CPABC Industry Update Summer 2014 - Page 16

An Overview of the LNG Shipping Industry (cont’d) Chart 3: LNG Carrier 1-Year Time Charter Rates Historically, the majority of the LNG fleet has been employed on long-term, fixed-rate contracts whereby a ship is dedicated to a specified project for a period of 20 years or more. The reason ships were employed on such long contracts was that the LNG itself was sold on longterm offtake contracts. These contracts were favoured because of the significant capital investments involved in natural gas extraction, liquefaction, transportation, storage, and regasification that are all necessary to build the LNG supply chain. Under these long-term charters, the ship owner is paid a fixed rate, typically around $70,000-80,000 per day, and is responsible for the vessel’s operating costs (for example, crew, maintenance, and repair costs). The LNG company directs the commercial operations of the vessel and pays for all of the voyage costs (including fuel costs, port charges, and canal dues). In recent years, a more fluid spot and short-term charter market for LNG shipping has emerged. This involves both the emergence of a true spot market, whereby LNG cargoes are sold on a single-voyage basis, and short-term charters of four years or less. In 2013, approximately 27% of all LNG trade was done on a spot or short-term basis, compared with just 12% in 2000. Under a voyage charter, the ship owner gets paid freight for a single voyage and is responsible for all voyage and operating costs. LNG shipping spot rates can vary widely page 16 | I N D U S T R Y U P D AT E due to market conditions, with earnings reaching as high as $150,000 per day during the strong spot market witnessed in 2012. Looking to the future, the expectation is that LNG trade – and therefore LNG shipping demand – will grow significantly in the coming years. The main driver for this growth is new demand for natural gas in Asia and the growth in natural gas extraction in Australia, the US, Canada, Russia, and East Africa. Teekay estimates that over 200 million tonnes per annum of new LNG liquefaction capacity will come online between now and the end of the decade. In order to transport these volumes, an estimated 160-210 new vessels will be needed, depending on where the vessels trade. As a result, ship owners have been busy ordering new LNG carriers in recent months. There are now over 100 vessels on order from shipyards in South Korea, Japan, and China. Some of these have been ordered to fulfill longterm contracts, but some have been ordered speculatively in expectation of future demand. The build-out of LNG infrastructure across the globe bodes well for the LNG shipping industry. Ship owners are getting ready for the coming wave of LNG by building ships to meet the growing demand. Christian Waldegrave is a shipping market analyst with over 10 years of experience. Currently, he heads up all research activities for Teekay Corporation and its daughter companies.