The future of the seaborne LNG trades

Nicola Contessi, a research associate at the York Centre for Asian Research in Toronto, on the demand outlook for LNG.

The liquified natural gas (LNG) market has proven equally tortuous amid unforeseen geopolitical and regulatory risks, dragging the shipping market on a roller coaster. But what is the outlook for the LNG freight market in the medium term?

Demand for LNG is seen widely on an upward trend. In 2020, the Gas Exporting Countries Forum forecasted a 1.4% growth per year to 2050. McKinsey’s Global Gas Outlook to 2050 anticipates a growth of 3.5% per annum up to 2035, then fizzling in the subsequent decade and a half.

Morgan Stanley estimates a 20-25% growth in demand by 2030, regarding the fuel as a bridge in the transition to renewables. BP sees a similarly buoyant demand for LNG up to 2050, unless a net-zero scenario prevails. Baker Hughes has made similarly optimistic considerations.

Demand will be propelled by Asia’s phasing out of coal, led by China, India, Japan and South Korea, followed by Bangladesh, Indonesia, Malaysia, Taiwan and Thailand. North America will be the second largest growth region, while Europe is expected to diminish reliance on gas, though Germany and Italy remain highly reliant on it.

Politics is clearly a key variable here. If inclusion of LNG in the EU taxonomy is confirmed, that will relieve some of the uncertainty surrounding European gas markets. However, with North Stream 2 off the table, it remains to be seen where that LNG will be originated, an even worse predicament should Moscow make good on its threatened retaliatory halt on North Stream 1 flows. All but certain is that Russia’s dominant position as Europe’s gas supplier is on the wane, and this could become interesting for the LNG shipping market.

The main suppliers during 2022-27 will be the US, which will likely top the league of exporters between 2022 and 2025, sharing the podium with Australia and Qatar. Other large exporters include Algeria, Canada, Norway and Russia.

Prices during the present decade could average 40% above those of the previous five years, perhaps even more on the heels of burgeoning oil prices. This will support massive investments of $65bn in new extraction projects needed to deliver an additional 73m tonnes per annum by 2030. They include productions in Qatar, Russia’s Arctic and the Mediterranean due to come online between 2022 and 2030, and the crucial expansion of liquefaction capacity under way in Qatar and Russia, while Germany is jumpstarting titanic regasification projects and storage.

Nonetheless, available models do not contemplate unforeseen black swan events that could upend energy demand. One has already materialized with the ongoing war in Ukraine. Its full ramifications are yet to be understood and much depends on its duration, but the sanctions adopted so far are so extreme that their impact on economic and household activity on both sides could send the world into a recession. On the other hand, the World Meteorological Organization forecasts rising global mean temperatures in the next five years.

The global LNG tanker fleet has experienced a steady increase since the turn of the century, reaching a total of 665 vessels and a capacity of 100m cu m at the end of 2021, and a fairly balanced tonnage.

Some of these will presumably be coming up for retirement in the next five years, considering that there are at least four carriers commissioned in the 1970s, 10 in the 1980s, and 54 in the 1990s.

The orderbook for newbuilds is well furnished up to 2027, and stands at close to 30% of the current fleet size.

This is why Clarksons estimates that the number of LNG carriers could exceed the 837 VLCCs currently afloat by 2025. By one account, as many as 142 LNG carriers should hit the waves by 2025 with 38 new deliveries due in 2022. Qatari owner Nakilat has orders for as many as 100 carriers worth some $20bn, absorbing 60% of global LNG shipbuilding capacity through 2027. For its part, Russian SCF expects delivery for 15 new carriers between 2023 and 2025.

As seen during December 2021, the spot market can swing wildly. Following a high point of $205,000 a day for a Tri-fuel diesel engine carrier, and a jumbo deal reported at $424,000 a day, spot freight rates have taken a substantial plunge since the beginning of 2022.

Russia’s invasion of Ukraine has jolted commodities markets into turbulent times, rocking both Asian and European LNG prices. If they remain high, then we may see a repeat of December 2021 freight rates. Yet, rates for now remain in the $28,000 to $36,000 per day depending on the route, not dissimilar from the goings that Argus picked up before the attack.

Nonetheless, contrary to other commodities, the LNG shipping market is largely priced around time charters, which can take seven-to-10-year terms. Hence, when newbuilds are delivered they have typically already been chartered. Equilibrium is therefore established on the medium to long term.

The ratio obtained by intersecting past and anticipated figures for LNG exports and carrier fleet size to 2024 shows a diminishing trend.

However, LNG trade is seen growing at a higher clip than pipeline transport, and should represent 48% of all traded gas by 2030 (650bn cu m), growing to 56% by 2050 (1,110bn cu m), while the number of exporting countries should grow from 21 to 30. Whereas a greater portion of Europe’s demand is now due to travel by ocean, a higher volume of Asia-bound gas will switch to pipeline as a result of the new China-Russia gas deal of January 2022.

The anticipated ship retirements and the expectation of a sustained primary demand well into the 2030s have driven a substantial orderbook for newbuilds. Deliveries are well spread over the period 2022-2027, by which time the market has good chances of seeing a tightening as Nalikat completes its mega-shipbuilding program.

Moreover, new routes will be coming online, such as the NSR route from the Russian Arctic to Asia. The 15 newbuilds due to join SCF are ice class carriers earmarked for it, provided that the intended customers stay out of the sanctions that see SCF as one of the targets.

In the interim, we can anticipate a lively but stable freight market, with a degree of segmentation as demand concentrates mostly in the Asia-Pacific and North-America. The longer voyages required from the export facilities to those growing import areas should keep the available tonnage occupied for longer periods of time, tempering rates. Considering the Baltic Exchange LNG routes, we can expect Australia to Japan and US Gulf to Japan to sustain similar rates to current ones. Conversely, US Gulf to Northern Europe contracts could experience an unexpected uptick even though Europe appears poised to accelerate on its energy transition course. But, to keep things real, Europe lacks adequate LNG distribution infrastructure, which could take about five years to complete.

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