Rising LNG/LPG use to expand carrier fleets

Projected LNG Trade Volumes [23,471 bytes]

Global demand for liquefied natural gas and liquefied petroleum gas is expected to grow significantly to 2010.

That will result in eventual growth of seaborne shipping capacity for both sectors.

Large-scale expansion in the LNG shipping sector is forecast by Ocean Shipping Consultants Ltd., Surrey, U.K.

A study by the consulting firm also says recovery in the LPG carrier market is expected to be focused on the medium term, however. Near-term prospects are unsettled, it notes.

The company's report, issued this summer, points out that LNG trade developments will be underpinned by a worldwide rise in natural gas consumption, exceeding the growth of other fuels during the forecast period.

Its outlook for LPG expects seaborne trade volumes to increase by more than 50% by 2010, reaching just beyond 69 million metric tons compared with 45 million tons in 1995.

LNG demand

World trade in LNG is set to expand to 122.7 billion cu m in 2000 and 155.8 billion cu m in 2005 from 92.5 billion cu m in 1995.

By the end of the 1995-2010 study period, LNG trade levels are expected to reach more than 183 billion cu m. That is an increase of 84%, equivalent to an expansion of more than 4.5%/year during the 15-year period.

LNG trade expansion is expected to be most dynamic during the near term, bolstered by expansion projects in Indonesia and Malaysia, along with new ones in Qatar, Oman, Nigeria, and Australia.

The main focus for LNG demand during the forecast period will remain the developed nations of the Far East, namely Japan, South Korea, and Taiwan. Japan is set to remain the world's largest LNG importer, with imports totaling nearly 80 billion cu m/year by 2010, 36% more than in 1995.

South Korea's commitment to gas use and LNG imports is reflected in growth of about 314% in trade levels to 29.5 billion cu m/year by 2010.

Taiwan's imports are also set to see more than a threefold increase during 1995-2010, to 14 billion cu m/year. Japan, South Korea, and Taiwan combined are expected to account for 70% of world LNG trade in 2010, the study says.

New markets in Thailand, India, China, and Philippines are expected to boost LNG trade during the medium to long term, although their combined share of trade by 2010 is expected to reach only a 10% share-equivalent to 17.5 billion cu m/year.

LNG shipping demand growth, the study says, is expected to be proportionately greater than trade volume expansion, because of the rise in relatively long-haul trades from such sources as Indonesia, Australia, Nigeria, Qatar, and Oman. Trade volume growth of 98.3% is projected for the period to 2010, and parallel employment growth is projected at 120%. Average shipping distance is expected to increase to 2,855 nautical miles in 2010 from 2,570 nautical miles in 1995.

LNG vessels

Demand projections, when combined with an increasing level of scrapping, suggest a steady rise in total newbuilding, the study points out.

The average newbuilding need, in terms of the prevailing fleet capacity, is expected to rise to 8.2%/year to 2000 from 7%/year. Medium to long-term growth rates are expected to moderate, falling to 5-6%/year to 2010.

With Middle East exports of LNG to the Far East set to expand during the next 15 years, improved economies of scale are likely with the construction of larger LNG carriers.

Port restrictions will be the main constraint to size expansion, with the construction of 175,000-200,000 cu m vessels considered feasible using current know-how.

LNG newbuilding prices declined during the early 1990s but recovered to within 2% of the peak 1991 level by 1996. Additional South Korean yards have entered the LNG market with first delivery in 1994, and competition has intensified.

Yards in France, Japan, and South Korea are now tendering for new vessels, although the project-based nature of LNG trading still results in the majority of new orders being placed with domestic yards of LNG ship owners.

LPG demand

Ocean Shipping's base case outlook for the LPG sector represents a weakening from past levels. Average growth rates are set to slow from the current pace of more than 8%/year to 3%/year in the short term to 2000.

In the medium term, trade growth is expected to recover to 3.5%/year to 2005, then decline to 2.3%/year during 2005-10.

Demand growth during the study forecast period will center on developments in South and East Asia, with LPG import growth focused on China and India.

Japan will remain the single largest importer of LPG during the next 15 years, accounting for just under 26% of world trade in 2010. However, this represents a fall in Japan's overall share from 35% in 1995, mainly because of the expected growth in imports into developing countries elsewhere in South and East Asia.

China's flourishing demand for LPG will lift imports to 5.5 million metric tons/year by 2000 and 10 million tons/year by 2010 from 3.6 million tons/year in 1995.

Indian LPG consumption will rise dramatically during the period, the study says. With 12 million domestic customers waiting to be connected, imports are expected to increase to 3 million tons by 2005 from 1.5 million tons in 2000 and 700,000 tons in 1995. By 2010, Indian LPG imports are expected to stabilize at 4 million tons/year.

In Indonesia-currently the largest regional supplier- a growing level of domestic demand combined with a decline in output is expected to reduce exports to 1 million tons/year by 2010 from 1.8 million tons in 2005, 2 million tons in 2000, and 2.4 million tons in 1995. This supply loss is expected to accentuate the decline in the region's export surplus in the medium term, reinforcing reliance on Middle East supplies.

The Middle East will dominate world LPG export expansion, increasing to 34 million tons in 2010 from 24 million tons in 1995. Not only will the established trade links to Japan, South Korea, and to a lesser extent Taiwan remain reliant on expanding supplies from the Middle East, but the key growth markets of China and India will increasingly depend on this supply source.

Modest growth in western European LPG demand is expected to be more than satisfied by supply expansions in the North Sea and Algeria.

By 2010, western European LPG deepsea imports are expected to reach 13 million tons/year, accompanied by a decrease in the need for long-haul Middle East imports. Total shipping demand is expected to show a rising trend during the forecast period, with the strongest growth coming in the medium term during 2000-05.

LPG vessels

During 1995-2000, an implied gross fleet expansion rate of 2.7%/year would be sufficient to maintain current productivity rates, the study says.

In the medium term, stronger demand underpins an increased fleet expansion rate of 3.4%/year in 2000-05. During 2005-10, fleet growth of about 2.7%/year is expected.

Taking into account new orders, as well as the need to replace aging vessels in line with historic scrapping levels, a fleet deficit of just more than 2.3 million cu m is expected during 1995-2000.

During 2000-05, an additional 3.9 million cu m will be needed to meet the proposed demand increase. And while the demand profile would indicate an increase in fleet capacity of 2.2 million cu m during 2005-10, the need to replace aging vessels boosts this volume to more than 4.2 million cu m, the study says.

Fleet additions during the 1990s in the small and large-vessel sectors have led to a general surplus in LPG fleet capacity. This in turn has limited any sustained recovery in freight rates and lowered profitability during a period of rising demand.

Continued restraint in newbuilding levels will be needed to ensure a medium-term recovery in freight rates, according to the study.

Market conditions for owners are likely to remain difficult in the near term. The pace and extent of market recovery will largely depend on the scale of vessels scrapped in the interim period. Vessel demolition levels will need to remain significant through the turn of the century if freight rates are to see a sustained recovery.

Recent freight rates for very large gas carriers have remained relatively depressed, resulting in profit averages of $212,000/month in 1995 and $79,000/month in 1996 despite a net decline in operating costs.

Marked strengthening of the freight market will be necessary, the study says, if funding for newbuilding is to be justified.