During the quarter ended June 30, 2017, there was continued momentum in the start-up of new LNG liquefaction capacity with the fourth train at Sabine Pass commencing commercial production.
Later this year, Wheatstone in Australia and Cove Point on the east coast of the U.S. are expected to start production. In total, Wood Mackenzie estimates that projects with approximately 28 million tonnes per annum ("mtpa") of nameplate capacity will come online in 2017. In addition, Shell's 3.2 mtpa floating liquefaction facility "Prelude" departed Samsung en route to the Browse Basin, offshore Australia
Sabine Pass shipped 48 cargoes in the second quarter of 2017, around four times as many as the same period in 2016, demonstrating the significant ramp-up of the facility as new trains have come online. Since start-up, the facility has shipped LNG to over 20 different countries, which include most recently Thailand, Pakistan, Taiwan, Poland and the UK.
The diversity in cargo destinations has meant that the average distance travelled for U.S. cargoes has been 7,500 nautical miles, approximately double the global long-term average, which is positive for shipping demand.
Some off-takers from projects currently under development have yet to secure all of their shipping requirements, leading to increased tender activity in the medium and longer term charter markets. These tenders include requirements for both newbuilds and on-the-water vessels with the latter being positive in terms of absorbing the current oversupply in the spot market.
Growing LNG supply has to date been met by increased demand in both new and existing markets. For example, Japan and South Korea, the two largest LNG importing nations, have increased their LNG imports in the first half of 2017 by 10% and 18%, respectively, versus the same period in 2016.
The new South Korean President Moon Jae-in has committed to cease electricity production from some existing coal-fired power plants, to halt construction of new coal and nuclear power plants and not to extend the lifespan of ageing nuclear reactors, all of which are expected to drive future LNG demand in the country.
Demand in the first half of 2017 in emerging LNG markets such as China (+35%) and Pakistan (+46%) has risen sharply over the same period last year. Pakistan's Petroleum Minister said in July that the country could import over 30 mtpa by 2022 (compared to 4.5 mtpa currently). This, would make Pakistan the fifth-largest importer in the world based on current levels of consumption.
Looking longer term, while final investment decisions ("FIDs") for new liquefaction projects in the current environment continue to be very limited, there have been a number of encouraging recent developments: for example, ENI took FID on the 3.3 mtpa Coral South
LNG project offshore Mozambique in June 2017, with BP having signed an agreement to purchase 100% of the LNG produced in late 2016.
In addition, at the end of this quarter, the US Department of Energy authorized an additional 2.5 mtpa of exports from the Lake Charles project in Louisiana, bringing total authorized exports to 17.5 mtpa. In the same month, Energy Transfer, Korean Gas Corporation and Shell signed a memorandum of understanding to study joint participation in this project.
Post quarter-end, Qatar Petroleum announced its intention to increase LNG production to 100 mtpa from 77 mtpa today by doubling the size of the new gas project in the southern sector of the North Field over the next 5-7 years.
A number of markets that do not currently import gas are exploring LNG as an alternative to oil and coal or to replace declining domestic gas supply. Many countries with growing power demand, such as Ivory Coast, South Africa, Bangladesh
and Myanmar, are looking at FSRUs as a quick-to-market, cost-effective solution to import LNG.
Other countries with FSRUs already in place, such as Pakistan, are looking at expanding their use of FSRUs due to the successful commissioning and effective operations of the existing units. FSRUs continue to be the preferred route for most new import markets as a quicker to build, more flexible and lower cost alternative to an onshore facility. Many producers and marketers of LNG appear to be focusing their attention on FSRUs as a key enabler in creating new markets for their LNG.
In the shorter term LNG shipping market, tri-fuel diesel electric (TFDE) headline rates have increased year on year, but remain below mid-cycle rates at around $35,000-$40,000 per day, according to Clarksons.
Whilst a recovery in spot rates, to mid-cycle levels, is taking longer than originally anticipated, we continue to see a greater number of fixtures in 2017 compared to the same period in 2016 and increasing signs of seasonality, both of which point to a tightening market. Over time, this market tightening should be helped by the low level of new vessel orders, which stand at 7 for 2017 year to date including four vessels ordered for the Yamal project post quarter-end.