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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Finding Work For The World’s Largest LNG Ship

LNG

It is not just individual investors that are having to be patient and bide their time waiting for energy sector investments to pay off. Many corporations are making long term bets in the energy sector, and those bets are taking a while to show their value as well. Take one recent investment from Mitsui O.S.K. Lines - a massive $400 million floating liquefied natural gas factory.

The enormous ship is different than most LNG tankers in that it not only carries LNG, but also turns it back into gaseous fuel avoiding the need for an expensive on-land terminal. The vessel is termed a floating storage regasification unit or FRSU. In other words, the ship is a complete end to end fuel delivery system.

Mitsui’s ship is also enormous. It is more than 900 feet long – longer than 3 football fields – and it can store enough LNG to power all of Sweden for a day. There are other FRSU’s out there, but the 345 meter Mitusi vessel can hold 862,861 cubic feet of gas – more than any other announced vessel on the market.

The idea was that the floating fortress could sail from port to port providing natural gas fuel as needed all at a fraction of the cost of a typical billion-dollar onshore terminal. Mitsui’s floating behemoth is scheduled for delivery at the end of this year, and it is likely to find itself without work for months.

Mitsui’s vessel is facing a natural gas market that has evolved rapidly over the last few years as onshore gas supplies have grown, and competition in the LNG space has intensified. At this point, Mitsui’s $400 million-dollar ship has no confirmed jobs for more than a year.

Mitsui’s investment is going to take a while to pay off, but it will pay off eventually. Mitsui has a confirmed 20-year charter for the vessel to work with Uruguay’s Gas Sayago. Over the course of that 20-year deal, the ship will be profitable – the problem is that the deal has taken a while to get started. Related: Saudi Use Of Solar Could Boost Its Oil Exports

Issues with energy infrastructure development in Uruguay have postponed the need for the vessel. At this point, the charter is supposed to start in 2018, but that could conceivably be pushed back further. In the meantime, Mitsui is looking for short term work for the ship – that’s proving hard to get though.

There is excess capacity in the industry at this point with many smaller FRSU’s having excess capacity – smaller FRSU’s in southeast Asia are often operating at only 30 percent of capacity. That means that even if Mitsui’s unit gets work, it may not be a large enough job to require the FRSU’s full capacity.

In the long run, the potential for the ship and the LNG market as a whole looks promising. LNG consumption around the world has increased significantly thanks to a 60 percent plunge in prices in the last two years. Egypt and Pakistan for instance have started importing LNG for the first time due to the price plunge, and using the FRSUs. LNG imports are likely to have risen 26 percent for 2016 when end of year figures are finally tallied. That would follow a 44 percent increase in 2015.

Against this backdrop, it is easy to be optimistic about the long-term market for LNG and FRSUs. There were 23 FRSUs in 2016, and that number is likely to jump to 30 or more by 2020. The market for Mitsui’s FRSU is going to be lucrative – eventually. Oil investors might consider taking a page from the firm’s book and looking to the long term for their investments as well, even if the short-term market looks more volatile.

By Michael McDonald of Oilprice.com

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