Changing trade patterns and evolving technologies were altering traditional shipping patterns as 2000 began, according to analysis by Poten & Partners Inc., New York.
The firm expected eastern economies reviving from sharp downturns to draw off historic crude oil trade from the Persian Gulf area. And shrinking supplies of LPG in trade might force a tightening in that market.
In an article in Oil & Gas Journal at yearend 1999, the firm said that LNG trade was on the verge of loosening.
Oil share
Throughout most of the world, said the consultant, alternative forms of energy had only marginally replaced oil, and in Asia oil`s share of the energy market was increasing. Most Asian nations in 1999 were recovering from their recessions of 1997-98.
Oil consumption as 1999 ended was growing and appeared ready to revert to growth rates of the first half of the 1990s by 2002 or 2003. In the Atlantic Basin, oil consumption and imports by Europe were expected to expand modestly through 2005. North American oil consumption and imports were likely to increase at historic rates.
For the Atlantic Basin, oil export availability was likely to increase in West and North Africa, Latin America, the North Sea, and the Caspian Sea, creating competition for deliveries from the Middle East.
Growth in exports from the Middle East was likely to be eastbound from the Persian Gulf. The trend promised to weaken demand for VLCCs and Suezmax tankers.
VLCC prospects
VLCCs depend on Persian Gulf exports. While exports from that region will grow, the shift from westbound to eastbound liftings from that region was likely to level tonne-mile demand until 2002. This would hurt VLCC owners, said Poten & Partners, coming just as a large number of newbuilding deliveries was expanding the fleet.
Scrapping activity is critical to restoring the supply-demand balance for VLCCs. The potential opening of two Iraq-Syria pipelines promised to cut into the Cape of Good Hope trade, a mainstay of VLCC employment.
The analysis assumed that the proposed pipelines would open but that their effective throughput would be modest. Orders for more newbuildings made since the start of the Asian financial crisis plus those already on order at yearend 1999 would cause a "bubble" of overcapacity that would keep short-term rates depressed.
VLCC supply was to be reduced by the Marine Pollution Convention (MARPOL) phaseout schedule affecting large numbers of VLCCs built during the mid-1970s. The phaseout schedule depends on oil company acceptance of hydrostatic balanced loading. The consultant said there were conflicting signals as to its potential use.
Low rates at yearend 1999, high bunker costs, and long waiting times for cargoes could convince owners that there is no point in hanging on to older tonnage.
Rates cannot increase until there has been a substantial reduction in the supply of vessel capacity through lay-up or scrapping. The supply-demand forecast illustrates the extent of overcapacity, which is reflected in the rate forecast (Fig. 1).
A modest rise in rates was likely to occur before the surplus bubble was liquidated.
LPG shipping outlook
Poten & Partners offered this description of ships in the LPG fleet:
- Fully refrigerated very large gas carriers (VLGCs) of 70,000-85,000 cu m, mostly involved in long-haul LPG trades.
- Fully refrigerated mid-sized gas carriers (20,000-60,000 cu m) that ship LPG and anhydrous ammonia as well.
- Semirefrigerated, semipressurized gas carriers (generally 20,000 cu m or less) that also transport chemical gases such as propylene, butadiene, and vinyl chloride monomer.
- Small pressure gas carriers (generally less than 6,000 cu m) that are mostly involved in coastal and other short-haul trades.
The LPG fleet afloat totaled 920 ships at the end of 1998. But 89 ships in the VLGC fleet transported 70% of the 45 million tonnes of LPG in world trade.
Japan and the rest
The VLGC fleet has traditionally divided into two segments: that controlled by Japanese charterers and shipowners and dedicated to Japanese import trades (slightly less than a third of world LPG trade) and the rest operating under a variety of trades and ownerships.
Ordering by Japanese shipowners has been more consistent than that by other owners. These vessels, once delivered, normally operate under long-term charters at fixed rates that are relatively immune to the short and medium-term fluctuations in the shipping market. And when these charters expire, a replacement vessel will be ordered.
Ordering by other owners has been more market-related. It is tied either to specific projects or trade flows or to an observed tightening in the supply-demand balance (reflected in rising charter-hire rate levels).
There have been two spates of VLGC newbuilding ordering in the past, one in the late 1970s and the second in the early 1990s (Fig. 2).
This gave a curious imbalance to the 1999 trading fleet, said the consultant: several of 20+ year vintage, few between 10 and 20 years, and a large number of modern ships.
A third newbuilding wave was under way as 2000 began. The orderbook showed 14 (with a further 2 options) for delivery from second half 1999 through 2001. The incentive was attractive yard prices.
Yard prices in 1999 were slightly higher than they were 20 years earlier, when the first VLGC newbuilding wave occurred. And the newbuildings in 1999 were much more fuel-efficient than the vessels that were built then.
How were all these vessels to be utilized?
Floating storage
Employment prospects for older vessels were bleak in the mid-1990s except for the trader-initiated move into break-bulk floating storage operations off China. During 1998, as many as eight VLGCs were deployed at one time as floating storage to supply this booming import market.
The start-up of fixed storage ashore in China, however, took this throughput away and reduced the floating storage requirement. By mid-1999, no more than two or three VLGCs were operating in this mode. The surplus vessels, once redelivered, ended up in the spot market.
And, each month of 1999, prospective charterers had a wide array of vessels to consider for any spot shipping needs. The surplus in the spot market also persuaded some charterers to cut back on their term-chartering of VLGCs.
The VLGC fleet depends on LPG supplies available from the Middle East (which, by themselves, account for more than half of the LPG in world trade).
Unfortunately, said the consultant, export supplies there would not be expanding in 2000-2002 because of constraints on export availabilities. Saudi Arabia`s LPG exports were likely to drop at that time as new petrochemical projects there came on stream, absorbing LPG previously exported.
This development clouded the outlook for LPG shipping in that there would be less LPG to transport but improved it in another way. The Eastern importing market (Japan, Korea, and China), short of LPG, would have to rely on some supply from increasingly distant exporting areas.
Over this period, therefore, growth in West-East LPG trades was to take place from the US Gulf (mainly in winter) and from Algeria, Nigeria, and the North Sea (mainly in summer).
Fig. 3 summarizes the trend in VLGC demand-in floating storage and in LPG trades East, West, and West-East-anticipated over 5 years.
Supply, demand; scrappings
In 1999 it seemed unlikely that, at least until 2002, ship demand would keep pace with supply (Fig. 4).
Poten & Partners said the supply-demand balance for VLGCs suggested three difficult years for shipowners-1999, 2000, and 2001. VLGCs would experience extended waiting times in spot markets. Surplus ships might find spot employment from time to time in clean products carriage. But there could also be some vessel layups.
Restoration of a supply-demand balance assumed that owners would then begin to scrap ships. There was a large pool of 1970s-generation gas carriers afloat. By 2005, their average age would be 30 years.
How quickly they disappeared from the trading fleet would determine the new shipping opportunities in VLGCs.
A vessel needs to remain in class to remain seaworthy. This requires regular surveys. If an LPG ship lasts 30 years (as many can), the shipowner at that time faces major commercial decisions. A very extensive (and expensive) special survey becomes due.
Many owners, even those who have maintained their fleets well, might contemplate scrappings at that time, some possibly before that date.
An older vessel is likely to stay in the trading fleet as long as its resale price sufficiently exceeds the scrap value. In 1997 and 1998, with the boom in Chinese floating storage, older ships commanded prices greater than $20 million.
At yearend 1999, the most recent deal had been closer to $5 million. With any further significant downward movement in value, said the consultant, scrapping would become a reality for some vessels.
Market upturn?
The shipping industry is used to cyclicality. The lead time of 2 years or more in ordering a vessel means that the ship may well be delivered in market circumstances different from those at the time the vessel was ordered.
That could be the case in 2000. A VLGC supply increase might coincide with a drop in demand for these vessels. A temporary oversupply would ensue.
Market signs provided reason for optimism, however. LPG is a supply-driven industry. New export supplies were likely to appear in 2001 or later from the Middle East (Qatar), Australia, Papua-New Guinea, Nigeria, Norway, and Venezuela, and all of these export volumes would require ships to move them.
And the shipping market is anticipatory. As soon as there are signs that the surplus is shrinking, charterers begin to fix forward ships again. This forward fixing tends to push up charter-hire rate levels ahead of any actual market tightening.
Such rate improvement is not uniform across all segments of the VLGC fleet. A rate differential of $100,000-120,000/month already exists between the new and older vessels in the fleet because of differences in performance and other factors. This differential was likely to increase.
Some charterers have policies not to fix ships on term-charter beyond a certain age. And some older vessels may not be acceptable on certain trade routes. A number in fact do not have IMO classification and US Coast Guard compliance and have only a limited arena for LPG trading.
These various factors will tend to lead to a wider rate differential for VLGCs in the future as a result of vessel age.
LNG shipping
In a specialized sector of the marine business is LNG shipping.
The ships use technology not found among other types of tankers. Another important difference is that employment of ships is fully committed before orders are ever placed with shipyards.
In this respect, LNG shipping reflects the business approach that has prevailed in the LNG industry since inception. The physical elements of a new LNG trade, gas production, liquefaction, ships, and import facilities, are costly. As a result, the chain is fully defined before investment decisions are made.
LNG buyers and sellers enter 20+ year LNG sale and purchase agreements (SPAs). One of myriad issues established during the negotiations leading up to the SPA is responsibility for shipping, and this often includes a requirement to provide new purpose-built ships.
LNG shipping is costly. Depending on the length of the transportation route, shipping for a new LNG project might cost from $0.60 to $1.00/MMbtu and account for 20-35% of the total delivered cost of LNG.
The high cost of LNG shipping results from three major factors, said Poten & Partners:
- Specialized designs, systems, and materials of construction are required to transport LNG at -163o C. and atmospheric pressure.
- The low specific gravity of LNG (0.46) and resulting low energy density requires a large volumetric capacity to deliver a relatively small energy content.
- As the LNG ship is a key link in the project chain, both LNG sellers and buyers demand high standards in design, construction, and operation.
Because of the high costs of transportation, ships are typically built to meet a contractually defined, long-term commitment to transport LNG that is being sold under a long-term SPA.
A few ships have been constructed on a speculative basis, in anticipation of future employment, and some of those ended in lay-up for as long as 23 years before finding employment under new owners.
At yearend 1999, the world`s LNG fleet consisted of 108 actively trading LNG ships plus 3 in lay-up. Two of the latter were to be reactivated and returned to service. The final ship in lay-up, Arzew, entered the shipyard later in 1999 and was scheduled to return to service in mid-2000.
In addition to the existing fleet, 21 ships as of Jan. 1, 2000, were on order at eight shipyards.
Table 1 shows ships on order as of Jan. 1, 2000, the shipyard, and LNG trade routes the ships will serve. The table shows that Asian shipyards had all the orders for new LNG ships. Korean shipyards with orders for 12 ships had the bulk of the new LNG ship construction business. Ten of the ships on order were to transport LNG to Korea.
The order list shows destinations of the tranche of LNG supply due onstream as the 21st Century began: the 10 ships to Korea, 4 to Japan, 2 to Spain and Portugal, and 1 to India`s Dabhol project.
Poten & Partners said that the two ships ordered for Malaysia LNG were an interesting exception to the rule that ship employment is fixed before the ships are ordered. No specific LNG contracts had been signed at the time of order nor any specific LNG trade route designated.
Of the 12 ships under contract with Korean yards, 10 were for Korean owners with long-term contracts of affreightment with Korea Gas Corp. (KOGAS). These ships, and three delivered earlier in 1999, were to transport LNG that KOGAS purchased from Indonesia`s Bontang LNG and from Middle East suppliers Ras Laffan LNG and Oman LNG.
The other two ships on order at Korea`s Hyundai Heavy Industries were for Nigeria LNG. They were significant in two respects.
- They were the first Korean-built ships for non-Korean owners and LNG trade routes.
- The ships were reported to have a shipyard price in the low to mid-$160 millions, a very low price.
Fig. 5 shows the significance of the new ship prices reported in 1999. Shipyard prices for ships ordered in 1985 and 1986 were reported to be about $125 million each. Prices climbed steadily through 1991, when they peaked.
In 1991-92, Korean shipyards received their first LNG ship orders from domestic owners, and in 1992 Finland`s Kvaerner Masa shipyard placed an extremely competitive bid for four ships to replace existing ships whose charters were scheduled to expire at Abu Dhabi`s Adgas project. Competition among shipyards later in the 1990s drove prices down.
Korean shipyards in the late 1990s were offering very aggressive prices in an effort to capitalize on the experience gained from design and construction of ships for KOGAS.
The technical specifications of LNG ships changed little after 1975. This shows the technical success of early ships. Poten & Partners said it also reflects a conservative business that seeks reliability in proven technology and a reluctance to change what works well in the specialized LNG service.
The standard ship grew in size from 125,000 cu m LNG capacity in the early years to 137,500 cu m in 2000. Three basic LNG containment systems, Kvaerner Moss spherical tanks, Gaz Transport, and Technigaz, dominate the industry.
The propulsion systems utilize steam turbines, a technology abandoned by the marine industry in the 1970s. It is well-suited for LNG, however, because the system can be easily adapted to use the LNG that boils off during a voyage as propulsion fuel.
Shipbuilding construction technology has improved and, of course, automation, control, and instrumentation systems have been upgraded significantly. But at heart the ship designs remained remarkably similar over the last 25 years of the 1900s.
The industry studied the potential of new propulsion systems for LNG ships, primarily diesel engines like the rest of the industry.
In the mid-1980s, Japanese shipbuilders spent considerable time and effort developing the dual-fueled, slow-speed diesel engine for the Australia North West Shelf tender. Ultimately, Australia NWS participants decided to stick with the proven steam propulsion systems.
The European Union, in cooperation with Wartsila Diesel, Chantiers de l`Atlantique, Shell, and Lloyd`s Register of Shipping funded a development project, under way at this writing, for a dual-fuel, medium-speed diesel engine.
In another technical development, the owners of the ship that will transport LNG from Oman LNG to Osaka Gas were installing a partial reliquefaction system aboard their ship. Onboard reliquefaction would give designers the opportunity to install diesel engines and not worry about dual-fuel applications.
Changing business
Change was also apparent in the structure of LNG business at yearend 1999. In a departure from only long-term sales, short-term LNG sales rose to match uncommitted liquefaction capacity with unfilled LNG demand. Moreover, projects were being started with only a part of their capacity committed, and short-term LNG sales were being used to enhance project economics.
Poten & Partners noted that short-term sales could be developed only because of the availability of a small number of existing LNG ships not committed to long-term trades.
This uncommitted shipping capacity arose because seven ships had been replaced by new ships in existing LNG trades. The ships replaced were well built and maintained and capable of continued service.
Four LNG ships were built speculatively in the 1970s and 1980s and did not find employment. After years in lay-up, the ships were purchased for a new long-term trade but used in short-term trades until the liquefaction plant was complete.
The short-term business generated by these ships, although relatively small, was highly publicized. Many of the ships engaged in short-term trading would transport LNG from the new Atlantic LNG project in Trinidad, which began operation in April 1999, and Nigeria LNG, which planned to load its first cargo in late 1999. The two projects were eventually to employ 11 existing ships.
This left a small fleet of existing ships to transport the large quantity of uncommitted LNG capacity available because of the start-up of more than 27 million tonnes of LNG capacity in 1997-2000.
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The KOGAS Hyundai Technopia, here loading in Qatar, was the second KOGAS LNG transport vessel to move RasGas LNG from the new plant to Korea. Photo courtesy of Mobil Technology Co.
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Tankers load upgraded crude oil from Orinoco production as part of several projects to increase output from the Venezuelan heavy-oil field. Photo courtesy of Conoco Inc.
