China’s LNG trading pattern to change with Qatar’s newbuilding order
Qatar Petroleum recently secured slots for building eight 175,000 cbm LNG carriers along with the option for eight additional vessels at China’s Hudong–Zhonghua Shipbuilding. The deal is reportedly worth $3 billion and the vessels are scheduled for delivery in 2024-25.
Qatar Petroleum is gearing up to book 120 newbuild slots at global LNG shipyards to cater to its planned North Field Expansion (NFE) project which will increase the country’s liquefaction capacity from 77 mtpa to 126 mtpa. The project has been planned in two phases with Phase -1 consisting of four liquefaction trains (33 mtpa) and Phase-2 with two liquefaction trains (16 mtpa). The first train of NFE Phase-1 is expected to commence operations in 2025.
The Qatar order is the largest of its kind in LNG shipbuilding history and is expected to take up 50-60% (based on expected 60-80 vessel order) of the global LNG shipyard capacity. South Korea’s three major LNG shipyards – Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI), Daewoo Shipbuilding and Marine Engineering (DSME) – along with China’s Hudong-Zhonghua were shortlisted by Qatar Petroleum in February 2020.
In terms of LNG shipbuilding, South Korean shipyards have more experience and higher technical expertise than shipyards in other countries. In the present orderbook of LNG carriers above 150,000 cbm, the three major South Korean LNG shipyards have 91 LNG carriers on order while Hudong-Zhonghua has just two. Therefore, the first order in the series being awarded to the Chinese shipyard was surprising, to say the least. However, we still expect a major part of the 60-80 vessel orders to be bagged by South Korean shipyards.
Qatar benefits from competitive pricing and opens doors to higher Chinese investment
We believe Qatar Petroleum was able to strike the deal at a competitive price of USD180 million per vessel given its strong bargaining position. This price is about 5% lower than the newbuilding price of similar vessels ordered in December 2019.
We believe Qatar Petroleum’s massive order for LNG ships at China’s shipyards may translate into investment by China-based companies in Qatar’s North Field expansion project. China will need 80% more natural gas by 2030 to meet its growing demand which can now be sourced from Qatar. We expect China’s LNG demand to grow at a CAGR of 7% during 2020-25 to 96 million tonnes.
Even with lower LNG spot prices, China imports around 82% of its LNG through long-term contracts with the balance met through spot or short-term contracts. Therefore, in order to meet the growing LNG demand in the country, China will look to secure more long-term cargoes in the coming years.
Meanwhile, we believe strengthening relations between Qatar and China will adversely affect US LNG export projects. These projects would have benefitted from supply deals with China given that the latter removed the previously imposed 25% tariff on US LNG.
In terms of vessel supply, Qatar’s order at China’s shipyard is expected to offset the lull in new orders for 2020 with speculative ordering drying up and project-linked ordering expected to be delayed to 2023-24.
Potential benefits for Nakilat
We expect Nakilat to benefit from Qatar’s mega LNG carrier order given Nakilat’s longstanding relation with Qatar Petroleum. As Nakilat has majority of its wholly owned Q-Flex and Q-Max vessels on longer-term charter with Qatar Gas (subsidiary of Qatar Petroleum), we believe some of the newbuilds will become part of Nakilat’s fleet, either as wholly owned or through a joint venture.