The growth of the floating storage and regasification unit (FSRU) market has been exponential over the past decade. The birth of the industry can be traced back to mid-2001, when El Paso contracted with Belgian ship-owner Exmar to fit regasification units onboard three existing new-build LNG ships and one new contracted LNG ship at Korea's Daewoo Shipbuilding & Marine Engineering (DSME). The market has grown significantly ever since, with 18 FSRU projects now operational across the world. Surprisingly, such growth has been achieved against the backdrop of a slowdown in emerging markets driven by weak commodity prices. This article looks at the key drivers behind the growth in the FSRU market and how we expect the market to evolve in the future.

Cost Differential with Land Based Terminals

Developers have a multitude of options to consider when structuring regasification projects. An important initial decision is whether to opt for an onshore regasification terminal or procure a floating regasification vessel. If the latter, some consideration should also be given to the type of vessel: FSRU, floating storage unit (FSU) with onshore regasification or floating power plant unit (FPPU). In terms of FSRU procurement, developers need to decide whether to lease or purchase and whether to elect for a new-build vessel or convert an existing LNG carrier (new-build vessels often being preferred due to the cost savings associated with superior boil-off efficiency). The cost differential between FSRUs and onshore regasification terminals is significant: a new-build 170,000 cubic meter FSRU typically would cost in excess of US$250 million to purchase, whereas the cost of developing a land-based terminal of comparable size is likely to be in the region of US$1 billion[1] However, developers typically opt to lease FSRUs rather than purchase, which can be explained by a number of factors. First, the conventional FSRU owners (BW, Excelerate Golar, Hoegh and Mitsui O.S.K Lines (MOL)) have long-standing relationships with the dominant ship manufacturing yards and usually secure options for multiple FSRUs on the basis of discounted individual units costs. Such discounts are unlikely to be available to developers wishing to procure individual units directly from the yards. Second, the lack of operational experience is a deterrent for developers wishing to purchase FSRUs directly – there are only 18 operational FSRU projects in the world[2] and very few companies that have operational experience of FSRUs. Typically developers would opt to lease FSRUs on the basis of a day rate, which can vary between US$130,000 and US$155,00 per day[3]. However, it is hard to determine a “market rate” for FSRUs given the number of different variables that need to be taken into account including: capacity of the vessel; new-build vs converted LNG carrier; length of the charter; terms and conditions of charter; credit support provided by charterer; and jurisdiction specific risks such as the prevailing legal and taxation regimes in the country where the FSRU is deployed.

Growth of FSRUs largely driven by the move to cleaner fuels

While there has always been a significant cost differential between FSRUs and onshore regasification terminals, the evolution of a preference towards FSRUs is rooted in several other factors including the need to reutilize excess shipping capacity and the necessity to cater for seasonal gas demand. In certain jurisdictions such as China and Indonesia, the move towards FSRUs was in large part driven by the need to diversify the energy mix and switch away from crude and coal to cleaner fuels such as gas – for Indonesia, FSRUs offered the lowest cost and fastest option to effect the switch to gas when compared with other gas procurement options such as onshore regasification or pipeline supply.

Speed of deployment influenced by regulatory backdrop of relevant jurisdiction

It has been stated that FSRUs are up and running as much as six times faster than onshore regasification terminals[4]. While it is accurate to say that generally FSRUs are faster to deploy than onshore regasification terminals, some of the obstacles and hurdles surrounding the deployment of FSRUs should be considered in detail before making any presumptions. Despite the fact that FSRUs are moored offshore there is often a complex permitting regime that needs to be navigated prior to deploying a FSRU. This may require a number of different licenses and permits relating to (among others) environmental impact and management, marine operation, gas processing and trading, employment/social security of shipboard personnel and often a general business or commercial license. Additionally, from a tax perspective the FSRU owner will typically have to apply for an import tax exemption (in respect of the tax treatment of the vessel), in some cases an exemption from local employment laws in connection with shipboard personnel and a Value Added Tax (VAT) exemption in relation to the importation of goods and equipment in connection with the vessel. Such regulatory requirements vary significantly from project to project and can cause significant delays to the deployment of the FSRU in the relevant jurisdiction. That said, there are recent examples where FSRUs have been deployed swiftly to address acute power shortages. BW recently concluded a five year FSRU charter with Egyptian Natural Gas Holding Company (EGAS) which operated on the basis of a five month timeframe from project inception to first gas – which represents a record short time for implementation[5]. Egypt is battling with significant power shortages and has had to significantly increase the level of imported LNG in order to meet domestic demand and has already deployed two FSRUs (Hoegh’s Gallant is moored next to BW Singapore in Ain Sokhna) with plans for the procurement of a third FSRU next year.[6]

Flexibility is the foundation of the FSRU market

The contracting structures for FSRUs have changed since Golar finalized the time charter for the world’s first two FSRUs to Petrobas back in 2007. The market in 2007 was characterized by long-term charters with a minimum of 10 to 15 years. The contracting structures adopted in the early years were more conventional and rigid. This was likely driven by the lending banks, which, at the time, were cognizant of the development/technology risks associated with this fledgling industry. Fast forward almost a decade and the market fundamentals have evolved. Flexibility for the charterer is a fundamental theme. We have seen the emergence of some seasonal FSRU charters such as Golar’s 2013 charter with Kuwait National Petroleum Company (KNPC) where the vessel is deployed as a FSRU for nine months of the year and is free to pursue spot carrier and other short term business opportunities for the remaining three months of the year.[7] The charter length for FSRUs now varies considerably. Shorter term charters, particularly in Middle Eastern countries such as Egypt and Kuwait, are being used as a bridging solution for the development of land-based terminals (Kuwait) or as a mid-term solution until offshore gas discoveries are commercialized (Egypt). We have also seen conventional infrastructure concepts adopted in FSRU projects – in Bangladesh, Petrobangla has signed an agreement with Excelerate which operates on a build-own-operate-transfer basis, where the FSRU is transferred to Petrobangla at the end of the 15 year term.[8] In some instances, FSRU owners are willing to make investments further downstream – Golar LNG has recently announced that it is in talks with Brazilian power partners to provide a FSRU to fuel a 1.5GW combined cycle power station in Sergipe (Northern Brazil). Golar is reportedly participating in up to 25% of the power project, which envisages Golar making an equity investment in the project.[9] Often developers have requested that the FSRU owner is responsible for operating and maintaining offshore infrastructure such as the jetty and potentially any interconnecting facilities – this envisages the FSRU owner taking on an entirely different risk profile than a conventional FSRU charter, this will typically be priced into the rate of hire. The ways in which FSRUs are financed have also changed significantly – a number of banks have entered the market and have found flexible, creative ways of tackling fundamental financing issues such as development risk and sovereign credit. FSRU owners have adopted new financing structures such as master limited partnerships (MLPs) to optimize returns – predominantly used to maximize cash flow and distribution growth from “dropping down” multiple shipping and FSRU charters into a limited partnership fund structure.

Careful prior assessment of gas demand is key to optimizing sustained utilization

The ability to accurately calculate future gas and electricity demand, taking into account any geographical discrepancies and changes in market fundamentals, is critical to the success of any FSRU project. Hoegh’s Lampung FSRU illustrates some of the risks associated with the development of gas infrastructure projects. The Lampung terminal is estimated to have cost approximately US$400 million and has the capacity to process 2 MTPA, which could satisfy 14% of Indonesia’s total power demand (based on last year’s figures).[10] However, the FSRU has now sat idle for approximately six months (it was only commissioned last summer).[11] The market fundamentals in the locality have changed since the project’s inception: gas demand has plummeted as the economic situation deteriorated and the decrease in oil price has created fuel-on-fuel competition, with gas from LNG becoming less competitive than oil in some parts of West Java. It is not always possible to account for such changes in the market fundamentals, but this example illustrates the importance of ensuring flexible contractual structures that allow for redeployment of the FSRU at alternative locations, variations to the length of the charter and potentially even the ability to sub-charter for use as an LNG carrier in low utilization periods.

Project delays part and parcel of the FSRU industry

Project delays and re-configurations of regasification projects are common in the FSRU industry. In Uruguay, the government recently cancelled its contract with GNLS S.A. (a 50/50 joint venture between Engie and Marubeni Corporation) for the development of a regasification project in the port of Montevideo, in which envisaged GNLS S.A. chartering a FSRU from MOL for 20 years. The government has since announced plans to continue the project by using MOL’s FSRU and directly charter from MOL – it is the first project where MOL will solely build, own and operate the facility. The FSRU proposed for the project will be the world’s largest – with a storage capacity of 263,000 cubic meters – and is expected to commence service in mid-2017.[12]

Re-deployment a fundamental risk mitigation strategy for FSRU projects

In 2008, Engie (then GDF Suez) and MOL agreed to charter two FSRUs from Hoegh LNG (co-owned by MOL) on 20-year time charters to support its Neptune LNG Deepwater Port project in Massachusetts, US. However, as the price of gas plummeted in the US, GDF Suez decided to suspend the operations when the economics of importing gas became uncertain. . The vessels originally planned for use at the Neptune LNG Deepwater Port have since been repurposed. The GDF Suez Cape Ann is currently operating as China’s first FSRU in Tianjin, China, having been sub-chartered in 2013 to China National Offshore Oil Corp (CNOOC) for 5 years. The GDF Suez Neptune is currently utilised as an LNG carrier, having delivered LNG cargoes to the Everett import terminal earlier this year from Trinidad and Tobago.[13]

Small scale opportunities for FSRUs in South East Asia

The geographical profile of certain South East Asian countries such as Indonesia and the Philippines highlights the future growth opportunities for small scale FSRUs. In Indonesia, the population is scattered across thousands of islands with varying levels of gas demand. The Eastern part of Indonesia, has certain areas with marginal gas demand in the range of 3 to 30 mmscf.[14] The procurement of a conventional FSRU (120,000 to 170,000 cubic meters) would be wholly unsuitable and uneconomical – in certain areas the water depth is too shallow for a conventional FSRU to operate. A number of domestic companies have now identified that small scale LNG transportation and receiving terminals are the most suitable and efficient way for gas distribution in certain parts of Indonesia. There are currently plans for a range of smaller scale FSRUs ranging from as little as 3,000 cubic meters to cater for certain isolated regions of Indonesia. Small scale LNG projects create a number of unique legal issues to consider such as the delivery mechanism, nomination procedure and take-or-pay mechanisms behind new forms of gas transportation such as LNG truck and container deliveries. It is important to synchronise the terms of the primary LNG supply and FSRU charter agreements with the various downstream supply and end-user distribution agreements to ensure that risks are allocated appropriately. However, further analysis of the economies of scale in the small scale FSRU market is required to understand whether such developments will be economically viable in the future. The fundamentals show that smaller scale FSRUs on a per unit basis are more expensive than conventional FSRUs.[15] As noted earlier, the capital expenditure required for a 170,000 cubic meter vessel is in the region of US$250 million (although the cost would be closer to US$100 million for a second-hand converted LNG carrier). It is estimated that the cost for a 20,000 to 50,000 cubic meter FSRU would be in the region of US$50 to US$70 million (which would have to be a new build vessel as no FSRUs of this size have been constructed to date).[16]

Click here to view table.


Over the past decade, the FSRU market has changed considerably. This change has manifested itself in the now increasingly flexible charter party agreements and in some instances, a number of risks are now being shifted on to the FSRU owners – we are now seeing seasonal charters and some shorter length charters. On the financing side we have seen a variety of new financing options available for FSRU projects as lending banks’ skepticism over the technology and development risk of FSRU projects seems to have abated. In South East Asia, geographical and regional fluctuations in gas demand present significant opportunities for the small scale FSRU market – although the economics of such projects need to be carefully considered. There are a number of challenges on the horizon for the FSRU industry as it grapples with a change in some of the fundamentals that have underpinned the industry for the past decade – cheaper oil presents fuel-on-fuel competition and the growth in the number of FSRU owners potentially presents a threat to profit margins. However, looking ahead to the next decade demand is continuing to increase – there are a further 30 FSRU projects currently being considered – and therefore any argument that suggests the industry will experience a slowdown should be carefully scrutinized.

To view the "Operational FSRU Projects as of November 2015" table (sourced from publicly-available information), please click here.