Gas ship owners enjoy it for now

READY FOR ANYTHING

FLEETS • GAS SHIP OWNERS HAVE BEEN ENJOYING SOME GOOD TIMES OF LATE BUT THE COVID-19 CRISIS WILL IMPACT MANY. THEY ARE, THOUGH, WELL PREPARED FOR THE FUTURE

FOR SOME YEARS now, careful planning of fleet expansion and replacement on the part of the major LPG tanker operators, together with consistent growth in global maritime trade in LPG and other gases, has delivered a generally calm market with – relatively – decent returns for investors. During 2019, the arrival of new export streams – mostly, but not all, from North America – together with continued demand growth in Asia produced a firm market, particularly in the larger size segments of the gas tanker fleet.

But, like all shipping sectors, LPG tankers had to face the arrival of the ‘IMO 2020’ rule on sulphur emissions, with the choice to either burn low-sulphur bunker fuel or to install exhaust gas scrubbers. It is interesting to see that the larger owners of very large gas carriers (VLGCs) have taken different approaches: BW LPG has invested in dual-fuel engines, both on its newbuildings and, progressively, as retrofits to its existing ships; Avance Gas, on the other hand, has chosen to take advantage of scheduled drydockings for special surveys to install scrubber units.

Neither option is cheap, and having ships out of service for longer than planned during a period of firm freight rates adds a further cost. But, by and large, owners appear to have navigated what seemed to portend a difficult time without too much disruption.

As 2020 began, gas tanker operators were reaping the rewards of their careful management of the global fleet, with firm earnings across the board but not least in the VLGC sector, where timecharter equivalent earnings were nearly three times what they had been just a year earlier. But things were about to change, and change drastically. The emergence of the Covid-19 epidemic in China immediately cut into demand for LPG and other gases and this was followed swiftly by the collapse in the global oil market, already over-supplied as a result of the emergence of shale oil and gas from North America but also by the fight for market share between other major producers. Added to that, the rapid spread of the Covid-19 virus around the world and the resulting lockdowns and restrictions on movement prompted further reductions in demand for all oil and gas products.

PLAY WITH THE BIG BOYS BW LPG is the largest player in the VLGC sector, with a fleet of 47 vessels out of a total 294 operating ships. It notes that, up to the end of April, 12 newbuildings joined the fleet and another nine are due by the end of the year, although work restrictions at shipyards as a result of Covid-19 may delay some of them. Avance Gas, another significant presence in the sector, says that the current orderbook is equivalent to 11 per cent of the existing fleet, with 23 further ships under construction for delivery in 2021 and 2022.

Avance also says that there are 27 existing VLGCs that are already 25 years of age or older; these must be considered likely candidates for demolition. However, at present the demolition market is almost non-existent, with work restrictions in place in south Asia not only removing much of the potential for demolition sales but also sharply reducing the demand for scrap steel, with a consequent impact on scrap values for old ships. Nonetheless, keeping old vessels working when there are not only IMO 2020 provisions to meet but also the requirement to manage ballast water properly means it is an expensive business.

In the short term, BW LPG believes that freight rates will be supported by production changes, the winding down of high inventories in the US and firming retail demand in Asia as Covid-19 lockdown measures are eased. Looking slightly further ahead, however, the collapse in oil prices means that production is likely to be curtailed, with a knock-on effect on the availability of export LPG volumes in the US and Middle East, while the low price of naphtha in the current market means it

becomes more attractive than LPG as a petrochemical feedstock. As a result, there is likely to be some downward pressure on VLGC utilisation during the second half of 2020 and into 2021, although a recovery in oil prices could affect this outlook positively.

Aside from BW LPG, which has sold its smaller LPG carriers and is now solely focused on VLGCs, and Avance Gas, the leading operators in this sector remain Dorian LPG, many of whose vessels operate in the Helios pool alongside Phoenix Tankers and some other tonnage, trader Petredec and some major Japanese and Chinese owners. An interesting expansion among the larger ships is the arrival of very large ethane carriers (VLECs), mainly targeted at long-haul ethane and ethylene exports from the US, which use a containment system derived from LNG carriers. Evergas is moving into this sector, as is Pacific Gas. ADDING PRESSURE Exmar still has some presence in the VLGC market, mostly with managed ships, although it has two 88,000-m³ newbuildings on order for its own account, for long-term charter to Equinor. Its focus, though, is on the midsize fully refrigerated sector, where it is one of the largest players, with 21 ships in the water out of a global fleet of 97. Exmar considers that, with a very limited orderbook at present and the upward trend in long-haul employment in this sector, the outlook is very promising.

One company making moves in the smaller fully refrigerated segments is Eastern Pacific Shipping (EPS), led by Iden Ofer. Over the past year it has acquired three 2009-built, 59,000-m³ vessels from Neu Gas and taken delivery of two 37,300-m³ newbuildings from Hyundai Mipo.

EPS recently placed an order for three more midsize gas ships at Hyundai Mipo against a charter with Equinor, which will be fitted with dual-fuel propulsion capable of running on LPG. EPS says this is in line with its Environmental, Social and Governance Policy, which calls for the use of alternative fuels as a way of reducing its carbon footprint. “These state-of-the-art vessels will pave the way towards decarbonisation by emitting significantly lower greenhouse gases and will be IMO-compliant years ahead of schedule. The construction and management of these vessels firmly place EPS and Equinor at the forefront of the shipping industry’s agenda to preserve the environment for future generations,” EPS says.

Navigator Gas is another operator in the smaller end of the fully refrigerated segment, but its main focus is on larger semipressurised/fully refrigerated (SP/FR) tankers, termed Handysize, and particularly on those capable of carrying ethylene and ethane, which both require much deeper refrigeration than LPG. In this sector it has recently established the Luna Pool with Pacific Gas and Greater Bay Gas, which became operational in the second quarter with an initial seven ships. At the end of May there were 12 ships entered in the pool, of which nine were carrying ethylene, two ethane and one propylene, and it is expected that the pool will expand to 14 vessels altogether. Navigator reports that propylene was exported from the US for the first time in more than a decade in May, for shipment to the Far East.

THE BUSINESS OF RUNNING GAS TANKERS IS HIGHLY

SPECIALISED, AVOIDING INTERFERENCE FROM ASSET-

PLAY MONEY AND LEADING TO WHAT IS MOSTLY

Navigator Gas also reports that the Handysize sector has been less sharply affected by the Covid-19 crisis than the larger ship segments; most of the LPG these ships carry caters to domestic demand (largely in Asia), which has so far held up well, and the Handysize market is less vulnerable to global price arbitrage movements than VLGCs. As a result, Navigator says, while freight rates this year have been volatile in the larger size segments, the Handysize timecharter index fell by only 5 per cent during the first quarter.

Navigator has also made moves to lock into new US export volumes through investment in a joint-venture ethylene export terminal at Morgan’s Point in the Houston Ship Channel, in partnership with Enterprise Products Partners. Although this was affected by the Covid-19 lockdown, exports recommenced in May with cargoes moving around the world. “These deepsea petrochemical trades provide robust tonne-mile demand to the segment,” Navigator says.

Navigator’s main competitors in the ethylene trades are Anthony Veder, GasChem, Lauritzen Kosan and the Unigas consortium, although all of these have a focus on smaller ships, mainly trading regionally.

SMALL AND TIGHT The dominant players in the fully pressurised (FP) sector are Epic Gas, which is now owned by BW LPG, and StealthGas. Epic Gas currently operates 44 of the 335 FP vessels in the global fleet (over 3,000 m³ and excluding those operating in domestic trades in Japan and China). It notes that the current orderbook is very low, equivalent to just 4 per cent of the active fleet, while the orderbook for SP/FR ships in the same size range comprises only three newbuildings. Together, these 18 ships on order are outnumbered by the 34 ships currently trading that are aged 28 years or older and are likely candidates for demolition once the scrapping market opens up again.

FP ships have benefited from the continued rise in US LPG exports, handling some 170,000 tonnes in the first quarter of 2020, compared to around 75,000 tonnes in the same period 2019. Most of that volume is for export to the Caribbean or Latin America, although since the second quarter of 2019 FP ships have also been used to carry LPG from the US to West Africa. FP ships can also carry a range of petrochemical gases, although in these markets Epic Gas reports that Chinese imports of propylene and VCM in particular were sharply down in the first quarter of this year compared to the prior period, and ethylene imports were also well down on the first quarter 2019. Epic Gas currently has a quarter of its fleet operating in Asia.

StealthGas has a fleet of 46 LPG carriers, including eight owned under joint ventures and one 11,000-m³ newbuilding due to join the fleet in 2021. Over the past year it has reduced its fleet through disposals and in the first quarter of 2020 achieved operational utilisation of 98 per cent. That figure would have been higher but for a technical fault that took one ship out of the market for three weeks.

HCB’s annual listings of the LPG tanker fleets on the following two pages includes the latest available data from the owners and operators mentioned. Readers should be aware that there is an element of double- and even triple-counting, as some ships included in an owner’s fleet may also appear in a charterer’s fleet and possibly in a pool fleet as well. The lists do not include a number of other large domestic fleets, particularly in Japan, South Korea and China, nor inland/coastal vessels employed in the US, Europe and China.

OPERATORS OF SMALL FULLY PRESSURISED LPG

TANKERS SHOULD CONTINUE TO ENJOY FIRM

EARNINGS ON THE BACK OF STRONG DEMAND

AND A VERY SMALL NEWBUILDING ORDERBOOK