LNG sector in a ‘perfect storm’

Thursday, 05 March 2020
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In recent results presentations, leading LNGC players summed up the current market predicament.

For example, in its fourth quarter report, Awilco LNG summed up the current state of play by saying that LNG production grew strongly in 2019 but demand is now unable to keep up.

As a result, global gas prices are under pressure and in addition to being at all-time lows, have also converged between the main basins, thus reducing tonne-mile demand.

Although increasing LNG volumes are expected to continue to drive tonnage demand, shipowners may find it challenging to secure work and earn higher charter rates in the near term, due to the current muted end-user demand, which has been exacerbated by the Covid-19 outbreak.

Gas demand from China’s industry and power utilities, the world’s second largest LNG importer last year, has reportedly been reduced by 10-14% thus far in 2020.

During the middle of February, natural gas was priced at around 25% of oil on an energy equivalent basis. In the longer term, low prices and the growing supply of molecules is expected to support growth in demand for natural gas, compared to other fossil alternatives.

More than 110 mill tonnes per annum of new LNG production capacity under construction is expected to come onstream in the next five years.

Tonnage demand and supply appear balanced going forward, as about 50% of the new production capacity is being built in the US, which depending on shipping distances, will underpin demand for LNGCs above the current fleet and orderbook, Awilco said.

Over the same time period, about 75 smaller and less economical steam LNGCs are expected to come off long term charters, as modern vessels will have an economic advantage as replacement tonnage.

Volatility forecast

However, periods of volatility and seasonality should be expected, the LNGC owner concluded.

In another earnings statement, GTT lowered its forecast for new FSRU orders over the coming decade.

GTT now predicts that containment system orders for new FSRUs will total between 10-20 units during 2020/29, down from earlier forecasts in July last year of 30-40.

This reduction is based on a greater likelihood of older steam driven LNGCs being converted into FSRUs, as they come off charter.

Due to limited vessel scrapping, there could be ample availability for conversions, GTT said.

Höegh LNG said that given the strong increase in liquefaction capacity coming online in the coming years, LNG prices are expected to stay low for the foreseeable future.

As Covid-19 seems to have temporarily reduced volumes of LNG imported to China and coupled with higher Asian winter temperatures, and low LNG prices closing the inter-basin arbitrage, LNGC market rates have felt a downward pressure, the company said.

Øystein Kalleklev, Flex LNG Management CEO, commented: “Due to the uncertainty and disruptions created by the coronavirus and associated low gas prices, we have elected to be cautious by maintaining a $0.10 dividend for the fourth quarter, and for the time being rather preserve liquidity, which stood at close to $130 mill at year-end.

“This gives us a comfortable financial position to handle the current market situation. While the freight and gas markets are currently challenging, LNG continues to be a long term story with expected annual growth of around 3 - 4% for the next two decades, as natural gas, and to greater extent LNG, is the transition fuel for a cleaner and more sustainable future,” he said. 

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