The geopolitical turmoil of recent months has placed the shipping markets, and in particular, the LNG sector, once again at the centre of global events. And with energy security adding further upside to a market already expecting plenty of underlying growth from Asian demand, energy transition dynamics and a lengthy export project list, LNG shipping is set for a significant growth phase.
Although progress can be uneven, LNG has a track record of growth (20 year growth has averaged 6.5%, versus 3.4% for gas pipeline trade, 2.4% for global gas demand and 1.0% for seaborne oil trade). And while we expected trade growth to slow a little next year (to 4% from 5% this year as we wait for liquification projects to come online), the case for future growth is supported by export capacity expansion (our database has 155mtpa of liquification capacity under construction, 303mtpa at FEED and 295mtpa proposed) and the prospect of LNG potentially benefiting, at least initially, from the energy transition (in our modelling, LNG grows more quickly in a Paris rapid decarbonisation case).
As we started 2022, global gas markets were already facing extreme volatility and pricing, now exacerbated further by the geopolitical ramifications of the Ukraine conflict (Russia produces 17% of global gas). And while these dynamics are contributing to inflation and macro-economic headwinds, for LNG the initial impact has seen European imports up 52% y-o-y this year as geopolitics and energy security move quickly up the agenda. As much of this European activity is diverted Asian cargoes (reducing tonne-miles), the recent strong charter rates (NB: news that Freeport LNG will be offline may weaken the short-term market) were driven by sanction uncertainty and an expectation that shipping requirements (and FSRU opportunities: European countries have already charted 8 units) would rise. Today a 1yr TC is assessed at $100,000/day for a TFDE unit, with a generally firm outlook. Further ahead, our early impact assessment work assumes much of Russia-Europe pipeline trade (120mt in 2021) will be phased out with a long-term global LNG trade projection of 620mt by 2030 (a 40mt upwards revision). But in a stretch case (replacing almost all Russian pipeline flows to Europe with LNG, and Asian growth unaffected) trade could reach 695mt from 401mt today (that could require an extra ~110 ships). There is, of course, huge uncertainty: lockdowns in China, a slowing economy, pricing impacting demand, evolution of the conflict and associated politics, Chinese policy (coal, pipeline trade), timescales needed for shoreside infrastructure.
Today, the LNG fleet has reached 632 ships* of 103.3m cbm, with ~30% of the fleet still steam turbines and considerable uncertainty around the impact of emissions policies (e.g. EEXI, CII, methane slip). The total orderbook is a sizeable 36% of the fleet after 86 ships ($15.6bn) were ordered in 2021: we are already at a record half year of orders (80) and, with newbuild prices up 20%, a record full year by investment ($16.7bn). While some of this activity relates to the pre-existing Qatari newbuild program, berth availability is now typically from 2025/6 even with Chinese yards expanding to beyond 20 ship annual capacity. Despite uncertainties (and LNG veterans will warn that “projects get delayed, newbuilds deliver on time”) with the energy transition and now energy security, there seems momentum for a material LNG expansion phase.