Will LNG Exports Boost Shipbuilding?

THURSDAY, DECEMBER 17, 2015


Shipyards in the United States could see a major boost in newbuilding orders if a congressional mandate goes forward requiring all liquid natural gas (LNG) exports to be transported on U.S.-built ships.

According to a new report from the Government Accountability Office (GAO), GAO-16-104: Implications of Using U.S. Liquefied-Natural-Gas Carriers for Exports, at least 100 new ships might be required to support these transport requirements.

However, this optimistic view is tempered by questions regarding how the time and expense involved in constructing this number of specialized ships would affect the LNG export market.

The report was published Dec. 3.

U.S. LNG Production Trends

Citing information from the Department of Energy (DOE) and industry forecasts, the GAO report indicates the U.S. is slated to transform itself from a net importer of natural gas to a net exporter.

Five large-scale U.S. liquefaction facilities—necessary for converting natural gas to LNG (the liquid form facilitates storage and transport)—are currently under construction, the GAO says.  

These five facilities have a projected capacity to export more than 12 percent of U.S. natural gas production in 2020.

The liquefaction capacity of these five sites has already been sold, their representatives told the GAO, mainly through 20-year contracts. Their customers will be responsible for transporting the LNG to export markets.

Based on the facilities’ estimates, a minimum of 100 LNG carriers would be required to transport their full capacity.

Transport Requirements

More than 30 companies have received DOE approval for large-scale exports of U.S. LNG via specialized LNG carriers beginning in 2015 or 2016, the GAO reports.

However, at this time, almost all LNG carriers in operation are foreign-built and operated. No U.S. shipyard has built an LNG carrier since 1980, and none are registered to a U.S. operator.

With these production developments, Congress is considering whether to propose legislative language that would require U.S. LNG to be exported via U.S.-built-and-flagged carriers.

Such a move could boost employment for U.S. mariners and shipbuilders alike.

Hiring Boost for Shipyards?

In its research, the GAO contacted 11 active U.S. shipyards. While representatives from three expressed interest in building LNG carriers, only two currently possess dock space long enough to construct this style of ship.

While U.S. workers would be tapped for the majority of new jobs, the shipbuilders expect they would need to rely on the existing expertise of Korean shipyard workers as well.

istock/OleksandrKalinichenko
© iStock.com / OleksandrKalinichenko
At this time, only two U.S. shipyards have dock space large enough to accommodate construction of specialized LNG carriers.

A representative from one of those shipyards estimated that, for an order of one large LNG carrier, it might hire about 1,000 short-term U.S. workers and hire an additional 250 to 300 skilled Korean workers for the duration of the build time to ensure the work is done correctly.

If it had contracts for a larger number of carriers, however, it anticipates it would hire fewer Korean workers, who would gradually be transitioned out as U.S. workers were trained to complete the work, it told the GAO.

The shipyard reps also indicated they are not likely to open new shipyards to increase their ability to build LNG carriers alongside other vessels, so there is a chance no additional new workers would be hired.

Still, they see promise in the potential LNG work contributing to the stability of the shipyard’s current shipbuilding jobs and lead to a more skilled workforce.

The Other Side of the Coin

While the congressional transport requirement promises to boost work in shipyards, there are some potential downsides to the proposal, primarily related to time and competitive advantage.

Based on the current capacity of U.S. shipyards the GAO spoke with, building 100 carriers would likely take over 30 years. Construction of each ship is expected to take four to five years, putting the shipbuilding far behind the timelines of the U.S. liquefaction facilities.

Comparatively, Asian shipyards are capable of delivering 50-80 large ships per year, Oil and Gas 360 reported.

Additionally, of the two shipyards that have sufficient space to accommodate the carrier construction, they both already have orders booked that will fill their production capacity through 2018.

According to industry representatives, U.S. carriers would cost about two to three times as much as similar carriers built in Korean shipyards and would be more expensive to operate.

The GAO estimates that a U.S.-built LNG carrier would likely cost $400 to $675 million versus the $200 to $225 million it takes for an LNG carrier to be built overseas.

© iStock.com / OleksandrKalinichenko
© iStock.com / OleksandrKalinichenko

The GAO estimates it would take more than 30 years to build 100 carriers based on the current capacity of U.S. shipyards.

Based on the agency’s analysis, these costs would increase the cost of transporting LNG from the United States (by about 24 percent, the GAO suggests), decrease the competitiveness of U.S. LNG in the world market, and may, in turn, reduce demand for U.S. LNG.

The extent of these effects depends on customers' circumstances and business decisions. For example, several stakeholders told the agency that implementing the proposed requirement could prompt customers to attempt to modify, renegotiate, or terminate their existing contracts for liquefaction.

Limited availability of U.S. carriers in the early years of construction may decrease the amount of LNG that could be exported from the United States for a period of time, leading customers to seek alternate sources.

Further, a reduction in the level of expected U.S. LNG exports could impact the broader U.S. economy, including potential job and profit losses in the oil and gas sector.

About the Study

As it considers whether to propose legislative language requiring U.S. LNG exports to be transported by U.S.-built ships, Congress asked the GAO to review the number of vessel-construction and operating jobs that would be created in the U. S. maritime industry each year in 2015 through 2025 if exported LNG were required to be carried (1) before December 31, 2018, on vessels documented under the laws of the United States and (2) after such date, on vessels documented under the laws of and constructed in the United States.

This resulting report discusses (1) DOE and industry expectations for the market for U.S. LNG exports and (2) how the proposed requirement could affect jobs in the U.S. maritime industry and the broader U.S. economy.

To create this snapshot of current industry and DOE expectations for the market for U.S. exports of LNG, the GAO reviewed and analyzed economic forecasts of the LNG market and interviewed relevant stakeholders including officials from DOD, DOE, the Department of Transportation, Coast Guard, and the U.S. Trade Representative; representatives of mariner groups, three U.S. shipyards that expressed interest in this market, the five U.S. liquefaction facilities that are under construction; and economic-research firms that have studied the LNG market.

About the GAO

The U.S. Government Accountability Office (GAO) is an independent, nonpartisan agency that works for Congress. Often called the "congressional watchdog," GAO investigates how the federal government spends taxpayer dollars, which can lead to laws and acts that improve government operations, saving the government and taxpayers billions of dollars.

Its work is done at the request of congressional committees or subcommittees or is mandated by public laws or committee reports. The GAO also advises Congress and the heads of executive agencies about ways to make government more efficient, effective, ethical, equitable and responsive.

   

Tagged categories: Government; Marine; Newbuilding (marine); North America; Oil and Gas; Program/Project Management; Regulations; Shipyards; U.S. Department of Energy

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