Gastech 2017: Mitsui OSK is Japan's largest owner of LNG carriers. But the slowdown in domestic demand growth and changing LNG trading landscape is forcing the company to rethink its traditional business model, ordering new tonnage against long-term demand.
MOL board member and managing executive officer LNG Takeshi Hashimoto spoke exclusively to LNG World Shipping about the opportunities and challenges ahead.
Mitsui OSK (MOL) plans to expand its fleet to 120 LNG carriers – but will this happen by 2020?
At the end of 2016, we had 74 ships on the water and 18 on order, a total of 92. We are delaying expanding our fleet to 120 ships by spring 2020 to reflect delays to new LNG-production projects. We feel now that it would be difficult to achieve that target by 2019 or 2020.
The 18 ships under construction will be delivered this year, next year and the year after, so by 2019 we will have 92 ships. Our market studies suggest that new vessels will be required in East Africa – for Mozambique and Tanzania, for the expansion of Russia’s Yamal LNG project, Yamal II, new US and Canada LNG projects or new expansion at Tangguh in Indonesia.
We expect all these projects to now start in 2020-2025. We still plan a fleet of 120 LNG carriers but will adjust the timing, from 2020 to 2025. Maybe our market analysis is too conservative, but it is based on the sentiment of the LNG industry today. It may be a different story next year.
Do you see LNG projects reaching final investment decisions this year, prompting owners to return to the shipyards?
This year will also be quite a difficult one for LNG shipping, for the shipowners and the shipyards. We are all waiting for big LNG projects to reach FID. If and when the Mozambique LNG project materialises, we think it will need 15 to 20 LNG carriers. While I understand there are many challenges, I hope this project can reach FID this year.
What are the prospects for new projects in North America – there’s no construction yet in Canada, and there’s a new administration in the US…
Many new projects are planned, especially in Canada, on the Pacific coast. But they need to sort out the environmental issues and marketing challenges. Many buyers in Asia – notably Japan, South Korea, India and China – have committed to new volumes coming from the US and from Australia that have started production or plant construction.
Sabine Pass LNG and AP LNG are part-completed. Asian buyers, facing lukewarm demand in their home market, have committed a little too much to these projects. Today, at least, Asian buyers do not have a strong appetite for new LNG projects – even though several LNG-production projects will expire their long-term contracts in Malaysia, Abu Dhabi and Brunei in the next few years.
A proportion of their replacement will need to come from new projects. Everyone is suffering an LNG oversupply. That makes it a very limited possibility that Asian buyers will support significant new volumes from the US or from Canada. The shipping community should wait for the time being.
Japan, as the world’s top LNG importer, is over-contracted under long-term deals. But new demand is emerging in smaller import markets. How can MOL benefit from that shift?
We remain very keen to develop business opportunities via floating storage and regasification units (FSRUs). These provide a safe solution for new buyers of LNG, mainly in emerging markets such as South East Asia, South America and India. These importers do not have enough investment in infrastructure to build land-based terminals.
An FSRU can provide more economical, faster solutions. We are very keen on FSRU solutions, especially in Asia, to develop these business opportunities. We are discussing these projects day after day, especially in Indonesia and in India, with various customers and potential customers.
You are working on your first FSRU project in Uruguay, of course. How is this progressing?
Last year, we fixed a new time charterparty with Gas Sayago. We are now waiting for a final investment decision and for approval from the Uruguay government. We hope Uruguay will give the project a green light by the end of February or March.
There are also FSRU opportunities in neighbouring states in South America – particularly in Chile and in Argentina. So we are looking carefully at new FSRU opportunities here and in Asia generally.
We will never order a vessel on a speculative basis. An FSRU is such a big investment. Our corporate strategy is that although this is slow to develop, we want to fix vessels to long-term contracts. We will do whatever we can to avoid too big a market exposure.
Bumi Armada converted your 1985-built LNG carrier Wakabu Maru into a floating storage unit (FSU) for Malta. Could MOL convert other vessels into floating units?
That depends on how you define conversion. We have studied FSU projects and believe several projects to use LNG carriers would be feasible. But rather than carry out expensive and extensive work converting LNG carriers, it is far simpler just to use the vessel for floating storage.
If the regasification unit can be installed on shore or a specialised barge, we think it makes sense to use a regas unit and floating storage instead of massive conversion works to FSRU. I doubt the wisdom of carrying out massive conversion works at a shipyard to use the vessel for floating storage.
The investment is relatively high and it becomes necessary to carry out so much pipework and steel work – and it takes a long time. When you compare this to the cost of constructing a new FSRU, we doubt that a full-scale conversion is competitive.
It only makes sense in the case of a relatively new vessel that cannot find employment, perhaps because of its fuel consumption or its cargo tank capacity. If you were desperate to fix such a vessel, then conversion to an FSRU – rather than chasing a long-term LNGC contract – might be a solution.
All the ships in our fleet are fixed to long-term contracts; we have just one vessel available, aged 20+ years. We doubt it would make sense to spend hundreds of millions of dollars converting such an old ship into an FSRU rather than order a new one from the shipyard.
You are working in Indonesia to provide coastal deliveries of LNG, in West Java and in Bali. What is your strategy for small-scale and coastal LNG shipping?
In Bali, we are providing a very small shuttle tanker, the 23,014m³ LNG carrier Triputra. In the past, it worked to support demand for LNG shuttle services between Indonesia and Japan and now we have switched it to serve Bali. This has been a unique business opportunity for us.
Indonesia offers so many business opportunities for domestic and small-scale LNG transportation that are relatively cheap, using floating storage from FSRUs or FSUs. But in Bali we provide only the shuttle tanker.
Markets such as Indonesia and the Philippines would seem ripe for shuttle services using smaller LNG carriers. Is that a niche that MOL can develop – will you order small-scale ships?
We recognise the demand for small-scale LNG carriers, for shuttle services and for LNG bunkering. We are interested in these segments. We have three small-scale LNG carriers, which are now relatively old. Now, this segment is advancing and we are starting new talks with shipyards in Japan, South Korea and China, trying to find a solution to build small-scale LNG carriers relatively economically.
The economics are very different to those of large-scale projects. These ships, with 10,000m³-30,000m³ cargo tank size, are likely to be built in South Korea or in China, rather than in a Japanese shipyard due to price competitiveness.
However, we have a history of building small LNG carriers in Japanese shipyards and want to encourage them to study seriously future business opportunities in small-scale LNG carriers, as there is strong demand in Asian countries including China, India and Indonesia, for small carriers in that size range.
Does this mean that as you expand your fleet to 120 LNG carriers, will Mitsui OSK diversify, ordering more, smaller ships by 2025?
We think so, yes. We are also very interested in the LNG bunker-supply business. We are looking at bunker barges and at shuttle tankers that can carry 10,000m³-30,000m³. Everything depends on the speed of development of the LNG-bunkering sector, but that depends so much on political and economic factors.
When you look at LNG-bunkering opportunities, are you looking at Japan or overseas?
Japan has so many shipping partners and the utilities are keen to provide LNG to bunker-supply projects at home. We feel it is more realistic to concentrate on projects near the point of production; the US Gulf, Australia and Middle East. We are also interested in international LNG hubs; Singapore, Rotterdam and so on.
How advanced are these plans?
We expect demand to grow steadily but slowly. There will be a gradual increase in ships using LNG as marine fuel, especially in Europe, and from ferries and domestic shipping services such as tugs and supply ships.
In five or 10 years’ time, there will be a boom in demand for LNG as marine fuel. Now is the preparation period for that demand. We want to prepare the technology, perhaps making some small investments.
How will Mitsui OSK adjust to the changing LNG landscape in Japan, a market that is over-contracted and where the utilities want more competitive and flexible buying terms?
Japan is the largest LNG market in the world. Most likely, our demand will be stable. Nuclear power is facing great difficulty starting again. It’s a headache, in terms of environmental costs. There are many question marks.
At the same time, we have to think about emission controls and reducing carbon dioxide. Meanwhile, the Japanese market is quite mature. We do not expect major growth in the domestic economy. Japan is importing 85-86 million tonnes a year (mta) of LNG and we expect this to stagnate or to reduce slightly for the next 20 years.
Meanwhile, we see a lot of up-side potential in China and India, which are importing 20 mta and 15 mta. We expect Japan’s international share to be much smaller but we expect China and India to be importing somewhere between 50-60 mta each by 2025-2030. These markets will drive LNG demand in future. We also see South America and Europe becoming big import markets.
China and India are negotiating better prices – how do you see terms and conditions changing?
In China especially, there is an over-commitment to LNG volumes. The investment and the infrastructure is not in place to consume such big volumes today. They need to reduce their obligations to buy or they have to dump their over-committed volumes by selling the excess at discounted prices. So they are suffering. However, we have strong confidence in the potential of India and China to grow, long-term.
Last year, Japan’s Big Three shipowners merged their container businesses; could this happen on the LNG side?
I honestly don’t think so. Ten or 20 years ahead, no one knows what will happen. But the container integration was an emergency that required the carriers to merge to survive in a difficult market. Today, all Japan’s Big Three are concerned to invest in LNG and want to develop their own portfolios by themselves. And we are happy about that.
Merger of our LNG businesses does not seem a good solution for us – at least not today.