LNG-Powered Ships Gain as Rising Output Answers Oil-Price Volatility

By Christine Buurma

(Bloomberg) — When TOTE Inc., a shipper that operates between the U.S. and the Caribbean, launched its newest container ship final month, the 760-foot craft carried a sure distinction: It’s solely the second of the large vessels worldwide fueled by liquefied pure gasoline.

The first was launched 4 months earlier by the identical firm.

TOTE is amongst a rising variety of shipowners turning to pure gasoline at a time of document output, stringent emission guidelines and churning oil costs. About 70 vessels of all sizes worldwide of at the moment are powered by LNG, up from 42 in simply two years, in keeping with DNV GL, which certifies ships for security. By 2020, the quantity could cross 1,000.

“More companies see natural gas as a viable alternative fuel source, given the abundance of supply and the relatively stable prices,” Peter Keller, govt vice chairman of Princeton, New Jersey-based TOTE, stated in a phone interview. At the identical time, “the environmental consciousness of the maritime industry has increased,” he stated.

Narrow Range

LNG costs are anticipated to commerce in a comparatively slim vary as exports from the U.S. and Australia rise and world demand, pressured by China’s slowing economic system, stays sluggish, in keeping with an Aug. 21 report by Bank of America Corp. Meanwhile, fluctuating gas oil costs are considered as a problem by many within the trade. West Texas Intermediate crude oil for next-month supply traded at $44.38 a barrel at 9:15 a.m. on the New York Mercantile Exchange after climbing above $60 in May and June.

“Oil has tumbled to 40 bucks and may be back up to 85 or 90 a year from now. Who knows?” Keller stated. “You can’t run a business with a long-term horizon with that kind of volatility.”

Natural gasoline output within the U.S., the world’s largest producer, rose to a document 2.455 trillion cubic toes in December, in keeping with the Energy Information Administration. Marketed manufacturing will develop 5.7 p.c to 78.95 billion cubic toes a day in 2015, the federal government estimates.

Cheniere Energy Inc.’s Sabine Pass terminal in Louisiana is scheduled to export the primary cargo of LNG from the decrease 48 states within the fourth quarter. At the identical time, Australia can be including to the glut with two liquefaction initiatives getting into service later this yr.

“Spare U.S. liquefaction capacity could aggravate the ongoing spot LNG market glut,” Max Denery, a Bank of America analyst, wrote within the report. “Longer-term, the critical question for LNG global prices is whether there will be enough demand to meet incremental supply from Australia and the U.S.”

As the drop in oil costs makes gasoline much less aggressive, orders for brand spanking new LNG ships have tapered off considerably, stated Anders Mikkelsen, a enterprise improvement chief for maritime advisory at DNV GL in Oslo. However, he believes the slowdown will likely be short-lived.

Oil Volatility

“No one expects oil prices to remain low,” Mikkelsen stated by phone. “They’re likely to increase over the next two-to- five years, so shipowners are still looking at LNG.”

While pricing is one motive behind the change, an rising world emphasis on curbing local weather change is one other. LNG reduces carbon dioxide air pollution by a minimum of 20 p.c and eliminates sulfur dioxide emissions, in contrast with commonplace bunker gas, in keeping with DNV.

More facilities for loading LNG onto ships as gas will likely be developed within the subsequent 4 to 5 years, in keeping with Grahaeme Henderson, vice chairman for delivery and maritime at Shell International Trading & Shipping in London.

“We’re starting in Rotterdam; we anticipate that further hubs in Singapore and the U.S. will follow thereafter in a global network,” Henderson stated in a phone interview, referring to trade traits and never simply Shell’s personal operations. The U.S. doesn’t but have an LNG fueling hub, in keeping with ship dealer Poten & Partners Inc.

Construction Costs

One bar to the rising curiosity in LNG-powered ships is the price to provide them. They are 10 to 25 p.c costlier to construct than comparative vessels working on gas oil, and it’ll take homeowners of gas-fueled ships 5 to eight years to recuperate these prices, Mikkelsen stated. The insulated storage tanks wanted for LNG contribute to the upper price ticket.

Tote invested about $350 million within the two LNG-powered container ships, together with about $40 million for the LNG tanks and associated techniques, Keller stated. An AGL Resources Inc. unit and WesPac Midstream LLC are constructing a liquefaction plant in Jacksonville, Florida, that’s scheduled to start offering gas for TOTE ships in 2016.

Fuel costs tied to Louisiana’s Henry Hub, the benchmark for U.S. gasoline, could soften the blow. While LNG contracts are traditionally linked to crude, including U.S. provide to the market is creating extra selection for shipowners, stated Jason Feer, head of enterprise intelligence at Poten & Partners in Houston.

“We’re seeing greater diversity in LNG pricing mechanisms,” Feer stated by phone. “People want to see some diversity in shipping fuel, and in the short- to mid-term, there’s likely to be quite a bit of LNG available at competitive prices.”

–With help from Naomi Christie in London.