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A Flickering Flame in a Bleak Winter Landscape?

Saturday, 18 February 2012 | 00:00
A weak start to the year in freight rates and trouble in the Atlantic-based economies has left shipping investors feeling a bit shaky. But there are always bright spots and todays winter warmer is the LNG business. With oil over $100/bl and climate regulations pushing for clean fuel, the LNG business, with its sky-high rates is an oasis of hope. LNG Demand LNG has been around for 50 years and has got itself the reputation as a high roller investment that does not always deliver. The first big, multi-ship, deep sea project was developed flawlessly by Shell in Brunei and commissioned in 1972. Soon after it was widely expected that the United States would need about 80 ships during the coming decade to meet the shortfall in domestic gas production. Ships were ordered and reception terminals built, but changing energy policy torpedoed the market and for the next 20 years LNG was mainly shipped to Asian importers.
Big Potential, Bumpy Ride
Today the LNG trade has reached 236 Mt, the same as coking coal. Despite its bumpy start, over 25 years it has grown at 6.7% pa, making it the fastest growing trade after containers (8.2% p.a.). In a world desperate for clean fuel and diversified energy, and with vast reserves of stranded gas, LNG has never looked more interesting. If growth continues it will create demand for over 40 ships a year to 2020.
Small Orderbook
In addition to this demand story, LNG has another attraction. Its orderbook is only 17% of the fleet (58 ships of 53.3 m³). Admittedly LNG has a patchy history of delays in delivering export capacity to the market. For example, the slippage of Qatari projects into 2010/11, after the delivery of vessels, gave investors a pretty rough time. But with Non-OECD growth putting pressure on energy prices and regulators upping the ante for clean fuel, it still looks a good bet for a gambling man.
Gambling on Gas
And that really is the issue with LNG. Its not for the faint hearted and the stakes are rising. After decades when the industry was about long leases with small margins, recently the market has edged away from the straitjacket of time charters towards a shorter term charter market for the vessels. Critical mass was always a problem, but today the fleet is 374 vessels (see graph) and when the orderbook is delivered it will reach 428. The VLCC market operated as a spot business with a 400 ship fleet for 20 years. Of course a diverse spot market depends on the availability of import facilities, but gradually that side of the logistics chain is gathering momentum too.
White Heat of Technology
So there you have it. The LNG business is on a roll. It is number two in the growth stakes, and for once has an orderbook which barely covers the likely immediate needs of the busi-ness. Thats something of a rarity in today's market. Have a nice day.
Source: Clarksons
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