Operators keep control of fleet

TIME IS TIGHT

FLEETS • VESSEL SUPPLY IS TIGHTENING AS GAS TANKER OPERATORS MAINTAIN THEIR RESTRAINT AT A TIME WHEN NEW SUPPLIES ARE INCREASING LONG-HAUL DEMAND

HCB LAST PROVIDED readers with an update on the global LPG tanker fleet two years ago, since when an awful lot has happened in the world of gas shipping – but in many ways very little has changed. Most of the same operators are featured in this year’s lists and some have slightly larger or smaller fleets; there have been a handful of exits – most notably IM Skaugen’s Norgas Carriers – but on the whole the picture has been surprisingly stable.

To a large extent that stability is due to the fact that the established LPG tanker operators – in all segments of the market – are long-term players with a vested interest in avoiding the boom-and-bust cycles that characterise other parts of the merchant shipping business.

Newbuilding activity has been sufficient to meet fleet replacement and expansion demand but no more. And there has been no return to the speculative contracting in the VLGC sector, prompted largely by the arrival of investment funds in the business, that was a feature of the market earlier in this decade.

What has changed over the past two years is the nature of the trade that drives demand for LPG tankers. In particular, continued growth in exports of LPG – including ethane – from the US is providing new employment, not just for VLGCs. And while the pace of import growth in China has cooled to some degree, Asia is still the motor of new consumption, with strong retail demand across the region. The semi-refrigerated segment is also benefiting from new flows of petrochemical gases around the world.

AT THE TOP END At the end of the first quarter, the global VLGC fleet numbered 268 vessels, according to Avance Gas, with an orderbook of 38 ships, equivalent to 14 per cent of the active fleet – compared to as much as 60 per cent only a few years ago. Of the new ships, 18 are due for delivery in 2019 and 19 in 2020. At the same time, there were 27 VLGCs of 25 years or older; BW LPG expects to see five of those sent for demolition this year.

Among smaller fully refrigerated LPG tankers (~35,000 m³), there has been a similar shrinking in the orderbook, which is now standing at around 6 per cent of the active fleet, according to Exmar, after peaking at more than 50 per cent in early 2016.

So while there is expected to be some expansion in the VLGC fleet this year, it seems likely that the new capacity will be accommodated, with further growth expected in US exports of LPG. BW LPG quotes the US Energy Information Administration’s (EIA) figures, which indicate that US LPG

EMERGING PRODUCT FLOWS ARE ENCOURAGING

production is likely to grow by 9.8 per cent this year, slightly below the 10.5 per cent recorded in 2018, and with domestic demand comparatively flat, net exports could expand by 13.6 per cent to 35m tonnes.

Not only are US exports rising consistently, they are also contributing to tonne-mile demand for LPG tankers; according to Avance Gas, in 2016 some 52 per cent of US exports went to the Far East, a proportion that has risen to 63 per cent in the first quarter of 2019.

In total, according to BW LPG, global seaborne LPG trade was 15 per cent higher in the first quarter of 2019 than in the same period last year. Exports from the Middle East were essentially flat, with Qatar, Saudi Arabia and Kuwait increasing volumes to compensate for the loss of Iranian product on the world market after the reimposition of sanctions, while exports from North America overtook those from the Middle East.

One concern has been the effect of the USChina tariff war on LPG trade. During the first quarter Chinese imports fell 2 per cent yearon-year but also switched mainly to Middle Eastern sources; US exports shifted to buyers in Japan and South Korea. The first quarter of this year also witnessed strong demand growth in India, with imports up 16 per cent year-on-year and the first VLGC cargoes arriving from the US. South-east Asia also increased its imports, particularly Indonesia, where imports were up 16 per cent on the year at 1.4m tonnes.

ANY GAS YOU WANT The situation is rather more complex in the Handysize segment, with its range of cargoes and diverse vessel types. Leading operator Navigator Gas identifies a fleet of 85 vessels in the 15,000-m³ to 25,000-m³ size range, of which 63 are semi-refrigerated; of these, 16 were delivered before 1995 and are now potential demolition candidates, while there are only eight new ships on order, of which seven are due for delivery this year.

Importantly for Navigator Gas, 33 of the Handysize vessels can operate in ethylene and ethane transport, along with 22 larger ships, including eight new very large ethane carriers (VLECs), a new segment for the LPG tanker business. And it is in ethane and ethylene that Navigator Gas sees potential, saying: “Growth in seaborne LPG and ethylene trade is expected as the current infrastructure bottleneck will be removed through commissioning of additional export infrastructure currently under construction.”

Navigator Gas is particularly referring to North America, where it is itself active in developing such infrastructure. It has a joint venture with Enterprise Products Partners to build a new ethylene export terminal on the Houston Ship Channel, due to begin operations in the fourth quarter of 2019 with an annual throughput capacity of 1m tonnes. Navigator Gas notes that current ethylene exports from the US are constrained only by terminal capacity and that domestic production is expected to increase by 47 per cent from its 2017 level by 2022, with nearly 19m tonnes of annual production capacity due onstream by then.

Navigator Gas also points to the opening this month of the AltaGas propane export terminal in Ridley Island, British Columbia, expected to deliver more VLGC cargoes for export to Asia and Latin America, and the opening of the Mariner East pipeline system by Energy Transfer, which is already delivering more LPG for export from Marcus Hook on the east coast of the US. In addition, Pembina Pipeline has a new LPG terminal under construction at Prince Rupert, British Columbia; Navigator Gas says this will export LPG in semi-refrigerated tankers for delivery to Asia and Latin America.

SMALL SHIP DEMAND Perhaps surprisingly, the increase in LPG exports from the US has also had a significant impact on employment of smaller gas tankers. While most such liftings have been for discharge in the Caribbean and Central America, a consistent slice head to the Mediterranean. Indeed, according to Epic Gas, US exports of LPG on fully pressurised and smaller (sub-12,000 m³) semi-refrigerated gas tankers almost doubled year-on-year.

Epic Gas also points to propane deliveries into China for propylene manufacturers. Propane dehydrogenation (PDH) capacity has increased sharply in China since 2013, in line with domestic demand for polypropylene but, with propylene imports flat at around 3m tonnes per year, there is a consequent firm demand for imports of propane.

Epic Gas also cites rising LPG demand in various parts of the world, not least in Indonesia, as was noted in terms of VLGC utilisation, but also in the Philippines, Vietnam »

and West Africa. South African imports are also rising, particularly since terminal operators have invested in handling capacity. Morocco remains an important driver too, although import volumes here are not expected to increase in coming years.

These underlying trends once more indicate an increasing tightness in the market; Epic Gas says there are only ten fully pressurised and five small semi-refrigerated tankers currently on order, while scrapping continues as elderly vessels some to the end of their useful lives. “Continued tight spot market conditions and a limited orderbook maintain a solid outlook for the pressurised vessel segment,” Exmar agrees.

ROOM FOR INNOVATION Although owners are being responsible about ordering, given the expected supply tightness in most gas tanker segments, there are new ships coming forward and many of them include innovations to help meet the changing needs of a more sustainable future. Exmar, for instance, has ordered two VLGCs to meet a long-term charter from Equinor and has gone out of its way to make them as environmentally friendly as possible.

The process has not been without its problems, however; the project goes back as far as the end of 2017, when Exmar contracted with Hanjin Heavy Industry for two 86,000-m³ carriers for 2020 delivery. The salient aspect of the order was that the new ships would be fitted with LPG-fuelled engines, allowing them to meet current and future emissions regulations, not least the ‘IMO 2020’ rule on sulphur oxide emissions.

As it turned out, Hanjin ran into financial difficulties and filed for ‘rehabilitation’ in early 2019. Exmar cancelled the contract and received a full refund from the Korea Development Bank. Last month it signed a new contract with Jiangnan Shipyard for the same vessels, now expected to be delivered in mid-2021.

The other major technological development has been the creation of a segment of the fleet equipped to carry ethane. Unlike other LPGs such as propane and butane, ethane liquefies at a cryogenic temperature close to that of ethylene. As such, ethane carriers are analogous to ethylene carriers – except that, as the trade has developed, ethane carriers have become much larger.

The latest ethane-capable ships to be delivered are two 83,750-m³ VLECs ordered by Evergas to carry ethane from the US to China under contract from Ineos Trading and Shipping. The first of the two, JS Ineos Marlin, was delivered in April from Dalian Shipbuilding; technical operator is Hartmann Gas Carriers. These vessels have the largest Type-C cargo tank ever made, using the trilobe design pioneered by Evergas. They also have 16,000-Kw MAN main engines running on ethane, with the option to burn fuel oil, diesel or LNG.

This latest pair for Evergas build on the concepts used in eight 27,500-m³ ethane carriers delivered by Nantong Sinopacific between 2015 and 2017, again for charter to Ineos. As the world moves towards tighter rules on greenhouse gas emissions, the development work put in by Evergas may show a way forward for other ship operators. HCB