Operators expect bigger profits as rising global trade in liquefied natural gas, boosted by demand from Asia, fuels a booming order book for the specialized tankers.
A raft of U.S. natural gas projects coming online in the next few years are likely to boost the global fleet of seagoing tankers carrying the product by up to a third, as shipping operators jarred by sharp swings in oil markets rush to take advantage of a big new stream of business.
At around $175 million each, vessels outfitted for liquefied natural gas can cost up to four times more than other ship types. But top shipowners say they could be the vehicle for most profitable trade in shipping since crude oil tankers powered global maritime fortunes in the 1960s.
LNG business has long been a small piece of the global tanker market, but trade in natural gas is on a sharp upswing as energy producers look for cleaner sources of power to replace oil and coal. Demand has grown at a sharp rate in Asia, in particular, and output has soared in the U.S. as improved hydraulic fracturing technology has made shale drilling for both oil and gas more cost effective, which has helped reshape global energy markets.
“We are moving into an era where fossil fuels will be reduced in the energy mixture, and LNG will be used extensively in the transitional period where more clean forms of energy can be developed,” said shipowner George Prokopiou. “If you are in shipping, you can’t ignore LNG.”
Mr. Prokopiou is chairman of Dynagas LNG Partners LP, which has five icebreaking LNG carriers on long-term contracts to move gas from the Yamal LNG project in the Russian arctic. He operates more than 100 ships, including crude oil supertankers and dry bulk carriers, under different companies.
The LNG market is powered by growing demand from Japan, China, India and Southeast Asia that has helped triple seaborne LNG cargoes since 2000 to 308 million metric tons last year, according to Bloomberg New Energy Finance. World-wide capacity for another 170 million metric tons is expected to be added by 2030, if planned projects are completed.
Much of the anticipated growth is driven by new LNG projects in Texas, Louisiana, Maryland and Georgia that will come online by 2022. The U.S. Energy Information Administration projects the U.S. will become the No. 3 LNG exporter in the world, behind Australia and Qatar, by the end of this year.
By then, the agency says, U.S. LNG export capacity will reach 8.9 billion cubic feet a day, more than double the current capacity of 3.6 billion cubic feet. “The energy costs in the U.S. are half of those in Europe and a third compared to the Far East,” Mr. Prokopiou said. “The financial benefits the U.S. has are tremendous, and more ships will be needed to move gas to export markets.”
Maritime operators and a beleaguered shipbuilding sector buffeted by sharp swings in various shipping markets in recent years are as anxious as the shale drillers to tap into the market.
There are now about 520 tankers capable of carrying LNG across oceans, according to David Bull, an analyst at London-based Maritime Strategies International. He expects the fleet to grow by about 28% by 2020, roughly in line with the growth in production.
South Korea’s Hyundai Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. , which are completing a merger agreed to last month, will be the biggest beneficiaries, as they will control 52% of existing orders with a combined order book worth $31.4 billion. Executives from both yards say LNG transport is the single bright point in an otherwise depressed shipbuilding industry.
LNG tankers cost more than oil tankers—the largest crude supertankers sell new for about $95 million—because of the technology needed to carry and control natural gas on long voyages. The gas is chilled to be condensed and then transported as liquid. Special alloys are needed for the ship’s tanks to keep the temperature at -165 degrees Celsius (-265 Fahrenheit) so the gas doesn’t evaporate.
Along with 101 ships on order, the total fleet of existing and ordered LNG tankers has a combined value of nearly $50 billion, according to marine data provider Vessels Value Ltd.
For the buyers, those orders carry risks since they target speculative business rather than existing demand.
Major producers like Houston-based Cheniere Energy Partners LP prefer to limit their exposure to volatile rate changes with long-term contracts called time charters that can stretch up to seven years. But experts expect many of the new ships to head into the short-term spot market as operators look to get the most revenue out of their expensive new vessels.
“In the past, owners ordered LNG tankers based on long-term contracts,” said Basil Karatzas, chief executive of New-York-based Karata’s Marine Advisors & Co. “Now, many shipowners prefer to trade their LNG tankers on the spot market as they see profits from the upside potential. This is unprecedented, because the ships involved are very expensive.”
Still, owners expect demand to run ahead of shipping capacity until at least 2024, paving the way for five years of healthy freight rates.
“With the new U.S. LNG plants, quite a few vessels will be required fairly quickly as there is no spare capacity out there,” Mr. Bull said. “The shift from coal and oil for power generation and heating will continue to propel Asian demand and barring a major crisis, not much can go wrong in gas trade over the next years. It’s good news for LNG vessel operators.” (March 14, 2019)
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