Ship Shape in 2017:  Older LNG carriers to the rescue

Ship Shape in 2017:  Older LNG carriers to the rescue

6th January 2017

2017 brings with it both challenges and opportunities for the natural gas sector, which was summarized in December.  In short, GCA expects that the global gas market, of which North America is now a fully paid up member, will be driven by three main factors this year which will significantly influence every gas related investment decision, whether it be drilling in the Haynesville or building a Methanol plant in Africa.  These reflect the impact on prices of the current over-supply situation, the emergence of new thinking, players and opportunities in the LNG market (buyers and producers), and a spike in the conversion of older LNG carriers into regas (and power generating) units.

Onshore in the US, the rig count increased 6 this week bringing the total to 641, four above the 637 a year ago.  This represents an average gain of 2% per week over the past ten weeks, a trend that should continue with WTI above US$50 per barrel.  

Natural Gas

With the US ramping up LNG exports and Australia adding yet further to its capacity in 2017, global gas supply will continue to run well ahead of demand, affecting prices especially for the increasing volumes of short to medium-term trades.  However, every cloud has a silver lining and in the case of gas that is manifesting itself as a steady line-up new LNG importers who are all seeking a quick entry into this world of lower cost gas.  This is fueled also by regulatory developments on SOx and NOx emissions that are helping phase out HFO, and some blends of higher Sulphur diesel in many countries.

As LNG prices have fallen, whether oil indexed or based on one of the ever increasing number of price formulations that depend on established hubs such as Henry Hub or NBP, the number of new LNG importers has risen dramatically, with over a dozen new buyers emerging.  Since spot prices fell below US$8/MMBtu Egypt, Jordan and Pakistan have all benefitted as emerging gas importers, and 2016 saw additional demand from Columbia, Ghana, and Puerto Rico.

Perhaps most significantly, this blend of motivated LNG sellers, and emerging LNG buyers is starting to drive new thinking, whether it be around pricing, contract terms, project structuring or technology employed.  Interestingly, while the global gas capitals of London and Singapore have retained their historic perspectives on the market, much of the innovative thinking is a product of US-based LNG companies.  This reflects new players bringing with them features more at home in the commoditized, highly liquid nature of US gas market to wider stakeholders, many of whom are keen to try new solutions and the industry is having to rethink some of the old “received wisdom” as a result.

One area that has come to prominence over the last few months, and which promises to be a strong theme for 2017, is the conversion of older LNG carriers to achieve a fast track, low cost avenue for aspiring gas importers.  The numbers speak for themselves.  With charter rates for older, steam driven carriers hovering around the US$20,000/day level for several months now, sometimes payable only for the loaded leg of the journey, many of those older vessels have little or no prospect of future useful economic life, despite being fully serviceable.  With conversion costs of less than US$100m, usually involving the addition of extra on-board power and deck mounted vaporisers, for some of these ships a new life as a floating storage and regasification unit (FSRU) remains the only alternative to being broken up.

Although life extension capex can be substantial for some older vessels there are still many ships available that remain well within their design life and for a new importer looking for a quick, low cost solution a converted carrier is a compelling proposition.  While some companies such as Golar have been pioneering conversions for several years (for both FSRUs and Floating LNG), there is currently a wave of new entrants to the conversion market such as Hoegh LNG, who announced their entry into the conversion market last year, and Gaslog, who ordered some of the plant required to convert one of their ships back in December.  Earlier this week Woodside highlighted the benefits of conversion to save time and cost, as part of a wider move towards more innovative, flexible LNG projects that they see as the future for the sector, and speculated that this was something they, too, may consider.

This more creative approach to smaller scale, more flexible and innovative LNG opportunities, fueled by the entry of significant numbers of new players who don’t respect the traditions of what has up til now been a slow moving industry, is clearly starting to build real momentum.  This will be a feature that will be updated and highlighted in this forum during the coming year.

Highlights from EIA’s Energy Outlook 2017  

The EIA indicates in its energy outlook 2017 that the US becomes a net energy exporter by 2025.  US crude production rebounds in late 2017 early 2018 from recent lows; with US consumption flat to down compared to recent history, net crude and petroleum product as a percentage of US product supplied is forecasted to decline in the reference case.  The US becomes a net energy exporter as petroleum liquids imports fall and natural gas exports rise.

Notwithstanding low and (expected) stable natural gas prices, US natural gas production is forecast to increase, supporting both higher domestic consumption and natural gas exports.  New electricity generation capacity is forecast to see only modest demand growth; it is the retirement of older, less efficient fossil fuel units that is the primary driver for demand.  The future generation mix is sensitive to the price of natural gas and the growth in electricity demand.  This is entirely consistent with the gas/LNG market themes highlighted above.

Perhaps most dramatically, the U.S transportation energy consumption is forecast to peak in 2018 in the reference case; rising fuel efficiency outweighs increases in total travel and freight movement.  Light tight oil is forecast to dominate US crude production growth; while other oil production will continue to yield significate volumes that is forecast to enter terminal decline by 2020.    

Weekly Recaps

Oil Drilling Activity

The total number of active onshore rigs increased to 641.  Despite the “bull run” since May 2016, when compared to a November 2014 figure of 1,876 active rigs, the current level is still 66% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 340 (up 3 last week), with Permian up 3, Eagle Ford and Williston flat.

Total US rig count (including the Gulf of Mexico) stands at 665, up 7 last week, with rigs targeting oil up 4.  The horizontal rig count increased to 534, up 2 last week.

Oil Price

Brent, the global benchmark for oil, was up $0.47 to US$57.20 a barrel, reflecting a gain of 0.83% on the week.

WTI crude rose $0.45 to US$54.15 a barrel, up 0.84% on the week.

US Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 16.7 million barrels per day, with refineries at 92.0% of their operating capacity last week.  This is 132,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.0 million, down 0.2% from a year ago.  Total commercial petroleum inventories increased by 6.1 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 4,000 barrels to 8.77 million barrels a day.  The Lower 48 crude production now stands at 8.241 million barrels per day, flat last week.

US crude imports averaged about 7.2 million barrels per day last week, a decrease of just under 1 million barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, 0.5% above the same four-week period last year.

Crude oil inventories decreased 7.1 million barrels from the previous week and remain at historically high levels.  The crude stored at Cushing (the main price point for WTI) was up 0.9 million barrels; total storage is 67.5 million barrels (~75% utilization).

Authors

Ship Shape in 2017:  Older LNG carriers to the rescue

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
Ship Shape in 2017:  Older LNG carriers to the rescue

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Ship Shape in 2017:  Older LNG carriers to the rescue

Bob George

Global General Manager - bob.george@gaffney-cline.com

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