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Natural gas is set to account for an increasing share of the global energy mix in coming years, with gas consumption growing by an average of around 1.5%-2% a year out to 2040, according to energy forecasting agencies such as the IEA. And based on recent trends, if the consensus views on natural gas prove accurate, the implications for the offshore and LNG carrier fleets are likely to be significant.

Stepping On The Pedal

In 2016, global natural gas demand stood at an estimated 347bn cfd, up by 24% on the 280bn cfd consumed in 2006. Demand for natural gas in recent years has been driven by industrialisation in developing economies (Chinese gas demand, for example, grew at a CAGR of 13% in 2006-16) and environmental concerns the world over. Historically, the majority of trade in natural gas has been by pipeline, for instance from Eurasia to Europe. In 2015, pipelines still accounted for 68% of natural gas volumes moved globally.

However, liquefied natural gas (LNG) has become an increasingly important form in which gas is traded, even given the costs of complex liquefaction and regasification facilities. Over 50% of existing nameplate liquefaction capacity at LNG export terminals (349mtpa globally) has come online since 2005. As a corollary, from start 2006 to start March 2017, the LNG carrier fleet increased from 193 to 479 vessels and tripled in total capacity to 70.2m cubic metres of LNG.

Shifting It Up A Gear

Growth in the seaborne LNG trade is in turn closely linked with growth in offshore gas production, as major LNG exporters such as Qatar and more recently Australia use offshore gas fields to provide feedstock to LNG trains. Qatar accounted for 30% of LNG exports and 22% of existing liquefaction capacity in 2016, all fed via offshore gas, mostly from the giant North Field. In 2006, offshore fields accounted for 28% of global gas production and by 2016, 31%. This is set to rise to 32% (119bn cfd) in 2017, mainly due to field start-ups off Australia that are to feed LNG projects like Wheatstone. Finding, developing and supporting offshore gas fields on Australia’s NW Shelf has created demand for a range of vessels from the offshore fleet of over 13,500 units.

More Gas In The Tank

The exploitation of these remote reserves has also spawned the FLNG concept – vessels that can be used to exploit otherwise stranded gas. The LNG markets are clearly challenged at present but in the long term, planned FLNG projects in Australia, Mozambique, Tanzania, Mauritania and other areas could potentially sustain offshore gas production growth. Another major source of gas production growth has been the US shale gas sector, where production rose from 4bn cfd in 2007 to 48bn cfd in 2016. The US accounts for over 50% of liquefaction capacity under construction (while some planned projects entail liquefaction of shale gas on near-shore FLNGs) and is set to become a major LNG exporter in coming years.

So offshore gas production has grown as a share of total global gas production, as has US shale gas. Both trends can create opportunities for LNG and offshore vessels. And if, in line with consensus expectations, gas continues to grow as a share of the energy mix, then these trends may have a long and interesting road ahead.

SIW1265:Global Natural Gas Production And LNG Export Capacity

In the last few decades, the shipping industry has generally been able to rely on seaborne trade as a fairly steady performer. However, the slowdown in volume growth since the financial crisis has focussed the industry’s thoughts on potential barriers to healthy long-term trade growth, so all eyes are on signs of a potential return to faster expansion in volumes…

Steady As She Goes

From 1988 to 2008 growth in world seaborne trade averaged an estimated 4.2% pa, a fairly robust level underpinning long-term demand for ships. Sure, the markets at times felt the impact of oversupply, but sustained weakness of demand growth wasn’t generally the problem. However, since 2009 the growth rate has slowed, averaging 3.2%, and just 2.8% since 2013. This still equates to significant additional volumes (1.8% growth in 2015 added 194m tonnes) but it’s still enough to get market players worrying.

Could Be Worse?

But should it? Maybe it depends on how you put the trend into context. Cycles can be long; Martin Stopford has famously identified 12 dry cargo cycles of more than 10 years back to the 1740s! The current cycle certainly feels like it has dragged on; it’s now more than eight years since the onset of the financial crisis. However, there are interesting historical comparisons. Between 1929 (the year of the Wall Street Crash) and 1932, the value of global trade dropped by 62% and didn’t get back to the same level until the post-war years. Now that really would have been a time to worry!

Getting Serious?

Today perhaps some of the anxiety is amplified by the seemingly wide range of factors that look threatening to seaborne trade’s supportive historical record. Protectionist tendencies, whether they be from the Trump presidency or the UK’s Brexit vote, slowing growth in China, ‘peak trade’, robotics and 3D printing: no-one really knows how things will pan out but everyone’s watching closely for anything to allay at least some of the fears.

Basket Case

So that brings us back to our old friend the ‘monthly trade basket’ (see graph and description). Six months ago we reported that this appeared to be showing a pick-up and this time round things are still looking positive. The 3-month moving average shows a generally upward trend since autumn 2015 with an average of 4% in the second half of 2016, hinting that the bottom of the demand cycle may finally have been passed. The current projection for overall seaborne trade in 2017 is still less than 3% with plenty of scenarios possible, but both market sentiment and the momentum right now feel a little more positive than that.

Feeling Any Better Yet?

So, while it’s quite right to try to assess the range of factors which appear to be lining up against a return to more robust levels of trade growth, it’s also far from incorrect to look for signs of a turn in the trend. Cycles in shipping can be long and sometimes it can take a while to identify them. That may not be helpful to hear but you can have a nice day trying…

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After a long cycle of build-up in capacity in the 2000s, shipyards hit a new peak in global output in 2010. Since then, the impact of reduced vessel ordering on shipbuilders worldwide has been a key issue for the industry, and it’s clear that global output has dropped significantly and shipyard capacity has diminished. But how far can those shipyards still active look ahead today?

Looking Forward

‘Forward cover’ is one basic indicator of the volume of work that shipyards have on order, calculated by dividing the total orderbook by the last year’s output (in CGT). Unsurprisingly, after a period of extremely low ordering in 2016, forward cover has shortened. Currently, global forward cover stands at 2.3 years having declined throughout 2016, as the orderbook shrank by 25% in CGT terms. Global forward cover was as low as 2.1 years at the start of 2013 (but delivery volumes in 2012 were 37% higher than in 2016) and peaked at 5.6 years in 2008.

Looking around the shipbuilding world, yards in Korea currently have the lowest level of cover at 1.5 years. European yards, meanwhile, bucked the trend in 2016, increasing their forward cover on the back of cruise ship orders (and falling production volumes) to 4.2 years.

Less To Go Round

Fewer fresh orders have also led to a greater number of yards ending the year without receiving a single contract. During 2005-08, the number of yards to take at least one order was on average equivalent to 87% of the number of yards active (with at least one unit on order) at the start of the year. In 2009-15, with ordering generally lower, the figure averaged 49%. In 2016 this fell further to 28%, with just 133 yards receiving an order. In China, 48 yards (26 of which were state-backed) won an order in 2016 compared to 284 yards in 2007. In Japan, 22 yards took an order in 2016 compared to 60 as recently as 2015. In Korea, 11 shipyards took an order last year.

Out Of Work?

Whilst many yards have tried to cope with the lower demand environment by slowing production or working outside their traditional product range, the statistics clearly point to huge challenges. In 2016, 117 yards delivered the final unit on their orderbook. The peak production level of these yards, many of them smaller builders, totals around 4m CGT. However, 163 yards are scheduled to deliver their current orderbook by the end of 2017 (although in reality slippage may mean some of the work runs on past the end of the year). Statistically, this represents 43% of the number of yards active at the start of the year. Although these yards have been reining back capacity and outputting less in recent years, the peak production level of this set of yards totals as much as 12m CGT. Offshore builders of course face huge pressures too, with about half of those active scheduled to deliver their final unit on order this year.

Global shipyard output and capacity have fallen significantly since the peak years. However, many remaining yards still don’t need to look too far ahead to see the end of their current workload. The shipbuilding industry will be hoping to see a return to a more active newbuilding market sooner rather than later.

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We’re well into the Year of the Rooster in China now, but trade figures for last year are still coming in and it’s interesting to see what a major impact China still had in 2016. Economic growth rates may have slowed, and the focus of global economic development may have diversified to an extent, but China was very much still at the heart of the world’s seaborne trade.

Not A Lucky Year

In 2015 the Chinese economy saw both a slowdown in growth and a significant degree of turbulence. GDP growth slowed from 7.3% in 2014 to 6.9%. Steel consumption in China was easing and growth in Chinese iron ore imports slowed from 15% to 3%. Coal imports slumped by an even more dramatic 30%. Container trade was affected badly too. China is the dominant force on many of the world’s most important container trade lanes and is involved in over half of the key intra-Asia trade. Uncertainty in the Chinese economy in 2015 took a heavy toll on this and intra-Asian trade growth slumped to 3% from 6% in 2014. Going into 2016, there was plenty of apprehension about Chinese trade, and its impact on seaborne volumes overall.

Back In Action

However, things turned out to be a lot more positive in 2016 than most observers expected. China once again underpinned growth in bulk trade, with iron ore imports surprising on the upside, registering 7% growth on the back of producer price dynamics, and coal imports bouncing back by 20%. Crude oil imports into China also registered rapid growth of 16%, supported by greater demand for crude from China’s ‘teapot’ refiners.

In containers, growth in intra-Asian trade returned to a robust 6%, and the Chinese mainlane export trades fared better too, with Far East-Europe volumes back into positive growth territory and the Transpacific trade seeming to roar ahead. Overall, total Chinese seaborne imports  grew 7% in 2016, up from 1% in 2015, with Chinese imports accounting for around 20% of the global import total. Growth in Chinese exports remained steady at 2%.

Thank Goodness

Despite all this, seaborne trade expanded globally by just 2.7% in 2016. Thank goodness Chinese trade beat expectations. Of the 296mt added to world seaborne trade, 142mt was added by Chinese imports, equal to nearly 50% of the growth. Unfortunately, this was counterbalanced by trends elsewhere, with Europe remaining in the doldrums and developing economies under pressure from diminished commodity prices.

Rooster Booster?

So, 2015 illustrated that a maturing economy and economic turbulence could derail Chinese trade growth. But China is a big place, and 2016 shows it still has the ability to drive seaborne trade and that the world hasn’t yet found an alternative to ‘Factory Asia’. 2017 might see a focus on other parts of the world too, with hopes for the US economy, India to drive volumes, and developing economies to potentially benefit from improved commodity prices. But amidst all that, China will no doubt still have a big say in the fortunes of world seaborne trade. Have a nice day.

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After another year of extremely difficult market conditions, many would forgive liner sector players for an air of resignation. However, despite a challenging freight market, charter rates remaining firmly in the doldrums and a major corporate casualty, looking back 2016 may well be seen as the year in which the container shipping sector really started to tackle its problems head on.SIW1255

Sustained Struggles

The container shipping sector has spent much of the post-financial crisis era under severe pressure and, as many expected, 2016 proved no real exception. Box freight rates in general remained weak, and the SCFI Composite Index averaged 18% lower in 2016 than in 2015. However, by late in the year it did appear that spot freight rates might be bottoming out on some trade lanes.

Against this backdrop, charter market vessel earnings remained extremely challenged, at bottom of the cycle levels. The one year rate for a 2750 TEU ship averaged $6,000/day in 2016, 37% lower than in 2015. ‘Old Panamax’ types fared even worse, averaging $4,979/day in 2016, 58% down on 2015, with the opening of the new locks at the Panama Canal impacting vessel deployment patterns.

Fundamental Traction?

Nevertheless, sector fundamentals did appear a little more positive in 2016. Demand conditions improved, with global volumes expanding by an estimated 3% in the full year to 181m TEU. Volumes on the key Far East-Europe trade returned to positive growth and the rate of expansion on intra-Asian trades accelerated back to more robust levels. However North-South volumes and trade into the Middle East remained under severe pressure from the impact of diminished commodity prices, though volumes into the Indian Sub-Continent grew strongly.

Meanwhile, containership capacity growth slowed significantly in 2016, reaching just 1.2% in the full year. Deliveries fell dramatically to 0.9m TEU (from 1.7m in 2015) and demolition accelerated rapidly to a new record of 0.7m TEU.

Still A Surplus

However, given the level of surplus built up in the post-Lehman years, and in particular the impact of the delivery of substantial capacity, much of it in the form of new ‘megaships’, the improved supply-demand balance seen last year was not enough to generate any significant improvement in market conditions. At the end of 2016, around 7% of total fleet capacity stood idle. The financial collapse of major Korean operator Hanjin was a further illustration of the acute distress facing both operators and owners.

Getting To Grips?

So, further recalibration still appears to be necessary to generate better markets. However, 2016 might also be seen as the year in which the sector finally started to lay real foundations for a better future. Demolition hit a new record, and financial distress and regulatory requirements are expected to drive further recycling. The ordering of newbuild capacity dropped to just 0.2m TEU in 2016, a dramatic halt.

Meanwhile, further significant steps in the consolidation of the sector were taken in the form of merger and acquisition activity involving major operators; the top 10 now deploy 70% of all boxship capacity, a figure set to rise to around 80%. Building blocks only these factors may be, but many will hope that at last container shipping is starting to build towards something more positive than the gloomy conditions that perpetuated in 2016.

In 2016 the shipping industry saw significant supply side adjustments in reaction to continued market pressures. For shipbuilders this meant a historically low level of newbuild demand with fewer than 500 orders reported in 2016, and the volume of tonnage on order declined sharply. Meanwhile, higher levels of delivery slippage and strong demolition saw fleet growth fall to its lowest level in over a decade.SIW1256

Pressure Building Up

2016 was an extremely challenging year for the shipbuilding industry. Contracting activity fell to its lowest level in over 20 years with just 480 orders reported, down 71% year-on-year. Domestic ordering proved important for many builder nations and 68% of orders in dwt terms reported at the top three shipbuilding nations were placed by domestic owners last year. Despite a 6% decline in newbuild price levels over 2016, few owners were tempted to order new ships, especially with the secondhand market offering ‘attractive’ opportunities. Only 48 bulkers and 46 offshore units were reported contracted globally last year, both record lows, and tanker and boxship ordering was limited. As a result, just 126 yards were reported to have won an order (1,000+ GT) in 2016, over 100 yards fewer than in 2015.

A Spot Of Relief

However, a record level of cruise ship and ferry ordering provided some positivity in 2016. Combined, these ship sectors accounted for 52% of last year’s $33.5bn estimated contract investment. European shipyards were clear beneficiaries, taking 3.4m CGT of orders in 2016, the second largest volume of orders behind Chinese shipbuilders’ 4.0m CGT. Year-on-year, contracting at European yards increased 31% in 2016 in terms of CGT while yards in China, Korea and Japan saw contract volumes fall by up to 90% year-on-year.

Further Down The Chain

In light of such weak ordering activity, the global orderbook declined by 29% over the course of 2016, reaching a 12 year low of 223.3m dwt at the start of January 2017. This is equivalent to 12% of the current world fleet. The number of yards reported to have a vessel of 1,000 GT or above on order has fallen from 931 yards back at the start of 2009 to a current total of 372 shipbuilders.

Final Link In The Chain

Adjustments to the supply side in response to challenging market conditions in 2016 have also been reflected in a slower pace of fleet growth. The world fleet currently totals 1,861.9m dwt, over 50% larger than at the start of 2009, but its growth rate slowed to 3.1% year-on-year in 2016. This compares to a CAGR of 5.9% between 2007 and 2016 and is the lowest pace of fleet expansion in over a decade. A significant uptick in the ‘non-delivery’ of the scheduled start year orderbook in 2016, rising to 41% in dwt terms, saw shipyard deliveries remain steady year-on-year at a reported 100.0m dwt. Further, strong demolition activity helped curb fleet growth in 2016 with 44.2m dwt reported sold for recycling, an increase of 14% year-on-year.

End Of The Chain?

So it seems that the ‘market mechanism’ has finally been kicking into action. A more modest pace of supply growth might be welcome news to the shipping industry but further down the chain shipbuilders are suffering. Contracting levels plummeted in 2016 and the orderbook is now significantly smaller. Even with the ongoing reductions in yard capacity, shipbuilders worldwide remain under severe pressure and will certainly be hoping for a more helpful reaction in 2017.

To much fanfare and accompanied by voluminous industry coverage, Mexico recently concluded Round 1.4, the country’s first ever deepwater licensing round. However, Mexico’s shallow waters may yet have a future too: Bay of Campeche reserves remain considerable and indeed, the country’s third shallow water bid round is ongoing. It is therefore worth reviewing the current state of shallow water E&P in Mexico.

Veering Off Course

Mexican offshore oil is currently produced entirely from shallow water fields, as has always been the case. The key sources of Mexican offshore oil have been several large field complexes such as Cantarell and Ku-Maloob-Zaap. As these fields and others came online, the country’s offshore oil output grew with a robust CAGR of 6.6% from 1980 to 2004, reaching a peak of 2.83m bpd in 2004. As the graph implies, four complexes accounted for 93% of this production. Decline set in thereafter at ageing fields (production at Cantarell began at the Akal field in 1979). Pemex – the sole operator of Mexican offshore fields prior to 2014 – tried to halt production decline, but with little success, given budget and technical constraints. Thus by 2013, offshore oil production at the four key field complexes had fallen to 1.31m bpd, accounting for 69% of Mexico’s offshore oil production of 1.90m bpd.

Getting Back On Track

This situation prompted President Peña Nieto’s government to initiate energy sector reforms in 2013, opening up the country’s upstream sector to foreign companies for the first time since 1938. Pemex was granted 83% of Mexican 2P reserves in “Round Zero” in 2014. The first shallow water round, Round 1.1, followed in December 2014. Only two of 14 blocks were awarded though, reportedly due to unfavourable fiscal terms inhibiting bidding by oil companies. The authorities then improved terms before launching Round 1.2 (shallow water), Round 1.3 (onshore) and Round 1.4 in 2015. Round 1.2 was better received than 1.1: as per the inset, 60% of blocks were awarded (75% of the km2 area on offer). One of the round’s victors, Eni, has already been granted permission to drill four appraisal wells on Block 1.

Turning Things Around?

In light of these positives, there are high hopes for Round 2.1, a shallow water round launched in July 2016. Indeed, 10 out of the 15 Round 2.1 blocks are in the prolific Sureste Basin, home to the Cantarell complex. Eight of these ten areas are unexplored, so there is sizeable upside potential, and have been mapped with 3D seismic, so operators could begin drilling promptly. Moreover, the surface area of the blocks in Round 2.1 are twice that of Round 1.1. It should also be noted that according to a 2016 IEA study, Mexico’s shallow waters still account for 29% of the country’s remaining technically recoverable oil resources. Finally, with rates for a high spec jack-up in the GoM assessed at about $85-90,000/day in January 2017, down 45% on three years ago, some oil companies might be tempted to make a move on a round that could offer a relatively low cost means to grow oil reserves and production.

So arguably, Mexican shallow water E&P is on the road again. There are potential hazards of course, such as oil price volatility or Mexico’s relationship with the US. But it is not implausible to think that Mexican shallow water oil production might speed up again in the coming years.

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