The lack of timely investments in building the LNG carrier fleet threatens market development and security of supply, which could materialize earlier than insufficient liquefaction capacity, Keisuke Sadamori, Director of the Office for Energy Markets and Security at the International Energy Agency, said earlier this week.
The Paris-based energy watchdog’s comments come against the backdrop of LNG carrier spot rates hitting record levels. The Pacific and Atlantic shipping rates have touched $170,000/day and $140,000/day respectively, and Atlantic and Pacific ballast rates remain steady at 125% and 150% respectively, according to S&P Global Platts data.
The IEA’s projections show that spare fleet capacity in the LNG market was sustained well above 15% between 2015 and 2018, but starts to decline sharply from 2019 onwards into single digits, and drops below zero by 2022-2023, indicating severe vessel shortages.
“Changes in the LNG market challenge the traditional LNG shipping business model,” Sadamori said on the sidelines of the LNG Producer Consumer Conference in Nagoya on Monday. He said current liquefaction projects led to many new vessel deliveries, which reach a peak in 2018, but this may not be sufficient for new supply by 2020.
Shipping investment has been under pressure as the banking sector has pulled bank due to sharp losses and write-downs incurred in the last decade as shipping companies reeled from heavy losses and oversupply. Rising interest rates and tighter money supply have raised concerns about new investment in LNG shipping.
“Under the move towards a more volatile and flexible business environment, the shipping industry must find new ways of mitigating credit risks to incentivize shipping investment,” Sadamori said.
US-China trade war
Sadamori said that the IEA was still unsure about the specific impact of increasing trade tensions between China and the US and the tariffs on US LNG, and was monitoring the situation.
However, he expects increased flexibility of the LNG market to absorb the negative impact from the difficult trade situation.
“The flexibility and liquidity of LNG markets in Asia has been progressing and developing and we are also seeing a larger role of portfolio players in the market,” Sadamori said.
LNG term contracts signed in 2017 show strong growth in short-term contracts of up to one year, with new buyers showing a preference for time flexibility over destination flexibility, according to the IEA. In general, the share of destination-free volumes is a growing trend, indicating the rapid development of the secondary LNG market.
“The development of this secondary LNG market in parallel with the traditional back-to-back agreements has been made possible thanks to the developments of the contract flexibility,” Sadamori said.
He said shipping alone will not be sufficient to offset supply disruptions due to the amount of time needed to redirect a cargo of LNG, which limits its effectiveness.
“Spot and flexible LNG has to be considered as a part of the broader range of tools, including network integration, storage capacity, fuel switching capacity in the power sector and demand side response measures,” Sadamori said.
Regions that have already implemented such tools, such as Europe, are in a better position to weather market volatility, but new importers like China are more exposed to these timeliness issues. This was seen last winter when the resilience of the integrated European natural gas market was evident, he said.
