09/07/2021 | News release | Distributed by Public on 09/08/2021 05:16
Singapore-based LPG shipowner BW Epic Kosan (BWEK) made a profitof $3.3mn in the second quarter - its first full quarter after Epic Gas and Lauritzen Kosanmerged on 12 March. The company has a fleet of 76 LPG and ethylene ships, comprising 48 pressurised, 26 semi-refrigerated and two refrigerated small-sized carriers. BWEK also agreed to buy two 8,900m³ semi-refrigerated LPG/ethylene carriers, the Bow Gallant and Bow Guardian, from Norway's Odfjell in mid-August. The deal is expected to close before 31 October. Argus' Aidan Lea spoke with BWEK chief executive - and former Epic Gas chief executive - Charles Maltby about the recent merger and the state of the small LPG carrier segment:
What have been the main challenges during the merger?
When combining two companies, there are many things to complete. We largely completed the corporate, or legal, stage in March. Simultaneously, we refinanced the Lauritzen Kosan vessels and combined the various insurances, lowering costs in all areas. We are now working on the operational and IT integration, which we expect to last until mid-2022. Our organisation is headquartered in Singapore, with Copenhagen as a regional office for the west of Suez market, alongside our other offices in London, Manila and Tokyo. Covid-19 has made the traditional pattern of relocating team members between offices to integrate processes and build a combined culture close to impossible so far. But we are now working cross-company in areas such as IT, safety, crewing, purchasing, training, technical, commercial and finance to plan a smooth integration, through considerable use of [communications software] Microsoft Teams.
Crew integration at sea is an important area. Crew management, training and deployment has already been complicated by Covid-19, so ensuring we achieve a one-team spirit across every ship at sea - effectively another 76 offices - is an ongoing challenge. The time difference between Singapore and Europe inevitably adds pressure to end-of-day meetings, and we look forward to the time when more of the team can work alongside each other for days, weeks or months in the same time zone. We must also expand dialogue with customers, through the smart use of digitalisation and digital systems - and business intelligence - reduce emissions across our fleet, increase the types of cargoes we carry, such as ammonia - and be ready for the anticipated growth in carbon capture CO2 cargoes - and grow our fleet.
Operational expenditure (opex) has significantly risen following Epic Gas' acquisition of Lauritzen Kosan's more costly semi-refrigerated and refrigerated LPG and ethylene vessels. Why did the company decide to expand outside the pressurised segment?
We had always considered stepping into the semi-refrigerated, refrigerated or ethylene sectors, but felt it would have been a distraction that might be detrimental to our focus [on pressurised ships] if we did so without adding a strong, experienced team. The opportunity to combine with the Lauritzen Kosan team and their experience and knowledge is unique and provides a strong second limb for the BWEK business. There is considerable operational and commercial overlap between a pressurised customer and a semi-refrigerated, refrigerated and ethylene customer. And while there are some technical differences, there are synergies in crewing, docking and purchasing, allowing us to deliver economies of scale over time.
The opex for these vessels is indeed marginally higher, in the region of 10pc, but this type of ship can take different cargoes that require refrigeration, with consequential higher earnings. Opex levels are also inflated at the moment in areas such as crew transfer, purchasing, and docking owing to the pandemic. Access to economies of scale in financing costs or insurance, as well as opex and business costs, will further increase margins over time.
Do you expect the modest order book for small LPG carriers to support freight rates in the coming months and years?
Newbuild supply for the smaller LPG carrier sector has been below the required renewal rate of 3.3pc after scrapping since 2017, with the smaller gas carrier fleet forecast to grow, before scrapping, by 1.4pc this year, and below the 3.3pc in 2022. The lack of newbuild orders is a result of lower returns in recent years, combined with the increasing challenge of ensuring newbuild ships will be fit for purpose in respect of meeting future emissions requirements. On the demand side, LPG seaborne trade - which accounts for 55pc of our cargo volume - is forecast to grow by 4.3pc on a tonne-mile basis this year, and by 3.9pc in 2022.
Consequently, the LPG market fundamentals remain positive. On the olefins side, which accounts for more than 40pc of our global traded volumes, 2020 and 2021 have been complicated years, with intra-regional supply and demand constantly disrupted by the pandemic. But [shipping consultancy] Drewry forecasts a recovery of 2.5pc in global volumes this year, and increasing tonne-miles as we head through 2022 and into 2023.
What are your expectations for the fourth quarter?
Like many, we hope increasing access to Covid-19 vaccines can help the global community to stabilise. We anticipate that this will lead to increased demand for LPG in developing economies for residential use, and a further step up in demand for olefins. We expect the usual fourth-quarter winter seasonality, which means increased demand for our vessels, weather delays in the many regions, alongside some Covid-19 disruptions. Consequently, we would expect tighter markets, higher rates, but also higher-than-average opex.
Why has the smaller LPG carrier segment been slower to introduce decarbonisation measures compared with very large gas carriers?
Smaller vessels burn less fuel and make shorter voyages, spending more time in port. Emissions are greater for the larger ships as well as the expenditure on fuel. So the initial focus has been on the larger ships as the benefits from efficiency improvements or investment in dual-fuel LPG engines are more obvious. But BWEK has invested in emissions reduction and energy saving technologies for a number of years, reporting a 0.4pc cut in carbon intensity over the year to 30 June, with our fleet on track to meet the IMO's [International Maritime Organisation] goal of cutting carbon intensity by 40pc by 2030.
We are also working with several industry partners to explore energy-saving devices and future fuels. We are evaluating dual-fuel ammonia engines. Our fleet includes 30 vessels capable of carrying ammonia, should Drewry's forecast of 50pc growth in seaborne ammonia trade by 2026 materialise.
It is also becoming clearer that to meet the UN's 2050 climate targets, the world must not only reduce emissions but also capture emitted carbon for reuse and storage. Seaborne trade of CO2 is very small, but may grow to match LPG as we head towards 2040, with the most likely vessels for this employment being similar to those within the BWEK fleet today. We have non-disclosure agreements with several carbon capture and storage projects and are working alongside major industry participants to review potential vessel, tank and engine designs, as well as regulatory requirements. We believe we have the necessary toolbox to support serious long-term partners in such projects.
|BWEK 2Q21 v Epic Gas 2Q20 results|
|2Q 2021||2Q 2020|
|General and administrative expenses ($/d)||1,156||1,021|
|Carbon intensity (%*)||22.9||22.7|
|* annual efficiency ratio|