Archives for category: gas carrier

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

The shipping markets have in the main been pretty icy since the onset of the global economic downturn back in 2008, but 2016 has seen a particular blast of cold air rattle through the shipping industry, with few sectors escaping the frosty grasp of the downturn. Asset investment equally appears to have been frozen close to stasis. So, can we measure how cold things have really been?

Lack Of Heat

Generally, our ClarkSea Index provides a helpful way to take the temperature of industry earnings, measuring the performance of the key ‘volume’ market sectors (tankers, bulkers, boxships and gas carriers). Since the start of Q4 2008 it has averaged $11,948/day, compared to $23,666/day between the start of 2000 and the end of Q3 2008. However, earnings aren’t the only thing that can provide ‘heat’ in shipping. Investor appetite for vessel acquisition has often added ‘heat’ to the market in the form of investment in newbuild or secondhand tonnage, even when, as in 2013, earnings remained challenged. To examine this, we once again revisit the quarterly ‘Shipping Heat Index’, which reflects not only vessel earnings but also investment activity, to see how iced up 2016 has really been.

Fresh Heat?

This year, we’ve tweaked the index a little, to include historical newbuild and secondhand asset investment in terms of value, rather than just the pure number of units. This helps us better put the level of ‘Shipping Heat’ in context. In these terms, shipping appears to be as cold (if not more so) as back in early 2009. This year the ‘Heat Index’ has averaged 36, standing at 34 in Q4 2016, which compares to a four-quarter average of 43 between Q4 2008 and Q3 2009.

Feeling The Chill

Partly, of course, this reflects the earnings environment. The ClarkSea Index has averaged $9,329/day in the year to date and is on track for the lowest annual average in 30 years. In August 2016, the index hit $7,073/day, with the major shipping markets all under severe pressure.

All Iced Up

The investment side has seen the temperature drop even further. Newbuilding contracts have numbered just 419 in the first eleven months of 2016, heading for the lowest annual total in over 30 years, and newbuild investment value has totalled just $30.9bn. Weak volume sector markets, as well as a frozen stiff offshore sector, have by far outweighed positivity in some of the niche sectors (50% of the value of newbuild investment this year has been in cruise ships). S&P volumes have been fairly steady, but the reported aggregate value is down at $11.2bn. All this has led to the ‘Shipping Heat Index’ dropping down below its 2009 low-point.

Baby It’s Cold Outside

So, in today’s challenging markets the heat is once again absent from shipping. And, in fact, on taking the temperature, things are just as icy as they were back in 2008-09 when the cold winds of recession blew in. This year has shown that after years out in the cold, it’s pretty hard for things not to get frozen up. Let’s hope for some warmer conditions in 2017.

SIW1250

Plagued by constant blackouts and power shortages, Egypt appears to be facing its worst energy crisis in decades. However, following the historic discovery of the giant gas field Zohr offshore Egypt in August this year and revived interest from IOCs, it seems that the tables are set to turn. Indeed, after a period of gas production decline, Egypt’s energy outlook is getting increasingly bright.

Slide Down The Gas Pyramid

Until recently, Egypt’s gas production story had been one of growth: production climbed from 1.68 to 5.76 bn cfd between 2000-2009 and in 2003, it was sufficient to kick-start LNG exports. However, a combination of political unrest (notably the Arab Spring of 2011) and rising population has resulted in natural gas supply shortages over the last 5 years. Domestic gas demand has on average grown by 8% y-o-y, eventually outstripping supply. As a result, Egypt has been forced to re-route LNG destined for exports to domestic consumption. Indeed, at the start of 2014, BG announced it was breaking its contracts because it was unable to export enough gas. This year, Egypt resorted to importing LNG from Qatar – a bitter moment for the previous exporter.

Enter Zohr

They say that when you hit bottom, the only way is up and for Egypt, this seems to be the case. Earlier this year, ENI made what is believed to be the largest ever gas discovery in the Mediterranean, named Zohr. The field is part of the Levantine Basin, home to other prolific gas finds such as the Israeli Leviathan field. ENI puts the find down to different use of sequencing models, concentrating on carbonate rather than classical sand reservoirs. The gas giant (estimated to hold 30 tcf of lean gas) is located in water depths of 1,450m, providing an exciting departure from typical shallow exploration of mature basins in the region. Additionally, BP announced a $12 billion investment in Egypt’s West Nile Delta project: another deepwater discovery with 5 tcf of gas resources. A move to deeper waters creates opportunity for subsea development, the current production solution of choice in all of the country’s active deepwater fields. Out of the 68 active subsea units in Egypt, 40 are operated by ENI and 8 by BP. It is likely that these operators will continue to implement subsea development in their future projects.

Clash Of The Giants

Elsewhere, the discovery of Zohr was not such welcome news. There were plans to import gas via a pipeline from the Tamar field and (once in production) the competing gas giant, Leviathan, in Israel. Plans for the Leviathan field will now have to be redrawn and potentially accelerated if Israel wants a claim of the region’s LNG exports. However, following extensive regulatory and anti-trust objections, its start-up date remains uncertain.

Nevertheless, it is clear that Egypt’s fortunes are turning. The Zohr discovery, alongside other scheduled start-ups, will strengthen Egypt’s energy balance in the long-term. And the story does not end here: it has been reported that there are 7 other deepwater blocks with similar lithology to ENI’s. There is evidently a revived interest in the Levantine basin, as IOCs begin to wonder where the next giant could be hiding.

OIMT201510

Successful investors are always looking to get on the right side of an uneven bet, and the shipping market has had an uneven look to it so far in 2015. There has been some improvement in earnings, and the Clarksea Index has risen to around 30% above its 2014 average. However, the upside has not been spread equally across the sectors at all, and the same could be said of trends in capacity growth.

Uneven Territory

Looking at the key markets, the LPG sector has continued to be a star performer, and tankers have had a great run in the year to date too. Containerships have seen charter earnings increase from historical lows, but poor old bulkers continue to see rock bottom levels. It’s an uneven picture to say the least. However, one factor that appears to be more even is the volume of capacity entering the fleet.

Flattening Out

Shipyard output looks fairly steady, with the 6-month moving average of deliveries averaging around 7-8m dwt per month for about a year and half now. As a result fleet growth has slowed from the c.9% level seen in 2010-11, and today the projection is for a fairly steady rate of growth in total cargo fleet capacity, with expected expansion of 3.5% this year and 4.1% in 2016. Is this good news? A high level view may suggest that, with a fair wind on the demand side, more moderate supply side growth at least should not make the underlying market surplus any worse. However, looking in more detail it is clear that the rate of capacity growth is highly uneven across sectors too.

Speeding Up

Supply growth in the key cargo vessel sectors can be split into three. In the fast lane we have those sectors where fleet growth is expected to speed up in 2016. LPG carrier capacity growth already looks rapid (VLGC capacity is projected to grow by 18% this year) and will accelerate again next year. Crude tanker fleet growth will also speed up (VLCC capacity is projected to expand by 6% in 2015). What sort of ‘landing’ might that bring for these markets? Capesize bulker fleet growth will ramp up to 5% in 2016 (as if this sector needed any more pressure), and after a few years of shrinkage the 1-3,000 TEU boxship sector will at last see some (much needed) expansion (1%).

Slowing Down

Supply growth in other sectors looks set to remain relatively steady in 2016 compared to 2015, but there are also a number of sectors where it is projected to slow in 2016. LNG carrier and Handy bulker supply growth will start to recede. Notably, expansion in the large (8,000+ TEU) boxship sector will begin to slow (20% in 2015 to 13% in 2016) whilst the medium-sized boxship fleet will staunchly continue to decline (by 2% in 2016).

So, market earnings are uneven today and despite the big picture suggesting that capacity growth will remain moderately steady across 2015 and 2016, delving into the detail suggests that supply-side impetus will be uneven from one sector to another. Some sectors might be start to feel fresh pressures whilst others might breathe a sigh of relief. Those aiming to get on the right side of the bet should look closely. Have a nice day.

SIW1173

Each year, in the first week of November, we invite readers of the Shipping Intelligence Weekly to predict the value of the ClarkSea Index one year ahead. The competition entries are always interesting, and give us an idea of what the shipping industry’s expectations of the market really are. However, as everyone knows, it’s hard to get it right and the competition can only have one winner…

Stick Or Twist?

In 2013, it felt like there was some consensus amongst industry players that the bottom of the cycle might have been reached and that markets would start to take a turn for the better. Shipowners contracted 176.9m dwt of new ships, the highest level since 2008, reflective of a more optimistic outlook than previously. The ClarkSea Index represents a weighted average of tanker, bulker, boxship and gas carrier earnings, and it is interesting to see if the entries in our annual competition supported this optimism.

At a first glance it seems that competition entrants had a cautiously positive outlook, with the average prediction of the early November 2014 index value at $14,553/day, well above the $10,843/day average prediction for November 2013 from last year’s competition. The average forecast was also far above the actual full year 2013 ClarkSea Index average of $10,263/day, and the value at the start of November 2013 of $10,767/day.

Hard Times?

Looking at 2014 to date, this optimism may have been slightly misplaced. The ClarkSea Index overall has not performed particularly well since November 2013, averaging just $11,625/day. Crude tanker earnings have improved but have been spiky, while product tanker earnings have generally remained under pressure. Bulker earnings have seen limited upside aside from some helpful spikes in the Capesize market. Gas carriers have been the star performers, with significant earnings gains, but containership earnings have remained in the doldrums.

During most of 2014 to date, the index has stood below the $12,000/day mark. Across the 45 weeks in the year to date, the ClarkSea Index only exceeded the average competition prediction in three of them. However, last week, on 7th November 2014, the ClarkSea Index rose to $15,139/day, helped by more positive bulker and tanker markets and up 41% year-on-year, if still well below the 2004-13 historical average of $20,795/day.

Pipped At The Post?

So, although index levels this year have generally remained low, the recent rise has meant that the actual value on 7th November was higher than the majority of competition entries. Around 25% of the ‘forecasts’ stood in the $13-14,000/day range; maybe people were right to be optimistic after all? However, having dipped below the $10,000/day mark in September, the index has only really improved over the last month or so.

So, is the glass half empty or half full? Depending on your viewpoint, the cautious optimism has either been misplaced or justified. Whatever the case, this year’s winner is Mr Peter Bekkeston of Klaveness Chartering with a forecast of $15,123/day. Have a nice day, Peter; your champagne is on its way.

SIW1147

Energy is shipping’s biggest single market, accounting for 43% of the cargo moved in 2013 – 4.3 billion tonnes. Oil is still the big dog, with 2.8 billion tonnes of cargo and the coal trade has now reached 1.2 billion tonnes. Which leaves gas as the junior partner in the energy triangle with 307 million tonnes of trade in 2013, of which 244 million tonnes was LNG and an estimated 63 million tonnes was LPG.

The Crown Prince Of Energy

LNG may still be the junior partner in tonnage, but it is widely seen as a future “seed corn” trade for the maritime business. This positive perception rests on two foundations. Firstly there are enormous reserves of “stranded” natural gas located so far from the world’s major consumer zones that sea transport is the only way to bring the product to market. Secondly natural gas is a clean fuel, in an era which is becoming increasingly preoccupied with reducing emissions of carbon and other pollutants into the atmosphere.

Fight For The Title

But it’s not all plain sailing and LNG is up against some tough competition – coal and oil – and in the three way fight for market share which lies ahead it has a few strategic disadvantages. Oil, the ultimate portable energy source, has the land and air transport fuel market nailed down. In this market the need to maintain LNG at a temperature of -162°C makes competition extremely difficult, and creates limitations to the wider use of LNG as a transport fuel.

The other major market is power generation and here LNG is on firmer ground. Once the storage and re-gasification facilities have been installed, LNG is the ideal clean fuel. The problem is that in this market coal is a long established and devastating competitor. Coal is generally much cheaper than gas and more widely available. In contrast gas supplies are more limited, requiring major investment, and are often located in “difficult” geopolitical areas.

Speedy Growth

Despite these disadvantages, the LNG trade has turned in a spritely growth performance. Since 1984 imports by countries east of Suez have grown by a CAGR of 5.8%, and by 6.5% west of Suez (despite a slowdown in 2012-13). Compared with the growth of the oil trade when it developed more than a century ago, this is super-fast. 44 years since the first LNG shipment by sea to Asia, global trade in 2013 reached 532m cbm, or 244m tonnes, with a fleet of 31m dwt. For comparison, after 44 years seaborne oil trade only reached 55m tonnes and the tanker fleet was just 9.5m dwt (in 1928). This is a reminder that although LNG has not been an easy ride, things take time and LNG’s growth path is pretty dynamic (though not without its problems – in the 1980s one third of the fleet was laid up).

Trending But Tricky

If current growth trends continue, LNG trade could reach one billion tonnes in the 2030s. It is easy to believe that there will be demand in an energy hungry world for this clean fuel, despite its limitations. But in the meantime LNG is a niche player, trading luxury fuel to price sensitive markets. Which makes it tricky, even for the big boys. Have a nice day.

SIW1137

While the expanding role of Asia (especially China, see SIW 1132) in seaborne trade has grabbed headlines in recent years, developments in the US, still the world’s largest economy, have also had a significant impact. In a short space of time, changes in the US energy sector have dramatically altered global trading patterns in a number of commodities, significantly impacting the pattern of volume growth.

Putting On A Spurt Of Energy

For much of the last three decades, US oil production has been in decline, falling on average by 1% a year since 1980 to a low of 6.8m bpd in 2008. Yet technological advances have since led to huge gains in exploitation of ‘unconventional’ oil and gas shale reserves. In the space of just six years, the US managed to raise oil output alone by an astonishing 60% to almost 11m bpd, a new record.

Making An Oil Change

This has led to huge changes in US energy usage and import requirements. Crude oil imports have almost halved since 2005, and since 2010 have fallen on average by 11% p.a. to 260mt last year. Exports of crude oil from West Africa in particular have had to find a home elsewhere (unsurprisingly, many shipments now go East). Since US crude exports are still banned, US refiners have taken advantage of greater domestic crude supply to produce high volumes of oil products, especially for shipment to Latin America and Europe. Lower US oil demand since the economic downturn has also contributed, and seaborne product exports reached 120mt in 2013, up from 70mt in 2009. Alongside global shifts in the location of refinery capacity and oil demand growth, these trends have transformed seaborne oil trade patterns.

The impact could be similarly profound in the gas sector. As US imports of gas, mostly LNG, have dropped (on average by 34% per year since 2010), plans to add up to nearly 100mtpa of liquefaction capacity by 2020 could mean the US eventually emerges as a major LNG exporter, potentially accounting for 15% of global capacity (from 0.5% currently). Meanwhile, LPG shipments are continuing to accelerate strongly, rising by more than 60% y-o-y so far in 2014 to 6mt.

Miners Under Pressure

There has also been an impact in the dry bulk sector. Lower domestic gas prices have pushed the share of coal in US energy use to below 20%, leaving miners with excess coal supplies. US steam coal exports jumped to 48mt in 2012 from 11mt in 2009, contributing to lower global coal prices (cutting mining margins) and higher Asian import demand.

So What Next?

So the effects of the changing balance in the US energy sector have been far-reaching, and there remains scope for more shifts to occur as trade patterns continue to adjust to changes in commodity supply and prices. While the firm pace of expansion in US oil and gas output may start to slow, any change to existing export policies could have further impact. What is clear already, in terms of seaborne trade growth, is that the focus has shifted away from US imports, for decades a key driver of the expansion of global volumes, towards the country’s developing role as an energy exporter.

SIW1135