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  • Roger S. Conrad

The Shipping News: LNG Overview

By Peter Staas on Jun. 27, 2015

Specialized tankers transport liquefied natural gas (LNG) from liquefaction trains to import terminals for regasification and injection into the pipeline network.

Investor interest in these floating pipelines surged in the wake of the Fukushima Daiichi crisis, as rising LNG demand in China and Japan’s aggressive purchasing of spot cargoes sent prices to the moon and redirected shipments that had been destined for Europe. These trends lengthened the average voyage significantly, engaging the existing fleet for longer periods.

In this environment, the supply-demand balance shifted in the favor of shipowners, with daily rates in the spot market—where vessels are engaged on an ad hoc basis—soaring to more than $150,000 from about $65,000 in early 2011 and $20,000 in mid-2010. Day-rates on three- to five-year fixtures also climbed, while long-term contracts ticked up modesty.

With the markets for oil tankers and dry-bulk vessels suffering from a significant supply overhang, upstart shipowners rushed to place speculative orders for new LNG carriers to take advantage of elevated day-rates in the spot market.

This overzealous ordering has swelled the global fleet of LNG tankers, while lower-than-expected demand growth in the Asia-Pacific region and the start-up of massive export projects in Australia have curtailed the movement of cargoes from the Atlantic Basin.

According to data from research firm IHS (NYSE: IHS), 27 percent of the LNG carriers slated for delivery through 2018 have yet to secure a charter that extends beyond a year.

(Click graph to enlarge.)LNG order Book

The vessels in the order book average about 170,000 cubic meters in capacity—58 percent of the global fleet ranges between 125,000 and 150,000 cubic meters—and boast superior propulsion systems to the steam-powered engines that still predominate in the legacy fleet. These newer engines can run a variety of different fuels, with the most advanced able to run on re-liquefied natural gas.

Even before spot LNG prices collapsed in late 2014 and early 2015, the arrival of speculatively built carriers had pressured day-rates in the shipping market; this downside accelerated in the short-term market, where charter rates plummeted to less than $30,000 per day for tankers with steam propulsion systems. Vessels with advanced fuel systems likewise suffered an almost 50 percent decline in spot-market day-rates.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor