Archives for posts with tag: Gas

In last year’s half year shipping report, we reported on an industry that “must do better”. With the ClarkSea Index averaging $10,040 per day in the first half (up 2% y-o-y but still 14% below trend since the financial crisis) there are still many subjects (sectors) struggling for good grades as our Graph of the Week shows. But are there some that are showing a bit more potential?

Don’t Rest On Your Laurels!

A year on from record lows, bulker earnings remain below trend (defined as the average since the financial crisis) but are showing signs of improvement. Capesize spot earnings moved from an average of $4,972/day in 1H 2016 to $13,086/day (75% below trend versus 33% below trend). Indeed, based on the first quarter alone, Panamax earnings moved above trend for the first time since 2014 and we have certainly seen lots of S&P activity. The containership sector has responded to the Hanjin bankruptcy with another wave of consolidation (the top ten liner companies now operate 75% of capacity) and some improvements, albeit with lots of volatility, in freight rates. Improved volumes, demolition and the re-alignment of liner networks, helped improve charter rates and indeed feeder containerships rates have moved above trend for the first time since 2011. Although some gains have been eroded moving into the summer, fundamentals for both these sectors suggest improvements in coming years but it may be a bumpy road!

Dropping Grades!

After solid marks in last year’s reviews, the tanker sectors tracked here have moved into negative territory compared to trend, with the larger ships feeling the biggest correction as fleet growth, particularly on the crude side, remains rapid and oil trade growth slows. Aside from a small pick-up in the LNG market in recent weeks, the gas markets remain weak, with VLGC earnings 42% below trend. Some increased activity, project sanctioning and investor interest has not yet taken offshore off the “naughty step” .

Still Top Of The Class?

The only sector significantly above trend for the first half is Ro-Ro, with rates for a 3,500lm vessel averaging euro 18,458/day, 42% above trend. There also continues to be strong interest in ferry and cruise newbuilding (the 2 million Chinese cruise passengers last year, now 9% of global volumes, is supporting a record orderbook of USD 44.2bn, as is the interest in smaller “expedition” ships). We must also give a mention to S&P volumes that are 60% above trend (51m dwt, up 50% y-o-y) and to S&P bulker values which improved 25% in the first quarter alone.

Showing Potential?

Upward revisions to trade estimates have been a feature of the first half, and we are now projecting full year growth of 3.4% (to 11.5bn tonnes and 57,000bn tonne-miles). Although demolition has slowed (down 55% y-o-y to 16m dwt), overall fleet growth of 2.3% is still below trend but an increase on 1H 2016 (1.6%). While there has been some pick-up in newbuild ordering to 24m dwt (up 27% y-o-y), this remains 52% below trend. Last year we speculated on an appointment with the headmaster – still possible but perhaps this year extra classes on regulation and technology? Have a nice day.

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Strong demolition has been a prominent feature of the shipping industry this year, as challenging market conditions continue to drive a significant supply-side response in a number of sectors. Across the total shipping fleet, demolition could reach one of the highest levels on record in full year 2016, but which markets in particular have taken the biggest hits?

Revving Up

2016 has been an extremely difficult year for the shipping markets, with conditions in most sectors under pressure. Reflecting this, demolition has remained at elevated levels, and in January to November, 841 vessels of 41.3m dwt were scrapped. Demolition so far this year has already exceeded last year’s total of 38.9m dwt, and whilst scrapping volumes have picked up in most sectors, some markets have played a more important role in this year’s tally than others.

Bulker Beat

Amidst continued depressed earnings, bulkcarriers have accounted for the lion’s share of tonnage scrapped this year. Bulker scrapping set a new record in 1H 2016, and while demolition has slowed in recent months, 385 bulkers of 27.7m dwt have been scrapped in the year to date. Bulker demolition has been historically firm since 2011, but the pace of scrapping in most bulker sectors this year has still exceeded the 2011-15 average, with Capesize and Panamax recycling this year around 1.4 times this level.

Boxship Bumps

Meanwhile, containership demolition has also made headlines this year, with increasingly young vessels being recycled. In dwt terms, boxship scrapping has totalled 7.9m dwt so far in 2016, but recycling volumes are already over triple that of full year 2015, with scrapping on track to reach a record 0.7m TEU this year. The pace of demolition of ‘old Panamaxes’ has been running at more than twice the five year average, whilst scrapping has accelerated firmly in the 3,000+ ‘wide beam’ sectors, with 6,000+ TEU boxships also scrapped for the first time.

Big Hits On The Bodywork?

By contrast, despite the softening in crude and product tanker market conditions this year, tanker scrapping has remained relatively subdued, at less than half of the five year average. However, while gas carrier scrapping remains limited in numerical terms, with just 18 ships recycled so far this year, LPG carrier demolition is on track to reach around double the five year average after earnings fell swiftly to bottom of the cycle levels. Meanwhile, car carrier scrapping has soared to 27 units of 0.14m ceu. This is already the second highest level on record, and on an annualised basis is four times above the 2011-15 average.

So, while total demolition this year is still falling short of 2012’s record 58.4m dwt, 2016 looks set to see yet another year of very firm recycling, eight years after the onset of the downturn. In some sectors, this strong scrapping is providing a helpful brake on fleet expansion. Furthermore, with bruising market conditions having clearly taken their toll, many owners are likely to be looking to the demolition market for a little while yet.

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Back in the past the gas shipping sectors may have been considered relatively niche within the world of global shipping. However, in the last two decades they have been amongst the faster growing parts of the industry. This week’s Analysis takes a look at how shipping’s ‘coolest’ sector has grown in prominence to become part of the mainstream, and some of the ups and downs along the way.

Keeping Cool

Gas (LNG and LPG) shipping may once have been considered by some as a relatively niche part of global shipping, with the fleet and trade volumes dwarfed by other sectors. Even today, LNG and LPG carriers account for just 5% of total world fleet GT, and LNG and LPG trade accounted for just 3% of global seaborne volumes in 2015. However, following phases of rapid fleet growth, the combined gas carrier fleet now stands poised to top 100 million cbm of gas carrying capacity next year, more than double the size of the fleet at the end of 2007.

Gas Expands

Following expansion in LNG trade in the late 1990s, in the mid-2000s a glut of new export terminal sanctioning led to a surge in LNG carrier contracting, peaking at 10.9m cbm in 2004. This supported average fleet growth of 15% p.a. in the period 2000-08, to 40.3m cbm at the end of 2008. In comparison the LPG carrier fleet grew more steadily, though trade growth was supported by increased export volumes from the Middle East and Europe. Between 2000 and 2008, LPG carrier capacity increased from 13m cbm to 18m cbm, at an average rate of growth of 4% p.a. Across this period combined gas carrier capacity grew by an average of 10% p.a. to total 58.2m cbm by the end of 2008. However, after the economic downturn, sanctioning of liquefaction projects slowed, which limited LNG fleet growth, and growth in the LPG sector slowed too. Between 2008 and 2014, combined gas carrier fleet capacity grew by a much less rapid 6% p.a. on average, with even slower growth in 2011-12.

Powering On

Nevertheless, since the start of 2015 it has been full steam ahead for the gas carrier fleet. With LNG carrier ordering backed by the return to liquefaction terminal sanctioning in the 2010s and the vision of a cleaner energy future, and LPG carrier demand supported by the advent of fracking in the US and refinery capacity expansion elsewhere, 26.1m cbm of combined gas carrier capacity was ordered in 2013-15. This has supported rapid fleet growth in recent years and since the end of 2014, LPG carrier fleet capacity has grown by 32% and LNG carrier fleet capacity by 12%.

Mainstream Profile

So, the gas sector’s profile is fully in the mainstream today, and despite it’s relatively limited share of the world’s tonnage and global seaborne trade, in other ways it accounts for rather more weight. Gas carriers are complex, high value units; they account for 15% of the shipyard orderbook in CGT (shipyard work) terms today, and for an estimated value of $78bn, 9% of the world fleet total. And with a 20-year compound annual growth rate of 8% in combined capacity, and the 100 million cbm mark just around the corner, surely that’s one of modern shipping’s success stories? Have a nice day.

SIW1241 Graph of the Week

The Indonesian government has been trying to reinvigorate investment in the country’s upstream oil and gas industry in the last few years. However, tough market conditions persist and political uncertainty remains a challenge. With oil companies seemingly losing interest in acreage offshore Indonesia, could offshore drilling demand in the country be running out of steam?

Ageing Problems

Indonesia is an OPEC member state and accounted for 16% (0.25m bpd) and 23% (3.67bn cfd) of offshore oil and gas production in SE Asia in 2015. However, oil and gas production off Indonesia declined by 4.7% from 2010 to 2015. In part this decline is because there have been few major discoveries to offset dwindling reserves at the country’s mature fields. Recently, operators have also been less willing to conduct additional development drilling on these depleting fields. As the Graph of the Month illustrates, offshore development drilling fell by 27% y-o-y between 2014 and 2015 and exploration drilling has also been subdued, with just two wells drilled in 2015, compared to 24 in 2014. Moreover, exploration has yielded only seven offshore discoveries since 2014, indicating that future development drilling demand could suffer as well.

Losing Interest

Problematic energy market fundamentals aside, political uncertainty has exacerbated the situation. The implementation of controversial Regulation 79/2010 in 2010 ended previous “assume and discharge” rules, meaning that new Production Sharing Contracts (PSCs) could be subject to varying and arbitrary levels of tax previously “dischargeable”. Operators recoiled strongly, denting interest in PSCs, as demonstrated by lacklustre participation in the 2013 Licensing Round. Corrective actions have since been taken, but it created crippling uncertainty in Indonesia’s upstream sector. Looking ahead, low oil prices and a 30% downwards revision to the level of tax oil companies can offset with costs, operators could become even less willing to commit to offshore acreage. Only 6 out of 11 offshore PSCs were awarded in the 2014 tender round. Moreover, Total and Chevron intend to relinquish the Mahakam and East Kalimantan blocks, which will expire in 2017 and 2018 respectively. Of 115 offshore PSCs held as of end 2015, 39 are undergoing termination, and operators might opt to reduce or end drilling activity if they intend not to renew these PSCs.

Under Pressure

It appears operators are losing interest in acreage off Indonesia, which could translate into weaker drilling demand, though the government has been exploring ways to stimulate investment and may eventually broker deals to keep operators committed to major offshore PSCs and capital outlay. Additionally, the country’s NOC, Pertamina, reportedly could assume operatorship of over 50% of upstream acreage. These factors might improve drilling demand in the longer term.

At present however, Indonesia’s offshore sector is clearly challenged: against the backdrop of globally reduced offshore E&P, the country has its own regulatory uncertainties. These factors have led to reduced interest in offshore acreage and subdued drilling activity. Unless the government can intervene to revive operator confidence, the near future also does not look encouraging for drilling demand.

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Generally, shipping industry watchers spend much of their time monitoring events out to sea: how fleets are evolving, trade volumes growing and freight rates performing. But occasionally it can be worth pointing the telescope in the other direction, and spending time considering how events on land can affect the industry. One such major land-based change has been the development of US shale oil and gas.

What No-One Saw Coming

Back in 2009, few would have dared predict that new fracking technologies would allow the US to add 10m boepd of unconventional output across a five year period. This is roughly the same net volume as was added to global offshore output between 2000 and 2015. The offshore markets have been amongst the hardest hit by the oversupply, and cuts in investment will make it harder to add to the 46.9m boepd set to be produced offshore globally in 2016. Since the oil price slump, rig rates have dropped by more than 50%, OSV rates by more than 35%, and today more than 300 rigs and 1,400 OSVs are laid up.

Shale In The Sights

One of the main factors which helped shale fracking to become widespread was the rapid recovery of the oil price after the 2009 downturn. This, of course, also helped the offshore sector have its day in the sun, before the downturn. But shale’s growth also had an impact on other shipping segments. US LPG exports grew at a CAGR of 71% in 2010-15. The growth of shale gas even led to proposals for the first transatlantic exports of ethane derived from it, and orders for ‘VLECs’ vessels followed.

The rise of shale gas also changed the LNG trade fundamentally. In 2010, US LNG imports were expected to be a major growth area. Today, the US has 117mt of under-utilised LNG import infrastructure (imports were just 1.86mt in 2015). Some projects have been converted to liquefaction, and up to 250mt of export capacity was mooted. One new project, Sabine Pass, is now exporting.

Telescoping Tank Capacity

Growth of US shale substantially reduced US import demand for light crudes. This primarily affected imports from West Africa. The transatlantic trade on Suezmaxes and Aframaxes fell from 1.8m bpd in 2010 to 0.3m bpd in 2014. But a 1975 ban on US crude exports prevented tanker exports of surplus oil, much of which is light grades for which US refineries were not ideally configured. US Jones Act tankers and tank barges benefited, as limited fleet supply for upcoast voyages sent coastal timecharter rates as high as $140,000/day in mid-2015, but there was no similar effect on international trade.

The US government has now eased the export restrictions, but this has come as lower oil prices have hit the rig count and output onshore. The lower oil price has caused shale to go into decline. Yet it has provided a nice boost for tanker trades, as low oil prices have stimulated oil demand from transportation and industry.

So, developments in the mid-west of America have had major ramifications for energy shipping and offshore markets globally. This is set to continue as the industry waits to see how shale responds to the slight oil price gain over Q2 2016. This only goes to demonstrate the need to keep this related land-based industry under surveillance. Have a nice day.

SIW1225

Historically, a prime characteristic of the shipping industry has been that when one sector is performing weakly there is generally another that is strong, and that even when most of the markets are down there is often one which provides at least some counterbalance by performing more robustly. Today’s market climate suggest that it’s worth taking a look at this interesting element of the industry’s make-up.

Interesting Indices

One way to examine this is simply to look at the performance of the key sectors over time. The graph shows six-month moving averages of indices representing earnings in the four major volume sectors, with each index based on the 100 mark being equivalent to the historical average. This allows a quick view of the relative health of each sector in historical terms compared to the other key sectors at any point in time. Today, the bulker and containership earnings indices are at a low ebb. Yet, though not quite at last year’s heights, the tanker market continues to perform robustly with the index above 100, and gas earnings, though sliding, still look strong in historical terms.

Looking back, this type of landscape is not new. In the 1990s, for 60 months in a row, the containership index stood above 100 whilst the other market indices lingered below the 100 mark. For over half of the period between May 2001 and March 2003, the tanker market index stood above 100 whilst the other sectors experienced earnings below historical averages. In the aftermath of the credit crunch, in 17 of the 18 months between May 2009 and October 2010 the bulker market index stood above 100 whilst the other indices remained below that level.

Different Drivers

This behaviour should not be unexpected. Only some market drivers are common across sectors. On the demand side, although macroeconomic factors can prove general, commodity-specific trends are often key. On the supply side, whilst shipbuilding, finance and steel industry developments can have a common impact, sector-specific building and demolition trends are very important too.

Clear Coefficients

To some extent this can be measured in statistical terms. The ‘correlation coefficient’ measures the strength of the relationship between two series (+1 represents the most positive correlation, 0 no correlation and -1 the most negative correlation). The average coefficient between the pairs of indices here is just 0.26, implying little correlation. Removing the more ‘niche’ gas sector index from the comparison, the average coefficient between the remaining three series is 0.52, still not really indicative of a particularly significant positive correlation.

Helpfully Out Of Sync?

So, shipping markets are highly cyclical but the cycles are not always in sync. In less than 20% of the period here were earnings in all four sectors concurrently below historical averages. With some sectors today looking fragile and demand growth sluggish overall, history might offer some reassurance if the brighter spots start to fade, by suggesting that something else might eventually have its time in the sun. Have a nice day.

SIW1224

The offshore industry is heavily dependent on the well-being of the oil and gas sector, and with oil prices remaining below $50/bbl, the offshore market is largely full of doom and gloom. However, there is one sector for which headlines in November have been positive: offshore wind. Could this renewable energy source provide some owners with an alternative market and an opportunity for specialisation?

Something In The Wind

As the Graph of the Month illustrates, historically offshore wind farms have been located close to shore in shallow waters of less than 50m. Today, the industry appears to offer potential for the offshore market as both approved and proposed projects are getting increasingly deeper and further from shore. Following a slowdown in investment due to regulatory instability in key markets such as UK and Germany, future final investment decisions (FIDs) have been looking less certain. Indeed, in 2014 the number of turbine installations in the UK fell by 35% during the first six months of the year in comparison to 2013. Yet, November’s headlines might indicate a wind of change. Statoil has reached a FID for a pilot floating wind farm, Hywind, moored to the sea floor offshore Scotland. The departure from traditional fixed turbines opens up the opportunity for more ambitious, deepwater projects. DONG also made a FID regarding the Walney Extension in the Irish Sea, which will become the largest fixed offshore wind farm yet.

Vessel Requirements

The installation of offshore wind farms requires the use of number of construction vessels, particularly cablelay and heavylift units. Estimates suggest that around 100km of cabling is required per wind farm. However, self-elevating designs currently dominate the installation phase due to their stability. Although most existing self-elevating platforms can be used, an increasing number of units are specifically designed for operation within the wind sector: the wind turbine installation (WTI) fleet grew at a CAGR of 11% over 2005-2014. A peak in WTI vessel orders in 2010 following a third licensing round in the UK resulted in a record number of 10 units entering the fleet in 2012. As of November 2015, 31 WTI vessels were active globally. As wind farms move further from shore into rougher waters, requirement for larger WTI vessels is likely to increase.

An Alternative Market?

On the other hand, the maintenance phase of offshore wind farms has the ability to absorb more traditional vessels in the North Sea. A handful of PSVs and MSVs have been converted into accommodation vessels for maintenance personnel. However, in reality the main demand is for small crew transfer vessels, usually with a LOA of <25m. The crew transfer fleet has grown substantially from approximately 40 units in 2010 to over 200 in 2015.

For now, offshore wind remains a niche market rather than a viable alternative for the mainstream fleet. Future growth is largely dependent on how attitudes of governments and private companies will evolve. However, technological advances, such as Statoil’s floating wind farm, at least push the industry in a helpful direction for offshore as a whole.

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