NH3 and CH4O for WinGD

GROWING ASIAN DEMAND FUELS RED HOT LNG MARKET

Sharp recoveries in demand for energy in Asia and Europe, supply disruption and unseasonal weather have contributed to a sharp run up in seaborne LNG prices, but the long-term rise in LNG demand seems certain to continue, Kari Reinikainen hears

While the market has focused on the recent rise in seaborne gas prices since May 2021, which has been pushed up by high demand for gas in Asia and Europe, high spot rates for natural gas will only have an indirect eff ect on the newbuilding orderbook, shipping analysts note.

While surging spot freight rates for LNG carriers have shot up, the effect has been compounded by the relatively small proportion of prompt LNG tonnage available in the market. The majority of LNG carri-ers are committed to long term charters.

This has led to some quite astonishing market movements. Current LNG carrier spot rates of USD 245,000 per day are up a staggering 1,785% compared to the March 2021 lows of USD 13,000 per day, said Guy Cooper market analyst at VesselsValue in the UK.

The same dynamic has seen soaring freight rates lift asset values: “The fixed age value for a five year old large LNG vessel currently resides at US$ 150 million, up 12% since the start of the year and 14% compared to October 2020.”

Currently, structural factors in the European gas market, such as declining production from mature Dutch offshore fields, as well as supply interruptions around the time of the completion of the Nord-Stream 2 gas pipeline, were encouraging buyers to rebuild stocks ahead of winter.

As a result, and the demand is further catalysed by the fierce competition between Europe and Asia to secure energy supplies, this has led to a surge in gas prices as suppliers struggle to keep up, he added.

The situation represents a complete reversal from the early months of 2020, during the early stages of the pandemic, when demand for oil and gas was “in free fall”. Slumping oil and gas indices during that period hit the market fundamentals for LNG carriers, as weak demand weighed on their valuations, he told The Motorship.

A number of market observers note that the emergence of price indices for LNG over recent years, as well as the progressive development of separate prices, means that price risk management tools are available for ship owners eager to lock in prices for their fuel. In other words, for ship owners who take action to manage their exposure to bunker price fluctuations, the potential impact of short term bunker price fluctuations should be limited.

Supply and demand fundamentals

From a longer term perspective, some analysts warn that demand for LNG could continue to outstrip supply. Morgan Stanley Research noted on 25 October that annual demand growth for LNG would rise by at least 25% by 2050, with slower demand growth for thermal coal over the period possibly lifting LNG to closer to 50%.

Morgan Stanley noted that this was likely to lead to an annual productive shortfall of 73 million tonnes, and that an additional US$65 million of investment in production capacity would be required by 2030. The IEA noted in its Q4 2021 report on the gas market that this productive shortfall had been exacerbated by a decline in LNG contracting activity, which fell by almost 30% year on year in 2020, or by 45% compared with its 2018 peak. The activity during 2021 to date shows some potential for recovery.

The impact of the Covid-19 pandemic could also be seen in final investment decisions (FIDs), which were also down from their 2019 record high. To date, one North American project was sanctioned in 2020, in addition to Qatar’s major expansion plan, which was confirmed in early 2021. “These new investments, added to the wave of FIDs taken before 2020, should therefore prove sufficient to satisfy additional LNG demand in the coming years,” the organisation pointed out.

Asian demand seen to grow 4% per year to 2040

From an LNG shipping perspective, one of the most important questions to be answered is where the growth in LNG demand is expected to occur.

Positively from a shipper’s perspective, Asia is expected to be the main driver of global growth in LNG demand over the coming decade. Shell has forecast that the demand for LNG in Asia will grow by 4% per year, three times the rate of the global demand for energy, up to 2040.

Imports to Asia would exceed 600 billion cubic metres in 2040, the company forecasts, which is signif-icantly more than the total imports today.

While gas interconnectors between Russia’s Far East with northern China exist, for example, the ma-jority of the increased export volumes are expected to carried by ship. The Motorship notes that con-tractual price differentials between seaborne LNG indices and the existing Sino-Russian interconnect-or, as well as technical challenges for maturing Siberian gas fields, are likely to encourage seaborne export. Emerging demand for LNG in coastal cities in southern China and southern Asia will also favour seaborne delivery.

Golar LNG forecasts the global demand for LNG to reach 550 million tonnes in 2030, a sharp increase from 360 million tonnes today. Demand in the Pacific region would lead the growth and expand by a forecast 27% to 324 million tonnes.

However, most of this demand growth would be met by suppliers in the Atlantic and Mediterranean regions, where the supply should rise by 67% to 210 million tonnes, the company said in a presenta-tion in September. Long distance between the source of LNG and where it is consumed increases ton miles and adds to the demand for shipping capacity.

Lars Bastian Ostreng, shipping analyst at Arctic Securities in Oslo, said that the development of the newbuilding orderbook for LNG carriers is closely linked to the anticipated increase in the global LNG liquefaction capacity.

This increased significantly in 2019 as the world was moving away from coal and oil to use more LNG, but then the Covid-19 pandemic led to a sharp fall in these investments.

The current newbuilding orderbook accounts for about a quarter of the number of ships in service, Ostreng said. There are some 600 LNG carriers currently in operation.

There will be a significant increase in the LNG production capacity in the next few years, particularly in 2026, when some 90 million tonnes or more than half of the capacity increase that year, is sched-uled to come online.

“A high price of gas is good news for potential new liquefaction capacity, which again is good for new-building projects,” Ostreng said. However, it takes about five years for a project to be completed, but capacity of an existing facility can be increased faster by adding a “train” or a production line to it. However, delays are quite common in connection with these large projects. the first Dual Fuel Diesel Electric (DFDE) powered ship entered service in 2004 and various other systems were introduced in the years that followed. “The future of steam turbine powered tonnage will largely depend on how strong or weak the (freight) market will be. However, it must be very hard for them even to comply with new regulation, such as EEXI,” Ostreng pointed out. Obsolete units are often converted into floating storage or storage and regasification use, rather than sold for recycling.

On the newbuilding side, 142 LNG carriers are due to enter service in the 2021-25 period alone. South Korean builders Hyundai, Samsung and Daewoo together have 110 of these contracts, with the Russian shipbuilder Zvezda holding 15 contracts and Hufong in China a further 11.

However, Qatar that plans to expand its liquefaction capacity to 126 million tonnes per year in 2027 from 49 million at present, has alone contracted more than 100 ships of this type and its orderbook extends to 2027. It has secured about 60% of the global LNG carrier construction capacity up to that year, Shakirov pointed out.

A rising supply of LNG combined with an anticipated withdrawal of steam turbine powered tonnage from the market should bode well for the LNG carrier industry. But on the other hand, new LNG carri-ers are larger than old ones: in 2020, the existing fleet’s capacity stood at 158,200cbm on average, up from 120,900 two decades earlier, Shakirov noted.

A high price of gas is good news for potential new liquefaction capacity, which again ‘‘ is good for new-building projects

Gas Exporting Countries Forum (GEFC) analyst Dr. Aydar Shakirov said in a report that there were 606 LNG carriers in service at the beginning of this year, of which 39.4% were steam turbine powered

The same report notes that 68 LNG carriers that were in service at the beginning of this year had been built before the turn of the Millennium. However, steam turbine propulsion only started to be re-placed by other systems after that date: