Gas supply challenges drive demand for additional shipyard capacity and technical expertise

It is widely acknowledged that efforts to curb emissions in the power and industrial sectors have led to a switch from coal to gas in recent years. This has resulted in a sharp increase in gas demand, which has placed huge pressure on supply. More recently, these market dynamics have been further accentuated by regional challenges, and global efforts to develop a new hydrogen industry.

 

Gas in Europe – supply challenges and potential solutions

 

Following the outbreak of the war in Ukraine, energy security (inclusive of the use of gas as a backup to intermittent renewable power) was elevated to the top of the political agenda. With the prospect of power cuts deemed unacceptable and sanctions imposed on Russian-origin gas by the international community, European gas importers have sought other suitable alternatives.

 

One potential option is the construction of more LNG carriers and Floating Storage & Regasification Units (FSRUs). These assets offset escalated risk in the supply of pipeline gas, while offering flexibility regarding location, and functionality. In the short term, FSRUs not employed in their regasification role can double up as LNG carriers. While, in the longer term, their true value could lie in their capability to inject natural gas into grids or end-users’ infrastructure at short notice.

 

FSRUs in Europe – track record and current usage

 

Europe has a successful history in the use of FSRUs, with smaller states such as Lithuania and Croatia using their flexibility to offset the need to build costly pipelines or develop a reliance on a sole supplier. However, with the urgency to fix more capacity before winter 2023/24 already becoming evident, certain larger EU states and their power and gas operators are seeing the potential merits of FSRUs. For example:

 

• In Germany, power generator RWE AG is now at the forefront of ramping up the use of FSRUs, having moored units at German North Sea ports, including the newbuild LNG Tanker Hoegh Gannet (IMO: 9822451) in January 2023
• In Italy, the LNG Tanker Golar Tundra (IMO: 9655808) was docked at the Port of Piombino in March 2023 by gas operator Snam Rete Gas S.p.a.
• Dutch operator, NV Nederlandse Gasunie took delivery of the LNG Tanker Golar Igloo (IMO: 9633991) at Eemshaven in late 2022

 

Obstacles to capacity building for FSRUs and LNG carriers

 

Some market observers expect that up to 25 FSRUs could be docked in Europe over the coming years. However, the drive to build more LNG carriers and FSRUs has encountered obstacles, not least the sharp loss of shipbuilding capacity over recent years at the world’s shipyards. Back in 2009, the shipbuilding sector was well-equipped, with over 300 functioning yards across the global market. But, just over a decade on, that figure has slumped to under 150, and many are not equipped to build LNG carriers or FSRUs.

 

This scenario is an age-old conundrum. When the need for new tonnage appears, the industry cannot deliver it overnight, since it takes time to build ships, and/or because there is insufficient construction capacity.

 

Shipyard capacity – current order book and potential future demand

 

Currently, the global order book for LNG carriers is brisk, with orders placed in early 2023 at South Korea’s Hyundai Heavy Industries (HHI) yard, as well as at its compatriot constructor, Daewoo Shipbuilding & Marine Engineering (DSME). Hudong Zhonghua Shipbuilding (HZ) also has a healthy order book, and China is building new vessels to challenge South Korea’s dominance of the LNG carrier industry.

 

On top of that, competition from the containerised shipping market is growing, with operators such as Evergreen Marine Corporation (Evergreen), and CMA CGM placing hefty orders for newbuilds to meet the well-documented surge in demand in recent years for containerised capacity. Other operators such as Yang Ming Marine Transport Corporation are likely to follow suit with orders in 2023. These operators are buying ships to meet more stringent environmental regulations, mitigate risks related to shipping’s decarbonisation transition and capture first-mover opportunities.

 

Accommodating all these requirements will require not only new ship building capacity, but also new technical capability to adapt to decarbonisation technologies. These market needs are already reflected in recent activity in the shipbuilding market, for example:

• The reopening of STX Dalian Shipbuilding Co., Ltd’s yard in Northern China in 4Q 2022
• The development of a new construction space at Jiangnan Shipyard in Shanghai, China, and at Yangzijiang Shipbuilding Co., which operates yards at Jingjiang on the Yangtse River, to meet demand for LNG carriers

Potential risks and opportunities arising from rising shipyard demand

 

The potential future rise in shipyard demand brings with it additional risks and opportunities, including a potential future surge in vessel scrapping, as environmental regulations tighten and older vessels become non-compliant and/or uneconomical. Furthermore, the long-term potential for newbuild demand to exceed construction capacity growth could result in a rise in freight rates for both containerised tonnage and LNG, as market participants wait for the newbuilds or retrofitted ships to come into service. As well as the potential for rises in operating costs, there are also questions regarding the financing of new shipyards. Interest rates are on the rise, hence the cost of big capital projects could become prohibitive, potentially slowing down the path toward the introduction of new shipyard capacity. Everyone likes a boom, but if it’s at breakneck speed, there can be unwelcome consequences.