Natural Gas Shipping Market
LNG market development
1998 could well be regarded as the year when the LNG industry finally
came of age and entered the real world of the energy market. Following the Asian financial
crisis in November 1997 the traditional markets for LNG have been reassessing their needs
and certainly the long term forecasts suggest a significant downward trend for the role of
LNG in power requirements. Whilst pre-Asian crisis LNG was considered as a must
have commodity, post-Asian crisis has seen customers dump this expensive commodity
in favour of cheaper alternative fuels. What is perhaps most alarming is that this does
not appear to be a short term revision of basic requirements but that is carried through
to the long term projections up to 2010.
Unlike previous years which have seen a steady growth in the region of
about 7% per annum, 1998 has been a year of stagnation with all exporters to the Asian
region experiencing cut backs in their deliveries. For example, Indonesia will see its
exports fall by about 4%, most of which involves the Korean customer Kogas. And if the
quantity reduction was not welcome news to exporters, the price achieved for the LNG has
added to their woes.
The steady fall in crude oil prices has eventually been fed through to
the LNG price as nearly all LNG pricing contract formulae have a crude oil factor in their
index. If present prices continue through to the end of 1998 Brent crude prices will be
about US$ 10/bbl with the average landed LNG price to Japan in 1998 at less than $3.00 per
mmBtu. For Indonesia the cif price to Japan has already fallen to about $2.50 mmBtu.
The European market has seen prices fall to a new low (for the past ten
years) with an fob price for Algerian gas at about $1.60 mmBtu. Quantities are holding
steady with the Spanish market still maintaining its position as the leading LNG importer.
Whilst the bubble may have burst for the Asian market the same cannot be
said for the Atlantic Basin. This region is now the focus of attention with the
forthcoming arrival of two new exporters coming on stream in 1999 and both projects
optimistic for plant expansion by 2002. Both of these projects (Atlantic LNG and Nigeria
LNG) have European buyers with the Brazilian market under study for any future plant
expansion. Although these are the preferred routes, the re-appearance of the US market is
under close scrutiny as an outlet for the surplus production from various projects.
Certainly there would appear to be growing speculation that the Cove Point terminal will
be re-opened in the foreseeable future. Everett in Boston is already well utilized and the
future role for the Lake Charles terminal is unknown given the recent sale by Duke Energy
to CMS but with "open access" rules anyone can put LNG through the US terminals.
The difficulty posed by the US market is that the price is very much dependent on the
volatile US market forces and it is basically unaffected by the oil prices. The US gas
market is huge and irrespective of the quantity of LNG arriving on the US East Coast it
would have zero impact on the market price. There is an active gas futures market in
existence which should allow traders the opportunity to cover their speculative purchases.
Although the US market may have no impact on the LNG price on a global
basis, the manner in which that market operates is being investigated by the Japanese
players. The Institute of Energy Economics (IEE) of Japan recently spent two weeks in the
USA learning about how that market deals with LNG from the various suppliers, which
currently ranges from Algeria to Australia, the latter being some 12,000 miles distant.
|The spot market
This should be considered as short term rather than true spot; the spot concept
as we know in the oil market is still some years away but it will arrive, possibly as soon
as 2005. 1998 saw several short term deals, the largest being the Qatar to Turkey contract
which involved eight cargoes delivered on the Osprey Maritime vessel "Gimi";
Qatar was also successful in placing a further three cargoes to Enagas, first lifting
being in December 1998 on board the Bonny Gas Transport vessel "LNG Finima".
Duke Energy have continued to be active in this trade; they purchased
five cargoes in addition to their 12 long term contract cargoes from Algeria: one cargo
came from Algeria, three from Australia and one from Abu Dhabi. In addition to these
"Duke" cargoes the Lake Charles terminal received another Abu Dhabi cargo for
the account of Enron. The notable point of interest with these two Abu Dhabi cargoes is
that they were delivered on project dedicated ships, the "Shahamah" and
"Umm Al Ashtan". Thus we have a clear demonstration of the downturn in the
Japanese market but more importantly a change in attitude from the Japanese buyers whereby
project vessels were released for third party business. The real significance of this
action may well be manifested in the forthcoming years, especially if we see a further
relaxation in the Japanese normal conservative philosophy that guaranteed supply takes
precedence over price, and they too play the market with the various projects which have
excess capacity at their disposal.
A new player arrived in the LNG short term market when Edison Gas bought
11 cargoes for delivery to the Italian terminal at Panagaglia. Edison chartered the new
SNAM vessel , "LNG Lerici", for these cargoes which should see the vessel
employed through to August 1998. This is evidently good business for both Edison and SNAM,
the latter no doubt being very happy with the deal as it is able to operate both their
vessel and terminal which would otherwise be experiencing a quiet period before the NLNG
swap deal commences at the end of 1999 (see BRS 1998 report).
Botas in Turkey continues to play the short term market, having been
successful at the beginning of 1998 in securing eight cargoes from Qatar at a price
reported to be $2.48 mmBtu, which represented a significant saving on their long term
Algerian contract cargoes. A repeat exercise took place in October 1998, but not such a
success due to a lack of available shipping. Their tender only attracted one response from
Adgas and whilst Botas was seeking five cargoes, Adgas was only able to offer three, once
again on their project vessels. In the event, Botas was able to secure the requisite five
cargoes though not from Adgas but instead from Algeria. (We do not have any further
details on this deal at the time of going to press).
Cabot LNG, a traditional player in the short term contracts suffered a
setback in 1998 when they ran into shipping difficulties. Having secured the shipping
services of the "Asake Maru", renamed "Mystic Lady", with a six month
charter with an option for a further 9.5 years, the vessel was subsequently found to have
cargo tank defects (see later comments in the LNG fleet). In consequence of these problems
Cabot was unable to lift a September cargo from Australia.
financial crisis has dampened enthusiasm for new long term purchase contracts and has
resulted in postponements for the three main plants seeking expansion notably MLNG Tiga,
Indonesia and North West Shelf. New grass roots projects such as Gorgon, Yemen and Tangguh
have also suffered similar fates.
In Europe, the same market has a somewhat different future, with
Nigerian LNG actively pursuing plant expansion. The NLNG CEO, Mr. Steve Ollerearnshaw,
recently announced that he expects the FID (Financial Investment Decision) to be taken as
early as 27 January 1999. The potential buyers are being kept a secret, but we anticipate
that their clients will be the existing buyers from the first two trains (Enagas,
Transgas, Gaz de France and Botas, but not Enel) plus possible new buyers in Israel or
Enagas would appear to be on the verge of buying more gas from Atlantic
LNG, should the partners in that project decide to press ahead with plant expansion.
However, we understand that there is some disagreement amongst these partners and whilst a
firm decision was expected before end 1998, no new date has been offered.
In the Middle East, we have seen how a geographical advantage has
been influential in securing market share in the new LNG "El Dorado" of India.
Mobil has been successful in securing the supply contract of 7.5 million
tons per year for two new LNG receiving terminals in Gujarat and Dahej. Mobil is looking
to advance the start up date for Gujarat by utilizing one of its new concepts of a
regasification unit aboard two existing LNG vessels from the Osprey fleet (at least their
model of the concept shows an Osprey vessel!).
Enron have also been successful in securing a supply of 1.5 million tons
per year from Oman LNG for their proposed receiving terminal at Dabhol. Enron have still
to close the financial arrangements for this project, having suffered a setback after the
US government imposed sanctions on India investment following Indias nuclear test
programme. However, Enron are confident that their financing will be secured by the end of
the first quarter 1999.
In South East Asia, we have seen MLNG Tiga remaining very
pessimistic about plant expansion, with 2005 being discussed as the earliest date but only
for a single train. North West Shelf has similarly downgraded its expansion plans to a
single train and they too are considering a new date possibly 2004.
Australia would also appear to be confident in securing sales to
a potential new market in China. Conflicting press reports have been circulated concerning
what Chinas position will be, but the market is certain to be very competitive.
|The infrastructure: liquefaction plants and regasification
In Australia, with a re-assessment of their
potential markets, notably Japan and Korea, a single train expansion is most likely for
the North West Shelf (NWS) partners, but realistically not before 2004. What shipping
requirements this will generate is yet unknown, as there is a strong chance that the
project may consider utilization of existing vessels. A 2004 start-up would coincide with
some shipping being freed up from the Arun project in Indonesia which will be approaching
the end of its production, and as the Japanese market is sought, keen pricing with
available existing Japanese ships could prove crucial to any sales contract.
In Malaysia, as with North West Shelf in Australia, it looks as
if a single train expansion in 2005 is the most likely outcome given the depressed Asia
market. MLNG Tiga is in direct competition with NWS for the Japanese and Korean markets.
If expansion is delayed by three years (originally 2002 was anticipated) it would seem
that the project will need to re-launch a tender for its new shipping needs, as it is most
unlikely that the terms of its 1997 tender would remain valid until a possible order date
130,000 cbm, blt 1994
by Chantiers de l'Atlantique,
owned by Petronas Tankers
In Indonesia, although Pertamina and partners continue to find
new gas reserves, moneti sing this gas is proving difficult. Political changes coupled
with low crude prices are complicating production plans, especially in the very
competitive Asian market.
In Japan, we have seen the first indications that the LNG market
share is under threat from alternative fuels. Figures produced by MITI (Ministry of
International Trade and Industry) and IEE suggest that growth will be about 2% for LNG,
with reduced importance for power generation with the Japanese power producers favouring
nuclear and coal fixed stations.
In Korea, subject to privatisation plans to be implemented by the
Korean government, we could see a decision for the first private import facility being
taken by the end of the second quarter 1999. A new terminal is expected to be built in
South East Korea, near Pusan. Both Kogas and Posco have plans to build terminals at 40 and
80 kilometres respectively, south west of Pusan. Posco have already secured financing for
their terminal, which is expected to import about 1.2 million tons per year from 2002,
from Mitsubishi Corporation on a ten year bot agreement and should therefore be viewed as
the favourite to succeed.
However, Kogas is probably reluctant to concede its position as sole
importer of LNG without offering some strong opposition.
In Oman, construction continues with their new plant with first
deliveries expected early 2000. Having signed the sales agreement with Enron all name
plate capacity (6.6 million tons pa) has been sold.
In Qatar, their two projects Qatargas and Rasgas would appear to
have a surplus of 4.0 million tons at their disposal. Such excess capacity could well be
an important issue for short term, or spot sales, in 1999 and 2000.
In Yemen, it would appear that British Gas could be its first
firm buyer with the Indian market as a potential outlet. Turkey continues to be an
interested customer, but Botas seeks participation in the upstream and/or plant which we
believe the project partners are unwilling to concede at this time.
In Egypt, LNG is back on the agenda with Amoco and SNAM studying
the possibility of a new plant. Italy and Turkey, with potentially Israel, are the
In Greece, the long awaited receiving terminal at Revithoussa
should be completed by June 1999. The small vessel, "Century" should commence
delivery from Algeria, for the account of Depa, at this time having secured a five year
time charter (plus options).
In Spain, there is intense activity for the Bilbao receiving
terminal and associated power plant. There has been intense lobbying in this region and it
looks as if a Spanish shipyard could enter the elite club of shipyards (currently 13)
constructing LNG carriers. The gas for Bilbao should originate from the Atlantic LNG
expansion, where Repsol has a significant shareholding (Repsol will also have 25% in the
Bilbao operation, alongside Amoco, who also has a shareholding in Atlantic LNG).
In Nigeria, construction of the new two train plant is almost
completed with first gas delivery expected during the fourth quarter 1999, i.e. on
schedule. Plant expansion is also on the agenda, with a firm decision expected by the end
of January 1999. Whilst market condition will dictate any of such decision, environmental
pressure on the project partners to reduce gas flaring in Nigeria will play a major role
in plant expansion as creation of a third train will use a larger percentage of associated
gas which should reduce flaring by about 60%.
In Brazil, Shell has signed an agreement with Petrobras to
develop a receiving terminal South of Recife, at Suape, with an IPP as intended usage.
Shell has 12 months to produce some realistic proposals. Nigeria LNG is seen as a
potential supplier but they will no doubt face competition from Atlantic LNG.
world fleet of LNG carriers at end 1998 consisted of 108 vessels although this could be
reduced to 107 early in 1999. The total capacity is 11,752,549 cbm, comprising of:
up to 50,000 m3
During 1998, one small, one medium and three large
vessels were delivered:
built in Japan
built in Italy
built in Japan
built in Japan
built in Japan
One vessel looks doomed for scrapping following the
findings of a life extension study which was carried out during the summer. The
"Asake Maru", 87,600 cbm built at Moss Rosenberg in 1974, renamed "Mystic
Lady", was destined for 10 years employment to Cabot LNG. Unfortunately, cracks where
found in all cargo tanks on the welded seams and MOL (Mitsui OSK Lines) has withdrawn the
vessel from service. The vessel will be scrapped but may be used for spare parts for the
"Norman Lady" (sistership) which is operated by Leif Hoegh. This latter vessel
has also been subjected to an extensive survey, and whilst some cracking has been found,
the problem is not as intense as the "Asake Maru". The repairs on the tanks
should be completed before the vessel enters long term service for Trinidad to Spain in
No ships were ordered in 1998, but 1999 could see one
ship ordered from Brunei, up to two for Nigeria LNG, one for Enron and possibly two for
Spain, all looking for delivery in 2002.
There is much speculation about the Korean vessels
destined for Kogas fob purchases. One vessel is yet to be started at the Samsung yard, and
is therefore at least 12 months behind schedule. This Samsung vessel, and the last vessel
on order at Hyundai Heavy Industries (HHI), had not secured financing prior to the Asian
crash. Whilst HHI continue to build their vessel which was ordered by its sister company
Hyundai Merchant Marine (HMM), Samsung has not progressed their vessel. Reports from Korea
suggest that financing for the Samsung should be finalised in early 1999 and that HMM will
settle their account with HHI by the end of 1999.
However, whether or not Kogas will use all of their new
vessels is the real cause for the speculation on availability of these vessels for other
projects needs. Certainly 1998 has seen a steady stream of interested customers
visiting Seoul. Original terms of the Kogas tender and subsequent COAs would suggest
that it will not be easy for foreign owners to pick up these vessels, but this does not
deter interest. Certainly, the two exporters Qatar and Oman are keeping a close eye on
Korean events as their sales contracts quantities require full utilisation of all the
vessels which should have been ordered. Any shortfall in the Korean fleet would
immediately impact on the volumes to be delivered to Inchon and Pyeong Taek.
1999 will see seven of the "existing" vessels
enter into service with Nigeria LNG, and the "Matthew" taking up its long
awaited employment for Cabot LNG. This situation will leave Osprey Maritime as the only
contender with non-project dedicated vessels (two) available for short term employment.
With these vessels apparently committed to Cabot LNG, there will surely be a fleet
restriction for short term trading, unless more projects follow Abu Dhabis lead and
release project vessels for spot sales.
The "old lady", the "Cinderella",
continues to perform well on its current trade to Spain. What the future holds beyond 2000
awaits to be seen but potential customers could be those small IPPs who only need small
LNG parcels - India and China take note!
It has been
normal practice to report a continued growth for this rather specialised business.
Established LNG players and other interested parties now find themselves in the unusual
position of having to completely reassess their predictions. Because of this situation we
have refrained from producing figures in this report as they would not offer any
significant information for our readers.
The industry has been under pressure over the past five years to reduce
the costs of plants and every element in the LNG chain. Shipping was also under scrutiny
and newbuilding prices are currently at their lowest for over ten years. However, there is
increased pressure for reduced costs for LNG and strong warnings are coming from Japan and
Korea, that the price of LNG needs to be much more competitive with alternative fuels. We
are now perhaps at a major cross-roads in this industry whereby the manner in which the
traditional LNG business has been conducted will not be acceptable in the future.
It would appear that buyers will demand more flexibility and this could
produce fob contracts in preference to cif deals, but of a shorter duration i.e. not 20
year deals. Such a move will make grass root project financing somewhat difficult, but
this is not a concern for the buyers.
Shipping supply will clearly play an important role in the forthcoming
years if the industry is to progress into a true spot business. With shipyard prices at
their current levels, there is little economic advantage to projects looking at existing
vessels, should there be any available.
With this in mind, we could be close to seeing a speculative ship being
ordered in 1999 for spot trade development, but always with the long term prospect of
securing project employment 2005 onwards. The question is who will do it and in which
month in 1999.
Shipping and Shipbuilding Markets 1999
I N D E X