The LNG shipping market
in 2000

A new millennium arrived and a new era in LNG began. As a company that depends on shipping for its livelihood we do have a natural bias towards shipping and, for this, we make no apology, but the year 2000 saw the LNG industry recognition that LNG shipping is the most important tool in the modern LNG industry. Let us not forget that the only reason that US$ 4 billion are invested in liquefaction plants, is to facilitate the transportation of methane by sea.

Our final comment in our review last year recommended the move to build speculation ships. It happened that two first class owners, Bergesen and Exmar, did just that: we thank them for such a move. The fact that two independent shipowners (i.e. non project-related) made these decisions, is a clear indication that this industry is changing.

The oil price has risen this year to US$ 35 per barrel (but has settled back to US$ 25-27) and this rise had an impact on gas prices, as if it was linked to the oil price. Hence the Japanese market saw its LNG price rise to a high level of US$ five to six m.btu(1). However, the new "American" market has seen the Henry Hub price peak at US$10, with a diurnal variation of US$ 1. This is a market that traders yearn for but one that LNG players (and here we include the financiers) don�t understand.

(1) btu = British thermal unit (0.252 kcal)
 

We want flexibility. Pricing indicates that trading is viable but where are the ships? Our brave shipowners, who ordered in speculation, have subsequently secured traditional 20 years charters and thus there was no "breaking the mould". Traders need a supply of ships and production plants need to know that there is a supply of ships that will arrive to lift the cargo. This scenario will sound familiar to the oil and coal industry, who are after all the competitive fuels in the energy sector.

There are several traditional shipowners, located in the Mediterranean, who are taking a close look at this industry and it is our opinion that they will not have to spend too much time on this subject before realising the tremendous opportunities that exist. Their main advantage will be flexibility, their experience with traders and their ability to do what they know best: running ships.
 

There was one new project that started this year, Oman LNG but no contracts were signed for proposed plants. However, we have seen renewed activities in Iran, Yemen, Norway, Egypt, Venezuela and Angola so that 2006 could be a very interesting year, as this is the time when these are expected to be on stream.

Atlantic LNG (Trinidad) confirmed the next phase of expansion with two new trains whilst North West Shelf (Australia) and Malaysia LNG are very close to finalising their expansion programmes.

The USA will soon have four receiving terminals in operation (by 2002) and no doubt will have expansion plans approved for the two to be re-opened, Cove Point and Elba Island. Everett in Boston was sold by Cabot to Tractebel, whilst Cove Point was sold to Williams which raises the question whether Duke sold their LNG interests at Lakes Charles too soon to CMS energy in 1999.

Europe has been attracting interest with its main activity focused on the Iberian Peninsula. The Spanish market has been opened up and it looks as if there will be two new terminals, one in Bilbao and the other at El Ferrol. Portugal is constructing a new terminal near Sines which should ultimately free up some capacity at Huelva and this news should interest traders.

Turkey will have a second receiving terminal, in Aliaga, ready by September 2001. But as yet there is no information on where the LNG will come from or where the gas will be sold. This terminal is under construction independently from Botas, the state owned energy monopoly, and how it will be utilised is still uncertain. However, what is clear is that the Turkish market has a need for the new facility.

India continues to test the patience of many LNG sellers as the year 2000 has passed without a decision on where their second LNG terminal will be sited (Enron has the first receiving terminal in Dabhol that should receive its first LNG in 2001).

Nigeria LNG is actively marketing sales from its next planned expansion of trains four and five. The market in the Atlantic Basin would clearly seem to be the most attractive one at the moment. There is also a rumour that Nigeria may get a second LNG project (start up +2006) that will have partners different to those involved in the first project, most likely Exxon, Chevron and others. This second plant will probably be located offshore.

Indonesia has had a quiet year with life basically reverting to normal, now that Korea is once again lifting its required quota. The price of the product has also returned to pre-1997 prices well assisted by the rise in crude prices. TotalFinaElf continues to seek buyers for its gas to enable a new train to be built but for the moment there are no developments. Perhaps they are looking forward to the idea of a new receiving terminal on the West Coast of North America that would bring the US market into the commercial reach of South East Asia.

Qatar, with its two plants of Qatargas and Ras Gas in full production still hopes to be the biggest LNG production plant in the world with expansion plans in an advanced stage. No doubt the pressure of a green field plant starting in Iran using the South Pars field will hasten some decision making.
 

There were 113 ships at the end of 1999 but with 14 ships delivered in 2000 there were 127 in December 2000. The total capacity is 13,569,049 cbm comprising of:

Six new "Moss-type" ships were added and eight �membrane-type�, bringing the fleet distribution to 67 "Moss design" and 54 �membrane type�.

Although 2000 was a busy year for ship deliveries, there was significant activity in ship orders. A total of 22 ships were ordered and there are a further seven optional vessels. Perhaps what is really interesting in this orderbook is that there were only five ships ordered by sellers, comprising one for Nigeria LNG ordering its third ship from Hyundai Heavy Industries and Malaysia ordering a further four. All of the others were private shipowners or gas buyers. Tokyo Gas has ordered two ships from Kawasaki, and Tokyo Electric one ship from Mitsubishi. Shell and BP also entered the market with orders for two ships each plus options for a further three each. However, the real event of the year was the speculative orders placed by Exmar and Bergesen (nice to know someone read our report last year!). Exmar have since found employment of their first ship with Enron, whilst Bergesen recently fixed their ship to Tractabel (ex. Cabot). Both of these charters are for 20 years.

2000 saw the arrival of three new LNG owners in Spain. Elcano, Tapias and Marpetrol / Knutsen who have ordered new ships from a new group formed by the merger of Bazan and AESA (now re-branded as Izar), to add to the list of 13 yards able to build LNG ships. The first Spanish ship is due in 2003 and will be a "membrane type" ship. The list of yards building ships is set to grow again next year but we will have to wait to see how negotiations develop.

The not so good news (from the shipowners point of view) for 2000 was that the wave of new orders for all types of vessels has resulted in the ship prices rising again. The new LNG ship price hit a floor of about US$ 143 million in March 2000, but it has now returned to about US$ 165 million for vessels built in Korea. If prices can stabilise around this level we should see some more ships ordered over the next year, speculative maybe, but if 2000 is an example, anyone who orders a firm ship does not need to wait long to find employment for it.

The �Mystic Lady� was renamed the �Hoegh Galleon� and was fixed to Enron for 17 years. With this firm business the owners embarked upon major refurbishment work on the ship and it should have been ready by November. Unfortunately, it has been delayed until March / April 2001 following a fire in one of the void spaces whilst undergoing repairs in Singapore.

The Osprey ships that are under charter to British Gas have been performing well and are under great demand. The high gas prices in the USA have resulted in spot charter rates reaching as high as US$ 150,000 per day, rates which must be pleasing some shareholders.

The oldest vessel in the world LNG fleet is now 35 years old (still on charter to Enagas) and there are 46 ships over 20 years old.
 

Well it has still not truly arrived but the number of transactions on short term deals has increased significantly. The CMS terminal in Lake Charles is set to have received a total of 55 cargoes in 2000 alone. CMS, Duke, Enron and El Paso (although their first cargo arrives Jan 1 2001) have all moved cargoes into the United-States. Coral Energy have again been active but Gaz de France is perhaps the surprising entity this year which has seen it moving cargoes on the �Edouard LD� from Qatar : this a vessel that has spent its entire life trading between Algeria and France. In December the same vessel crossed the Atlantic with a cargo sold to El Paso and will perform a second soon after.

The high gas prices in the United States have encouraged activity in the longer hauls away from the traditional fixed routes. However, even without the high prevailing prices the sellers are now firmly aware that there is a good market where excess volumes can be moved. As the other terminals in the United States open up the opportunities to continue to move gas in that direction will improve. Where there is volatility in the pricing we will see the energy traders desperate to participate with LNG cargoes. At the moment we are not aware of any gas buyer who has not onsold his LNG cargo, as soon as he has signed the purchase contract. However, where we have seen the volatility in the Henry Hub price, it will not be long before we see some LNG cargoes changing hands en route. LNG does pose a problem here, in that you never know how much cargo you will receive due to boil-off, but this can be addressed by only trading some of the molecules and not the entire cargo.

If the trade can develop along these lines the true spot market will arrive, but the shipping will need to be created. Could we have a pooled fleet offering coa-type contracts? Perhaps and we would like to see it happen, although who will participate remains to be seen. We are aware that some large shipowners are looking at this scenario and we would certainly like to encourage large operators such as A P Moller to reassess their view on LNG shipping. A real challenge would be to convince some of the other old pioneers such as P&O and Geogas to re-enter this arena, although their memories may be too good to take such steps.

The LNG market is truly global with cargoes moving east and west. Australia, and Malaysia have sold cargoes into the United-States with Oman and Qatar selling into Europe. Whether buyers obtain full flexibility on destination is perhaps the biggest challenge for the future, but if they do it will greatly assist the spot market for the traders. Imagine a trader buying a cargo from Oman and taking his ship through the Suez Canal. He can try to sell to Turkey, continue west and tempt Greece, whilst still talking to Italy. France is the next opportunity followed by Spain and then if still no luck in the Mediterranean just keep checking the Nymex price in the United-States. If successful in selling in the Mediterranean his vessel can then be well placed to lift a cargo from Algeria or Egypt before returning to the Middle East Gulf area.

There are certainly some interesting years ahead.
 

We have been tempted to repeat our conclusion from last year which is still valid, especially our view on speculative ships, but that is not in keeping with the innovations in this industry.

Instead we would suggest that as the industry is going through a transition period that will leave a permanent mark. We believe that time is right to try and move away from the staid, and thirsty, steam turbine technology as propulsion. Diesel electric has been discussed for many years but now that the passenger ship industry has embraced gas turbines the LNG industry should perhaps do likewise.

There have been brave decisions made this year with speculative ship orders and a speculative terminal (Turkey). New players are arriving into this industry and at least one �old� one has re-entered (El Paso) so that LNG is constantly hitting the headlines.

This industry should no longer be considered as specialised but should in fact be recognised as "special" and with this re-branding more new players will be encouraged rather than discouraged as was the case when "specialised" was the brand name.

And last but not least, with a re-branding perhaps our friends in the financial institutions will reassess the financing risks on our speculative new gas turbine vessels, which will truly be "special ships". LNG Shipping Solutions(2) will be the way for the future developments in this industry.

(2)j/v between BRS and Clarksons