Qatar’s desire to aggressively monetize its North Field gas reserves has prompted the country’s industry leaders to focus on cutting costs and improving services along the supply chain, in addition to diversifying gas use. Where needs are not being met, Qatar is wielding the power of strong demand for its considerable reserves in an attempt to transform industries rather than accept the status quo. To this end, Qatar has shaken up the shipbuilding industry and is now attempting to secure better rates for LNG vessels on the Suez Canal. Melanie Lovatt reports from Doha.
Qatar recently took two unprecedented steps to secure cheaper LNG transportation. It secured options on ship building slots from the Korean shipyards of Daewoo, Hyundai, and Samsung until 2012, rather than commission ship-owning companies to arrange building and it also gave the green light to reputable ship-owners looking to enter the LNG market. The latter was a particularly controversial move according to some industry experts, since the LNG carrier sector had previously been operated by a fairly exclusive club of LNG operators. Some of the club stalwarts have criticized the changes, suggesting they will have negative safety implications, although Qatari officials remain adamant that safety remains a top priority. Qatar is also being accused in some shipping circles of pushing down time charter rates. But according to Qatar’s Second Deputy Premier, Minister of Energy and Industry and Chairman of Qatar Petroleum (QP), ʹAbd Allah al-ʹAttiyah, the emirate made the changes “to present a single face” to international shipbuilders and ship-owners. It consolidated the ship acquisition program in order to “maximize the benefits of bulk purchase power and synergies,” he said.
Against a global backdrop of increased shipbuilding activity, climbing prices and tightening capacity, Qatar’s LNG projects have had to introduce innovative contracting strategies to secure access to shipbuilding so that expansion plans could be carried out, Mr ʹAttiyah said. Qatar has said that it will spend $15bn to add at least 70 vessels to its LNG fleet by the time Qatargas-4 comes on line in 2010 (MEES, 7 March). The move to open the door to ship-owners who had the required technical capabilities and financial strength to conduct safe and
reliable LNG shipping operations has opened up the competition and “resulted in securing attractive charter terms and conditions,” Mr ʹAttiyah added, speaking at the First International Middle East LNG Shipping Forum in Doha on 6-7 June. However, new ship-owners who have won LNG tenders, but are new to the LNG business, are required to hire pre-approved LNG ship managers for their vessels.
Economies Of Scale
In order to benefit from economies of scale, Qatar and its LNG partners investigated the feasibility of introducing very large LNG tankers with a capacity exceeding 200,000 cu ms and have decided that, despite some operational constraints, this size of vessel represents the future. However, while Qatar has made firm orders for the large Q-Flex ships, which have capacities of about 215,000 cu ms, it has not yet placed orders for the largest proposed size on offer – the Q-Max, which has a capacity of around 260,000 cu ms. Even the Q-Flex are much larger than conventional LNG ships which are typically around 150,000 cu ms. The ships are limited to that size by Japan’s unloading facilities (Japan accounts for over half of the world’s LNG demand). Qatargas Managing Director and Vice Chairman Faisal al-Suwaidi told delegates that Qatar’s LNG shipping is undergoing such an expansion that “even if we wanted to use existing LNG ship-owners they wouldn’t be enough.” Industry expert Francois Khawan, Advisor to Poten & Partners, judges that Qatar “played the game right” because it expanded the pool of owners. “The reality is that an experienced ship-owner should be able to enter the business,” he said. New owners include Canadian company Teekay (TK), Overseas Shipping Group (OSG) of the US and Greece’s Maran Gas Maritime (Marangas).
Despite the achievements, shipping still remains the most important element in Qatar’s cost structure when moving LNG to the remote markets of the Atlantic Basin and Far East. Transport typically makes up a third of total LNG cif costs, although it can often reach 40% and there have been some cases where the figure has climbed as high as 47%. Mr ʹAttiyah said that Qatar foresees a potential bottleneck in maintenance facilities and therefore has embarked upon a project to build a dry dock and ship repair yard at Ras Laffan. The new facility, which will be able to accommodate sizes up to very large crude carriers (VLCC) in addition to large LNG carriers, is expected to reduce maintenance downtime. The project, which is expected to cost around $500mn, is now in its final stage of preparation and Qatar hopes to soon announce implementation. Currently the Gulf’s dry docks are at Asry (Bahrain) and Dubai Dry Docks. The Ras Laffan dry dock is expected to include two VLCC-sized graving docks, one float dock and 12 wet births.
Qatar Seeks Better Suez Transit Rates For LNG Shipments
Qatar is also engaged in negotiations to reduce the Suez Canal transit fees for LNG ships, which Mr ʹAttiyah says do not apply fairly and equitably when compared to other hydrocarbon vessels and constitute, under certain market conditions, a heavy burden on shippers moving LNG cargoes through the canal. Qatargas Chief Operating Officer, Commercial and Shipping 'Ali al-Hammadi told MEES Qatar wants LNG to enjoy the same treatment in terms of volume discounts as crude oil. He pointed out that with its LNG expansion plans, Qatar brings long-term transit commitment to the Suez Canal and warned that if it became uneconomic to take cargoes through the canal, they could be shipped to Asia instead. The potential for fresh discounts for LNG carriers using the canal is significant in that improved rates would apply to all other LNG shippers, according to the international treaties and laws covering the canal.
However, Ahmad al-Manakhly, Deputy Director of the Suez Canal Authority (SCA) Planning and Research Department pointed out that the canal faces stiffer competition for crude transportation, such as pipelines. Moreover, while crude tankers can use the Cape route, the additional sailing time makes the route uneconomical for LNG due to boil-off, which reduces cargoes by around 0.14% per day. “Our viewpoints are different, but we will continue our discussions with the Qataris and hopefully arrive at a win-win situation,” Mr Manakhly told MEES.
The Suez tariffs are calculated on both the earning capacity of the ship and the cost of using other routes. As ship sizes increase, there are economies of scale. For LNG carriers, the design is also important, with the Moss type ships (domed on top) rating a higher tariff than the more modern membrane type (as are the ships on order for Qatar). Mr Manakhly noted that SCA operated a cargo incentive program, offering tariff reductions of 5% for shipments of 0.5-1mn tons/year and 10% for 1-2mn t/y and 15% for shipments over 2mn t/y. Overall LNG tariffs work out around 18c/mn btu meaning that a roundtrip by a 134,000 cu ms vessel would cost about $450,000 in tariffs. Mr Manakhly said that the canal would be able to accommodate very large LNG carriers in the future without problems. He said that an LNG carrier of 250,000 cu ms would have a draft of only 40ft which is easily accommodated by the present draft limit of 62ft (which is being dredged to 66ft in 2006). Qatar shipped 3.5mn tons of LNG through the Suez Canal in 2004, with 3.2mn tons to Spain, 0.1mn to Portugal and 0.2mn to the US.
Qatar Looks For More Creative Bank Solutions For LNG Ship Financing
Qatar is also pushing financiers to develop more innovative and efficient ways to finance new carriers. According to Mr ʹAttiyah, Qatar will soon be operating the largest LNG fleet in the world and will be pushing banks to offer creative financial solutions. One approach already adopted by Qatar is the formation of Qatar Gas Transport Company (Nakilat), the most successful IPO in Qatar’s history (MEES, 31 January). The company was established to hold shares in vessels and already has 28 LNG carriers on order. These include three in partnership with TK, four with Germany’s Pronav, four with OSG, and four with Marangas. There is also one on order in partnership with Japanese consortium J4 which includes MOL, NYK, Mitsui and K-line. The Pronav and OSG ships were commissioned by Qatargas-2, and the J4, TK and Marangas vessels were commissioned by RasGas-2.
Recently a deal was concluded for RasGas-3 vessels which include eight in partnership with Japanese consortium J5 (which includes Iino Line in addition to the J4 members) and four vessels in another TK partnership. Nakilat is expected to expand rapidly and will not only be involved in the transport of LNG products, but might also transport associated products, such as LPG, sulfur, condensates and possibly GTL products. The company will become a major force in the shipping industry with a fleet in excess of 100 vessels. It will also operate the planned Ras Laffan dry dock, which is expected to be running by 2009, and is currently seeking a strategic partner.
