Too Many Boats, Not Enough Cargoes: LNG Carrier Oversupply Drives Rates to Historic Lows

Mounting delays for natural gas liquefaction projects in the US and around the world not only place fresh strains on the pocketbooks of the operating companies but have had the knock-on effect of causing a vessel glut. Newbuild LNG carrier deliveries have been outpacing the new liquefaction facilities built to support them. Facilities delays come in various forms, whether its materials, lining up enough contracts to make a final investment decision, or in the case of the US, playing catch-up after the Biden administration’s year-long pause on issuing new permits for LNG projects. The current administration lifted the pause in late January. Permitting across the board has become a bit of a nightmare to hear some operators tell it. Getting the paper to conduct the simplest project can take months and at a much greater cost than previously experienced. Perhaps no example is more telling of this new world order than the one given by Williams President and CEO Alan Armstrong at CERAWeek by S&P Global in Houston in March. “A project we’re working on right now, the permitting cost side of the project, and this is if everything goes well—the permitting cost is twice as much as we’re spending on pipe,” he said. “So, when people talk about tariffs, we’d be glad to pay the 25% tariff as long as we can get our permits done. There is so much value to be had for our country in getting our permitting lined out in a way that we don’t wind up in courts and we don’t wind up with the risk dollars. Frankly, it’s not just the time, it’s not just the cost of that. It’s the risk associated with having a project stop after you’ve spent hundreds of millions of dollars (on it).” While operators continue to navigate the uncertain permitting waters, Chinese and other Far East shipyards are churning out new LNG carriers. The current building cycle can be traced back to the beginning of the Russia/Ukraine war. When Russian natural gas supply was cut off, the need for new supplies to flow into certain areas in Europe became urgent. The quickest answer was to bring LNG into the region. The new market demanded new infrastructure and that included carriers to move the fuel from suppliers to the new market. “You had a lot of ships being used for (LNG) storage in Europe when the war first started,” explained Josie Mills, senior analyst at Enverus. “With less ships being used for storage; those have also moved back on the market. So, not only are you having the ships that have been constructed coming online, but you’re also seeing those come back online too.” As vessel deliveries mounted without cargoes to transport, the additional units began placing downward pressure on charter rates—sending them to historic lows. In some markets, the rates went negative for several days.