It is rare for the major LNG carrier owners to all be in one place at the same time, but between Posidonia and the recent Capital Link event we got to hear from some of the key players on the main industry topics
Posidonia is a huge shipping exhibition held every two years in early June in Athens. Attached to it are a series of conferences and balmy evenings at shipowners’ parties. Posidonia is organised by the Greek shipowners’ association and is, in effect, a celebration of Greek shipping.
In recent years the US-based, Greek-owned conference organisation Capital Link has organised the Analyst & Investor Capital Link Shipping Forum on the first day of Posidonia.
This year’s Forum was devoted to gas carrier shipping and on the panel were Tony Lauritzen, chief executive of Dynagas LNG Partners, Paul Wogan, chief executive of GasLog, Stavros Hatzigrigoris, managing director of Maran Gas Maritime, Harry Vafias, founder and chief executive of StealthGas, and Christos Economou, founder and chief executive of TMS Cardiff Gas. The panel was moderated by Espen Landmark Fjermestad, head of shipping equity research at Fearnley Securities.
The volume of Qatari LNG shipped to China in 2017 was over five times greater than that from the US
Mr Fjermestad opened the discussion by setting the scene. According to his data, seaborne LNG shipments are growing seven times faster than the growth in pipeline gas exports. The fastest growth in LNG demand were shipments to China, where there was a 60% growth year-on-year in 2017, versus analysts’ earlier predictions of 20-30% growth.
As his opening question to the panel, Mr Fjermestad asked if this growth level will continue. Mr Lauritzen pointed out that although China’s LNG import growth was spectacular, gas only represents 6% of the country’s energy mix. Nonetheless, the use of coal is being cut back under anti-pollution edicts and, as a result, the demand for LNG will grow as coal burning diminishes.
Mr Wogan cautioned about sources when quoting statistics, pointing out that his organisation calculated that China’s year-on-year LNG import growth in 2017 was 46%. Nevertheless, he agreed that Chinese LNG imports would continue to grow strongly for the foreseeable future. “Once you make the change from coal to gas, you don’t go back,” he told the audience.
The impact was clear; the panel acknowledged that Chinese LNG demand helped drive up spot rates by 50% in 2017, but agreed that the country’s gas-buying strategy will be more considered going forward. Over the first six months of this year, according to the panel, spot rates had increased from US$54,000/day to US$80,000/day. In addition, interest in period charters is rising.
Ship availability was very tight during the 2017/18 winter months, noted Mr Fjermestad. The panel agreed the high vessel utilisation rates had helped drive demand for 18-month charters to cover the risk of being short of a vessel when Chinese demand peaked.
The panel was also in agreement regarding the impact of a trade war between the US and China. According to the panel host, 60% of the rising production from Cheniere Energy’s Sabine Pass terminal went to the Far East in 2017, but mostly to Japan and Korea. Sabine Pass accounted for only 3.5% of China’s LNG imports.
However, there are work-arounds; a number of US-sourced shipments this year have been bought by traders and sold on to China via third parties. These are not affected by tariffs.
"There is hidden capacity in the existing fleet; while LNGCs engaged on long- or medium-term charters sail at an average speed of 19.5 knots, those re-let into the spot market or on short-term contracts are only sailing at an average speed of 14.5 knots”
Time for new projects
While the LNG spot market is important, it is a by-product of long-term offtake arrangements. Mr Fjermestad cautioned that there had been very few final investment decisions (FIDs) on new LNG production output over recent years.
Mr Wogan noted that, aside from the market uncertainty factor, there had been no FIDs due simply to the lack of available finance. One explanation for the lack of finance is that this is a product of the current phase of the credit cycle.
Banks are under pressure to maintain and grow capital under the series of regulations introduced since the financial crisis of 2008. Internally, LNG projects are competing with other hard-asset projects, like real estate, aircraft and shipping, for funding. This explains why those LNG greenfield and expansion projects that do take place ultimately have state financing in some form or other.
For an LNG project not backed by the state there is a requirement for 70-80% of the offtake to be secured to a solid customer. Mr Wogan noted that the recently taken decision by Cheniere to proceed with Train 3 at its new Corpus Christi terminal had 80% of the offtake secured.
It may be that future FIDs will be taken with a lower level offtake, and more sold spot. One issue is the price of LNG; as more projects come on stream, the spot price of LNG will reflect the emergence of a more mature market and the availability of a greater level of supply, rather than being indexed or linked to other energy prices, like the crude oil price minus a constant.
Looking ahead, the panel agreed there was a deficit of LNG carriers, but there was no agreement on what number of ships would be required by what date. Opinions varied on the number of new orders that would need to be placed over the next 12-18 months, from 32 to 62 vessels. The panel moderator suggested that to cover the medium term and the buildout of projects with FIDs, around 30 new LNGCs were required for entry into service in the 2020-21 period.
However, there is hidden capacity in the existing fleet. Analysis shows that while LNGCs engaged on long- or medium-term charters sail at an average speed of 19.5 knots, those same vessels re-let into the spot market or on short-term contracts are only sailing at an average speed of 14.5 knots.
Engines and FSRUs
Mr Fjermestad posed another interesting question: which of the two available dual-fuel, two-stroke propulsion system technologies is better, MAN’s ME-GI or Winterthur Gas & Diesel’s X-DF?.
Mr Hatzigrigoris of Maran Gas, a shipowner that has chosen the ME-GI option, explained his company’s specification was not standard. “Our ME-GI arrangement is slightly different in that we have two high-pressure compressors instead of one and full rather than partial reliquefication. Although ME-GI engines have their advantages, the high, 300-bar fuel-injection pressure calls for specialist fuel gas supply systems.”
The last discussion involved the floating storage and regasification unit (FSRU) market. Mr Wogan stated that as the FSRU fleet and regas vessel project numbers have grown, the rates commanded by such ships have fallen; but, then again, so have newbuilding prices.
“I think there is a short-term overhang of ships,” he said. “Some FSRUs were ordered prematurely, against projects that did not reach fruition. However, if you believe in the thesis that gas is a cheap, clean and abundant energy source that many companies want to get access to, then you have to believe in the FSRU story, as it is the quickest and most cost-effective way to get gas into a market.
“We are confident that FSRUs are going to play a major part in the gas industry and will give decent returns,” Mr Wogan concluded. “It is all about the unit freight cost. We have put reliquefaction plants on our LNG carriers with dual-fuel diesel-electric (DFDE) propulsion systems, for example, and in terms of what the customer wants and our internal rate of return, it makes sense.”