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Analysis: Qatar's giant LNG fleet expansion to shape market in coming decade

Highlights

To define trade flows and provide commercial leverage

More Q-Flex and Q-Max vessels will boost economies of scale

Geopolitical concerns key to maintaining captive fleet

Singapore — Qatar's plan to double its LNG carrier fleet by 60 vessels will be one of the largest fleet expansions the industry will witness to date and will be critical to the evolution of LNG trade flows and market dynamics in the next decade.

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Qatar, the world's largest LNG exporter, already operates the largest LNG fleet through its shipping subsidiary Nakilat, which has pushed economies of scale with its Q-Flex and Q-Max vessels, the largest LNG carriers in operation.

The fleet expansion underscores a favored tactic among Middle East producers, such as Saudi Aramco and National Iranian Oil Company, wherein shipping investments are strategic to maintaining market dominance. Even Malaysia's Petronas, a top LNG exporter, controls its own fleet.

Qatar's LNG exports

Most of Qatar's LNG is supplied through long-term contracts on a destination ex-ship basis, where the seller arranges for shipping. This business model has been challenged by the growth of the spot market, but Qatar is unlikely to make a drastic shift from contracted supplies. This has been reaffirmed by the proposed fleet expansion.

When Qatar's second-largest LNG producer Rasgas signed a deal to supply Italy's Adriatic LNG terminal in 2001, the 25-year contract was market changing.

It was the first time that Qatar took control of shipping with destination ex-ship contracts, and it led to the formation of Nakilat, according to GIIGNL, the International Group of Liquefied Natural Gas Importers, a non-profit organization.

The LNG market hasn't looked back since then.

Supercooled: The evolving LNG fleet driving the global gas boom

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The situation is similar to Bahri, the Saudi tanker shipping company, as they mostly move their own cargoes, but the ships are also relet to the spot market when commercially sensible, Court Smith, shipping analyst with brokerage and data provider VesselsValue, said.

Smith said Qatar may also consider flexibility with physical deliveries given the 30-year life span of the vessels and the rapidly changing market. It is common for older LNG ships from expiring contracts to be redeployed on the spot market.

In addition to commercial leverage, perhaps the biggest driver for maintaining a large LNG fleet is geopolitical. Qatar is still feeling the impact of the Saudi-led trade embargo in 2017, which put it in a situation similar to Iran's where the producer was forced to rely on its own ships.

Doha's withdrawal from the OPEC last year to focus on gas means that a domestic LNG shipping fleet will be key to Qatar's long-term LNG ambitions.

UNPRECEDENTED FLEET EXPANSION

Earlier this week, Qatar's energy minister said a recent delegation to South Korea was studying the addition of 60 new LNG tankers. This corresponds with the expansion of Qatar's LNG export capacity to 110 million mt/year from 77 million mt/year, and Qatar Petroleum's Golden Pass LNG terminal in Texas.

This is likely to be, by far, the biggest order to date, for any kind of ship, and will increase the current global LNG trading fleet by 10%, Ralph Leszczynski, head of research and consulting at Italian shipbroker Banchero Costa, said.

Leszczynski said the last time Qatar's fleet grew on this scale was nearly 10 years ago when it ordered 45 units over 3-4 years, spread among the three largest Korean yards -- Daewoo Shipbuilding & Marine Engineering, Samsung Heavy Industries and Hyundai Heavy Industries.

The orders were completed in a record 34 months by August 2010, demonstrating the efficiency of South Korea's shipbuilding sector, and paving the way for them to build the bulk of the current global fleet.

"The same is likely to happen this time as well. Only South Korean yards have experience in building such vessel types and have sufficient capacity," Leszczynski said, adding that each Q-Flex or Q-Max roughly costs $200 million.

That implies an investment of $12 billion for 60 vessels.

BIG IS BEAUTIFUL

While the Q-Flex or Q-Max vessels helped expand global LNG infrastructure -- terminals like Singapore's SLNG are designed to fit large vessels -- they have not been compatible with older terminals in Japan and FSRUs in shallow water ports like Pakistan.

They also cannot pass the expanded Panama Canal to serve US projects. This means that Qatar is likely to order a mix of large Q-Max style ships as well as normal-sized carriers to meet its transportation needs.

On the other hand, Q-Flex or Q-Max vessels have also opened up new markets.

"Looking at the trade flows of the Q-Max/Q-Flex vessels, it definitely looks like these ships are finding some new destinations as demand for LNG has risen. Big ships equal lower costs in almost all cases," VesselsValue's Smith said.

He said flexibility will be critical for the new ships as the spot market develops and charterers want more flexibility in discharge options; and the new vessels will also take into account berth expansions and the expansion of midstream and downstream infrastructure at key destinations.

In January 2012, Q-Max ships delivered LNG to only three terminals -- UK's Isle of Grain, Malta's Valletta and Canada's Canaport, and Q-Flex ships delivered to Japan's Sakai, Isle of Grain and UAE's Khor Fakkan.

By the end of 2018, Q-Max ships had made deliveries to 31 LNG terminals globally and Q-Flex ships had reached 88 terminals, according to VesselsValue.

Nakilat currently has 65 LNG carriers, out of which 20 are conventional LNG ships with a capacity of 145,000-170,000 cu m, 31 Q-Flex ships of 210,000-217,000 cu m, and 14 Q-Max ships of 263,000-266,000 cu m.

-- Eric Yep, eric.yep@spglobal.com

-- Edited by Geetha Narayanasamy, newsdesk@spglobal.com