Oh to Be Big in LPG, and VLGCs, Now That Shale Gas Is Here

Oh to be Big in LPG, and VLGCs, Now That Shale Gas is Here

The shale gas boom in North America is helping drive both returns for very large gas carriers (VLGCs) and interest in VLGC newbuildings towards record highs. Freight rates in the first five months of this year jumped by 75 per cent as charterers sought out the tonnage needed to move the growing volumes of liquefied petroleum gas (LPG) coming onto the market.

Falling in the 75-85,000m3 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 150-vessel VLGC fleet transports LPG as fully refrigerated cargoes.

Today the Middle East, traditionally the leading exporter of LPG by a wide margin, is using more of its gas output as feedstock for its own expanding petrochemical production. The rise in LPG exports from the US Gulf has come at just the right time as it is helping to compensate for falling Middle East shipments and offset any potential market disruption. It is also generating more tonne-miles, thus keeping VLGCs busy and shipowners happy.

Although some of the freight rate buoyancy recorded earlier in the year has eased slightly, average monthly earnings for VLGCs on 12-month time charters are still expected to clear the US$1 million mark this year. This is about 7.5 per cent higher than the 2012 average and 20 per cent above the breakeven mark. Spot rates have been as much as 50 per cent higher at various times over the first half of 2013.

The development of the newfound unconventional oil and gas resources in the US, much of which is rich in natural gas liquids (NGLs), is impacting the global energy and petrochemical industries. The increasing output is giving rise to rebounds in US chemical manufacturing and exports of refined products and LPG.

After a decade in which LPG imports outweighed imports, the US became a net exporter of LPG once again in 2011 and seaborne shipments are forecast to grow strongly in the years ahead. By the end of 2012 LPG export cargo loadings in the US had reached the 5 million barrels per month (bpm) level, about 50 per cent ahead of a year earlier.

Propane accounted for 90 per cent of this traffic and butane 10 per cent. With propane in Houston now costing about 60 per cent of that in Japan and the US market for propane currently oversupplied, it is not difficult to appreciate the overseas interest in US product.

Approximately 90 per cent of the US LPG export cargoes are shipped from Gulf Coast terminals, primarily to Latin America and Europe. Existing Gulf LPG terminals are being expanded and new facilities are being planned to cope with the growing export volumes. The terminal expansion projects are set to double the US LPG export capability, to 12 million tonnes per annum (mta), by 2015. Not surprisingly, Asian buyers are becoming increasingly interested in the VLGC cargoes originating in the US.

The opening of the enlarged Panama Canal in early 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 per cent of the fleet, are able to utilise the Canal as it stands. The enlarged waterway will be able to accommodate the entire fleet.

Healthy VLGC freight earnings are expected to be sustained for at least the next two years due to the relatively small number of newbuildings entering into service over the period. In capacity terms the global VLGC fleet is set for net growth of about 12 per cent over the 2013-14 period, based on a vessel lifespan of 28 years. This is broadly in line with the anticipated increase in seaborne movements of LPG.

However, the unfolding attractiveness of the VLGC market has prompted a surge in newbuilding orders over the past year, including by some shipowners new to the sector. Shipbuilders currently hold contracts for a reported 35 VLGC newbuildings and many of the latest wave of orders come with options for further vessels attached. The level of contracting has been so brisk that the world fleet is set for another spurt in net growth in 2015-16, of getting on for 15 per cent at the very least.

Whether the continued growth in LPG production is going to be enough to keep a rapidly expanding fleet fully occupied and enjoying healthy rates of return beyond 2015 is a moot point. Industry watchers are urging constraint in deliberations on further newbuilding orders on the grounds that any additional VLGCs contracted at this stage would lead to overtonnaging and a fleetwide rates collapse.

Notwithstanding the threat of another bust cycle, bold shipowners see the current market situation as a golden opportunity. VLGC newbuilding prices are at historic lows and shipyard berth slots for early deliveries are available.

Furthermore, China is emerging to challenge the traditional dominance of leading Korean and Japanese shipyards in VLGC construction. Orders have recently been placed for the first VLGCs to be built in China, at very attractive prices.

Shipowners opting for new tonnage stand to gain in other ways, to the extent that the temptation to phase out older tonnage sooner rather than later is gaining ground. Today’s newbuildings are more eco-friendly than existing VLGCs, most notably in terms of fuel consumption.

Embracing the latest marine engine technology will result in reduced fuel bills and further savings will be gained through the application of improved hull lines, modern antifouling coatings and more efficient propeller/rudder arrangements. With fuel now accounting for over 50 per cent of operating costs, shipowners are more willing than ever to consider investments in measures that will reduce lifecycle costs.

Fleet renewal and fleet creation with fuel-efficient, high-quality VLGCs that are claimed to achieve savings in fuel costs of 15 per cent makes more sense than ever before.

[mappress]

BIMCO, August 30, 2013