For a while, it seemed that LNG tanker charter rates could only go up. After a 2009-2010 over-supply glut, the time charter rates were propelled past the $100,000 a day threshold due to the combined effect of the Fukushima incident and expectations of future flows coming out of the new US and Australian liquefaction plants. In response, order books for tankers grew, encouraging international energy groups to enter the market. This ended up locking many companies into high rates for the service for multiple. These arrangements may now require revisiting as rates are decreasing in response to over-supply (new vessels entering service) and lower demand caused by the decrease in LNG price differentials.


Charter rates have seen increases in recent years, despite a drop related to the economic crisis of 2008 and a surplus of new-builds in 2009. The global economic crisis also led to the delay of a number of large liquefaction projects, and as a result, the placement of orders for new LNG carriers decreased sharply. This created a shortfall in capacity in 2011 and 2012 as players needed to secure shipping for new liquefaction projects coming online. This tightening of supply and increased demand in the Asia-Pacific region, particularly due to the Fukushima nuclear leak, helped push prices upwards during 2011-2012. However, we are currently observing a market correction for this industry.

Transfer Pricing Aspects

In group situations, LNG vessels are often held by specialized companies and used by other group companies, either indirectly through bareboat charters or directly as effectively time charters. Historically, the typical approach to setting up intercompany rates was reasonably straightforward, and included specialized entities providing transportation services that essentially combined crewing services (remunerated through a cost-plus arrangement), internal broking and vessel operation (receiving rates established with reference to the market). The most material of these rewards would typically go to the vessel owner, who assumed the risks associated with the vessel and the risk that they could not recover their significant historic investments.

In Detail

The last two years have seen decreases in gas and LNG pricing, so it is no surprise that the charter rates are starting to follow suit. New vessel deliveries, ordered in advance of the completion of new liquefaction projects, have resulted in a surge of vessel capacity. Furthermore, as it becomes less lucrative to divert cargoes to Asia, vessel journey times are decreasing, lowering overall utilization. This combination appears to be leading to a period of oversupply, with a consequential fall in charter rates. This trend is likely to be exacerbated by further deliveries of ships, due to the time lag between order and delivery. The surplus is expected to continue until at least 2016, at which point new Australian liquefaction and US export projects are expected to come online.

In the meantime, tax authorities have expressed some interest in the shipping market—only in early 2014, the UK tax authorities started looking closely at the day rates in the petroleum sector, and enacted a specific cap on deductibility of intra-group charter rates for drilling vessels for taxation within the UK Continental Shelf.

Given these rapid changes in market conditions for LNG chartering it may be the right time to review intercompany charter rates.

Shift Toward Sustainability by 2020

The potential for a robust global climate deal at the Paris Climate Summit in December 2015 is driving an increased emphasis on renewables and clean tech in the next five years according to energy companies surveyed in PwC’s new Global Power and Utilities Survey.

Evaluated from the classic energy trilemma between security, affordability, and sustainability; survey respondents appear to be anticipating a more robust climate deal than has been achieved before—with sustainability and cleaner energy moving up from 61% of their focus in the trilemma now to 81% in just five years.

Security of supply remains the foremost priority, with the shift in focus towards sustainability largely at the expense of affordability. This emphasis change is most in South America, with a move from 54% to 83%, and least significant in Asia Pacific—55% to 66%.

The report also finds that power utility businesses around the world are reporting a difficult transition as energy transformation takes hold with increased concern about immediate risks to the power system as well as challenges adjusting to longer-term changes.

In the short-term period to 2020, concerns about nearly all of the major risks facing the power sector are rising. Alongside the leading risks of regulatory uncertainty and the difficulties of attracting investment, companies are moving to high alert on other key risks:

Sophisticated cyberattack – 75% concerned by 2020, up from the current 40%.

Fuel availability/supply risk – 77% expect this to be a moderate to a very high concern by 2020, up from the current 66%.

Blackouts – 74% concerned by 2020, up from 68% currently.

Emissions/air pollution – 75% concerned by 2020, up from 53% currently.

The survey reflects a sector that is mindful of the challenges facing it, but is uncertain about how successfully they can be addressed. For example, in the case of the key issue of technological change, more survey participants say their company is struggling to respond effectively than are dealing with it successfully—38% versus 25% with the remainder somewhere in between. The survey also shows a mixed outlook on how sustainable existing strategies will be:

43% of those in North America and 35% in Europe say that current power sector company business models are already broken and the need for change is already urgent.

The urgency of business model change is perceived to be less elsewhere—71% globally accept that current business models won’t be sustainable but think change can be gradual.

But 58% say there is a medium to high probability that the sector will face a “downward” or even “death spiral” from disintermediation, technology disruption, and customer behavior, with power utility companies and current energy systems undergoing a major decline.

Norbert Schwieters, Global Power and Utilities Leader, PwC, said:

“Looking ahead, we think predictions of a ‘death spiral’ for companies in the power and utilities sector are overdone. But, the dangers facing the sector are intensifying and companies will need to stay ahead of change. The challenge will be to make timely moves to gain the most of the market opportunity of ‘old energy’ systems and business models while, at the same time, transitioning to the new business models required as energy transformation takes hold.

“Areas that are of limited or only emerging importance to the sector at the moment, such as smart city, smart home, and smart community infrastructure, local energy systems, electric vehicles, and off-grid solutions, will become increasingly important alongside an increased emphasis on capabilities such as product innovation, big data platforms, digitization, and online security.”

The report also includes a new Power and Utilities Market Disruption Index, based on survey respondents’ assessment of disruption in five key areas:

At a global level, the index rises by 42% between 2015 and 2020.

Europe remains the most disrupted region in 2020 but, because it is already experiencing a relatively high degree of disruption, the 2015–2020 rise of 33% is one of the smallest.

Survey participants in North America anticipate the biggest disruption index increase, up 64% to take the region to disruption levels comparable with Europe by 2020.

All regions record significant increases in the index. North America moves above the Asia Pacific region to second place in the ranking by 2020.

Again, Norbert Schwieters of PwC stated:

“Market and new competitive disruption is picking up pace in power markets around the world and it’s expected to intensify in the next five years. Less than one in three said their market is relatively undisrupted now, but hardly any expect that situation to continue to be the case by 2020. It’s arising from a combination of policy, technological, and customer change and creating a transformation in how we think about, produce, and use electricity.”

The Power and Utilities Market Disruption Index

Graphics and details of the full Power & Utilities Disruption Index are on the PwC website and are obtainable from the PwC media team. The index is based on survey respondents’ assessment of disruption in five key areas—policy and regulation, customer behavior, competition, the production service model (the infrastructure, products and services provided by the sector), and distribution channels (how the sector reaches and delivers to customers). For each one it is possible to identify developments that are happening now and which, if they accelerate or impact in combination, could intensify disruption. The Disruption Index is a composite measure of a basket of these five disruption factors.

About PwC

PwC helps organizations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax, and advisory services. Find out more and tell us what matters to you by visiting us at www.pwc.com

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

PwC Director- Head of Oil & Gas

PwC Partner- Utility, Mining & Energy Leader

PwC Partner-Assurance Leader

PwC Director, Industry Expert


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