LPG operators look ahead

FLEET FOR THE FUTURE

GAS FLEETS • WITH DEMAND STRONG AND THE POTENTIAL THAT NEW TRADES WILL EMERGE FROM THE ENERGY TRANSITION, GAS SHIP OWNERS ARE SITTING PRETTY AND SITTING TIGHT

THERE WAS A TIME, around thirty years ago, when LPG was being touted as the fuel of the future. Comparatively low in emissions, with a well established supply chain, LPG could offer a cleaner way of fuelling the future. To some extent that vision paid off, with domestic use of LPG for cooking and home heating still increasing in many developing countries in Asia.

But those forecasts of growth in LPG demand did not take account of other developments, that only emerged this century. In particular, the use of LPG as an alternative to naphtha as a petrochemical feedstock was already in the market, but the emergence of shale gas fracking, particularly in North America, generated significant new volumes of LPG for the world market, bringing down the price and making it a more attractive alternative. Also in the petrochemical area, the growth of propane dehydrogenation (PDH) as a relatively easy route to the production of polypropylene added hugely to propane demand – and continues to do so – especially in China. Additionally, and as a result of the shale gas boom, the emergence of ethane as a stand-alone product has driven more long-haul trade, with US ethane moving by ship to Europe, India and China.

That emerging ethane trade has necessitated the development of new types of gas carrier, with containment systems based on LNG rather than LPG transport, given the low cryogenic temperatures required, and ships of rather larger capacity than typical very large gas carriers (VLGCs) used for propane and butane. These very large ethane carriers (VLECs) are also generally configured to use ethane as fuel and there are an increasing number of VLGCs now being built to use LPG as fuel, with some operators, notably BW LPG, retrofitting their existing vessels.

Gas tanker operators are also well placed to take advantage of changing trades as the energy transition develops. For instance, ammonia is being touted as one alternative fuel that will be easy to adopt, either for direct consumption as fuel or via fuel cells to generate electric power. There are several plans in place to move ‘green’ ammonia from production sites around the world to northern Europe, a task for which medium-sized LPG tankers are well suited, since they are already involved in the trade.

PLAYING WITH THE BIG BOYS The growth of US LPG exports has been remarkable. In 2015, total US production of LPG was 66m tonnes, of which 18m tonnes was exported; by 2020, production had grown 36 per cent to 90m tonnes but, with domestic consumption essentially flat, exports had surged by more than 250 per cent to 46m tonnes. According to the US Energy Information Administration (EIA), 2023 projections show a further 17 per cent growth in production to 105m tonnes with exports rising 28 per cent to 59m tonnes.

Some of that additional output from the US (as well as from Canada, at a lower level) has been used to fill a gap caused by a shortfall in Middle East exports, particularly at those points in recent years when oil production has been curtailed to support the oil price, leaving less associated gas available for fractionation. But with Opec+ recently upping output to

OPERATORS ARE STILL INVESTING IN NEW

CONSTRUCTION IN THE VLGC SECTOR, WHERE

ADDITIONAL LPG VOLUMES ON LONG-HAUL TRADES ARE

compensate for the shortfall in the availability of Russian product, there is now more LPG moving out of the Middle East once more.

For VLGC operators, that is important, as the shipping routes from North America to Asia are longer than those from the Middle East to Asia, which has added significantly to tonne-mile demand, particularly in the period since 2019.

Not surprisingly, VLGC operators have responded to that additional demand (and rising freight rates) by placing more orders for new ships. Additions to the VLGC fleet have averaged around 20 per year between 2017 and 2022 but the orderbook points to the delivery of 43 newbuildings in 2023 alone, which will take the global VLGC fleet up to 378 ships by the end of that year. BW LPG does, though, note that the number of potential demolition candidates will start picking up again next year, based on the age profile of the current fleet.

TRICKLE-DOWN EFFECT Newbuilding activity is also expected to pick up in the mid-size LPG tanker sector next year, with Exmar pointing to more than 30 new ships on order, equivalent to 30 per cent of the existing fleet. These will also be mainly dual-fuel ships, with the US the largest provider of LPG liftings. Mid-size vessels are also the workhorse of the global ammonia trades and are currently experiencing a sharp uptick in tonne-mile demand as the conflict in Ukraine is causing a shift in the trade to longer-haul routes.

Navigator Gas notes that it is not just ammonia that is being affected by the Ukraine conflict, with a similar impact on LPG and petrochemical gases. The company, which operates primarily in the Handysize sector, also reports that, with surging tonne-mile demand across all LPG tanker segments, the degree of substitution between them has shrunk. Increased US exports of LPG are positive for larger gas carriers, in turn reducing competition from other size categories within the LPG shipping segment. This dynamic also applies to the Handysize segment: when ethylene capable vessels are employed in ethylene or ethane trades, and when fully refrigerated vessels are employed in ammonia trades, there are fewer vessels competing for LPG and the more straightforward petrochemicals, which in turn is positive for the semi-refrigerated sub-segment of the Handysize vessels.

In the small gas carrier segment – which BW Epic Kosan defines as all fully pressurised carriers and those semi-refrigerated ships below 13,000 m3 capacity – total fleet growth has been very restricted since 2016 and looks set to continue in the same vein at least for the next two years. It expects fleet growth this year to be 2.2 per cent, though this could be reduced by further demolition activity; over the

THERE IS NEWBUILDING INTEREST IN THE LARGER

VESSEL SIZE RANGES, BUT FEW ORDERS ARE COMING IN

FOR SMALLER SEMI-REF AND FULLY PRESSURISED past five years the average annual scrapping rate has been 2.0 per cent and there are currently some 26 small gas carriers of 30 years of age or more in operation, equivalent to 4.8 per cent of the active fleet.

However, given the ongoing firm demand for gas tanker tonnage and the small orderbook in the smaller vessel sectors, and despite a recent improvement of scrap prices, it would not be surprising if owners are minded to keep their ships trading, especially as the future may deliver yet more employment opportunities. The tables on the following two pages show a summary of the major LPG tanker operators’ fleets, taken largely from published information. Given the structure of the business, individual ships may be included more than once, against their owner, manager and/or pool operator, so the total number of ships indicated will not sum to the actual fleet size.