Shipping industry must brace for churn in global LNG trade
Low LNG prices in Asia have affected projected industry trade flows
A NEAR doubling of seaborne natural gas trade by the end of this decade is the kind of growth in business that shipowners have been wanting for years, even as excess tonnage continues to pile up and weigh on freight rates in the current market.
But there is considerable uncertainty around how this growing liquefied natural gas trade will shape up, not least because of the crash in Asian LNG prices and softening demand.
As buyers and sellers negotiate the contours of an expanded LNG marketplace, it is the shipping industry that will be caught up in the balancing, or rebalancing, act.
“The shipping market in particular is going to be stressed over the next [trading] period as people are unwilling to commit to LNG vessels going forth because they’re just not sure where those volumes will be moved to,” Woodside Petroleum chief executive Peter Coleman said at a gas conference in Singapore recently.
Mr Coleman was referring to the impact of the sharp decline in Asian LNG prices, which have sunk to a third of the $20/mmBtu seen in the aftermath of the Fukushima nuclear disaster.
Much of the ramping up in LNG investments in recent years has been on expectations that Asian LNG prices will remain high. This ranged from multi-billion dollar export projects in the world’s remotest locations, to unprecedented speculative ordering of LNG carriers at shipyards. But with LNG prices at record lows, many these investments have come under scrutiny.
“If you thought the reduction in capital [spending] in 2015 was bad wait till you see 2016,” Mr Coleman warned.
Low LNG prices in Asia have affected projected trade flows, with longhaul trade to Asia from projects halfway across the world, such as Canada and the US, no longer economic. This is significant because Asia accounts for 75% of global LNG demand.
Amid the onslaught of new suppliers from Russia to Africa, LNG trading patterns are also changing rapidly. For instance, many new projects, mainly from the US, no longer require destination clauses, making it difficult for traders and shipowners to predict trade flows, sign long-term charters or assign fixed trading routes.
New market forces
Shipowners also have new market forces to contend with.
Earlier this year, Japan’s largest utilities Tokyo Electric Power and Chubu Electric joined forces to form Jera, a joint venture aimed at increasing the bargaining power of Japanese LNG consumers.
Jera will control total LNG purchasing volumes of roughly 40m tonnes, the biggest yet for a single trading entity, and also combines the trading and transportation assets of the two Japanese utilities.
“We will have access to eight receiving terminals, together with 16 LNG vessels,” said Jera general manager Hiroki Sato.
“We would like to be a game changer in the Asian LNG market.”
A fleet of 16 LNG carriers will propel Jera into the ranks of the 10 largest owners of LNG tanker fleets.
Singapore’s Pavilion Energy, the LNG arm of Temasek Holdings, has also launched its own fleet in joint venture with BW Group.
These new players will push for flexibility in cargo sizes and the ability to import gas directly from the US instead of chartering vessels from operators, which could put vessel operators at a big disadvantage moving forward.
Opportunity in the midst of uncertainty
But as Woodside’s Mr Coleman said: “In all of that uncertainty there’s a huge amount of opportunity.”
At the Gastech conference in Singapore, Asian LNG buyers from the key markets of China and Japan came out strongly with arguments for long-term procurement from North America. As much as 60% of the currently contracted volumes going into Japan by 2020 will need to be recontracted, which presents a large market opportunity for new suppliers.
Japanese utilities such as Tokyo Gas are now prepared to have US LNG comprise as much as 30% of their total imports, up from previous expectations of just 20%. “There’s room for more US LNG in Japan,” a senior Tokyo Gas executive said at the conference.
“US shale energy is 100% destination free and it also gives [us] a low cost base and transparent pricing system. In that sense we really think US shale energy is a game changer,” the executive said.
While China’s flagging economy has weighed on LNG demand, Chinese buyers also made a strong pitch for importing US LNG. This is surprising because no Chinese player has signed a formal purchase agreement with US suppliers, partly due to fears of political risk.
“In effect I think a considerable volume from the Gulf of Mexico eventually will go to the China market given that the volume is very flexible with no destination clauses,” BG Group’s chief China market economist, Xianfang Ren, said.
She said that despite pricing and demand uncertainties there was a lot of Chinese interest in US LNG because it offered a very good opportunity for price risk diversification.
“It’s not based on oil, it’s based on Henry Hub. That by itself offers something that Chinese buyers and Asian buyers will consider integrating into their portfolio.”
Shenyuan Ma, vice-president at Chinese gas company ENN Group, said his company was in talks to procure US LNG, and believed other Chinese buyers were in discussions as well.
“I believe in the future there could be [Chinese] companies that take LNG capacity or tolling arrangements from US suppliers or projects,” he said.
“Our view is that we would like to have elements of US LNG to diversify supply.”
Eventually the future of the longhaul LNG trade will be determined by competition. Chinese players gravitating towards LNG from western Canada will have to consider US pricing and the proximity of Australian and Russian LNG supply.
“The US has a very compelling cost proposition,” said Cheniere Marketing vice-president of strategy Andrew Walker.
“It’s not going to be a gap filler. In fact it’s going to be a leader in driving change in the industry.”
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