'The Seaborne Transportation Of Liquefied Natural Gas 1977-1985 —Trades, Costs And Revenues'

The expected boom in LNG shipping, which has been forecast consistently during the past decade or more, remains as far from being realized now as it has ever been. This generalization holds despite 1977 having emerged as a peak year for interest in LNG shipping, with both the press and the shipping industry avidly reporting any development in this sector of energy transportation.

Most of the interest in 1977 focused on expectations for future LNG trades and their shipping requirements. The latest survey, "The Seaborne Transportation of Liquefied Natural Gas 1977-1985 —Trades, Costs and Revenues," from HPD Shipping Publications, has in the light of 1977 developments thoroughly analyzed the mid-1977 existing and potential future LNG trades and their shipping requirements. This analysis pays especial attention to the comparative transportation costs and revenues a s s o c i a t e d with LNG shipping.

Some of the most notable LNG shipping d e v e l o p m e n t s in 1977 suggest an improving and an encouraging market outlook for LNG tankers by the early 1980s.

Just one example was the announcement by Kockums, the financially troubled Swedish shipbuilding group, that it was going ahead with the construction for stock of two 133,000-cubic-meter carriers at a total cost of at least $250 million. This decision to build for stock was taken on the strength of the hoped-for e a r l y e m p l o y m e n t of the two newbuildings soon after their completion scheduled for 1979. However, the Drewry analysis shows that this faith in the early employment potential for LNG carriers was unfounded and now seems to have rebounded on Kockums, which faces the prospect of financing lay-up expenses for at least three years on top of the extremely high capital charges on the two ships. Kockums is not alone in this, however, and other owners with charter-free, or chartered but inactive, LNG ships are confronted by the same bleak outlook.

The Drewry analysis of the LNG carrier market shows that in 1977, the expected boom in LNG shipping was still some five years in the future, i.e., LNGC supply is forecast to stay in excess of demand until some time in 1982, when it will balance. The implications for the LNG trades are that from the mid-1977 base of existing contracted trade, the volume of seaborne trade in LNG will treble by end-1980, it will increase by between five and almost seven times by end-1985, and if all currently mooted projects materialize, has the potential to multiply by almost 12 times sometime beyond 1985. The analysis also quantifies the forecast LNG carrier supply / demand disequilibria at each year end during the period 1977-1985 by a comparison of the known shipping supply — based on the existing LNG carrier fleet plus the presently scheduled newbuilding fleet of LNG carriers— with the shipping demand generated by the forecast LNG trades. Consequently, a continuation of the large LNG carrier surplus apparent at mid-1977 is forecast until 1982—the apparent surplus at mid-1977 was equivalent to 52 percent of the then existing fleet, but the actual oversupply was greater than this because the LNG projects in operation were f u n c t i o n i n g at less than contracted levels due to liquefaction plant inefficiencies. Beyond 1982, the rapid LNG trade growth will generate a growth in shipping demand which will outpace the currently scheduled shipping supply until, at end-1985, a deficit LNGC supply of 2.8-8.2 million cubic meters is indicated. This shipping capacity shortfall is an equivalent 22-66 large ships of the standard 125,000-cubic-meter size and would require investment of some $3-9 billion to eradicate, assuming average 1977 LNGC newbuilding prices. The large capital investment required to finance the shipping element in an LNG export project is significant in determining the cost of transportation, and hence the delivered cost of LNG.

In its thorough examination of LNG shipping costs and revenues and LNG prices, the analysis shows that the delivered cost of LNG in 1977 was: $1.50-1.55 per million BTU at a trading distance of 1,000 nautical miles (transportation accounting for 13-16 percent of total traded cost of LNG), $2.00-2.05 per million BTU at a trading distance of 5,000 nautical miles (35-37 percent of total traded cost), and around $2.90 per million BTU at a trading distance of 12,000 nautical miles (accounting for around 55 percent of total traded cost). The capital costs associated with LNG ships were calculated to account for 60-73 percent of total annual fully builtup trading costs of these vessels, taking into consideration a range of trading distance of 1,000-12,000 nautical miles, and a ship size of 50,000-330,000 cubic meters. The cost of transportation is thus more influential in determining the delivered cost of LNG as the shipping distance increases. The future LNG trades which are presently without committed shipping supply are principally medium/ long-range projects, and therefore the delivered cost of LNG in these will be heavily dependent upon the cost of capital for shipping.

It is because the capital element in the transportation of LNG is so very great that it is essential to have a fully integrated LNG export project which has shipping supply committed well in advance of trade start-up, and which is tied for the duration of the contract for the sale and purchase of LNG — usually 20 years. The prerequisite of long-term security of shipping supply in LNG trades precludes any regular short or medium-term employment poten- tial for charter-free LNGCs ordered on speculation. It appears that a substantial spot market for LNG ships will not develop. This comment underlines the discouraging immediate future for charter- free LNGCs (there were 21 such ships which totaled 1.3 million cubic meters in the existing and newbuilding LNGC fleet at mid-1977). Unless the owners of these ships can secure their longterm commitment to future LNG trades, which are as yet deficient in shipping supply, they face a bleak future.

"The Seaborne Transportation of Liquefied Natural Gas 1977- 1985 — Trades, Costs and Revenues," priced at U.S. $140 for all overseas orders or £65 for U.K.

orders, is available from HPD Shipping Publications, 34 Brook Street, M a y f a i r , London W1Y 2LL.