The demand for Liquefied Natural Gas (LNG) carriers in Europe has dramatically increased this year, driven by growing concerns over gas supplies among European buyers.
This surge in demand has led to a sharp rise in both freight rates and rents for LNG carriers. LNG prices have experienced significant fluctuations, soaring from less than $2 per million British thermal units (BTUs) in 2020 to a peak of $57 in August, according to recent data. Although prices have seen some decline, they remain high, exceeding $30 per million BTUs.
The heightened need for heating across European countries has prompted a scramble to secure energy shipments, pushing global LNG shipping rates to unprecedented levels. For instance, the daily rental rate for an LNG carrier with a capacity of 174,000 square meters in the Asia-Pacific region escalated from $66,000 in early August to $300,000 by early October. Similarly, rates in the Atlantic region surged from $74,000 to $300,000 during the same period. Consequently, the cost of long-term leases for LNG carriers has also increased.
In this competitive landscape, LNG ships have now "replaced" container ships in terms of market dominance. By the end of July 2022, gas carriers overtook container ships as the predominant ship type in market share. A record-setting transaction of 101 large LNG ships further underscores the significant shift towards LNG transportation, highlighting the industry's response to the current energy demand and market dynamics.
The current shortage of LNG ships can be attributed to several key factors:
1. Implementation of New Environmental Regulations: The International Maritime Organization (IMO) is set to enforce new regulations, including the Ship Energy Efficiency Index (EEXI) and Carbon Intensity Indicator (CII), aimed at reducing carbon emissions from ships. Many older LNG vessels may not meet these new standards without significantly reducing their speed, which necessitates the acquisition of additional, more efficient LNG vessels to maintain capacity. Given that the typical lifespan of an LNG ship is around 25 years, and with approximately 24% of the current LNG fleet being over 15 years old and 10% over 20 years old, the demand for newer ships is expected to rise as older ones become obsolete due to these environmental standards.
2. Increase in Natural Gas Production Capacity: The expansion of LNG production capacity in key regions worldwide has spurred the demand for large LNG carriers. For instance, the expansion of Qatar's North Gas Field is projected to boost Qatar's annual LNG production capacity from 77 million tons to 126 million tons by 2027. Consequently, the volume of LNG ships is anticipated to increase by 65% over the next decade, with sea traffic expected to rise to 630 million tons by 2030, up from 380 million tons in 2021. This growth in LNG production directly translates to a higher demand for LNG carriers.
3. High-Tech Nature of LNG Ships: LNG vessels are considered one of the most sophisticated segments of the shipbuilding industry, characterized by their high technology, reliability, and value. Currently, only a limited number of shipyards can build large LNG ships, with production capacity fully booked until 2027. The complex construction of large LNG ships, which is only feasible in a few shipyards primarily located in Japan and South Korea, poses a significant challenge in meeting the surging market demand for LNG carriers in the short term.
Natural gas transportation relies heavily on two methods: pipeline transmission and the use of large LNG ships that liquefy natural gas at low temperatures for bulk transport. The shortage of LNG ships, therefore, poses a significant challenge to the global energy supply chain, emphasizing the need for increased shipbuilding capacity and technological innovation to meet growing demand.
