LNG trade: an agent’s perspective

LNG is considered a specialist commodity requiring particular care and the attention of experienced personnel. The technically complex and sophisticated nature of both the ships and terminals, as well as the highly regulated nature of the trade, requires the agent to be fully conversant with the unique characteristics of the LNG trade, including local and international regulations.

LNG carriers, ports and terminals have to meet exceptionally high safety standards. Therefore, it is a requirement, and there is an implicit understanding, that all responsible parties, including the agent, are trained and vetted to a high standard and act with a full working knowledge of the entire operation, and their role within it.

China

In December 2014, the Gaslog Chelsea, loaded with 150 000 m³ of LNG from Papua New Guinea, berthed at the Sinopec Shandong Qingdao LNG terminal in China. Its arrival marked Sinopec’s first LNG project in Shandong Province. The first phase of the project has a designed receiving and transport capacity of 3 million t of natural gas and is capable of meeting the demand of 22 million households per year.

Located at the new Dongjiakou port in the West Coast New Area, the Sinopec Shandong Qingdao LNG terminal was constructed and is operated independently by Sinopec. In the future, it will have a receiving and transport capacity of 10 million tpy.

In 2009, Sinopec signed a long-term deal to buy 2 million tpy from the PNG LNG project over a period of 20 years. Sinopec is the last of China’s three national oil companies to begin importing LNG, making a significant contribution to energy conservation and emission reduction in the country.

As agent, Inchcape Shipping Services (ISS) China has been involved in this project since 2010. It assisted Sinopec in developing know-how of terminal and ship operations, port tariffs, tug usage and other matters, such as assimilating and collating LNG terminal information and port manuals for China’s LNG terminals.As of December 2015, ISS Qingdao had acted as local agent for 13 LNG shipments at the new port.

Compared with other vessels, LNG carrier operations are demanding, commencing with the berthing operations at the yet to be finished Qingdao LNG terminal. Furthermore, it takes at least five working days to obtain relevant government permissions for berthing such vessels. The LNG commercial interests also require a high level of quality service.

As such, ISS Qingdao formed a team of specialised operational staff dedicated to the LNG business. The Qingdao LNG terminal is still in its construction and expansion phase and ISS continues to assist the terminal in all aspects of its marine business, including the incoming LNG vessels.

Papua New Guinea

In May 2014, the Spirit of Hela loaded the first LNG cargo out of Papua New Guinea bound for Tokyo Electric Power Co. in Japan. ISS PNG acted as the terminal agent for this historic shipment.

The ISS PNG agency team is on site at the terminal, located 20 km from Port Moresby, on a daily basis, with vessels loading every three to four days. As agents, ISS coordinates and communicates between the terminal and the carrier to handle arrival and departure, organise clearance procedures and ensure that there are no operational delays. ISS also fulfils its client’s cargo export documentation to meet customs requirements.

To date, having handled over 150 vessel calls, the PNG terminal is almost regarded as the home port for the regular LNG carriers. ISS has extended its services to these vessels for all husbandry needs, such as crew changes, immigration formalities, ship provisioning and spares, waste removal, etc. These husbandry operations are carried out through the terminal or over the seaward ship’s side, which ensures that loading operations are not disrupted.

ISS handles the coastal petroleum product tanker trade on behalf of a client in Papua New Guinea. With the commencement of the LNG trade, which is expected to produce more than 9 trillion ft³ of gas over the estimated 30 years of operations, ISS continues to strengthen its service delivery to its LNG clients.

Japan

Japan is currently the world’s largest importer of LNG, although its imports dropped to 85 million t in 2015.

In the early days of the LNG trade, all cargoes were delivered by vessels chartered by cargo vendors under Delivered Ex Ship (DES) terms. ISS estimates that more than 30% of cargoes are currently delivered by vessels chartered by Japanese buyers under Free on Board (FOB) terms, and this is a growing trend.LNG cargoes are imported by 17 buyers at 29 LNG receiving terminals around Japan. The number of both buyers and receiving terminals is expected to grow further in the year ahead.

Another feature of the trade in its early stages was the use of long-term contracts, typically for 20 years or more, with vessels deployed according to an annual delivery programme.

In recent years, the long-term contracts serving older LNG projects are expiring or are being renewed under new terms and conditions, while new LNG projects are appearing simultaneously.

As cargo sources have expanded, LNG buyers have started importing cargoes from various points of origin on spot, short-term or portfolio contracts, to meet peak demand or to cover the time gap between termination of old contracts and the commencement of new projects.

In particular, following the Tohoku earthquake and nuclear accident at Fukushima in 2011, electric power companies dramatically increased LNG imports on spot and short-term contracts, to cover the closure of nuclear power stations.

ISS expects LNG import volumes in Japan to remain stable for the time being, although the import sources are expanding.

Today, ISS Japan is working for nine projects supplying cargoes under long-term contracts, and for more than 30 owners and operators of LNG vessels who trade under spot and short-term contracts. In 2014, ISS attended 898 LNG calls at ports around Japan. The company’s role is not only to arrange port clearance, but to assist its clients in maintaining and developing business.

For owners and operators, it is important to comply with the requirements of each terminal and local regulations in addition to international rules. To this end, ISS assists its customers in meeting requirements, such as:

• Customs verification to Custody Transfer Measurement System (CTMS): before trading to Japan, LNG vessels are required to have verification for accuracy of CTMS by Japanese customs authorities in order to determine the import quantity for taxation.
• Confirmation of ship-shore compatibility: when the vessel calls at an LNG terminal for the first time, it is common procedure to hold a meeting at the terminal in order to confirm ship-shore compatibility, (e.g. interface of ship-shore connection, mooring arrangement, cargo operation procedures, etc.).
• Local regulations: for LNG vessels, each port authority and terminal has the regulations for safety in port entry and cargo operations according to the particular conditions of each region.

LNG operators and officer personnel are required to study and understand those local regulations in advance, and to fulfil the necessary reporting and arrangements for escort tugs, watch boats, etc.

US

In early 2012, ISS noted in an article published by LNG Industry: “As an important footnote, the discovery of shale gas in the US has prompted existing as well as potential new facilities to be built with liquefaction capability, radically altering the balance of trade. Where several billion dollar facilities have been developed over recent years for the import of LNG based on the fear of shortages, these are now being transformed into export facilities with US government approval. This in turn has resulted in a transitional lull in business until conversion work is completed – still two years or more away.”¹

Now, four years on, with much of the LNG market still in limbo or in transition from regasification to liquefaction, the authors can only speculate as to how the market will develop over the next year.

The transition from regasification to liquefaction is, of course, market driven. In respect of the US Gulf, the market underwent a drastic change in 2011 and has remained somewhat weak ever since. The development of LNG production in shale sites has dramatically changed the market, forcing many players to reverse direction or stop completely.

LNG movements that shipping agents such as ISS have handled include discharge operations at terminals such as CMS Trunkline LNG, Lake Charles, Louisiana; Sempra Marine Terminal, Hackberry, Louisiana; Cheniere Energy Inc.’s Sabine Pass, Louisiana; Golden Pass LNG, Sabine Pass, Texas; Freeport LNG, Freeport, Texas; Southern LNG, Elba Island, Georgia; and Dominion Cove Point LNG, Lusby, Maryland.

Several of these terminals are in the process of re-fitting, and many new start-ups are either breaking ground or are still in the planning stage.

Most of the projects referred to above will not have reached the US Federal Energy Regulation Commission (FERC) approval and financial agreement stage until later this year or into 2017. Completion of many of the conversion projects in the states of Louisiana and Texas are only forecast for 2017 to 2019.From the agent’s point of view, the operational learning curve to adjust to such change is minimal. However, the inherent volatility of the LNG market and the financial ramifications have been seen before.

ISS has been able to weather the ups and downs that have affected the industry over the years. When LNG imports were strong, it was able to increase its experience through gaining a bigger market share. When the US market began to slow down, it was able to fall back on other longstanding business without losing those personnel with LNG experience. Therefore, the company is ready to take on the challenges and new opportunities that this sector presents.

Reference

1. ELLIOTT, N., ‘Agents of change’, LNG Industry, (Spring 2012), pp. 53 – 56.

Written by Nick Elliott, Inchcape Shipping Services, UK.

This article was originally published in the August 2016 issue of LNG Industry magazine.

Read the article online at: https://www.lngindustry.com/lng-shipping/08082016/lng-trade-an-agents-perspective-2873/