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K Line seeks partnerships to grow its LNG business

Sun 26 Feb 2017 by Karen Thomas

K Line seeks partnerships to grow its LNG business
Yuzuru Goto: backing new partnerships, unconventional gas projects and high quality shipmanagement

Japan-based K Line commands a fleet of 49 LNG carriers, 20 managed in-house. K Line LNG (UK) managing director Yuzuru Goto tells Karen Thomas why careful study and strategic partnerships will drive the shipowner’s LNG growth

Eighteen months ago, K Line was working to build a 61-ship fleet by 2020. How have your plans evolved?

We have an equity position in 49 vessels, live and on order. Our LNG shipmanagement business is divided between London and Tokyo. London manages eight LNG carriers and Tokyo manages five. We will manage seven ships on order, giving us 20 under group management by 2020.

Eighteen months ago the group planned to increase its LNG fleet to 61 by 2020. Last year we revisited that target and have fixed it at 57 vessels by 2020, reflecting delays to new projects.

What do you expect for future shipping demand, based on new projects reaching a final investment decision (FID) in the next few years?

We think things are going to slow down. Production projects have already taken FID without full commitment on the buyers’ side. There’s a surplus of LNG coming. That, with the trend in oil prices, will have an impact on project approvals.

That’s why everyone is looking now at floating storage and regasification units (FSRUs), floating storage units (FSUs), smaller capacity regasification solutions, gas-to-wire and small-scale projects. There’s a real focus now on creating small pockets of imports because so much LNG is coming to market. We think it will be a challenge to take investment decisions on other new projects – at least for a while.

What prospects do you see ahead for Japanese import demand?

Japan’s LNG demand is linked to the energy mix strategy and is falling in line with the restart of its nuclear reactors. Today’s LNG demand in Japan should be the peak.

How will K Line evolve to suit a changing LNG landscape?

We’ve always focused on long-term charters – that is our strength. Now, charterers want shorter, more flexible shipping coverage – and that’s not a model we have been completely comfortable with. We are looking for different ways to meet shorter, more flexible demand.

We don’t order LNG carriers on a speculative basis. We will order if we have a reasonable charter term with a good, solid, credible customer. Anything from seven years is something to look at.

However, we will have to be creative in how we structure those deals. That was the case with the 48th and 49th ships on our books; two 173,400m³ newbuildings chartered to BP to lift cargoes from Freeport LNG in the US. These will be the ninth and tenth vessels we manage from London.

It’s a long-term contract but our customer required flexible terms. We made the bid, building on our existing relationship. But we controlled our exposure by partnering with the Greek shipping company Chandris, which is very strong in tankers and bulkers – with whom we have developed a strong relationship.

What have you achieved with your partnership with Chandris?

This new business model strengthens us, from a shipmanagement point of view and from the point of view of our customer. It’s the first time we have joined forces with a Greek shipping company in LNG. Greek shipowners have a history of shorter, more flexible charter requirements. They are more comfortable with such deals and have an appetite for this sort of risk exposure.

The deal allowed us to control our exposure, while keeping the shipmanagement and the relationship with BP. Patris and Kinisis will be delivered in January and September next year. It’s a new business model for us, to team up with partners that have a slightly different risk appetite – it’s a win-win scenario.

We are talking mostly to shipowners involved in other segments, who are comfortable taking this kind of risk exposure in tankers or other shipping segments. They are familiar with the risks and it allows us to control our exposure but to continue to grow our business and to strengthen our relationships with our customers.

Twenty-four of your ships are fixed against Qatargas and RasGas cargoes. How will the Qatari merger affect your business?

We manage the Qatargas ships from Tokyo and the RasGas ships from London. The Qatargas ships are managed from Tokyo because the buyers are Japanese and because of the trade pattern. We manage the RasGas vessels from Europe, to be more focused towards the Atlantic Basin, to the US and to Europe.

However, the two offices work closely because the Qataris have been working together more and more. The Qatari merger is very interesting. It will be interesting to see whether this will impact us or not. For the time being there will be no changes to the operation but we will always consider the best way to support them. We feel that it’s about Qatar trying to align and to have a more efficient organisation as the largest LNG supplier.

What are your plans for other LNG-shipping segments?

We have recently set up a new division in Tokyo to drive opportunities in small-scale, midscale and regasification projects and other gas-related new projects. There are so many different possibilities. This new division will assess them and decide what K Line should focus on.

We are late in the game on the downstream side – a couple of years ago, we were focusing on the upstream side of the energy value chain. We went in early in floating LNG (FLNG) with Flex LNG, as a joint venture, in 2006. Having invested heavily, we eventually exited the business. We are cautious now, in taking the next step. But we are also hungry.

Could K Line convert its own ships to support offshore LNG projects?

Our older tonnage is tied in to long-term contracts, although some of these contracts will expire soon. We also have two 2008/2009-built Trinity-class vessels, good-sized modern steamships without long-term contracts, that would make very nice conversion candidates for an FSRU or as floating storage units. So we are marketing them as such.

For utilising our existing assets, an FSRU project would work well for us. But the new division is looking at new investment opportunities. We are looking to utilise existing assets and to invest in new areas in gas.

Adjusting to the changing market means new partnerships in our existing business and developing new, unconventional business. We are committed to putting new resources into these areas. But our third goal is to improve quality in our shipmanagement business, to build and maintain our reputation by achieving zero incidents and high customer satisfaction.