Growing natural gas liquids production spurred by the US shale gas boom has stoked interest in new classes of ships to move ethane and LPG across oceans: very large ethane carriers and ultra large gas carriers.
The first VLEC orders have been placed and could keep shipyards busy for years, even as more are built to move cheap US ethane to Asia and Europe. But the time for ULGCs is yet to come.
After years of uncertainty because of economics, paltry demand and ballooning supply, the future is looking bright for ethane as appetite emerges in Europe and Asia, and with it the need for longer-haul and larger vessels.
India’s Reliance Industries Ltd. is paving the way with a $723 million contract in July to build six vessels of 87,000 cubic meters each, the world’s first VLECs. These will be built by South Korea’s Samsung Heavy Industries and are slated for delivery by the end of January 2017. They would be able to move 1.5 million mt/year of ethane from Reliance’s US shale joint ventures to a cracker being built at the Jamnagar complex.
“There is a developing market in VLECs. However, this is likely to follow the characteristics of the early LNG carrier market in light of the capital commitments to build infrastructure to deliver and receive ethane. We expect VLECS will be built against firm long duration, or more than 10-year time charters, not speculatively,” a shipping source said.
The technical design and management requirements, the source added, will see this as a niche market for firms with LNG and LPG experience and is likely to be a small fraction of the very large gas carrier market size.
Even as the Reliance deal was being negotiated, industry experts were skeptical about the prospects of moving ethane to Asia. They cited poor economics, lack of commitment to building ethane-fed crackers — as naphtha and propane remain the preferred feedstocks — and the absence of VLECs to carry large volumes across the seas. Also, Northeast Asian petrochemical makers have so far not hinted at using ethane as a cracker feedstock.
Analysts have said 25 large ethane vessels would be needed to service the US Enterprise Products Partners’ 200,000 b/d ethane export project alone. And large ethane carriers are also in the works.
Navigator Gas is building four 35,000-cu-m ethane carriers at Jiangnan Shipyard and Switzerland-based Ineos is contracting six 27,500-cu-m vessels from Danish shipping firm Evergas, being built in China, to transport US ethane to its European crackers.
The VLEC sector got a boost with announcements from two leading classification societies. International classification society ABS was chosen to class Samsung Heavy’s VLECs, while DNV GL signed a letter of intent with Hartmann Schiffahrts, Jaccar Holdings and HB Hunte Engineering for the classification of five 85,000-cu-m VLECs of the ECO STAR 85K design.
Hinting interest in the fledgling sector, shipping major BW noted that the ethane vessels market offered opportunities to companies with expertise in VLGCs and low-temperature liquefaction such as that required for methane transportation.
But VLECs will take up shipyard capacity otherwise available for VLGC newbuilds, it added.
Tight supply caused by increased long-haul LPG flows from the US and Africa to Asia — propelling freight rates to record levels of more than $140/mt this year for the Persian Gulf-Japan route and around $300/mt for the Houston-Japan route — could ease by end 2015, as VLGC newbuilds hit the market.
There are now 1,195 LPG carriers, with at least 1,000 cu m capacity each, totaling 21.4 million cu m, of which 157 are VLGCs. Sources said 146 new carriers, including 73 VLGCs, are due for delivery over 2014-2016, mostly from the second quarter of 2015 through Q2 2016.
As BW noted, competition for shipyard space from VLECs could limit further developments of large, or ultra large, LPG vessels.
Yet, this has not stopped discussions about the potential of ULGCs. As global LPG trade soars, bigger vessels might be needed to leverage economics of scale.
“There was talk about this six to seven years ago, when the market thought the US would import a lot from Qatar and the Middle East,” a Western trader said. That idea fizzled out before hitting the drawing board and now the tables have turned with the US becoming a major exporter. The current shortage and record chartering rates of VLGCs could prompt the industry to review the economics of ULGCs.
These ultra large vessels could break bulk via ship-to-ship transfers, or via pipelines outside port limits, and move the cargoes to a number of buyers within a particular region, sources said.
Detractors argue that such mega vessels would face loading limitations, such as access to the Houston Ship Channel and terminals. “In the absence of terminal capacity designed for a larger vessel class, it is difficult to envisage value in building larger vessels,” one shipping source said.
“The size of the order book suggests that VLGCs remain the dominant preference for LPG transportation, and there seems to be a sufficient order book to absorb LPG transportation requirements beyond 2016,” the source said, referring to the industry’s choice of vessels that can carry 44,000-mt cargoes, against ULGCs that can move double that.
A Western trader said no ports could take ULGCs and they would have to take a fixed trade route. “As you see going forward, ships are getting smaller because of ballast tanks to be double hulled. And also, if you increase intake on ships in excess of 45,000 mt, it will be tough for traders as risk will increase as well.”
Another Western trader said countries must weigh the economics of building or upgrading ports. “What would be the economics and incentives for traders to carry such a large cargo which is double the current cargo [size]?” the trader said. “We would have big sellers and big buyers. Terminals should invest in more tanks or cargo discharge has to be done at more terminals.”
Eyes are on whether China would be motivated to build bigger terminals as its thirst for cheaper propane feedstock grows along with the building of more propane dehydrogenation plants.
Supporters of mega LPG vessels dispute the argument that the demise of ULGCs would be a lesson for the LPG sector, adding that ULCCs faced draft restrictions. “The biggest LPG ships will never reach the dwt of a ULCC, so the draft issue can be ignored,” one source said.
ULGCs can also go through the expanded Panama Canal when it opens by mid-2016, as they are within range of the 160,000-180,000 dwt Suezmax crude vessels, which are cleared for the waterway, shipping sources said.