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LNG Shipping, Set to Chart a New Course? - LNG Review 2005
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Gaurav Seth
Head, Global LNG Shipping Finance, SG Corporate and Investment Banking
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Originally printed in:
LNG Review
- 2005
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It is widely known that LNG shipping and LNG ship financing have seen an unprecedented boom in the last few years. More than 80 LNG ships have been ordered in the last two years alone, against a current fleet size of approximately 176. The competition among ship owners for this rapidly growing market is intense. The LNG ship financing market has faced similar trends – it has grown significantly and is extremely competitive. Given current market conditions, both LNG shipping companies and financiers must wonder whether this momentum can hold and, if so, for how long. The question is whether the market will follow a cyclical trend so common to the shipping sector at large or evolve in a different way.
This article examines the LNG shipping market, the LNG ship financing market and some of the challenges and opportunities that lie ahead.
Current Market
The LNG shipping market continues to witness significant market opportunities with several new projects – liquefaction and regasification – looking for long-term LNG tonnage. Some examples of LNG shipping tenders concluded and those in progress this year are Sakhalin (three ships), Tangguh (eight ships), Yemen LNG (up to four ships), Suez LNG (four ships), Kogas (four ships), Rasgas III (12 ships) and Petronet (up to two ships), with further Qatari projects yet to tender out their shipping requirements.
Shipping companies are prepared to charter LNG ships to ‘greenfield’ projects and to projects in jurisdictions with higher country risk, at attractive charter rates and weaker charter terms. Despite being aggressive, shipping companies are finding it increasingly difficult to distinguish themselves from their competitors other than on price.
The financing market for LNG ships finds itself in a very similar situation. The number of banks interested in financing LNG ships and the appetite for greater risk and underwriting capacity for such assets has grown substantially. LNG shipping finance now attracts a diverse group of financial institutions that range from shipping banks and project finance houses to export credit agencies and newer sources of finance such as Kommanditgesellschaft (‘KG’) funds and Islamic finance. Banks are willing to stretch loan maturities, reduce pricing, relax loan covenants and take higher project and country risks.
This robust trend is a reflection of the financiers’ view that financing of an LNG ship – which comprises a combination of a mobile asset and employment under a long-term contract – is a compelling financing proposition. However, like LNG shipping companies, financiers are competing largely on price to win new business as most leading players are willing to offer similar loan terms and financing capacity.
Future Developments
No doubt the increasing market size and competitiveness of LNG shipping and LNG ship financing has brought with it several benefits. There is greater opportunity, more players, greater liquidity, increasing appetite for risk and, ultimately, more competitive tonnage and financing. A common dilemma, however, is whether the current pricing trend is sustainable or further pricing pressure will tip both markets into a cyclical trend perhaps more akin to ‘boom and bust’ cycles typical of past shipping markets.
There are mixed views as to whether the LNG shipping sector (and financing of LNG ships) will mirror the trends generally associated with traditional shipping in the short to medium term. LNG shipping (and its financing) may not be as closely aligned to cyclical shipping trends as the following reasons suggest:
- The LNG shipping market is more reliant on the growth of the overall LNG market, which is predicted to hold its growth pattern, than on the traditional shipping market, which has witnessed strong growth but attracts mixed views on its short- to medium-term future.
- LNG shipping remains a contract-based business and is not really an asset play, which should give it greater immunity from market forces that typically drive the traditional shipping market cycles.
Categories:
Transportation
,
LNG
,
Gas Processing
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Gaurav Seth is Head of Global LNG
Shipping Finance at SG Corporate
and Investment Banking. His
responsibilities include co-ordinating
the origination, structuring and
execution of LNG shipping projects
globally. Mr Seth specialises in
limited recourse financing of
LNG ships and has led
advisory/arranging transactions for
LNG shipping projects for various
countries, including China, India,
Nigeria, Russia and Qatar. He
started in the LNG ship financing
business in 1998, while he was at
ANZ Investment Bank. Mr Seth is a
member of the Institute of
Chartered Accountants of India and
holds a bachelors in commerce
degree from the University of Delhi.
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