Interview: FLEX LNG’s Jonathan Cook on chartering

As signs emerge that LNG shipping is beginning a slow recovery, market entrant FLEX LNG is taking positions in the short and long-term charter market. Chief executive officer Jonathan Cook speaks to ICIS about the company’s plans.

FLEX LNG is the only ship owner to charter in vessels for the sole purpose of chartering them out. Can you explain your strategy?

One of the strategic reasons for chartering in LNG vessels now was to bring FLEX into operation sooner rather than later and building relationships with market participants.

FLEX has chartered in four LNG carriers, the 174,000 cubic metre (cbm) Woodside Rees Withers, the 170,200cbm Pskov, the 155,000cbm Yenisei River and the 160,000cbm Energy Atlantic.

The Woodside Rees Rivers is from Woodside while the Pskov and Yenisei are from Gazprom, so we are already building relationships with important LNG market participants.

We believe that the shipping market will be improving in 2017 and 2018.

When FLEX LNG first looked at chartering in an LNG vessel at the back end of last year the charter rates were reasonable to do so. However, we believe four LNG carriers is the right number, and we are not in the market to charter in any more vessels for now.

According to ICIS market intelligence, FLEX LNG has subchartered all of its LNG carriers for six months with six months’ options to extend the contract. It has now chartered the Woodside Rees Withers to Germany’s Uniper from April 2017 on a six months plus six months’ term, while it has chartered the Pskov on spot voyages to BP. It remains in discussions for the charter of its other carriers.

You have four vessels under construction delivering in 2018. These are not yet committed – is this part of your strategy?

From a market fundamentals perspective, we are taking the right ships at the right time.

New LNG production is entering the market in earnest from 2018, which will bring demand for LNG carriers into balance particularly in the later part of that year.

We are looking at different opportunities for these vessels, and there are a number of tenders out there that we will participate in. We have no firm rule about not committing these ships, but generally we view our orders with no charter commitments as a good thing.

The shipping market has been through a period of weakness and waiting to take a charter is a prudent thing to do rather than to commit to a charter with rates as they have been.

From a technical perspective, vessels with a capacity of around 174,000cbm are the right size.

We don’t see any destination terminals that you can’t go to with a 174,000cbm vessel that you could go to with a 160,000cbm carrier. On top of that, demand for LNG carriers is driven by new production. Many of the sales and purchase agreements (SPAs) are for longer voyages out of the US. A modern vessel with large capacity is able to make these longer voyages more efficiently.

According to ICIS market intelligence there are a number of upcoming tenders for long-term charters.

The Yamal LNG project is looking to charter four conventional vessels from the end of 2018 to receive LNG via ship-to-ship transfer at the Belgian port of Zeebrugge. On a nearer-term basis, Indian LNG buyer GAIL will soon launch a requirement for four LNG carriers for a three-year charter commencing in September 2017.

FLEX LNG has two MEGI LNG carriers with capacity of 174,000cbm under construction at Samsung Heavy Industries and two at Daewoo Shipbuilding and Marine Engineering. All vessels are for delivery in 2018.

You have a Heads of Agreement with US company NextDecade which stipulates the terms for the long-term charter of FLEX LNG floating storage and regasification units (FSRUs). Can you tell me more about your FSRU strategy?

We are actively pursuing FSRU projects and have a team dedicated to the business development side of the process.

We are in discussions for several FSRU opportunities and are working with shipyards on FSRU design.

Without getting too technical there are certain areas for improvement in FSRU design, from improving reliability and allowing for in-service maintenance to be carried out more effectively, to improving storage and regas capacity.

In terms of our view on FSRU conversions versus newbuilds, we believe a conversion is only needed when it is a matter of timing, for example, if you needed an FSRU very quickly.

Otherwise, from an economical view, the cost of a conversion can be more expensive, and you often need more storage than the underlying LNG carrier can provide so you would only really do a conversion if the timing required it.

The team at FLEX LNG has a lot of collective experience in FSRU projects.

What is your outlook for the 2017 charter market?

In 2017 we expect the development of the spot market to be more gradual, with rates starting to pick up towards 2018. A lot of vessels will be needed in the 2019 timeframe.

Most analyst forecasts suggest that at least 50 incremental ships will be needed to make up an LNG shipping shortfall into 2020. Now there are clearly some uncommitted vessels in the existing fleet but these will not be sufficient to make up the deficit.

According to ICIS intelligence, prompt charter rates have fallen from the spike of $50,000/day for a modern vessel at the beginning of this year. Prompt charter rates are hovering around $30,000/day in both the Atlantic and the Pacific as available vessel numbers are similar in both basins.

The summer is expected to continue to be bearish, but shippers still expect prompt charter rates to pick up towards the end of the year.

The driving force behind charter market bearishness is the ongoing delay to large Australian projects such as Ichthys which was originally expected to begin production by the end of 2016. josie.shillito@icis.com