LNG carriers called ‘floating pipelines’

Reflects sale of most liquefied natural gas under long-term contracts; conversion to LNG more expensive than ocean shipping

Stan Jones

Researcher/writer for the Office of the Federal Coordinator

The story of LNG shipping is a tale of massive investment, sophisticated technology, engineering wizardry and repeated efforts to tame the ocean’s mayhem. All in the pursuit of moving trillions of cubic feet of natural gas worth tens of billions of dollars a year across the seas.

It’s a fast-growing industry that connects a mix of sellers, buyers, middlemen, financiers and engineers. The fleet ranges from a pair of aging carriers whose maiden voyages saw them set sail from the shores of Alaska’s Cook Inlet 45 years ago to ultra-modern behemoths partly powered by the very gas they carry.

It actually started 10 years before that Cook Inlet cargo when the world’s first LNG delivery left the U.S. Gulf Coast aboard the Methane Pioneer, destined for England.

Looking ahead to the proposed Alaska North Slope LNG project, an entire day’s production from its plant at Nikiski would fit easily into a single oceangoing tanker after the natural gas was supercooled into a liquid 1/600th the volume of its gaseous state.

The job then: Keep it cold, keep it safe and keep it moving to customers.

Worldwide, ships carried more than 11.5 trillion cubic feet of natural gas as LNG in 2013.

That may sound like a lot - it’s enough to supply the entire United States for nearly half a year - but it was only about one-tenth of all natural gas used around the world. Most gas moves by pipeline, which, as in the case of oil, generally is far cheaper than hauling it in expensive tankers.

But for island-bound customers, such as Japan, or for others too far away to reach by pipeline, seagoing LNG deliveries are the only option, despite costing more than delivery by pipeline. The expense isn’t so much running the ships as making the LNG. It generally costs far more to convert the gas into a liquid than to haul it across the ocean.

It required several thousand voyages to deliver all that gas last year, using several hundred ships, with new ones costing about $200 million each to build. And with global demand expected to grow a lot over the next decade or two, it will take a lot more ships and a lot more voyages to deliver all that LNG.

A growth industry

This was the fledgling industry’s Gemini orbital space launch - a totally new thing. Although the builders and operators of the Pioneer thought and hoped they knew what they were doing, they were at or beyond the edge of what was known about LNG and how to move it safely across the sea.

Workers installed aluminum tanks in the ship, using balsa word supports and plywood and urethane insulation. A press release issued the week the ship left Louisiana said it was a “historic voyage,” carrying the fuel to “gas-deficient England.” It added, “The maiden voyage climaxes five years of research and development.”

The test worked, the market grew and it looks to keep growing.

And though eight or 10 oil tankers still move across the seas for every one LNG carrier - as they are known in the industry - liquefied natural gas is nonetheless the hot ticket these days for shippers and shipbuilders.

During 2013, about 360 LNG tankers were in service. They averaged 150,000 cubic meters in capacity, which is enough gas to supply some 42,000 U.S. homes for a year. An additional 108 vessels were on order, according to an end-of-year report by the International Gas Union.

The going rate for building a typical LNG carrier these days is around $200 million, with orders normally placed two to three years before delivery.

South Korea has long been the dominant player in building LNG carriers; 56 percent of the current fleet was built there, according to an August 2013 presentation for the Alaska Legislature by the consulting firm PFC Energy. And the global investment banking firm Jefferies reported in June 2013 that Korean shipyards had nailed down 86 percent of orders for new tankers currently under construction, with Japan and China splitting the rest.

The price that really defines the market is not the cost to build a tanker, but the daily cost of chartering it. That rate comes in two flavors: long-term and spot.

Charter rates vary

Benjamin Gage, a PFC analyst, estimated early this year that 85 percent of tankers were operating under long-term charters. But, he said in an email, he expects that share to erode as new vessels being built on speculation come into service and older tankers come out of long-term charters.

Eero Vanaale, an analyst with the British ship brokers and consulting firm Clarksons LNG, projected early this year that 73 percent of newly built tankers between 2014 and 2017 would be committed to charters on delivery, with the remainder open for the spot market.

Most often, tankers under long-term contracts are tied to a specific project, a business model often called “the floating pipeline.”

The floating pipeline has developed because most LNG is sold under long-term contracts, so the sellers have certainty of sales revenues before undertaking multibillion-dollar investments to build liquefaction plants, and the buyers have certainty that the gas will be delivered when they need it. Both parties have enormous incentives to nail down shipping costs for the duration of the contract, even if that can mean having to forgo surprise opportunities on the spot charter market.

While the floating pipeline may not pare final transportation costs to the bone, it does remove some uncertainty and risk from the complicated and unpredictable energy business.

The other flavor of tanker rates is the highly variable spot-charter rate, meaning what a tanker will cost if you need it only for a relatively short time. The usual definition is 3 months to 5 years. Recent rates ranged from about $24,000 a day in the summer of 2009 to $141,000 a day in the summer of 2012, according to PFC.

Over the past year, the short-term rate has sagged to around $70,000 a day, which industry players and observers say is somewhere near the breakeven point for operators in the spot market.

This is putting retirement pressure on a category of aging tankers known in the business as “Old Ladies” due to higher costs for maintenance, upkeep and fuel. The oldest of them are the 45-year-old SCF Arctic and SCF Polar, operated by Russia’s Sovcomflot Group. They’re due to be sold for scrap this year.

And, with them, a notable chunk of Alaska history will be scrapped. The two vessels started life as the Arctic Tokyo and the Polar Alaska and were built to service the small LNG export facility at Nikiski that opened in 1969.

Ship owners vary, too

Some LNG tankers are owned and operated by shipping companies such as Vancouver-based Teekay, Greece’s Dynagas, and Japan’s NYK Line and Mitsui O.S.K. Lines.

Others are owned and operated by international hydrocarbon producers like the Netherlands-based Shell and Britain’s BG Group and BP.

Still others are owned and operated by the companies that buy LNG, such as Japan’s Tokyo Electric Power and Tokyo Gas (a major supplier of gas and electricity) and the French electric utility and global gas supplier GDF Suez.

Finally, some are owned and operated by the LNG projects themselves such as North West Shelf Australia, which started operations in 1989, and Angola LNG, which is a partnership of the Angolan national oil company with four international oil companies.

In many cases, LNG projects, sellers and buyers that run their own tankers also charter additional vessels from shipping companies.

Editor’s note: Part 2 of this story will appear in the June 15 issue of Petroleum News. This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, available online at www.arcticgas.gov/lng-carriers-called-floating-pipelines.