Japan Inc builds its LNGC fleet
Japan’s top utility companies are leading a renaissance in domestic construction of LNG carriers, reorienting the way the country purchases its gas imports.
Tokyo Gas, Osaka Gas, Kansai Electric Power, Kyushu Electric Power, Tokyo Electric Power (Tepco), Chubu Electric Power and Toho Gas are stepping up the control they exert over their own shipping fleets. They are negotiating long-term purchases of cargoes on a free-on-board (FOB) basis from the new Australian projects now coming on stream.
The utilities have also signed natural gas liquefaction tolling agreements with the new US export terminals that offer the flexibility to make their own shipping arrangements and to determine the cargoes’ ultimate discharge port. To do this, they have linked up with the top three Japanese shipowners and technical LNGC managers ̶ Mitsui OSK Lines (MOL), NYK Line and K Line ̶ to jointly order tonnage for the new projects, taking them on long-term charters.
Japanese utility companies now have an aggregate LNGC fleet of 39 in-service and on-order vessels, 21 contracted since 2010. Mitsubishi Heavy Industries (MHI) and Kawasaki Heavy Industries (KHI) have secured most of these orders, although Imabari Shipbuilding and Japan Marine United (JMU) have made notable breakthroughs.
By strengthening control over their LNG supply chains, the Japanese utilities aim to reduce transport costs and tap the market opportunities that having part of the fleet engaged in short-term and spot cargo trading will create.
The expertise that Japan Inc brings to the utility company LNGC fleets includes valuable input from the country’s top trading houses. Established players such as Mitsubishi Corp, Mitsui & Co and Sumitomo hold stakes in the export projects and are foundation buyers of the LNG for the utility companies. They are sometimes also minority shareholders in the LNGCs.
Japanese trading-house knowledge of LNGC design, construction and operation dates back to the pioneering days of the LNG industry, long before the utility companies became involved with shipping.
First movers
Two 125,000m3 ships ̶ LNG Flora delivered by KHI in March 1993 and LNG Vesta completed by MHI in June 1994 ̶ were the first LNG carriers in which Japanese gas utility companies took a stake. The vessels were ordered by a pool comprising Tokyo Gas, Osaka Gas and Toho Gas and served Indonesia’s Badak IV project for 20 years, until 2014.
Osaka Gas then added the 135,000m3 LNG Jamal to its fleet in October 2000 for lifting Oman LNG cargoes. Tokyo Gas introduced its third ship, the 145,000m3 Energy Frontier, in September 2003.
That month Tepco introduced its maiden LNG vessel, the 137,000m3 Pacific Notus. Like Tokyo Gas, Tepco purchases cargoes from Malaysia, Darwin and Sakhalin 2. Both utilities have employed Energy Frontier, Pacific Notus and subsequent LNGC deliveries interchangeably amongst these projects.
Kansai Electric made its first foray into LNG shipping with LNG Ebisu, a 147,500m3 vessel delivered in September 2008 and in which the utility holds a 70 per cent stake. The MOL-operated ship is engaged on long-term charter, lifting cargoes at Australia’s Pluto export terminal among other locations.
Chubu Electric entered into LNGC ownership in 2012, ordering two 155,000m3 vessels for lifting cargoes from its Australian project purchase agreements. Chubu Electric holds a 40 per cent stake in SeishuMaru and EsshuMaru, which both entered service in late 2014.
Kyushu Electric Power became involved with LNGC operations in March 2009 when MHI handed over the 145,000m3 Pacific Enlighten. The vessel is jointly owned by Tepco.
The second ship in which Kyushu Electric has a direct interest will start operations in the next few weeks. The 155,000m3 LNG Jupiter is due for delivery from MHI this month and will transport Ichthys LNG cargoes once that Australian project launches next year.
Owned by MOL, LNG Jupiter will also load Ichthys cargoes for Osaka Gas. LNG Jupiter is the first Japanese-owned LNGC built to serve both a domestic electric power company and a domestic gas utility.
Consolidation
LNG Jupiter expands the Osaka Gas fleet to six ships. The seventh is LNG Mars, another 155,000m3 vessel from MHI, due for delivery next month. It will carry cargoes from Australia’s new Gorgon project.
The other utility company fleets have also grown. Following the completion by MHI of the 155,000m3 LNG Jurojin in November 2015, for the Ichthys project, Kansai Electric now has two ships in its fleet. A third, the 164,700m3 LNG Fukurokuju, is due for delivery by KHI in March and will carry cargoes produced at Australia Pacific LNG.
There are now nine ships in service in the Tokyo Gas fleet and four on order at the JMU yard for delivery in 2017 and 2018. Operated by MOL and NYK, the four newbuildings will transport LNG from the Cove Point bi-directional terminal on the US east coast.
The Tokyo Gas complement was the largest Japanese utility company LNG fleet until last year, when Tepco and Chubu Electric merged their operations to form JERA. JERA plans to invest heavily in domestic and overseas power generation and to boost the combined Tepco and Chubu LNGC fleet from 16 vessels to 30 by 2030.
The aggregate volume of LNG the two companies purchase for domestic consumption, some 40 million tonnes per annum (mta), makes JERA the world’s largest LNG purchaser. JERA’s long-term plan anticipates a 25 per cent decline in its own LNG purchases for Japan by 2030, reflecting a drop in the country’s overall LNG imports.
However, JERA’s planned fleet build-up means that its ships will carry a much larger percentage of the group’s LNG shipments to Japan by that date and will engage in overseas trading opportunities.
Japanese demand
Although Japan remains the world’s largest LNG importer by a wide margin, demand for gas in power generation and heating is beginning to ease. Shipments to Japan fell by 3.9 per cent last year, to 85 million tonnes (mt), or 34 per cent of the world trade in the product, and the trend is set to continue.
The restart of several Japanese nuclear reactors following a rigorous post-Fukushima safety review will do more to curb the demand for LNG than any other factor. Three of the country’s 43 operable plants have now been recommissioned and 25 are seeking permission to resume operations. Eclipse Energy forecasts that Japanese LNG consumption could drop to 77 mta by 2020.
The Japanese utilities will strengthen their ability to control their supply-chain logistics with the expiry of 10 mta-worth of long-term LNG purchase contracts, to be replaced, to some extent, by new volumes of LNG from Australia and the US.
However, Japan’s utility companies have overcommitted themselves, having signed up to 38 mta of new LNG supply over the past five years – a figure that far exceeds domestic gas demand.
That means several LNGCs in these companies’ growing fleets will be trading LNG on a spot and short-term basis internationally. Delivering cargoes to countries that need LNG means these ships will add much-needed liquidity to the global LNG market.
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