Pranay-Shukla

Examining the impact of industry

trends on LNG shipping

Medium term outlook for LNG shipping market :

Why so much buzz!!

25 October 2011

Presented by:

Pranay Shukla

F.NMIS, MICS

© Drewry 2011

Drewry | Examining the Impact of Industry Trends on LNG Shipping 2

How the different shipping markets are faring

High returns in the LNG shipping market has enticed new shipowners into this niche

segment

o In May 2011, a Greek ship owner cancelled its VLCC’s on order at the DSME and converted

them into LNG vessels

o In September, a drybulk ship owner placed a contract for a LNG carrier at STX in exchange for

two Capesizes previously ordered

Assumptions: For all vessel sectors, IRR and payback calculated on 5 year old vessel prices and one year time charter

as in September 2011 . Trading life-25 years and scrap price -$550/ldt

0%

7% 7%

14%

18%20

1211

7 6

0%

4%

8%

12%

16%

20%

Tankers-VLCC Dry Bulk-

Capesize

LPG-82,000 cbm

f/r

Chemicals-

37,000 dwt

LNG- 147,000

cbm

0

5

10

15

20

25

No

of ye

ars

IRR (%) Payback Period (right)

© Drewry 2011


o Global LNG trade in 2010 stood at 212 million tonnes

o Out of total global LNG trade, share of Japan (which is the biggest LNG importer) was 32% and stood at

94 million tonnes

o In March, earthquake followed by tsunami in Japan crippled its nuclear power generation capacity

o On fear of radiations many of the affected as well as unaffected nuclear power plants were shut down

o About 80% of Japan's nuclear power plants still remains offline

o Soon after Tsunami, it was estimated that Japan will need 8-10 million tonnes of additional LNG, but it

appears that those figures were quite pessimistic

o Apart from Middle East and Pacific, Japanese utilities have even begun importing LNG from countries like

Norway

What has led to a sudden surge in LNG market

© Drewry 2011


LNG trade in the first half of 2011

o In 1H11, LNG trade

increased by 14%, over

1H10

o Significant increase in

imports noted from Asia

(14%) and Europe (15%)

o In 1H11, LNG imports into

Japan, South Korea, India

and UK contributed to more

than 75% increase in total

trade

o 82% of the increase in LNG

demand has been met by

increase in exports from

Middle East

14.71

8.93 4.90

0.98

-0.10

15%

121%

-1%14%

14%

-2

0

2

4

6

8

10

12

14

16

Global LNG

Trade

Asian

Imports

European

Imports

Middle

Eastern

Imports

Americas

Imports

Mill

ion t

onnes

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Absolute Change (million tonnes) % Change (1H11 vs 1H10)(right)

3.29

11.89

14.44

8%

34%

14%

0

2

4

6

8

10

12

14

16

Global LNG Trade Middle East exports Pacific Basin exports

Mill

ion t

onnes

0%

5%

10%

15%

20%

25%

30%

35%

40%

Absolute Change (million tonnes) % Change (1H11 vs 1H10)(right)

© Drewry 2011


LNG trade: expanding steadily

o LNG trade has grown

at a CAGR of 8%

during the period

2001-10

o A total of 23 importers

and 19 exporters

govern LNG trade

o Constraint on

liquefaction capacity

o Global liquefaction

name plate capacity

stands at 277 million

tonnes

o Regasification

capacity adequate

o Global regasification

name plate capacity

stands at 559 million

tonnes

0

50

100

150

200

250

300

350

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Bill

ion c

bm

Argentina Belgium Brazil Canada ChileChina Dominican Republic France Greece IndiaItaly Japan Kuwait Mexico PortugalPuerto Rico South Korea Spain Taiwan TurkeyUAE UK USA

Importers

0

50

100

150

200

250

300

350

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Billio

n c

bm

Algeria Australia Belgium Brunei Egypt

Equatorial Guinea Indonesia Libya Malaysia Nigeria

Norway Oman Peru Qatar Russia

Trinidad and Tobago UAE USA Yemen

Exporters

© Drewry 2011


Medium-term planned additions - LNG liquefaction and regasification capacities

o In next five years, around 75

million tpa of liquefaction capacity

is scheduled to be delivered

o Share of Australia is 76%

o Total regasification capacity u/c is

67 million tpa

o Share of Asia is 71%

o On and after 2015-16, Australia is

expected to increase its share in

the Asian LNG demand, which is

expected to be at the expense of

Middle East LNG exports

0

10

20

30

40

2011 2012 2014 2015 2016

Millio

n to

nn

es

Angola LNG Australia Pacific LNG EWC LNGGassi Touil Gorgon LNG, Barrow Island MLNG Dua-debottleneckingPluto LNG T1 Prelude FLNG Queensland Curtis LNGQueensland GLNG Train 1 Queensland GLNG Train 2 Skikda (Expansion)Wheatstone LNG

0

5

10

15

20

25

30

2011 2012 2013 2014

Mill

ion

to

nn

es

Singapore Mexico Japan Italy Indonesia India China

© Drewry 2011


LNG production and regasification capacities by 2015

o Global regasification capacity has grown at a CAGR of 6%, during the period 2001-10

o Global liquefaction capacity on back of Middle East, grew at a much faster pace of 9% during the same

period 2001-10

o By 2015, global liquefaction and regasification name plate capacity is expected at 340 million tonnes

and 626 million tonnes, respectively.

Forecast

0

100

200

300

400

500

600

700

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mill

ion tonnes

Liquefaction capacity Regasification Capacity

© Drewry 2011


LNG shipping demand by 2015

o LNG shipping demand has outpaced LNG trade

o In the last 10 years, LNG shipping demand grew at a CAGR of 11%, while LNG trade during the

same period grew at a CAGR of 8%

o Primarily due to increase in sourcing of LNG cargoes from long haul destinations

Forecast

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

0

100

200

300

400

500

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Bill

ion c

bm

mile

s

Bill

ion c

bm

LNG Trade LNG shipping demand (Right)

© Drewry 2011


LNG vessels

o LNG cargoes generally shipped in three different categories of vessel namely - Small ( less than

100,000 cbm), Conventional (110-177,000 cbm) and Large vessels (Q-Flex and Q-max)

o Majority of LNG cargoes carried on conventional vessels and is the most dynamic segment

o The current orderbook has only conventional LNG carriers in its list

0

50,000

100,000

150,000

200,000

250,000

300,000

1966 1976 1986 1996 2006 2016

Built year

cbm

Orderbook Fleet

All vessels on order are

conventional LNG carriers.

Purpose-built Q-flex and Q-max

carriers for Qatari projects

© Drewry 2011


LNG fleet by 2015

o LNG fleet at the end of September stood at 353 vessels (52 million cbm)

o At the end of September, LNG orderbook stands at 64 vessels(10 million cbm)

o LNG fleet at the end of 2015 is estimated at 416 vessels (in absence of any further order and

deletions)

Scheduled

-50

0

50

100

150

200

250

300

350

400

450

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

No

of ve

sse

ls

Deletions Scheduled deliveries Deliveries Fleet Start

© Drewry 2011


Leave No Gaps - Conventional LNG shipping

o Long-term charters up to 20-25 years, on fixed price term contracts

o Limited LNG shipping capacity-one of the constraints for the development of a spot market and the

temporary construction slippage of projects or trade optimisation have provided some excess

shipping capacity

o LNG importers had limited role in LNG vessel owning

o The success of this trade has been built on long-term sales contracts

o These have enabled investment in costly infrastructure and increasing economies of scale

o Risks have been shared - suppliers accepting the price risk and customers the volume risk

o However, demands from LNG shipping changing along with changes in the LNG trade

© Drewry 2011


Growth of short term LNG trade

o The short-term market took around 20% of the total LNG trade during 2010

o Of the 19 LNG exporting countries, 18 loaded at least one LNG short-term cargo during 2010

o Of the 23 LNG-importing countries in 2010, at least 22 countries were involved in importing at least one

short-term LNG cargo

o South Korea, the biggest importer of spot cargoes imported 129 short term LNG cargoes in 2010, up 104%

over 2009

o India who has been a significant spot buyer of LNG noted a decline in spot contracting of cargoes in 2010

0

5

10

15

20

25

30

35

40

45

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Mill

ion T

onnes

USA Europe Asia

Increase in

liquefaction

capacity due to

facility enlargement

Commissioning of additional

LNG liquefaction capacity

- 1997: Qatar Gas

- 1999: Nigeria LNG, Atlantic

LNG,RasLaffan

- 2000: Oman LNG

Spurt in US and

European imports

Increase in Asian

imports

© Drewry 2011


Spot LNG freight rates-Conventional LNG vessel

o Spot freight rates currently hovering above $110,000pd, up from $38,500pd an year ago

o Major oil companies as well as Rasgas/Qatargas absorbed any available spot vessel

o Insufficient tonnage available until mid-2013

o Nakilat is about to approve the overhaul of 45 of its largest tankers from 2012 to 2015 to burn

natural gas instead IFO

o Retrofit in Qatari vessels will exacerbate a shortage of ships and could stifle short-term trade

o In the short-to medium-term, spot freight rates expected to remain strong

Drewry short-term rates

0

20,000

40,000

60,000

80,000

100,000

120,000

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

US

D/d

ay

Drewry short-term rates

© Drewry 2011


Investment highly profitable at current long-term period rates

o At the end of September, average long-term period charter rate for a conventional vessel stood at

$90,000pd

o A major LNG shipowner fixed one of its newbuild vessels in September on a long-term charter

(extending up to 10 years) for a strong rate of $90,000pd

o At a long-term period rate of $90,000pd, the IRR turns out to be 10% and a payback period of 10

years

o Under construction and planned liquefaction plants will require additional vessel capacity on long

term

0

5

10

15

20

25

40,000 60,000 80,000 100,000 120,000

USD/day

No o

f years

0%

4%

8%

12%

16%

20%

Payback years IRR

IRR = 9% Payback

period = 11 years

© Drewry 2011


Vessel utilisation above 90%!

o One of the major LNG shipowner reported that its vessel utilisation in 2Q11 increased to 97% as

compared to 91% in 1Q11, that can be seen as a trend across the sector

o In the last one year, LNG shipping capacity has increased by just 2.3%

50%

60%

70%

80%

90%

100%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

0%

6%

12%

18%

24%

30%

Fleet Growth Rate (Right) Fleet utilisation

© Drewry 2011


o Two types of swaps-Physical & Time

o With increase in the number of portfolio players increase in the number of swaps

o Physical swap:- In order to minimize shipping distance, LNG cargoes can be moved from the

shortest available export destination

o Physical swaps have been helpful in meeting LNG demand at the earliest possible time

o Time Swap:- The cargoes can be swapped between importers located in two different regions,

depending on the demand conditions

o Swaps to help in easing shipping demand to some extent

Changing dynamics in LNG shipping & trade

© Drewry 2011


Spain

Malaysia

Oman

South Korea

Contract bound movement

Bintulu-Cartagena 7,303 miles

Al Qalhat-Inchon 5,656 miles

Swap cargo movement

Bintulu-Inchon 2,241 miles

Al Qalhat-Cartagena 4,229 miles

Physical LNG swap

© Drewry 2011


Japan

South Korea

Malaysia

December

November

Scheduled Delivery Actual Delivery

High Korean LNG

Demand in November

Time swap

© Drewry 2011


Current LNG Fleet demolition schedule

o In next five years, 14 LNG vessels will cross 40 years of its trading life, which implies these many

vessels would be required as replacement tonnage

o This will further tighten vessel supply

Scrap Schedule of LNG fleet - September 2011

14 25 9 626 32

89

261

0

100

200

300

<= 5 years <= 10

years

<= 15

years

<= 20

years

<= 25

years

<= 30

years

<= 35

years

<= 40

years

No of vessels

© Drewry 2011


NB price still at a discount

o In last couple of years, LNG newbuild price (inflation adjusted) has softened from a high of $212

million in 2009 to $202 million in September 2011

0

50

100

150

200

250

3001980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Sep-1

1

US

D m

illio

n

NB Price Inflation adjusted NB average price (2001-2010)

© Drewry 2011


Where to order?

Shipyard Capacity-Limited but increasing

European Yards

C.N.I.M. – France(1981)

Kvaerner Masa – Finland (1997)

Sestri-Cantiere – Italy(1998)

De l'Atlantique-France(2007)

Japanese Yards

NKK (2000)

Mitsui(2008)

Universal S.B.(2008)

Koyo Docks(2010)

Mitsubishi(2010)

Kawasaki(2011)

Korean Yards

Hyundai(2009)

Hanjin(2010)

STX S.B.(2010)

Samsung (2011)

Daewoo (2011)

Chinese Yard

Hudong-

Zhonghua (2009)

o European and American yards lost out competition to Far Eastern yards

o In the current fleet, South Korean yards have built a total of 191 LNG vessels( out of the total 353)

o Japan comes a distant second with 96 vessels, followed by French yards which have built 27 vessels

USA Yard

Gen Dynamics (1980)

© Drewry 2011


Far East shipyards dominate orderbook

Orderbook by shipyard Orderbook by builder country

24%

15%

16%

38%

3%

2%2%

Daewoo H.I. Hudong S.B. Hyundai H.I.Kawasaki H. I. Mitsubishi H.I. Samsung H.I.STX S.B.

15%

3%

82%

China Japan South Korea

o At the end of September 2011, the LNG orderbook stood at 62 vessels

o South Korea is leading the pack with 51 vessels followed by China(9 vessels) and Japan (2

vessels).

© Drewry 2011


Far East yards more competitive

Hourly compensation in manufacturing, 2009 Global steel prices

0

200

400

600

800

1,000

1,200

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Jun-1

1

US

D/m

t

1.58

14.20

30.3633.53

53.89

0

10

20

30

40

50

60

China* South

Korea

Japan USA Norway

US

D p

er

ho

ur

o European shipyards lost out due to cheap labour cost and abundant supply available in the Far East

o In the Far East itself, LNG shipbuilding has moved from Japan to South Korea

o Will China be able to take up the share from South Korea

© Drewry 2011


New entrants testing waters

o Alpha Tankers & Freighters became the third Greek newcomer to order an LNG vessel this year,

contracting a 160,000 cbm vessel at STX Shipbuilding for delivery in 2015

o Prior to Alpha Tankers & Freighters, Cardiff Marine and Thenamaris Ships Management were the new

Greek shipowners to foray into LNG shipping

o In the first nine months of 2011, out of total 46 vessels ordered, 30% alone have been ordered by new

entrants

Shipowner Confirmed Vessel Orders Remarks

Alpha Tankers & Freighters 1 New entrant into LNG Shipping

Awilco LNG 2 New entrant into LNG Shipping

Thenamaris Ships Management 3 New entrant into LNG Shipping

Cardiff Marine 4 New entrant into LNG Shipping

China Shipping Development/Mitui OSK Lines 4 New entrant into LNG Shipping

Excelerate Energy LP 1 Old LNG shipowner

NYK Line 1 Old LNG shipowner

BW Gas 2 Old LNG shipowner

Hoegh LNG 2 Old LNG shipowner

Sovcomflot 2 Old LNG shipowner

Dynagas 4 Old LNG shipowner

GasLog Ltd. 4 Old LNG shipowner

Maran Maritime Gas 7 Old LNG shipowner

Golar LNG 9 Old LNG shipowner

© Drewry 2011


Conclusions

o LNG shipping market has moved out from a difficult period faced in 2010 to good times

o Middle East to Asia will continue to remain a major LNG trade route

o As Australian liquefaction capacities comes online, Australia to Far East trade route to gain

prominence

o Short-term LNG trade to increase share in total global trade with the entry of new players having

LNG portfolio across the globe

o Vessel availability to remain tight, especially in the spot market as majority of LNG vessels ordered

in the past were dedicated to some specific projects

o In 3Q10, around 8-10 vessels were available in the spot market, but in 3Q11 any available tonnage

was acquired immediately by the big oil gas majors which has resulted in spot freight rates above

$100,000/day mark

o Spot freight rates not expected to go back to levels seen in 2010 in the short-to medium-term

o Period rates also expected to remain strong

© Drewry 2011


UK Office Drewry 15-17 Christopher Street London EC2A 2BS,United Kingdom Telephone: +44 (0)20 7538 0191 E-mail: [email protected]

India Office Drewry 209 Vipul Square, Sushant Lok-1 Gurgaon 122002, India Telephone: +91 124 40476 31/32 E-mail: [email protected]

Singapore Office Drewry 5 Shenton Way #33-02, UIC Building, Singapore 068808 Telephone: 65 6220 6923/9187 5990 E-mail: [email protected]

We are a privately owned and headquartered in

London, with offices in India and Singapore

with added support from an extensive network

of overseas representatives.

Drewry was founded in 1970 to provide

independent information and advise to the global

maritime industry. Since then we have worked

with over 4,000 clients in more than 100 countries

Global

© Drewry 2011


Thank you for your attention

Pranay Shukla

Senior Research Analyst

[email protected]

www.drewry.co.uk

+91 124 4974961

Pranay-Shukla

Documents

o lng trade

lng imports

o global lng trade

lng vessels o

lng market

lng trade o constraint

dwt lng

lng carrier