Very large gas carrier owners hold onto their hats

Time:2014-08-21 Browse:61 Author:RISINGSUN
Just when it looked like things could not get any better for owners of very large gas carriers (VLGCs), they just did. Freight rates are up 66% on levels of a year ago and this segment of the LPG carrier fleet is poised to absorb a disproportionately large order-book with, it seems, nary a pause for breath.

VLGC owners, like those in many other sectors of energy shipping, are caught up in the US shale revolution. Because both shale gas and shale oil are rich in natural gas liquids (NGLs) and because the volumes being produced are rising rapidly, US exports of one of the principal NGL fractions, propane, are skyrocketing.

This past April US LPG exports were averaging 43,600 tonnes per day, about 65% up on the levels of a year earlier. The total for 2014 is expected to reach 13.5 million tonnes (mt), 50% above last year’s level. These volumes are pushing the US up towards Qatar, Abu Dhabi and Saudi Arabia at the top of the LPG exporters’ league table.

The exploitation of the country’s shale oil and gas resources has enabled this overnight success story. After a decade in which LPG imports outweighed imports, the US became a net exporter of LPG once again only in 2011. Loadings for sale to overseas customers have been accelerating ever since.

Furthermore, world market demand for US LPG has been developing nicely, thanks to the competitive price at which it is available. The US is oversupplied with the product and needs the export market. Overseas petrochemical producers are waking up to the benefits offered by propane and its sister NGL ethane as feedstock, while utilities are switching from their present fuels to LPG in increasing numbers, not least to take advantage of its clean-burning characteristics and high calorific value.

US exports are driving the demand for new VLGCs and supporting the healthy freight rates commanded by the ships in the existing fleet. Falling in the 75-85,000 m3 size range, VLGCs are the largest LPG carriers afloat and the gas shipping industry’s workhorses when it comes to transporting large volumes of propane and butane over long distances. The 156-vessel VLGC fleet transports LPG as fully refrigerated cargoes. The current VLGC order-book stands at 44 such vessels.

Approximately 90% of the US LPG export cargoes are shipped from Gulf Coast terminals. Existing Gulf LPG terminals are being expanded and new facilities are under construction to cope with the growing export volumes. The terminal expansion projects are set to more than double the US LPG export capability, pushing it towards the 30 million tonnes per annum (mta) mark by 2017.

Despite the availability of this capacity, a more realistic export volume for 2017 would be around 21 mt. Such a level of shipments would place the US at the top of the exporter’s league table, well clear of its nearest rival.

In terms of providing the necessary processing and terminal infrastructure, exporting NGLs like ethane, propane and butane does not require anything like the same commitment as LNG. One of the biggest challenges for US producers of NGLs has been in simply getting their products to a coastal facility for export. Although the country has a comprehensive gas pipeline network in place, new lines are being laid to facilitate the movement of NGLs from shale plays like the Marcellus and Eagle Ford to coastal gas fractionation plants and export terminals.

At the moment, most of the US exports are shipped to customers in Latin America and Europe. However, given the relatively low price of US LPG and rising local demand, it is hardly surprising that Asian buyers are becoming increasingly interested in the VLGC cargoes loading on the Gulf Coast. In recent months a number of VLGCs have embarked on the 90-day trip around Cape Horn to Asia with cargoes of US Gulf LPG.

The opening of the enlarged Panama Canal in late 2015 will help trim the shipping costs associated with these long-distance deliveries. In terms of Panama Canal transits VLGCs are currently a borderline case. Only the smallest ships in the class, or about 20% of the fleet, are able to utilise the Canal as it stands. The enlarged waterway will be able to accommodate the entire VLGC fleet.

Chinese plastics producers are lining up to become major buyers of US LPG. There is a major shortage of propylene in China due to the growing demand for its use in the manufacture of high-quality plastics for consumer goods. The construction of propylene dehydrogenation (PDH) plants in China that will use US propane as feedstock has been identified as the optimum solution. Chinese firms have plans for nine such plants and it is estimated that the country will need 6 mta of propane feedstock from US suppliers by 2017. When all the plants are completed in 2016, China will account for 40% of global PDH capacity.

Although the Middle East as a whole remains the leading LPG export region by a considerable margin, increasing volumes of its gas output are being used as feedstock for its own expanding petrochemical production. The timely rise in US LPG exports is helping to compensate for declining Middle East shipments and to offset any potential market disruption. It is also generating more tonne-miles in delivering cargoes to customers, thus keeping VLGCs busy and ship owners happy.

Healthy VLGC freight earnings are expected to be sustained for the next two years, at the very least, due to close alignment between the newbuilding delivery schedule and the steady rise in the industry’s tonne-mile demand. Assuming an average vessel lifespan of 28 years, there will also be a number of older vessels taken out of service for recycling over the next three years.

In addition to the 44 VLGCs on order, ship owners also hold a considerable number of optional building berth slots. One dark cloud is the possibility that the ship supply/demand balance could be upset if the majority of the options held against the existing newbuilding orders are exercised.

The opening of the Panama Canal and the delivery of the ships currently on order will serve to reduce the upward pressure on freight rates some two years from now. However, the US shale boom will not come to a halt then and the momentum created by the country’s LPG export surge will carry the VLGC sector along for several more years. Furthermore, the trickle-down effect from buoyancy in the large ship segment will percolate throughout the entire LPG carrier fleet as the global LPG supply chain spreads its net.