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THE EVOLUTION OF LNG TRANSPORTATION TOWARDS WHAT
INDUSTRIAL PARADIGM?
Liliya V. Chernyavska liliya_at_economia.unige.it
Pierre Carriou pc_at_wmu.se
SIET - VIII Riunione Scientifica I trasporti ed
il mercato globale
Trieste, 29 giugno - 1 luglio 2006
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THE EVOLUTION OF LNG TRANSPORTATION TOWARDS WHAT
INDUSTRIAL PARADIGM?

1. Aim of the research
2. Factors on the base of recent radical changes
3. Impact on the market structure
4. Towards new industrial paradigm in LNG
   transportation
5. Critical issues
6. Final considerations

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AIM OF THE RESEARCH

1. To identify possible new industrial paradigm for
   the maritime leg of the LNG transport sector
2. To outline the set of factors on the base of the
   recent radical changes occurred through the LNG
   industry and to suggest possible classification
   of these factors with respect of their nature and
   influence
3. To highlight the critical issues of the new model
   and its influence on the development of global
   natural gas market.

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THE EVOLUTION OF LNG TRANSPORTATION TOWARDS WHAT
INDUSTRIAL PARADIGM?

1. Aim of the research
2. Factors on the base of recent radical changes
3. Impact on the market structure
4. Towards new industrial paradigm in LNG
   transportation
5. Critical issues
6. Final considerations

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ANALYSIS OF NATURAL GAS DEMAND (1/2)

• The rate of growth of the primary energy demand
  of the world was about 1,7/year from 70s till
  nowadays and will continue to rise
• The consumption of natural gas has been doubled
  during last 20 years reaching 2.190 Mtoe in 2002
• The rate of the growth of natural gas demand is
  expected to be 2,3/ year
• The contribution of gas to the world energy
  balance will increase from 21 in 2002 to 25 in
  2030
• The composition of the sectorial consumption of
  gas will change significantly
• The present great consumers will continue to
  expand their demand keeping the first positions
  in the world rank-list. New consumers will appear

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KEY FACTORS FOR NATURAL GAS DEMAND GROWTH (2/2)

• Non binding usage of natural gas
• Convergence gas-electricity
• Impact of the technological innovation on the
  costs of natural gas production and consumption
• Security of supply issues
• Liberalisation of the natural gas market
• The price of gas on the final market in
  comparison with other fuels
• Environmental issues
• Macroeconomic trends.

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NATURAL GAS SUPPLY BRIEF DESCRIPTION AND RECENT
TRENDS (1/2)

• Largely diffused all over the world, but its
  geographical distribution is not homogeneous
• The resources are concentrated in some regions of
  the world and in the future the concentration
  will increase due to the depletion of the
  existing production areas
• Nowadays the R/P ratio for natural gas is about
  67 years
• The importance of the shelf and deep-water
  resources is growing
• The weight of the stranded resources is
  increasing
• While the conventional natural gas resources are
  decreasing, the unconventional ones become a more
  important source of natural gas for the future

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NATURAL GAS SUPPLY BRIEF DESCRIPTION AND RECENT
TRENDS (2/2)

• Last years the rate of growth in natural gas
  production was about 2,6/year. The future rate
  will be about 2/year. The production will double
  from 2.514 Bcm at 2000 to 4.314 Bcm at 2020
• The efficiency of the exploration and production
  is higher than 10 years ago and will continue to
  increase
• The present production areas are under the
  process of depletion
• The cost of production in the new areas will be
  higher
• The new production districts will be more distant
  from the consumption centres than they are now
• The production from off-shore and stranded
  structures will grow.

THE IMPORTANCE OF NATURAL GAS TRANSPORTATION WILL
INCREASE
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MOST IMPORTANT DEMAND SIDE FACTORS FOR LNG
TRASPORTATION

• Growth in natural gas demand (Convergence
  gas-electricity)
• The security of supply issues (push towards
  diversification)
• Liberalisation of the natural gas market

• Number of the operators entering the market is
  growing
• New big operators are appearing (large
  electricity consumers)
• Fragmentation of the natural gas demand and
  instability of the market shares of the
  traditional operators and newcomers
• Difficulty to foresee the off-take volumes

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MOST IMPORTANT SUPPLY SIDE FACTORS FOR LNG
TRASPORTATION

• Two opposite trends consolidation of the
  resources and increasing of the sources of
  supply
• Impact of the technological innovation on the LNG
  supply chain
• Surplus of LNG emerge at the liquefaction plants
• Lack of capacity and technological/infrastructural
  limits in regasification facilities.

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THE EVOLUTION OF LNG TRANSPORTATION TOWARDS WHAT
INDUSTRIAL PARADIGM?

1. Aim of the research
2. Factors on the base of recent radical changes
3. Impact on the market structure
4. Towards new industrial paradigm in LNG
   transportation
5. Critical issues
6. Final considerations

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CHANGES IN MARKET STRUCTURE

• Globalisation of the natural gas markets
• New price formation mechanisms and new pricing
  formulas
• Changes in the contractual structure and terms
  (from classic ToP contract to master plan
  contract gt from 0 to N levels of freedom)
• Growth in the spot transactions
• Some remaining peculiarities of the regional
  markets
• Changes are accruing primary at the LNG segment
  of the natural gas market, to be then also
  introduced into pipeline transportation.

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THE EVOLUTION OF LNG TRANSPORTATION TOWARDS WHAT
INDUSTRIAL PARADIGM?

1. Aim of the research
2. Factors on the base of recent radical changes
3. Impact on the market structure
4. Towards new industrial paradigm in LNG
   transportation
5. Critical issues
6. Final considerations

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TOWARDS NEW INDUSTRIAL PARADIGM
MORE FLEXIBILITY AND LESS RISKS

• Impact of the technological innovation on the
  maritime leg of gas transportation

• Increase in the capacity of LNG carriers (125.000
  gt 216.000)
• New systems of propulsion
• Lower prices of ships
• As a consequence, decrease in the transportation
  costs

• Number of operators entering the market is
  growing
• Fleet growth 199693 (9.821 cm) gt 2005189
  (22.428 cm)
• Weakening of the links with specific projects
• Strong increasing of the importance of the spot
  transactions
• Entrance of new ship operators/owners (new
  downstream operators, independent shippers).

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NEW PATTERNS OF LNG TANKERS OPERATION

• Role of the new large capacity LNG ships
  (long-term charter)
• Role of the old ships (long-term charter with
  some spot trading for small old ships spot
  trading)
• Optimal fleet portfolio in order to minimise
  operational and financial risks.

Push towards concentration and co-operation
Need for experience of operation on the markets
with high volatility and seasonal nature.
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THE EVOLUTION OF LNG TRANSPORTATION TOWARDS WHAT
INDUSTRIAL PARADIGM?

1. Aim of the research
2. Factors on the base of recent radical changes
3. Impact on the market structure
4. Towards new industrial paradigm in LNG
   transportation
5. Critical issues
6. Final considerations

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CRITICAL ISSUES TO BE TAKEN INTO ACCOUNT (1/2)

• Limitations related to the on-shore
  infrastructures (liquefaction and receiving
  terminals) and new requirements from
  technological and operational sides
• Increasing of the operational and financial risks
  (it is necessary to be careful to guarantee the
  pay-back of the vessel gt nowadays it is
  impossible to have a full merchant carrier)
• Problems with financing projects without
  dedicated contracts
• Price volatility on the final markets and time
  charter volatility
• Capacity over-supply

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CRITICAL ISSUES TO BE TAKEN INTO ACCOUNT (2/2)

• Continue process of concentration in ship
  building and possible saturation of the existing
  capacities
• Problems related to security (growth in traffic
  gt growth in number of incidents)
• Very slow process of standards updating gt could
  slow the new technologies introduction
• Possible changes in regulation
• Competition from the pipeline transport and, in
  future, from GTL terminals
• As a consequence gt growing complexity of the
  market structure and increasing in transition
  costs.

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THE EVOLUTION OF LNG TRANSPORTATION TOWARDS WHAT
INDUSTRIAL PARADIGM?

1. Aim of the research
2. Factors on the base of recent radical changes
3. Impact on the market structure
4. Towards new industrial paradigm in LNG
   transportation
5. Critical issues
6. Final considerations

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FINAL CONSIDERATIONS

• Natural gas sector will be an extremely fast
  growing industry in next three decades
• Technological innovation is the key factor in the
  transportation cost decreasing
• Market structure will continue to change
  acquiring global dimension
• New organisational pattern still has no
  definitive structure
• Role of traditional operators as carriers will
  continue to decrease
• In order to min. risks and max. flexibility,
  operators will optimise fleet structure and fleet
  capacities
• Push towards concentration and cooperative
  behaviour will appear
• LNG transportation will be an extremely risky
  business over next decade
• Any serious accident could have a dramatic impact
  on industry development.

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PRIMARY ENERGY DEMAND OF THE WORLD
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SECTORIAL SPLIT OF THE NATURAL GAS DEMAND
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FUTURE NATURAL GAS DEMAND BY AREA