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Asian LNG importers set for 60 per cent charter fleet boost

The LNG carrier fleet controlled by Asian importers is set to grow by almost 60 per cent during the next few years, as 39 ships on order are completed and added to the 67 vessels currently in service. An LNG World Shipping review of the region’s LNGC commitments shows that the newbuildings will boost the cargo-carrying capacity of the Asian LNG importer charter fleet to 16.2 million m3, from 9.9 million m3 today.

The rapid expansion of the fleet highlights the drive by the region’s buyers to exert more control over the LNG supply chain. The ability to load cargoes onto their own ships on a free-on-board basis, in combination with the increased flexibility inherent in today’s LNG sale and purchase agreements (SPAs), is enabling importers to save money and more closely match the demand requirements of their individual receiving terminals. The option of trading excess cargoes on the open market is an added bonus.

Asia is the world’s principal LNG market, as it has been for the five decades since the trade’s inception. According to figures compiled by the International Group of LNG Importers (GIIGNL), Asian nations purchased 191.6 million tonnes (mt) in 2016, or just under 73 per cent of the global trade in the product.

A great deal of purchasing power is inherent in this commitment, and Asian importers have benefited from the LNG oversupply, and hence low prices, in recent years. It is currently very much a buyers’ market.

Asian utilities have sought to further strengthen their bargaining position in recent years by forming alliances to negotiate contracts and operate ships.

The charter fleets of Asian LNG exporters, in contrast, have reached a level of maturity in recent years, and newbuilding orders have been limited to those necessary to replace older tonnage. Asian LNG exporters currently charter 50 LNGCs and have three further vessels on order.

Japan in the vanguard

Japan remains the leading importer out of Asia’s 10 LNG-buying countries and has been the world’s top destination for LNG cargoes for 45 years. The country’s 34 terminals received 83.3mt of LNG in 2016, a 2 per cent drop on a year earlier.

Although Japan is an established market and import levels are not expected to increase significantly in the years ahead, a number of existing, long-term SPAs will be expiring soon. Japanese utilities have been busy lining up alternative, new sources of supply, including from Australia and the US, and these are already beginning to replace volumes reaching the end of the agreed contract period.

Japanese importers will charter 25 LNGCs currently under construction and build their controlled fleet to 55 ships in the process. The 12 ships for Mitsui & Co and Mitsubishi Corp among the newbuildings are the first LNGCs ever to be taken on long-term charter directly by Japanese trading houses.

In March 2015, Tokyo Electric Power (Tepco) and Chubu Electric Power established their Jera joint venture to enable a co-ordinated approach to fuel procurement, investment in gas assets and the operation of chartered tonnage.

Jera’s LNG import volume was 35mt in fiscal year 2015, the largest among Japanese buyers and about 14 per cent of LNG purchases worldwide. The total put it slightly ahead of Korea Gas Corp (Kogas), the previous market leader. Jera has a charter fleet of 10 LNGCs in operation and four more on order.

The other leading Japanese LNGC charterers are Tokyo Gas, with eight ships in service, Osaka Gas, with seven, and Kansai Electric, with three. Tokyo Gas also has four ships under construction and Kansai Electric one.

Korea and China

Kogas accounts for well over 90 per cent of the 34.2mt of LNG imported by Korea in 2016. The volume was 2.3 per cent up on the previous year’s figure and represents a stemming of the tide, as the country’s purchases have been dropping in recent years.

Korea is another mature LNG market, and overall import levels are not expected to alter markedly in the coming years. Kogas charters 21 LNGCs from domestic owners to transport the bulk of the nation’s purchases, the oldest of which date from 1994, and has six newbuildings on order.

In early 2016 SK E& S emerged as Korea’s second LNGC charterer. The electric utility has a pair of 180,000m3 vessels under construction at Hyundai Heavy Industries for delivery in 2019 and service in lifting Freeport LNG cargoes.

China imported 27.4mt of LNG in 2016, a 37 per cent jump on the previous year’s level. If purchases grow at the same rate this year China will overtake Korea by the end of 2017 to become the world’s second largest destination for LNG.

Although China National Offshore Oil Corp (CNOOC), PetroChina and Sinopec, China’s three largest state-controlled energy firms, all operate LNG import terminals, only CNOOC and Sinopec charter LNGCs directly. CNOOC accounted for about 50 per cent of China’s imports last year.

CNOOC has been chartering vessels since 2008 when Dapeng Sun, the oldest of its seven LNGCs, was delivered. Sinopec’s chartering history began only last year but it will have a fleet with the same cargo-carrying capacity as that of CNOOC by the end of 2017 when four new ships being built at Hudong-Zhonghua have entered into service.

When the new ships are operational and bedded in on the charterer’s nominated routes, Sinopec will release two of the four ships it currently has on charter. These are BW Pavilion Leeara and BW Pavilion Vanda which have been taken on medium-term hires, until 2019.

Following completion of work for Sinopec, BW Pavilion Leeara and BW Pavilion Vanda will commence 20-year charters to Pavilion Gas of Singapore.

Further alliances

Asian LNG importers have not limited their alliances to their fellow countrymen. It is recognised that unified groups can exercise increased purchasing power and over the past year a number of supranational co-operative agreements have been provisionally inked.

The most notable is the March 2017 memorandum of understanding agreed between Jera, Kogas and CNOOC, the leading importers in their respective countries. Although the details of the co-operation have yet to be finalised, the participants have stated that they plan to jointly procure LNG, participate in LNG projects and manage LNG inventories and shipping requirements.

For years LNG buyers have been promoting the need for more flexible LNG contracts, especially when it comes to the destination clauses in the traditional take-or-pay contracts that restrict them from reselling or swapping cargoes. The Jera/Kogas/CNOOC alignment is regarded as a key step to empowering LNG buyers in respect of both procurement and destination clause flexibility.

The new clout of Asia’s charterers presents a challenge to LNG producers seeking to organise the financing required for a new liquefaction train. Success in future will depend on the extent they are willing to be flexible in the drive to find common ground with Asia’s gas buyers.
Source: LNG World Shipping

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