for the product growing as pipeline gas supply to Europe falters. Who would have envisaged that new and existing pipelines, in which billions of dollars had been spent, would be halted prior to start up?
The world is changing; what would have been a drive towards a greener world (which we need) has changed and reality has set in that yes, we can get there, but at the same time compromise is needed to keep the lights on.
This became a worldwide problem as the world’s economy began to recover from the pandemic. Whilst Europe is diversifying its usage into alternative sources such as renewables, as demand for gas has recovered, there has been an ever greater threat to overall stability; that of curtailed supplies of pipeline natural gas (brought about by the Ukraine conflict).
“Product prices have risen to an all-time high”
Pipeline gas can always be threatened, which is one of the reasons why LNG has become an alternative to those supplies of natural gas which cannot be delivered due to geographical or political reasons. This has hit home more during 2022 than in any other time, as supplies of gas have been reduced to Europe, with Nordstream 2 not starting up and Nordstream 1 supplies curtailed for “technical reasons”.
Nine FSRUs in Europe
The number of floating storage and regasification units (FSRUs) required to replace pipeline supplies are insufficient and those that were available have now either been purchased at numbers well above their original cost, or chartered for long periods. In Northern Europe alone, plans are underway for at least an additional two land-based LNG terminals and a minimum of nine new FSRU projects, the first of which has begun operation at Eemshaven in the Netherlands. Europe has historically been viewed as the empty sink for excess volumes, when many of these volumes headed to more lucrative Eastern markets.
What happens next? From where we were in June 2020, with gas prices languishing below US$4.00 and cargoes cancelled from the US Gulf due to lack of demand, the market today is a complete change. Product prices have risen to an all-time high, far beyond levels seen normally for a few months in the winter in the East, with both Europe and the Far East competing for additional volumes. Terminals in Europe, which had been running at lower levels, are now finding that they cannot take all of the LNG they would like to and whilst storages of gas in Europe in 2020 hovered at below 40% of capacity, today those same storages were just over 80%, meeting the targets set by the EU government.
Will we see prices remain at this high level? A directive from the EU joining member states together to increase bargaining power and reduce costs could have some effect but some (most?) of the LNG is under long-term contract. It is the short-term volumes that have risen in price considerably and these could certainly remain strong, particularly with increased demand from the East which has not really been seen during 2022. High temperatures in many of the countries, coupled with high gas prices, has led to alternatives being sought and closed nuclear facilities have been one of the options. China, which overtook Japan as the world’s largest importer during 2021, has now retracted to second place, as lower demand from industry and increased supplies from pipeline gas occurred. However, we must not forget that whilst LNG is a fossil fuel, it is the greenest fossil fuel, until alternative renewable sources are available to cope with lack of wind or sun. As China’s economy recovers, we may well see it increase imports of LNG and thus again, become the world’s largest importer.
“Pipeline gas can always be threatened, which is one of the reasons why LNG has become an alternative”
As for availability of LNG, supplies have yet to increase. We have encountered supply problems from Norway, Australia and Nigeria during 2022 at a time when LNG has been most required. The new facility at Calcasieu for Venture Global has begun operation, with additional volumes to be sourced from both Senegal and Indonesia towards the end of 2023. A number of FIDs have been taken during H1 2022, but a number await in the wings and many have reached sales for over 70% of their first train. Hopefully, we should see a number in the next couple of months – notably Next Decade, with the Rio Grande LNG, Tellurian with Driftwood and Sempra with Port Arthur and Cameron phase 3. However, these facilities are unlikely to be in operation prior to 2026 and thus the shortage of LNG will remain.
A premium for newbuilds
On the shipping front, it is a similar story, but we are facing increased newbuilding costs together with longer delivery times and have seen the price of a 2026 delivery rise to almost US$250M. The pressure on yards, driven by the large QatarEnergy order for the North Field Expansion, has been immense and whilst Chinese yards, of which there will be four by 2026 and potentially a fifth in the offing, are quoting for later, South Korean yards are still not past 2026. There are very few uncommitted vessels for the period 2023 through to 2026 and those that are will likely be at a premium to meet the higher newbuilding costs, increased costs of finance and the lack of modern available tonnage.
We have seen a fundamental change in the shipping market, in that many of the vessels available for the shorter term are now in the hands of the portfolio players and trading houses. Periods of long-term charter, which reduced from the traditional 20 years down to seven years, are now increasing back towards the 10- to 15-year levels as charterers try and obtain “value”. At the same time, technological advances are now minimal with a “standard” specification with low boil off, air-lubrication systems and reliquefaction as the order of the day. Engine standardisation could be the next change. One point to raise is that of the new regulations for both EEXI and CII which come into force during 2023 – the CII will have the most effect on shipping and this could see more of the older, smaller steam vessels head towards either projects or recycling.
We are therefore positive for the LNG shipping industry moving forward past 2030 – alternative greener sources will begin to play a larger part, but LNG in general, will continue to be a major player in the transition towards greener fuels for the foreseeable future.
Ms Turner will open the LNG Shipping & Terminals Conference, Europe, which will be held in London 16-17 November 2022, with her presentation, Market round-up: the LNG paradigm shift. For more details on the event, please click here.
© 2023 Riviera Maritime Media Ltd.