LNG, Oil Ship Building Mismatches Future Demand

The global LNG and oil shipbuilding industry faces significant risk of overcapacity in the coming decades as the energy transition gains momentum, warns a report by Climate Analytics. The study highlights a mismatch between forecasted ship building for LNG transportation and the demand portrayed by the net-zero scenario put forth by the International Energy Agency (IEA).

In 2022 alone, the global oil fleet witnessed the addition of 34 LNG carriers, with 335 more expected to be added between 2023 and 2028. This surge in orders was primarily driven by the oil and gas industry's increased demand for LNG, triggered by Russia's invasion of Ukraine. However, when compared to the energy transition scenarios evaluated, the report reveals that the projected global LNG ship orders exceed the anticipated demand.

Under the first Net-Zero scenario, which aims to maintain the global temperature rise below 1.5°C against pre-industrial levels, expected capacity growth surpasses projected demand by 317% by 2040.

Even under the Announced Pledges Scenarios where temperature rises are expected to be limited to 1.7ºC, the surplus capacity still exceeds 45% by 2040. In the scenario where stated policies remain unchanged, capacity surpasses demand by 15% by the same year.

Climate Analytics reports that the global LNG shipbuilding industry is heavily dominated by South Korean shipbuilders. In 2022, they secured over 70 percent of LNG carrier vessel orders, reinforcing their grip on the market.

Despite the high risk of stranded assets associated with LNG carriers, South Korean shipbuilders are anticipating a surge in new orders from oil and gas companies that are intensifying their focus on fossil fuel operations. Currently, QatarEnergy and South Korean shipbuilders are engaged in discussions for a potential order of up to 40 new LNG carriers, expected to be delivered in 2027.

If these new vessels are constructed as planned, the global LNG shipping capacity will further exceed the IEA's forecast of LNG trade. This poses a particular risk for financial institutions that provide loans and underwriting to the capital-intensive shipbuilding industry.

The potential overcapacity in LNG and oil shipbuilding serves as a reminder of the challenges faced by industries heavily reliant on fossil fuels. As the world transitions toward cleaner and more sustainable energy sources, careful consideration and realignment of investment strategies will be crucial to avoid significant financial risks associated with stranded assets and excess capacity in the future.