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Why we’re building the biggest ships ever made

The Offshore LNG regasification terminal, the FSRU Toscana, is towed into Valletta's Grand Harbour July 1, 2013. The FSRU Toscana, a converted ship and the first offshore-moored floating regasification plant in the world, is on its way from Dubai to Livorno, Italy, where it will be permanently moored and used as a gas terminal and export point, according to local media. REUTERS/Darrin Zammit Lupi (MALTA - Tags: MARITIME BUSINESS ENERGY) MALTA OUT. NO COMMERCIAL OR EDITORIAL SALES IN MALTA - RTX1195V
Reuters/Darrin Zammit Lupi
By Kabir Chibber
Published Last updated This article is more than 2 years old.

Royal Dutch Shell, the Anglo-Dutch energy giant, is building the largest seafaring vessel ever made—a ship so large it has the volume of six of the world’s largest aircraft carriers and is just a tad shorter than the new One World Trade Center. The 488-meter (1,601-foot) Prelude is being made in South Korea by Samsung, and it is a monster.

AP Photo/Shell
Meet the Prelude, coming 2016.

What makes it so special is that it can process gas on board that has been extracted from the ground and turn it into liquefied natural gas (LNG). Normally, this process—which makes the gas 600 times smaller in volume and therefore far easier to transport— is done on land and sent down pipelines to the ships that then send LNG to the energy-starved countries in Asia that voraciously consume it. The Prelude will shortcut the process for a Shell field more than 100 miles off the northwest coast of Australia.

The Prelude is special but it’s not the only ship on the high seas carrying super-chilled fuel. The Greeks, the world’s biggest shipowners, have spent a record $1.8 billion this year (paywall) to buy 11 new LNG carriers. They are now second to the Japanese in owning LNG carriers, which cost around $200 million apiece, at least three times as much as other types of vessels of similar size, but they are linked to lucrative long-term contracts that pay back the investment.

All this is being spurred by a boom in natural gas, particularly from the US. Shale gas extraction has pushed US natural gas output to a record level every year since 2011 and made the US the world’s largest producer. The Americans will start competing with Australia and Qatar to export the stuff around the world next year. And that’s where these ships come in.

And this could start to break the once-rigid link between the price of LNG and the price of crude, which is set through a complicated formula built into long-term contracts. The North Asia spot price for LNG has only fallen 5% since mid-June, whereas crude oil has fallen a staggering 50% since that peak, according to Bloomberg data. But these contracts have a six-month lag—so expect the price of gas to fall sooner rather than later.

Many Asian buyers feel the rush of US gas may spell the end (paywall) of paying through the nose for imported gas and the link between crude oil and LNG, as well as having things like “destination clauses” built into contracts, which specifies which port a tanker can sail towards. “Traditional suppliers need to defend themselves or keep up with the changes,” one Japanese official told the Financial Times.

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