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Keith Schaefer

Keith Schaefer

Keith is the publisher of the Oil & Gas Investments Bulletin – an investment newsletter that looks at opportunities within the Canadian small cap oil…

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The Global Shipping Industry's Most Profitable Sector: LNG Shipping

The Global Shipping Industry's Most Profitable Sector: LNG Shipping

Record demand for liquefied natural gas (LNG) has created a huge new global industry for the vessels that carry the fuel.

And that has created huge profits for the biggest LNG ocean tankers. Their day rates have skyrocketed... as much 2 to 3 times greater today than they were just 1-2 years ago.

In fact, LNG (which is now shipped around the globe) has suddenly become the most profitable sector in the global shipping industry.

It marks a sweeping turnaround from the latter part of the last decade, when the industry practically bottomed out.

At that time, many shipping firms avoided running LNG tankers. The sector was written off as too pricy, and not likely to earn anyone a profit.

The reason for that:  The shipping industry had geared up for huge LNG imports into the US, ordering a lot of ships. They were delivered on time, but then, to (almost) everyone’s surprise, US gas production started to increase (sound familiar?) because of the shale revolution gas prices in the US started to go down—making LNG imports into the US uneconomic.

And so that liquefaction capacity—where LNG is returned to its regular gaseous form that is used to heat your home—was never built. I’m talking about LNG import terminals.

Asia did start ordering a lot of LNG contracts, but with a glut of supply, they were able to offer the ship owners only marginal returns. Nearly all gas was moved on ships signed on with charters of 20 or 25 years.

A short-term and more profitable spot market never really developed for such vessels. This forced many tanker owners to idle their ships — These are vessels that had cost them about $200 million+ each. As recently as two years ago, roughly one-third of the world’s 374 LNG carriers were laid up or out of use.

(Today, every single LNG ship that is seaworthy is active. There is ZERO spare capacity, anywhere in the world.)

With high costs to build new ships, and low returns, the industry has not ordered new ships for a few years.

Then events happened that changed everything.

The devastating earthquake and tsunami in Japan in January 2011 forced the closure of many of its nuclear power facilities. This forced Japan, which was already the world’s largest importer of LNG, to import even more. Luckily for the country, it had already embarked on a major project to expand its existing LNG terminals and to build new ones.

The CEO of Norway’s Hoegh LNG said in May “I’ve been in the LNG market for more than 20 years and I’ve never seen the market change this rapidly or this strongly.”

In addition to Japan, the next two biggest importers of LNG are South Korea and China. In total, Asia accounts for about 60% of global demand for LNG, and their imports are still rising. So after the Japanese earthquake, in particular, the industry’s supply/demand fundamentals – which were already turning positive – accelerated the revival in LNG shipping.

Demand for LNG—particularly from Asia where natural gas ranges from between $15 and $20 per million BTUs—rose due to the Japanese disaster and economic growth.  To take advantage of the higher prices in Asia, energy companies vied for unused LNG tanker capacity around the world, offering tanker owners higher prices and an unprecedented range of short-term contracts in the spot market.

The CEO of one of the world’s biggest LNG carrier owners BW Gas, Andreas Sohmen-Pao, spoke of the change in the market, “What has happened… is that the destinations have become more flexible, to the extent that cargoes will move according to price differentials.”

What that means is, shippers can now choose where to ship LNG for the most money.

Just in the last month, according to Bloomberg, there were 13 ships redirected to Asia from Europe. For the first time in history there is now a truly global natural gas market thanks to LNG.  In fact, LNG imports into Japan alone this year are expected to hit a record of 79 million metric tons, according to Norway’s Arctic Securities.

Now all of the world’s LNG ships were brought back into use after the Japanese earthquake. Rates in the once-sleepy spot market for transporting the commodity revived to a level where owners are again able to operate their ships profitably—very profitably.

As I said, LNG shipping is now one of the most profitable subsets of the global energy sector. (I will tell you exactly how obscenely profitable it is in our next story ;-).)

LNG shipping companies are now ordering new vessels in order to meet the surging demand. But there will be a very tight LNG shipping market for several years.  That means dayrates, company cashflows and investor profits in this sector should increase as well.

There are several reasons for this:  One is that there are few LNG shipping companies.

Another is that Rome wasn’t built in a day and neither are LNG tankers— It now takes two years from start to finish. (Only ONE more vessel will be delivered in 2012.)  Third, very few companies make LNG tankers, and getting a spot in their production schedule is now very difficult.

AND — the large capital cost of a ship is a barrier to more competitors entering the industry.

In conclusion, there is growing demand for LNG from the likes of Japan, South Korea and China… keeping natural gas prices high.  And there is increased production of cheap natural gas from Qatar and  Australia—so shipping LNG to capture that price gap makes huge economic sense right now.

What’s more — If the US can permit LNG export terminals to bring its super cheap gas into the global LNG mix, the LNG shipping sector will get busier… and become more profitable yet.

By. Keith Schaefer

Publisher, the Oil & Gas Investments Bulletin

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