Turning the shipbuilding corner

The logjam has broken. After going two years without placing an order for a new LNG carrier, shipowners are getting out their chequebooks and signing newbuilding contracts. Although only one new ship has definitely been ordered as yet, Mitsui OSK Lines (MOL) has provisionally agreed to build four new vessels in China on the back of time charter arrangements with ExxonMobil.

The firm LNG carrier order that has been placed is for a 147,000m³ vessel that will be built at the Hudong-Zhonghua shipyard in China on behalf of a consortium led by China LNG Shipping (Holdings) Co (CLNG). The new GTT NO96 membrane type ship is being built to serve China National Offshore Oil Corp’s (CNOOC’s) recently opened Shanghai LNG terminal and both CNOOC and Shanghai LNG are members of the consortium that will own the vessel.

It was originally intended that ownership of this newbuilding would be split between CLNG and MISC of Malaysia, but that deal fell through. Petronas of Malaysia is contracted to supply 3 million tonnes of LNG per annum (mta) to the Shanghai LNG terminal at Yangshan, a volume that will account for the bulk of the shipments to the facility until its Phase 2 expansion capacity is commissioned at some yet-to-be-specified date.

Although one firm and four provisional LNGC orders are hardly notable compared with the 2004-05 heyday, when 116 new LNG carriers were contracted over the two-year period, the recent activity represents a ray of hope for not only a beleaguered shipbuilding industry but also a raft of ship equipment suppliers that have had to accommodate rapidly slowing production lines.

The recent flurry of activity also heralds the start of a new round of ship orders to meet the needs of LNG projects whose final investment decisions (FIDs) have been delayed while the full impact of the post-September 2008 global financial crisis could be assessed. Although there is never likely to be another LNGC contracting boom on a scale to match that of 2004-05, the current orderbook, which has been dwindling rapidly since 2007, is due for some reinvigoration.

While not all the projects expected over the next few years are guaranteed to come to fruition in the foreseeable future, some FIDs have already been made. The Papua New Guinea (PNG) and Gorgon LNG projects, for example, have recently been given green lights, and of the four new ships MOL will build in China two are earmarked for PNG LNG, two for Gorgon.

The recent firm and provisional LNGC orders, as they stand, have also confirmed the growing belief that Chinese shipyards will emerge as the dominant force when shipbuilding activity picks up once again. To date only five LNG carriers have been built in China, all steam turbine-powered, 147,000m³ ships and all completed by the Hudong-Zhonghua yard over the past two years, such as Dapeng Sun (pictured).

Hudong-Zhonghua encountered teething problems while constructing the first vessels in the original five-ship series. However, as a result of the lessons learned, building work on the final ships went much more smoothly. The Shanghai-based builder has now won the order for the new CLNG ship and stands poised to secure further LNGC contracts resulting from the new round of tendering activity getting underway.

Although the large Korean shipyards have achieved unparalleled productivity and quality standards in their LNGC construction work over the past decade, it was always envisaged that the Korean builders would be unable to match their Chinese counterparts on prices going into the new decade.

The politics of ship construction also favours China going forward. The new Asian LNG projects are being developed, to a large extent, on the basis of China’s growing appetite for LNG imports. Throughout the history of LNG shipping every country with both a shipbuilding industry and a sizeable requirement for LNG imports ensured that the orders for the ships to carry the gas went to domestic shipyards. Following the successes of France, the US, Japan, Spain and Korea, it is now the turn of China to move to the forefront of LNGC construction.

Furthermore, Hudong-Zhonghua will not be the only yard in China to establish its LNGC building credentials. A number of the country’s other major shipbuilders have carried out the necessary preparatory work to enable the fabrication of such vessels. Dalian New, Jiangnan and Nantong KHI are amongst other Chinese yards positioning themselves for LNGC construction.

Supporting this national drive, China State Shipbuilding Co (CSC) has recently unveiled a series of three of its own LNG carrier designs, covering ships of 160,000, 175,000 and 220,000m³.

For their part, Korean yards have moved to fill their dwindling LNGC orderbooks by gearing up for a new type of LNG vessel work – the construction of floating LNG production and regasification vessels. Several Korean yards have also entered into joint ventures with overseas shipbuilders that will enable them to build ships in other countries, including China, Russia and the Philippines. Finally, Korean yards will no doubt be in the bidding for all the third party LNGCs that need to be built in the future.

Meanwhile a number of venerable names have dropped off the list of those shipbuilders with a backlog of LNG carriers to build. The latest yard to complete the final such vessel on its current orderbook, following Hyundai Heavy Industries and Mitsui Shipbuilding & Engineering in similar circumstances, is Mitsubishi Heavy Industries (MHI).

For many years MHI was the leading LNG carrier shipbuilder but Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering have both overtaken the Japanese yard within the past three years in terms of LNGC completions. Although MHI is looking to bounce back with new LNGC construction work, in much the same way that Hudong-Zhonghua has done in China, the challenges for the Japanese yard are greater.

The world LNG carrier fleet now stands at 342 ships, following the delivery of 40 vessels in 2009 and five during the early weeks of this year. Because most of the new LNG production plants now coming onstream have been delayed, the oversupply of ships, already inflated by the slackened demand for gas in 2009, has been further exacerbated.

The number of LNGCs currently in lay-up runs into double digits. Furthermore the downward pressure on freight rates for those ships carrying spot cargoes is being reinforced by the end to what has been a particularly cold winter season.

Under such circumstances there is a tendency to think that the laid-up vessels, currently surplus to requirements, could help meet the needs of those LNG projects about to go out to tender for the required shipping capacity. However, most of the laid-up ships are older, smaller, steam-powered vessels that cannot compete with new modern tonnage in terms of running costs and operational efficiencies.

While some older ships have been converted into floating storage and regasification units (FSRUs), thereby gaining a new lease of life, the relatively small size of these LNGCs has called into question the economic viability of some FSRU conversion-based schemes.

However, any such capacity constraints attendant on the older ships also need to be weighed against the benefits that can be derived by mounting a fast-tracked FSRU conversion project. There are currently a number of utilities and gas distribution companies, in countries like Indonesia, Bahrain, Pakistan, Jamaica, Israel and Uruguay, which are desperate to commence gas imports as soon as possible. The possibility of converting an existing LNG carrier into an FSRU and hooking it up to the domestic gas grid, all within the space of 18 months, holds great attractions.

So LNGC shipbuilders anxious to secure new orders expect to derive benefit from FSRU project developers and their requirement for some existing ships for conversion. Also, the commissioning and buildup to full capacity of those previously delayed liquefaction plants during the course of 2010 will further absorb new tonnage entering the market.

If no further new ships are ordered this year and those on order are delivered on schedule, there will be only 15 vessels in the LNG carrier orderbook at the end of 2010. That equates to about 4 per cent of the existing fleet, a figure which is much too low, considering the dynamic nature of this gas shipping sector and the buoyancy of the long-term forecasts for LNG. All the elements are in place for a resurgence in LNGC ordering, albeit not to the scale of five years ago.