Multiple researchers have pointed out that shipowners in the LNG transport sector may be facing current and future “asset stranding” risks.
Researchers state that, based on the current supply and demand fundamentals of the global LNG market, environmental development trends, and shipping decarbonization plans, this risk is highly likely to become a reality.
The LNG shipping sector is currently in a downturn: the previous investment boom in LNG liquefaction facilities and LNG carriers has disrupted the supply-demand balance. Affected by low charter rates, the sector is expected to face difficult conditions until 2027.
Sam Reynolds, Asia LNG Research Lead at the Institute for Energy Economics and Financial Analysis (IEEFA), said: “The delivery rate of LNG carriers is faster than the construction rate of new export facilities, leading to an oversupply in the LNG carrier market.”
Shipowners are pinning their hopes on charter rates rising as more LNG infrastructure Final Investment Decisions (FIDs) are approved and LNG supply increases.
However, Sam Reynolds pointed out that uncertainties remain regarding LNG’s competitiveness against locally produced renewable energy; simultaneously, major LNG importing regions such as Japan, South Korea, and Europe are planning to reduce the proportion of LNG in their energy mix.
The International Maritime Organization (IMO) is expected to finalize rules for the shipping industry’s decarbonization path next week – in the IMO’s green fuel classification, LNG as a marine fuel may be placed at a disadvantage, potentially leading to a decrease in its demand.
Latest research from University College London’s Energy Institute and the German non-profit organization Kuhne Climate Center (KCC) shows that LNG carriers not only face investment risks due to current supply and demand fundamentals; they also face risks within the LNG shipping sector due to global climate goals requiring restrictions on fossil fuel use.
The research estimates that by 2035, $48 billion invested in LNG carriers could face write-offs.
Vishnu Prakash, Director of Alethiarc Consulting, explained: “Of this $48 billion, about 40% was invested in listed companies, and the remaining 60% was primarily invested in non-listed companies.”
The two aforementioned institutions also studied the risks of investing in the broader “fossil fuel fleet” (referring to ships transporting fossil fuels like oil and LNG) and developed an “Investment Risk Monitor Tool” – this interactive tool can predict future demand for such ships, aiming to provide decision-making references for investors.
The research hypothesizes that if the goal of “limiting global warming to 1.5°C” is achieved, then within the fossil fuel fleet, LNG carriers would face the highest stranding risk, as this goal requires extremely low carbon dioxide emissions. The number of LNG carriers has already grown exponentially (currently 814 ships), and the number of new ship orders has also increased significantly.
Retrofitting these LNG carriers to transport other bulk commodities would require additional capital investment, which would weaken the fleet’s competitiveness and profitability.
In contrast, tankers and LPG carriers have lower risks because they possess the potential capability to switch to transporting other cargoes (such as ammonia).
Researchers stated that among international stock exchanges, the New York Stock Exchange (NYSE) would be the most severely impacted.
This is because US stock exchanges have the highest proportion of shipping companies related to the fossil fuel fleet. Currently, the valuation of the existing fossil fuel fleet covered by the New York Stock Exchange accounts for approximately 12.5% of the total valuation (i.e., $42 billion).
