We’ve detected that you are using an outdated browser. This will prevent you from accessing certain features. Update browser

LNG – perfect storm brewing

Why LNG is key to energy security

Panos Mitrou, LR's Global Gas Segment Director, explains why a ship supply crunch could worsen the world’s energy crisis and limit scope for LNG to support the energy transition.

A global energy crisis was under way long before Russia invaded Ukraine earlier this year. But the war has advanced regional energy problems and Europe, in particular, is in dire straits as it faces the approaching winter with low energy stocks and no chance of replenishing them before cold weather arrives in a few months time.

The pandemic masked energy security challenges as industrial activity declined and energy demand dipped. But now that most developed economies are recovering, the shortage of power is evident. Supplies of gas lie at the centre of the problem.

Apart from the US where exports are rising, there will be only limited new supplies of LNG in the near future. So, now that the war has taken vast quantities of gas out of the system, energy-starved countries are turning to the LNG spot market for gas at phenomenal prices. The few producers with spare export capacity can name their price.

Changing LNG trade patterns have not necessarily favoured the owners of these specialised ships. LNG from the US to Europe, for example, clocks up fewer tonne-miles than imports from the Middle East or Asia. Despite this, the LNG sector is firm and will remain so, thanks to higher volumes and demand for sea transport and fleet capacity constraints.

Ship supply constraints

The energy storm will worsen in the months ahead. There are four long-established LNG carrier construction yards, three in South Korea – Daewoo, Hyundai and Samsung – and Hudong in China. Two more Chinese builders have joined the short list recently – Dalian and Jiangnan – and another newcomer, Yangzijiang (YZJ) is expected to join the ranks.

All LNG construction facilities are full until well into the second half of the decade. Reflecting this, the most recent orders have been agreed at prices up by $60 million – latest contracts have closed at around $250m. Notably, these ships have relatively basic specifications. They are without some of the bells and whistles seen in past deliveries.

LR estimates that the annual production capacity of LNG builders is between 70-80 ships at the most. We also estimate that during the second half of this decade, liquefaction and trade demand volumes may require twice this number.

Some LNG producers who are ramping up exports have been caught out by the lack of construction capacity, hit by higher prices and longer delivery times. However, this has not deterred some companies from taking the plunge.
Where LNG liquefaction projects require delivery to terminal, key shipping players have not hesitated to work with new yards entering the LNG space. In this context some of the yard newcomers have already been booked for years ahead, limiting further any remnant yard capacity.

The upshot? The world will lack the LNG shipping capacity to meet transport demand by 2025, possibly before.

Lack of carbon efficiency

Meanwhile, much of the existing LNG fleet is unlikely to fare well when new IMO carbon efficiency regulations enter force in January. LR estimates that 400-plus existing LNG carriers in the 640 ship ocean-going fleet will fall in categories D and E of the carbon intensity indicator (CII).

This is largely because of inefficient steam-turbine and early diesel propulsion and a lack of boil-off management systems. Fundamental upgrades to lift them out of unacceptable D and E ratings into A, B or C categorise will be required.

Where such modifications prove uneconomic, owners may win a new lease of life for the ships as suitable candidates for conversions to floating storage units, with or without regasification capability. Floating technology is widely seen as the quickest way to raise import capacity and compensate for lost pipeline throughput.

But ship conversions will also take shipping capacity out of the market, generating more supply pressure. In carbon efficiency terms, these old ships may have poor ratings but they are still reliable vessels that the market could be in need of to balance demand.

Transition depends on security

There are fundamental issues to consider. We cannot have an energy transition without energy security and there is very little of that in many import-reliant countries right now. The planet’s energy security is under threat and carbon-free energy sources at scale are still many years away.

In the meantime, LNG is the cleanest hydrocarbon energy by far, and this applies to both the energy and the shipping sector. Ships using it as fuel make substantial emissions cuts. That said, methane slip remains a challenge but measuring its impact and applying the technologies being developed to tackle this problem will go a long way to improving LNG’s carbon footprint.

The world has abundant supplies of natural gas and plenty of existing export capacity with more under development. With pipelined gas in turmoil, LNG remains the reliable means to transport natural gas despite the cost of liquefaction and regasification. As things stand, and with the projected increase in LNG supply, before mid-decade, we will lack the capacity to ship LNG around the world in the volumes required.

A perfect storm is brewing.

Horizons December

Read more articles like this in Horizons

Thought leadership, maritime insights and expert advice from Lloyd’s Register.

Explore the new issue


What we think

LR's experts regularly share their research and insights.

Can't find what you are looking for?

Hit enter or the arrow to search Hit enter to search

Search icon

Are you looking for?