This review of LPG shipping, written by Poten & Partners, will appear in a book being prepared by the Petroleum Economist to commemorate SIGGTO’s fiftieth anniversary.
Development of the Fleet
LPG was a late-comer to ocean transportation. The fact that LPG is gaseous at ambient temperature and pressure and yet liquid when stored or transported in a pressure or refrigerated state caused major design problems in the initial building of such ships.
The first LPG to be shipped internationally was in fact transported in the deck tanks of cargo liners. Dry cargo ships were then converted and refitted with cylindrical pressure tanks for LPG. It was not until 1953 that the first purpose-built LPG tanker, the Rasmus Tholstrup, was constructed in Sweden. Later on in the decade, these pressure ships became commonplace in Europe. But an efficient design - given the thickness of the tanks – usually limited the carrying capacity to around 2,500 cubic meters.
The solution for larger payloads was refrigeration. By cooling the cargo, the pressure could be reduced with a consequent reduction in the thickness and the weight of the cargo tanks. In 1959, Gazocean had the first of these vessels of semi-refrigerated design, the Descartes, constructed at the La Ciotat yard in France.
Longer-haul LPG trades, however, required much bigger cargo payloads than semi-refrigerated vessels could offer. That was the problem facing prospective importers of LPG into Japan from the Middle East and other distant supply sources in the early 1960's. The new tanks to store LPG in this vessel would have to be free standing and fully insulated within the ship's hull to prevent any cold escaping and damaging the hull. They consequently required construction with special low-temperature nickel steels. But the tanks did not need to be cylindrical in shape (as was the case with pressurized and semi-refrigerated vessels) and could be much more efficiently moulded to fit the contours of the ship. The pioneer in a new LPG vessel design was Bridgestone Liquefied Gas. The first fully-refrigerated vessel, the 28,875 cubic meter Bridgestone Maru, was ordered at the Mitsubishi Heavy Industries yard in Yokohama and delivered in 1962. The Bridgestone Maru II, delivered in 1964, started the modern practice of using the inner hull of the vessel and part of its side shell as the secondary barrier to protect the hull structure. Later designs increased the cargo carrying capacity of these vessels to 75-85,000 cubic meters, the standard size for VLGC's (very large gas carriers) today.
The VLGC has remained the largest sized LPG trading vessel. They trade to many disports, most of which have been built only with sufficient draft or storage capacity to accommodate a VLGC-load. The design improvements since 1970 have thus tended to be refinements only, more fuel-efficient engines and new bow designs (such as Kawasaki Heavy Industries’ Sea Arrow). The fact that LPG has always been recognized as a hazardous cargo has meant that the safety precautions such as double bottoms, now being introduced for the tanker fleet, have always been part of LPG ship design. The LPG trading fleet has always had a relatively enviable safety record. Serious incidents have been few over the years.
Structure of LPG Trades
History and trade routes determined that the LPG shipments East would be dominated by the VLGC-sized vessel. Not much LPG moves in that market between the 40-45,000 ton VLGC lot-sizes and the 2-4,000 ton pressure cargo trades for regional distribution. The VLGC fleet has thus traditionally divided into two segments - that controlled by Japanese charterers and shipowners and dedicated to Japanese import trades and the rest operating under a variety of trades and ownerships.
The European experience has been different than trade East. LPG shipping grew up with a mix of trade routes and a trading interest in other cargoes, such as ammonia and chemical gases, which also require refrigerated or pressurized transportation. European owners built and operated LPG vessels in a variety of ship sizes and for a variety of different employments. Many owners invested in this segment of the business. But difficult trading conditions for single vessel operators meant a concentration over time of fleet control - through ownership, charters-in and pooling arrangements - with a few ship operators. To help their cause, each company pool has concentrated in a particular vessel size. Thus Bergesen concentrated in the VLGC and the 50-60,000 cubic meter fleet, Exmar in the 20-40,000 cubic meter fully-ref fleet, and A. P. Moller in the 10-20,000 cubic meter semi-ref fleet.
VLGC Shipping Markets
The first wave of VLGC shipping orders occurred in the late 1970’s and was timed to coincide with the big buildup in LPG exports anticipated out of the Middle East. But the shipowners who had invested in VLGC’s at this time found the going tough in the 1980’s. Because of crude and LPG cutbacks in the Middle East, the supply of ships outpaced demand and market-fixing rates fell sharply. Few new vessel orders were placed at this time. However, the traders who did take forward positions on these ships in the rising spot shipping markets of the late 1980's and early 1990's were able to realize substantial shipping profits. Short-term rates surged during the period of the Iraqi invasion of Kuwait and the resulting Gulf War.
The late-1990's saw two generations of VLGC's trading - the older 1970's generation and the newer more fuel-efficient 1990's models. Employment prospects for the older vessels might have been bleak had it not been for the trader-initiated move into break-bulk floating storage operations off China. That market, however, disappeared in 1999 as shoreside storages in China were built; and, with newbuildings being added to the trading fleet, there was a large overhang of VLGC ships on the market.
In response, the lead VLGC shipowner Bergesen, with the participation of some other owners, formed a pool which set uniform fixing rates in an effort to manage the surplus. The pool fixing levels worked for two years. But there were still ships outside the pool that could be fixed at lower rates. By year-end 2001, Bergesen had to abandon pool-fixing levels and to follow the market. The low rates obtainable over much of 2002 did have one salutary effect. It persuaded owners to start scrapping their older VLGC’s that were now approaching thirty years of service. Five were scrapped over the year and five again in 2003 as market rates began to improve. By mid-2004, indicative time-charter rates for modern VLGC tonnage were in the $700-750,000 per month range.
The older vessels still trade, but with increasing handicaps. Oil companies in general do not like to publicize specific age restrictions. They do have strict vetting procedures which may or may not require physical inspection. Generally, they would be happy to vet a vessel up to 20 years in age, less keen on vessels between 20 and 25 years and reluctant to vet older vessels. Some require an independently-prepared CAP inspection in each case for vessels over 20 years in age.
VLGC Shipping Outlook
The current VLGC fleet numbers 98, of which 43 are over 20 years in age.
As of July 1 2004, there were, in addition, seventeen VLGC newbuildings on order at yards in Japan and Korea, for delivery between the second half of 2004 and 2008. Those who have ordered have included the oil major BP, the trader Geogas, and European shipowners such as A.P. Moller, Eagle Ocean, and Zodiac Shipping that are not presently engaged in VLGC shipping.
Too many or too few? Attractive yard price quotations were behind the initial surge in orders. Deals done in 2002 were in the $55-57 million yard price range, not much higher than the level twenty years ago when the first VLGC newbuilding surge occurred. However, in 2003, yard space East began to tighten, the US dollar depreciated, and steel prices escalated. VLGC yard price indications in first half 2004 were at or in excess of $70 million.
LPG trade projections suggest that all of these vessels should find employment at good rates. LPG is a supply-driven business. Seaborne exports of LPG, on the basis of present known projects, are anticipated to increase from 45 million tons in 2003 to 68 million tons by 2010, a rise of almost 50 percent.
There is still some excess capacity in the current VLGC trading fleet, a considerable amount if the 8-10 VLGC’s trading profitably in alternative clean products are taken into account. And the pessimists would also say that the same arguments about supply expansion being made now were made some twenty years ago. As the trade found out then, plant design capacities do not necessarily translate into produceable volumes for shipment. Plants start up late, don’t work, or run well below their intended capacities. Thus the ships ordered may not in fact be needed.
The potential difference this time, compared with last, is that many of the new projects are gas rather than oil-based. The high capital cost element in these projects should ensure that the operators will endeavor to run their plants at high levels in order to repay the debt incurred. Operations should be less affected by any OPEC crude oil cutbacks than they were in the past. For some, the VLGC newbuilding total of seventeen is sizeable. But when compared against the LNG newbuilding total of 60-70 vessels, this market segment may not present such a risk for shipowners.
Other Ship Sizes
Age is also catching up with the non-VLGC segment of the LPG trading fleet, with the possible exception of the small pressure vessels.
The fully-ref fleet of 20-60,000 cubic meters has seen vessel replenishment (older vessels being scrapped, new orders being placed), mainly by the established players – Bergesen, Exmar and A.P. Moller. Others who have ordered have been Sonatrach (for LPG trades) and Hydro Agri and Sovcomflot (for ammonia trades). The preferred ordering sizes have been 56-60,000 cubic meters and 35-38,000 cubic meters.
The semi-ref vessels of 10-22,500 cubic meter size, including the specialized carriers that transport ethylene, mix their employment between LPG and chemical gases. Most trade in the Moller Skandigas pool. However, this segment of the fleet also includes the celebrated Navigator vessels. Navigator ordered in China five of the largest ethylene carriers ever built. They delivered in 2000, each at a cost of $50-55 million. However, trading results could not support the high level of interest payments due. When the Navigator Group defaulted on its bond payments in early 2003 and filed for bankruptcy, the disposition of these vessels lay with a New York court. The status of these vessels, whether they be operated as a going concern or sold, has been a matter of much speculation within the industry.
This segment of the fleet experienced a market downturn in 1998 when the Asian financial crash hit chemical gas trades. It has not really recovered. However, charter-hire rates for these vessels have begun to bounce back, from the $325,000 per month levels at the time of the crash to around $525,000 per month today.
Pressure and small semi-ref LPG ships still abound, some 680 of them at last count. Pressure vessels used to be built in sizes up to 5,000 cubic meters. But the latest generation has extended this range to 11,000 cubic meters. Two 11,000 cubic meter pressure tankers – the Kendal and Keswick - were delivered from Japan in 2003. Usually, the tanks have to be very thick to sustain the pressure. But the new construction has involved much lighter nickel steels.
Some fifty years ago, the first purpose-designed LPG carrier was built. Today, the industry has matured. A range of ship-types – fully-ref, semi-ref, ethylene, and pressure – now ply their trade around the world.
The main technical challenges have been solved. But the commercial challenges go on. The fruits of enterprise have not always been rewarded. The industry has seen its fair share of ups and downs over the past fifty years (and will undoubtedly see them again over the next fifty). But all of the new gas projects being constructed and planned around the world, from which LPG will have to be extracted, suggest that this industry will have a promising future.
This article appears in Poten's monthly research report on LPG in World Markets. For information about this publication, please visit http://www.poten.com/s_lpg_products.asp