13-08-2016

LPG shipping retains strong fundamentals

LPG

Set for charter to Borealis later this year, Navigator Aurora will be able to lift 20,000 tonnes of ethane
Despite the recent drop in freight rates, gas carriers of all sizes are handling expanding trade flows and ethane is emerging as a new gas ship cargo

Although freight rates have fallen across every sector of the LPG shipping fleet so far this year, the industry’s fundamentals are still basically sound and shipowners are confident of a sustained earnings rebound by the end of the year.

It also must be remembered that the declines, especially in the large ship segment, have been from near record highs.

The good times enjoyed by owners of LPG and petrochemical gas tankers in recent years are due primarily to the US shale gas revolution. Fractionation of the natural gas liquids (NGLs) brought to the surface across the country have made available unprecedented new volumes of competitively priced propane, butane and ethane.

Even after allowing for their use as cheap feedstock in a range of new US petrochemical plants, the surging product flows are over and above what can be utilised domestically. Within the space of a few years shale gas has enabled the US to become the world’s largest exporter of LPG and to launch overseas shipments of ethane, a new liquefied gas carrier cargo.

VLGC phenomenon

The fleet of very large gas carriers (VLGCs) of 75,000-85,000m3 has grown at an unprecedented rate in recent years. As of 1 July 2016 there were 234 of these fully refrigerated LPG carriers in service and 52 on order.

The VLGC fleet has expanded in response to the rising volume of US Gulf shipments, healthy Middle East exports and a strong demand for LPG, especially in Asia. VLGCs transport the vast majority of global seaborne trade in LPG, which, following 10 per cent growth in 2015, now stands at approximately 85 million tonnes per annum (mta).

Middle Eastern countries, notably Qatar, Abu Dhabi and Saudi Arabia, export an aggregate 35 mta. While this volume has remained relatively stable in recent years, shipments from the US have skyrocketed, climbing from 10 mta in 2013 to 18 mta last year.

The US added a new dimension to its LPG export capability in March when the 78,700m3 BW LPG vessel BW Denise became the first VLGC to load cargo at a US east coast terminal. The 44,000-tonne shipment was taken onboard at the Sunoco Logistics-operated Mariner East facility at Marcus Hook near Philadelphia.

Sunoco Logistics has also been active in the US Gulf, opening its Mariner South terminal at Nederland, Texas, the region’s third LPG export terminal, in February 2015. With a capacity of 5.8 million mta, Mariner South complements the 15.5 mta Enterprise Products Partners (EPP) and 6.3 mta Targa Resources terminals on the Houston Ship Channel.

A fourth US Gulf LPG export terminal capable of handling VLGCs is due to be commissioned by Phillips 66 alongside its Freeport, Texas oil terminal during the third quarter of this year. The company expects to load 12 VLGCs per month at the 6 mta facility.

The recent opening of the enlarged Panama Canal has made it possible to cut westbound US Gulf/Asia voyage times from 45 days to 25 days. The link will benefit Asian customers by allowing US LPG exports to compete more directly with those from the Middle East.

The original Panama Canal locks are able to accommodate LPG carriers of up to around 75,000m3, or about 10 per cent of the VLGC fleet. In contrast all VLGCs can utilise the new, larger locks.

The percentage of Asia-bound US cargoes that will utilise the expanded link remains to be seen, as a VLGC transit fee approaching US$200,000 and the possibility of extended waiting times for the new locks could act as deterrents.

VLGC returns

Although 35 new VLGCs were commissioned in 2015, only 14 had been delivered by August. The unprecedented levels of LPG produced for export in combination with a balanced VLGC fleet drove spot rates for such vessels to near record highs of US$3.7 million per month by July last year.

Thereafter, the pace of VLGC deliveries picked up while the demand for LPG tonne-miles began to ease. Following the 21 VLGCs completed in the last five months of 2015, 32 of the 46 vessels due for handover this year had entered into service by 1 July. This tonnage influx, which equates to a 30 per cent increase in the VLGC fleet over the past 12 months, had driven

VLGC spot rates down to US$1.7 million a month by January and as low as US$405,000 a month by July.

New VLGC orders placed in 2015 totalled 29, comprising primarily of vessels of 84,000m3 but including eight with capacity of 78,000m3. The latter vessels will be built to an upgraded Panamax design to enable them to transit the old, established Panama Canal locks with the largest possible volume of cargo.

Only four VLGCs were contracted during the first half of this year, and new ordering is likely to remain subdued for the rest of the year and into 2017 due to the lower freight rates and limitations on credit availability. At the same time completion of the 52 VLGCs on order is scheduled to take place in an orderly fashion through 2018 – and today’s depressed freight rates will accelerate recycling of older vessels.

Also supporting the controlled return of a balanced VLGC fleet and continued high fleet utilisation rates is the steady rise in US LPG exports. Some forecasters believe US exports will total 23mt this year, 28 per cent up on-year.

VLGC owners see seasonal demand fluctuations and geographic LPG price spreads to be in their favour. Disparities in regional LPG prices that encourage shifting long-distance trade flows and absorb excess shipping capacity should strengthen in the months ahead.

Smaller gas carriers

The various smaller gas carrier segments have also suffered declines in spot market rates during 2016, although to nothing like the same extent as the VLGC fleet. None of the other fleet segments has been expanding as rapidly as the VLGC portfolio.

The July 2016 rates for 38,000m3 medium gas carriers (MGCs) were about 40 per cent down on those in January and those for handysize ships of 22,000m3 had dropped 33 per cent. The demand for semi-pressurised/fully refrigerated (semi-ref) ethylene carrier tonnage has remained relatively strong and spot rates for 12,000m3 vessels of this type had sagged by less than 15 per cent over the first half of 2016.

Returns for fully pressurised LPG carriers providing European coastal distribution services are down by a similar margin but those on Asian coastal duty have suffered hardly any rate drops in 2016.

Ethylene

Ethylene is a major petrochemical building block and the ethylene-capable fleet of gas carriers has grown over the years to cover the long-distance balancing movements of the product.
Plant outages and arbitrage opportunities are key drivers of ethylene shipments and, although there is an element of arbitrariness to the trade, the sheer scale of global ethylene production ensures relatively steady employment for LEGCs. The ability of these semi-ref ships to carry LPG and a wide range of chemical gases further supports fleet utilisation.

The liquefied ethylene gas carrier (LEGC) fleet stands at 160 semi-ref vessels in the 1,500m3-37,500m3 size range. These vessels transport approximately 6 million tonnes of ethylene each year, equivalent to only 3.5 per cent of world ethylene production.

Until recently, the largest LEGCs were vessels of 22,000m3 but the pioneering construction of semi-ref ships also able to carry ethane has added a new dimension to the fleet. Named at the Jiangnan yard in May 2016 and the first of four 37,500m3 ethane carriers for Navigator Gas, Navigator Aurora is the largest ethylene-capable ship yet built.

Quite aside from the influx of this new generation of ethane/ethylene carriers, the LEGC orderbook in recent years has reflected the general preference for larger ships in the drive to achieve economies of scale in ethylene transport.

From a ship numbers point of view, the LEGC fleet is now in a stable patch, with older, smaller vessels sent for recycling being replaced by similar numbers of newbuildings with higher-cargo-carrying capacities. During 2015 eight LEGCs were delivered while five were scrapped. Only one ethylene carrier was ordered.

Enter ethane

Ethane, a major feedstock for ethylene production, is the new gas carrier cargo kid on the block. Previously limited to a couple of low-volume North Sea trade routes in small, ethylene-capable ships, seaborne ethane traffic is now going deepsea thanks to surplus product from US NGL production.

A total of 30 semi-ref and fully refrigerated ethane carriers in the 27,500m3-87,000m3 size range have been ordered in recent years. The first five, comprising Navigator Aurora and four 27,500m3 Dragon-class vessels for Evergas, are already in service.

Sunoco Logistics commissioned the first US ethane export terminal, also at Mariner East at Marcus Hook, at the end of 2015. In its first phase the ethane terminal has an export capacity of 0.8 mta. Subject to achieving the necessary pipeline construction permits, a second ethane train at Marcus Hook will be completed early next year, boosting the throughput potential to 1.4 mta.

A larger ethane export terminal is being built by Enterprise Products Partners (EPP) at Morgan’s Point in Texas. Scheduled for completion in third-quarter 2016, the facility will be capable of loading up to 4.1 mta of ethane initially, building to 7.6 mta at a later date.

Low production costs make US ethane exports competitive as petrochemical feedstock globally, despite the current depressed prices of crude oil and its derivative naphtha, an alternative for the chemical industry. Optimists believe overseas shipments of US ethane could reach the 15 mta level by 2020.

Source: LNG World Shipping

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