The natural gas shipping industry in cross sea of the global circumstances

Table of content

1. Introduction
1.1 Background
1.2 Problem analysis
1.3 Purpose
1.4 Research questions
1.5 Delimitations

2. Methodology
2.1 Scenario planning approach
2.2 Research strategy
2.3 Research design
2.4 Line of action
2.5 Description of methods
2.5.1 Scenario planning methodology
2.5.2 Analysis of economic models and theories
2.6 Limitations of methods
2.7 Research ethics
2.8 Trustworthiness

3. The global energy market

4. The natural gas market
4.1 The supply chain of natural gas
4.2 The specific features of natural gas
4.3 The consumption patterns and reserves of natural gas
4.3.1 The consumption patterns of natural gas
4.3.2 The reserves of natural gas
4.4 The determinants of demand and supply of natural gas
4.5 The prices and future trends of natural gas
4.5.1 The prices of natural gas
4.5.2 The trends of natural gas
4.6 The natural gas shipping industry

5. Theoretical frameworks
5.1 The equation of natural gas ships demand
5.2 The absolute and comparative advantage theories
5.3 The competitive and sustained competitive advantage
5.4 The Heckscher-Ohlin theorem
5.5 The Porter’s five forces model
5.6 The theory of consumer choice

6. Scenarios in practice
6.1 Scenario development technique
6.1.1 Global Business Network
6.1.2 Limitations of the scenario development technique
6.2 Scenario I: Boom and bloom
6.2.1 Scenario I: Plot description
6.2.2 Scenario I: Analysis
6.3 Scenario II: Deep in depression
6.3.1 Scenario II: Plot description
6.3.2 Scenario II: Analysis
6.4 Scenario III: Shutting the gates
6.4.1 Scenario III: Plot description
6.4.2 Scenario III: Analysis

7. Discussion
7.1 Scenario I: Reflections on demand function
7.2 Scenario II: Reflections on demand function
7.3 Scenario III: Reflections on demand function

8. Recommendations for strategic management
8.1 Learning experience as a key to success
8.2 The necessary requirement for amendment
8.3 To respond strategically to competition

9. Limitations and recommendations for further research

10. Final reflections and lessons learned

11. References

Appendix 1: Major trade movements of natural gas in 2014

Appendix 2: Global merchant and LNG fleet distribution

Appendix 3: Building blocks from GBN for scenario creation

Appendix 4: GDP per capita from selected countries

Appendix 5: Comparison of greenhouse gas emissions among energy sources

Abstract

Shipping of natural gas across the oceans is of significant importance - linking the energy production business with the consuming nations around the globe. Natural gas supply is predicted to increment 1.9% p.a. until 2035, therewith facilitating its transportation as a commodity on board of currently 415 liquefied natural gas vessels and further 168 more to come by 2020. Despite its comparably small size of not even one percent of the worldwide merchant fleet within the industry of shipping, the carriage of natural gas on board of vessels has been overall on an upwind within the last twenty years, foremost due to the greater discovery of natural gas as a source of energy and an increased demand for energy resources in general.

Particularly the natural gas shipping industry underlies peculiar states of affairs: It is a highly technologized, investment intense segment which is affected by currents of political, economic, and environmental origin. Hence, natural gas shipowners as well as other participants upstream and downstream of this sector find themselves in difficulty of strategic decision-making. The purpose for this study has therefore been to investigate in how a natural gas shipping company and other market participants can take a farsighted strategic decision in the complex and uncertain business environment of today and, thereby, planning for the future. By using the scenario approach of modelling a complex world in single happenings, it will be thought deeply and creatively about the future whereof the most salient factors affecting this industry are illuminated. Upon these scenarios, various economic theories and models including an equation of natural gas ships demand are applied whose concepts could be exercised by market participants in order to adapt to ever-changing circumstances with vigilance and to reduce the risk of being unprepared for the future.

The study found that the global natural gas industry is impacted by the dynamics deriving from conditions enforced by, for instance, the ongoing financial and economic crisis, legislative forces, substitutionary effects of energy products, and political discord in natural gas providing as well as receiving countries. The outer-firm global contexts leave a footprint on the strategic decision-making of a firm. In addition, it was proofed that scenario conduction is a viable tool for strategic planning of a firm active in the natural gas shipping field in order to address the business environment of uncertainty and assist in strategic management processes of business leaders. The research was conducted as a qualitative study drawing from a multitude of secondary literature.

The implications shall serve not only natural gas shipowners but also other related market participants in terms of strategic decision formation, visual thinking, and future anticipation of their business field.

Key words

economic models; economic theories; future studies; global natural gas industry; global circumstances; global energy demand; global business network; global energy supply; industry analysis; liquefied natural gas; natural gas; natural gas shipping; scenario approach; scenario planning methodology; scenario development technique; shipping industry; strategic management; uncertainty.

List of abbreviations

illustration not visible in this excerpt

List of figures

Figure 1 GDP growth and seaborne trade growth in relation

Figure 2 Forecasting, scenarios and hope

Figure 3 Total energy supply by resource 2011 and 2020,

Figure 4 Export and import balances of energy sources per continent from 1990 to 2030

Figure 5 The natural gas industry supply chain

Figure 6 Natural gas consumption vs. production from 2004 to 2014 in billion cubic meters

Figure 7 Trade volumes of LNG from 1990 to 2013

Figure 8 Average wholesale prices in USD per 1 million BTU of natural gas in IGU regions in 2014

Figure 9 LNG fleet from 1972 to 2015

Figure 10 Example of two-dimensional scenario matrix

Part 1:

Presentation of research

The aim of the first section of the paper is to outline the topic of the paper as well as the methodology applied. First, a description of the background of the topic is given. Second, a problem analysis is provided which are followed by the purpose and research questions. Finally, the methodology of the research is presented.

1. Introduction

The world economy is to the highest degree dependent on trade. Resources, industrial and consumer goods are produced, manufactured and utilized in every corner of the globe. The majority of the worldwide exchange of commodities is transported by merchant shipping which contributes with more than 90 percent to the intercontinental movement of goods. More than 110,000 merchant ships make up for the most energy efficient carrier of traffic of all per ton kilometer I. H. S. Global Limited (2015, see appendix 2). Within the past forty years, seaborne trade has quadrupled in size and has become crucial for the national economies (UNCTAD, 2014); nevertheless, the relevance of this segment of international trade has remained invisible to the general public as per George (2013).

1.1 Background

In the shadow of the global economic problems ramps and rages a crisis within the international shipping industry, which has caused and most probably will further cause substantial difficulties. Since in all aspects the maritime segment underlies the international market environment, its high vulnerability gives evidence that the future of the blue sector of international trade is by no means certain.

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Figure 1 GDP growth and seaborne trade growth in relation²

The shipping markets and international growth cycles are to a great degree interconnected. No matter if considerable loss or high profit potential arises, the world trade defines maritime trade (see figure 1). Hence, the worldwide decline of the economic cycle led to the market phenomena that fewer goods were demanded and produced directly affecting the shipping industry. Thereby, resulting in overcapacity of vessels since the need for transportation means decreased against the profit and legislatively-driven surge of newbuilding orders, and an intensification of market competition on the remaining cargo to be conveyed. The shipping industry ran into heavy sea of persisting weakness of the shipping markets, the remedies of the financial and bank crisis as well as restraint growth of the world economy, while at the same time costs for ship operations increased. In spite of political endeavor to prevent more severe and problematic macroeconomic scenes from occurring, these bleak prospects have been felt by shipping participants for seven years now (Danish Ship Finance (Danmarks Skibskredit A/S), 2014, Baltic and International Maritime Council (BIMCO), 2015).

Especially, the comparably newly emerged natural gas shipping industry might appear less affected by these outer conditions: Considering its small stake of 0.3 percent of liquefied natural gas (LNG) tankers in relation to the worldwide merchant fleet, their particular segment transports a commodity which is predicted to mount 1.9 percent of annual growth in global demand until 2035 according to the BP Energy Outlook 2035 (BP p.l.c., 2014, I. H. S. Global Limited, 2015, review appendix 2). Yet, in their crucial role of delivering an increasingly demanded natural resource, being exposed to technological advancements, high capital intensity, demanding environmental and labor regulations, currently deteriorating natural gas prices and volatile consumer markets display examples of how easily the wind of change can pose risks to the natural gas shipping businesses if these influencing variables, among others, shift (Go-Maritime.net, 2015). Shipowners as well as other market participants upstream and downstream the natural gas shipping supply chain try to understand the current and to anticipate the future global movements in turn affecting their behavior. In these days, their strategic positioning in crisis-ridden business times has become more crucial than ever before in order to remain a player on the global shipping parquet. Heideloff and Pawlik (2006) as well as Peng (2001) suggest that cautious steps in the strategic positioning in the energy shipping business are mandatory, whereas an analysis of macro circumstances can assist in the understanding of the eclectic environment. The continuous race of assimilation to new conditions pressures in order to accomplish the market survival successfully. Which in return leaves hardly any room for the actual need of anticipation of the future for the individual businesses of the natural gas shipping segment (Shenkar et al., 2007). Consequently, the question arises of “How can a company in such uncertain environment plan for the future?” (Peng and Meyer, 2011) instead of ‘only’ following the race of strategic adaptation, which shall become the foundation of this research. It seems advisable for ship managers and other related businesses in natural gas to take a closer look upon the surrounding contemporary and possible future challenges of this development before initiating or amending long-term strategic decision-making by jumping on the bandwagon (Stopford, 2009, Peng and Meyer, 2011).

1.2 Problem analysis

Natural gas ship owning companies as well as market participants of this industry lack in many cases a strategic concept in order to ensure the competitiveness of their businesses. Their approach of strategically aligning their business activities for the future consists often of having a limited perspective based on long-term charter parties. Next to that, monitoring past and present market movements, competitor analysis, and following governmental as well as implementing environmental requirements are among others the standard actions as for planning the future. Yet, their business managers find themselves in the midst of sudden happenings, surprising and usually negatively influencing the short and/or long- term business plan. Even though knowing that the natural gas shipping business as such is a versatile, fast moving and demand-driven segment, estimations for the strategic future do not necessarily incorporate incalculable events. Given now the seventh year of the shipping crisis with charter and freight rates still under pressure, a plummeting oil price, trammeling comprehensive sets of rules such as on the CO2 emission of ships causing cost surges, or the persisting threats of piracy, being prepared for the unthinkable can become a potential management tool says also the annual report of the VDR Verband Deutscher Reeder, the German shipowner’s assosciation (2014). The question emerges of “How can a shipping company or other market participants of the natural gas shipping industry take an anticipative strategic decision in the complexity and uncertainty of the business environment of today and thereby planning for the future?”.

1.3 Purpose

The purpose of this study is to assist the strategic future thinking of any related businesses of the natural gas shipping sector. In order to become more skillful towards anticipating and reacting upon potential unexpected global happenings, scenario planning can be a valuable method. Incalculable events are made tangible and processible by extracting an imaginable scenario of one happening and approaching it with creating one or more business strategy solutions to the new potential situation. As van der Heijden (2005) points out: “We have to look into the future. Otherwise, it would be driving by night with no lights on.” Hence, business decisions of all kinds are not necessarily only about justifying budgets and making assumptions based on historical data. But instead about broadening the horizon of the decision-taking levels of a company towards, first, considering the complex environment of tomorrow, secondly, acknowledging the fact that all the requested information will not be available and, thirdly, based on uncertainty incorporating a more farsighted view of what might happen as well as the responsive action(s) to that (Ringland, 1998, Leemhuis, 1985).

Therefore, this research shall support in guiding practicians and professionals of natural gas shipping businesses to make more meaningful strategic choices. It provides the firm with enhanced understanding of the natural gas demand and supply and the business environment they are in since the role of natural gas in the macro and microeconomic context is evaluated. The analysis of scenarios is backed by economic models and theories as well as an equation of natural gas ships demand which try to give an idea of how to approach, and review the journey into the unknown as well as backing the scenario planning methodology for a safer navigation into the future. Because the future may be prepared for, if it cannot be predicted (Wilkinson and Kupers, 2014). One scenario involves an optimistic outlook of the future of natural gas shipping with strong global economic growth and low regulatory power. The second scenario includes a rather pessimistic future with high regulatory involvement through policies upon the backside of worldwide low economic growth. In addition to that, a third scenario with an abstract perspective is chosen where a Middle Eastern producer shuts off natural gas exports while a developed country becomes energy-self-sufficient. The analyses to all there cases are significant to LNG shipowners, charterers, port management as well as freight forwarders, ship yards, suppliers, insurance companies, ports, natural gas production firms, natural gas traders, and natural gas exporting, transmitting as well as importing countries. Within their roles as stakeholders in the natural gas shipping industry, all of them have been facing the great challenges of the cross sea of the entire shipping industry for many years now, resulting in difficulties in uniting firm strategy with the uncertain business environment (VDR Verband Deutscher Reeder, 2013). In the context of this research, scenario thinking shall provide the ability of anticipating the real world behavior, which can be unexpected. Here, constraints and changes of the external environment are explored; the ties or connections between forces to be examined (Ringland, 1998, Bood and Postma, 1997).

Moreover, this study might add a further example to the academic literature for theorists and researchers within the field of scenarios as well as strategic management of a shipping firm. In addition, information from this work may spark and facilitate debates due to the topicality of anticipative strategic decision- making in the general shipping industry (Maritimes Kompetenzzentrum PricewaterhouseCoopers AG, 2014).

1.4 Research questions

The principal research and sub research questions cover the areas of industry analysis, scenario approach, economic models and theories and strategic decision-making. They are as follows:

Principal research question:

How can the liquefied natural gas (LNG) shipowners and the surrounded industry prepare for the uncertainties of the future which the global marketplace creates?

Sub research question 1: In which framework of global and business environment is the LNG shipping industry embedded in?

Sub research question 2: What are the most salient factors having an impact on natural gas shipping?

Sub research question 3: What are future scenarios the LNG shipowners and other market participants of the natural gas industry could possibly face?

Sub research question 4: How do these scenarios affect the natural gas shipping industry? And how can these influences be analyzed, demonstrated and drawn from the macroeconomic level to the microenvironment of the natural gas shipping industry?

Sub research question 5: Which steps of strategic decision-making could be taken in order to prepare accordingly for the potential scenario outcome?

1.5 Delimitations

The study is limited to the natural gas shipping industry and its side businesses only, meaning that other interconnected parts and industries of the supply chain will not be covered.

In terms of data collection, the application of secondary sources will lay the foundation of researched information. The necessary valuable data is obtained through investigative research in data bases, case studies, management journals, maritime and scientific literature, shipping indices, reliable internet documentary, reports, and complemented through the author’s business knowledge and experience in shipping. As part of this paper, no interviews and neither surveys were conducted (Johnson and Christensen, 2014).

Furthermore, this paper shall be seen as an academic contribution to the above described problem statement and its purpose may not be mistaken with a ‘one size fits all’ approach.

Finally, it should be pointed out that the study does not claim to offer best practice solutions to managers of the relevant industry. The aim of this paper is also not to predict the future, yet, to liberate people’s mindset from finding a possible way of dealing with uncertainty (Schwartz, 1999). It does not fully grasp the entire dimension of all the circumstances and the influencing factors the natural gas shipping industry copes with. However, this research attempts to identify the most salient forces affecting the natural gas shipping industry and to address them accordingly in a scientific analysis. It is an extract of the subjective perception of the author. Subjectivity is given due to the fact that the author chose the scenarios depending on personal perceptions, however multiple futures are possible.

The author confirms that any error may be held to her account.

2. Methodology

The following chapter shall provide an overview of the methodology applied in this study. This includes the research design and strategy as well as the line of action, a description of the methods applied, followed by the limitations and research ethics, and finalized by the trustworthiness.

2.1 Scenario planning approach

Greater attention, academically and professionally, in the scenario planning approach in general emerged after the oil price crises in the 1970s. Past these demanding times, i.a., Royal Dutch/Shell was pioneering that their scenario thinking approach brought them into a more resilient and profitable state compared to the rest of the world market’s participants due to having anticipative business plans up in their sleeves (Schwartz, 1999, Schoemaker and van der Heijden, 1992). With the Shell-phenomena happening and the experiences made, planners have moved from forecasting to foresight. The procedures of planning based solely on forecasts, which had experienced a frequent utilization, were then seen as too rigid and obscuring strategic thinking (Mintzberg, 1994). The distinguishing contribution which the scenario approach makes in comparison to, for instance, forecasts is that it recognizes multiple views displaying the inevitable uncertainty in order to anticipate more cautiously. Scenario analysis, on the contrary, is permitting flexible reaction to structural change. Further, Ringland (1998) argued that if a scenario was a forecast, then one could anticipate that it will happen, which is not the case. Due to this, planning through scenarios shall not be confused with forecasts, a ‘ certain ’ end to a product, whereas scenarios are the ‘ uncertain ’ end. This paper will only apply scenario planning as a methodology.

Uncertainty is a state of affairs which causes discomfort. The term refers to unknown outcomes in the combination of certain factors, yet their coming out is indeterminate (Postma and Liebl, 2005). Examples of uncertainty are, for instance, whether the oil price will continue to decline or the relationship development between Cuba and the United States to draw near. Considering the uncertain factors especially within the fast moving and interdependent markets of today, it appears precarious to navigate a firm successfully, aiming for outpacing competition, sustainable growth and continuous development. In the ideal world, business managers would like the future to be largely predictable instead of encountering unforeseen happenings challenging their strategic plans. It is not possible to create a contingency plan for every conceivable occurrence; yet, the way of looking into the future can be approached by applying scenario planning as a strategic management method (Wilkinson and Kupers, 2014). Here, Schwartz (1999) defines it as “a tool for ordering one’s perceptions about alternative future environments in which one’s decisions might be played out.” It is the choice of an instrument to be used for reviewing the given data through the scenario planning approach and a futures technique that challenges assumptions. It can be seen as an alternative and an extension to forecasting. To a certain extent visualizing the future might be able to be grasped with forecasting, yet once uncertainty increases the data assisting in foreseeing prospective happenings, trends and events diminishes. Scenarios do not imply guessing what precisely will happen in the future, they instead head for the opposite and look for uncertainties. Scenarios can be defined as a number of stories which are generated in order to project knowledge and potential happenings or events into the future. These are conducted viewing a long-term scale of 25 years or for a short-term period of 3 to 10 years to come (van Notten et al., 2003). The planning horizon depends on the issues under consideration; “Similarly it is the balance between momentum and volatility in the business environment that determines how far a business plans into the future.” (Heijden, 2005, p. 97) Then scenarios start to become an option and add a skill to the firm’s strategy analysis before the future becomes fully unpredictable and hope is the last resort as per figure 2. Visualized in the center of the graph, scenarios rather serve as a collection of futures that outline the boundaries set to uncertainty and predetermineds.

illustration not visible in this excerpt

Figure 2 Forecasting, scenarios and hope³

Scenarios of the world are often used to anticipate ‘real life’. By questioning “How different can the world be tomorrow or the day after tomorrow?”, scenarios can form a reasonable description of a future happening. The scenario approach has been used to assist in creating an underlying process for “developing and testing (business) strategies in the light of future uncertainties” (Ringland, 1998). Yet, they need not to become true, they need to be useful, lead to discussion and intellectual agility. It works from outside in: projecting the ‘enemy’ from the outside of the boundaries of the organization into the organizational thinking by identifying the threats and opportunities in accordance with the, for instance, external factor evaluation of a SWOT analysis (Porter, 1979, Ringland, 1998). Scenario planning can become a valuable factor in the assistance of an organization’s anticipation of change in a number of dimensions, because its thinking mode assists in decreasing fear, uncertainty and doubt of different future outcomes and conversely increases strategic foresight. No matter if for small or large businesses, it can provide a viable method across industries and firm sizes in finding better guidance in case of the emergence of a scenario. Once one’s mind has played through a thought, even the most abstract might become even less unusual. It has been proven worth by many companies that by applying scenario thinking as a way of developing recommendations for, in a way, best practices of the future. Through picturing various future outcomes, the resulting act of taking action is made visible and explicit, easier to visualize in a non-threatening way and eventually ready to be implemented, if applicable (Wack, 1985). In this regard, Slaughter (1996) describes that “Foresight pushes the boundaries of perception in at least four major ways by:

Consequence Assessment: assessing the implications of present actions, decisions, etc.; Early Warning & Guidance: detecting and avoiding problems before they occur; Pro-active Strategy Formulation: considering the present implications of possible future events; Normative Scenarios: envisioning aspects of possible or desired futures.”

Among the afore-mentioned learning effects of using the scenario approach are also the development and enhancement of capacities and capabilities of an organization to make considerate decisions (Schwartz, 1999). Especially firms that were able to broaden and (re-)challenge manager’s horizons towards the previously unaware mindset proved to anticipate difficult periods, to flexibly take trends and to see innovation potential in opportunities. Initiating preventive and proactive methods are parts of addressing uncertainty, improving cautious decision-making and adding strategic strength to a firm instead of being compelled to take reactive and curing steps in the aftermath. By doing so, they move towards understanding longer term uncertainties which is sometimes left behind the day-to-day organizational thinking (Fortes et al., 2015, Ansoff, 1975).⁴

In accordance with Schwartz (1999), scenarios go even further than being a powerful vehicle for challenging and broadening the horizon of management thinking. This method may enable and facilitate strategic conversations as well as enlarge organizational learning towards selecting key decisions and priorities, which have become increasingly more important and more difficult (Godet et al., 2001). Since the future by its nature cannot necessarily be predicted, this investigation is done by using the abstract scenario approach in order to model a complex world (Malaska, 1985, Postma and Liebl, 2005).

2.2 Research strategy

As a methodology the scenario approach is exerted by creating or taking existing scenarios which can provide a decent instrument for imagining the world. The scenario planning methodology has its foundation in a qualitative approach which, however, contrasts the quantitative forecasting methods that take the predicted futures in consideration.

Already from the emergence of the first scenario planning approaches, the definite allocation between the use of qualitative or quantitative research techniques was discussed in accordance with Kemp-Benedict (2004). The quantitative research method is generally represented in the traditional forecasting approach, since it rested upon the circumstances that tomorrow will not much deviate from the circumstances of today (Bryman and Bell, 2011). Here, the methods of the school of ‘probabilistic modified trends’ represent common quantitative approaches. Based on past and current trend data, the chance of an occurrence in the future and its eventual ramifications are extrapolated. In addition, the impacts of this event form ground for considering whether it affects the future direction of a trend, possibly proceeding then with a different course. Surely depending on its purpose, organizations choose this technique in order to enlarge the breadth of possible futures. However, forecasting shows is limitations once major events in the environment challenge this view (Huss and Honton, 1987), and once the interplays of underlying relationships come into force. Once the outline of the future becomes too complex and imprecise, quantitative techniques have limits to display these serious business information (Schwartz, 1999, Armstrong, 2001).

Van Notten (2006) argues that using both quantitative and qualitative scenario techniques can be viewed as a strength, saying “a quantitative scenario may be enriched and its communicability enhanced through qualitative information” and “a qualitative scenario may be tested for plausibility through quantified information” (p. 14). Yet, on the other hand merging these two methods might as well be viewed as challenge. And generally speaking, the usage of a quantitative scenario research may be seen as meaningful in rather narrowly focused, short-term projects which as well are nourished with profound information (Wilkinson and Kupers, 2014).

When it comes to qualitative scenario research, their methods are adequately applied in projects with long-term horizons and less certain futures as per Amer, Daim, and Jetter (2013), which bring along the advantage of being malleable to complexity and uncertainty. Due to the constraints provided by applying only quantitative methods, scenario planning has emerged further towards qualitative techniques in the 1970s. Even though, quantitative among other various tools are used in order to complement scenario planning methodology, futures studies remain a highly subjective phenomena struck by complexity and, therefore, scenarios continue to be qualitative in nature (Martino, 2003).⁵

All in all, this study takes a qualitative, intuitively-led approach, where words are provided with a greater meaning than data (Wilkinson and Kupers, 2014), yet minor quantitative data in numerical form provides complemental background information.

2.3 Research design

The research design of this study is based upon the collective case study research. This method allows for describing and analyzing multiple scenes of complex key information which take place within a certain framework of its environment. Usually this scene is composed of elements which are interrelated, interconnected or even reciprocal which act within a bounded system. Within the context of this paper, the cases are given by the various scenarios which are studied and analyzed upon the application of economic models and theories. Each single case (scenario) is explained and surveyed by means of the internal and external environment, thus the context within the scenario is embedded in. Despite its intention of comparison among the different cases and their outcomes, this research study chooses to view and examine the scenarios individually and refrain from commenting on similarities and differences, the cross-case analysis (Johnson and Christensen, 2014).

The data analysis of the collective case study research applies a holistic approach, meaning looking at each individual scenario situation in its entirety. To a certain extent, the underlying interdependencies will be considered, however in many cases these hidden activities remain unknown to the general public as well as to the author. Additionally, it appears sensible to set a frame (bounded system) around each case- created scenario in order to not overload the scenario with information, to focus on the main influencing factors, to reduce the intake of complexity to a manageable and comprehensible amount, and to shed light on the information which is crucial to the scenario story. The data derives from various sources, the eclectic approach through desk research, in order to enhance the richness and understanding of each scenario.

In addition to the multiple-case design research, the grounded theory research is seen as a viable method in order to complement accordingly. Due to the fact that the to-be-applied- theories and explanations are generated and developed once the data collection and scenario construction have taken place, an inductive approach is developed. This traces appropriate theories while data and information of all kind is gathered and analyzed resulting in understanding for the phenomena (p. 456).

The activity of data collection for grounded theory research is conducted in a concurrent mode throughout the entire data research, gathering and analyzation process through desk research (p.458).

In total, three scenarios are illuminated and analyzed within this entire research. The deriving models and theories, mainly of economic origin out of grounded theory research, are then applied for the analysis of the scenarios.

2.4 Line of action

The execution of the research has followed a path of certain consecutive phases in order to achieve a substantial reply to the research questions posed.

At first, the process of a background study as well as data collection was performed. The corresponding extensive research of literature was mainly focused on articles from the research catalogues, i.e., ScienceDirect, ProQuest, MarketLine, or EBSCO Publishing. In addition to that, books were used to complete the information and when comprehensive information was required. While searching for relevant articles and books, certain keywords were used either individually or in combination with one another: ‘natural gas shipping industry’, ‘global natural gas industry’, ‘natural gas’, ‘current issues in shipping business’, ‘scenario planning’, ‘scenario methodology’, ‘futures studies’, and ‘strategic management’. Further on, an additional research was conducted in order to academically support the economic models and theories applied to each scenario setting.

Secondly, in the next phase the analysis of the data took place. Here, the results of the literature review were surveyed. The data was selected upon validity, content and context, importance to the topic by quickly skimming the abstract and reading further in case of proven relevance. The methods for analysis of the data were done by taking the whole picture of the topic in consideration and categorizing it to the different segments of need in accordance with the thesis structure.

Afterwards and thirdly, the design action was carried out which included the construction of new scenarios, the adoption or amendment of given scenarios as well as the application of the appertaining models and theories. By trying to model a complex world, the right and most remarkable parameters had to be found projecting as well as influencing the future of the natural gas shipping industry. Based on these, the scenario approach was used to create scenario plots which are, eventually, challenged and analyzed by the frameworks of mainly economic models and theories. The latter provided ground for argumentation of strategic management behavior afterwards.

2.5 Description of methods

This study includes two consecutive methods applied in order to represent and analyze the researched data. The following scenario planning methodology provides the foundation for the creation, adoption and amendment of scenarios undertaken in part 3. Then, the analysis of the economic models and theories is described thereafter.

2.5.1 Scenario planning methodology

The main and first named method applied in this research is the scenario planning methodology. As per van Notten (2006), scenarios bring along two principal purposes: the exploration as well as the pre-policy research. The exploration scenarios aim at stimulating the creativity senses towards enhancing greater strategic capability and wider strategic thinking. The pre-policy scenarios take emphasize on identifying trends and therefrom recommending concrete possibilities for strategic decision-making of an organization which is a common theme in pre-policy research. This paper does not distinguish in either one of the two, resulting therein that both purposes are represented and combined, because both of them reciprocally reinforce one another, may fuse and build a combined foundation for discussing the future. Therefore, the author chooses to leave the decision of the further purpose and application of the outcome of this study to the individual reader (Wilkinson and Kupers, 2014, Bishop et al., 2007).

Furthermore, in order to avoid confusion it needs to be clarified that the development of scenarios differs from the term scenario planning. While scenario planning contains a complete foresight study, the development of scenarios concerns the construction of the story line and plot. Hence, scenario development can be seen as a significant aspect of scenario planning (Bishop et al., 2007). A thorough description and reflection of the specific technique applied for scenario development can be found prior to the scenario plots in ‘6. Scenarios in practice’.

The author of this research utilizes self-created scenarios as well as future scenarios of studies in literature in order to develop a unique scenario plot. The origin of the individual scenario scenes which can be either an extract of literature or self-creation will be displayed within scenario setting accordingly.

2.5.2 Analysis of economic models and theories

The second method applied comes into force once the scenarios have been successfully developed. The creation of scenarios does not necessarily lead to implications for management. These shall be analyzed by the application of economic models and theories and, thereby, leading to an idea generation of how to reflect upon the scenarios and how to approach the adoption of the scenarios into strategic decision- making. The objective is the transformation of knowledge on the key factors and driving forces through scenarios into improved organizational preparation for the future of the market participants of the natural gas shipping industry. Facilitating the ability to visualize is supplemented with the characteristics and techniques of economic models and theories as part of the investigation process of important decisions which act as a complement towards convergent thinking about different futures.⁶

2.6 Limitations of methods

By taking the qualitative research approach it brings along limitations to the methodology applied. Choosing the main application of the qualitative over the quantitative research approach has been debated as a potential limitation by van Notten (2006) before, and concluded by Martino (2003) and Schwartz (1999) that the complexity of the topic in addressing future studies makes a pure quantitative research design unfeasible. Yet, finding and visualizing the subject meaning only within the secondary data gathered can be seen as a limitation to the research in a qualitative way. Therefore, quantitative sources complete on a small scale towards a more comprehensible picture.

Disadvantages of studying multiple cases may be found in the depth of the analysis of the individual case. The trade-off between depth and breadth is tried to be compensated by reducing the number of scenarios analyzed to three which leaves room for in-depth examination, thereby avoiding vague and shallow outcomes of this research. Johnson and Christensen (2014) address this issue but still recommend leaving the final judgement of balancing both sides to the author.

Forecasting has been excluded since its approach of probabilistic analysis technique assumes that the future continues as the past has played. As Wilkinson and Kupers (2014) outline, the usage of probability can only be applied in situations where “historical patterns are set to repeat”, whereas the starting point for scenarios derives from unpredictable that contain inevitable and undeniable uncertainty. Generally speaking, forecasts are built to sell, and scenarios have the sense to respond (van der Heijden, 2005).

The method of scenario planning overruled the sole usage of forecasts also due to the fact that having information on hand which is substantial and inconsistent can be better processed into scenario construction than into forecasts. However, once a situation reveals dimensions of various surprises, hence inconsistencies, these are also difficult to capture and deal with within scenarios thereby limiting the scenario methodology application. In addition, scenarios itself cannot adequately mirror complexity of the business environment as well as reveal hidden connections and interdependencies caused by and based on complexity or information overload (Wilkinson and Kupers, 2014). Postma and Liebl (2005) critique that even though scenarios were constructed for highlighting the crucial uncertainties, the scenario development technique is incapable of handling the great complexity and neither concurrent developments nor an increasing amount of trends. Through that constraints in grasping the big picture in one framework can occur. This created paradox, whereas displaying complexity is an advantage as well as a disadvantage for scenario planning, may illustrate the limitations of putting unlimited irrationalities into a logic system.

Following the afore-mentioned critique, there does not exist one comprehensive approach of displaying the future in scenarios which is capable of capturing the entire ‘real world’ without straining it by a rigor framework, as a consequence reducing reliability grounds. Developing, merging and complementing various techniques has until now remained an ongoing challenge and can be seen as a weakness of the methodology (van Notten et al., 2003).

Regarding the scenarios generated as well as the subsequent economic models and theories used, these are only exemplifying the industry reality. Both scenario creation and their analysis leave room for interpretation up to the decision makers.

2.7 Research ethics

Throughout the entire research the research ethics regarding privacy of the data collected and its following precautionary measures have been warranted. Concerning authorship, the author (named within the cover page of this study) acknowledges the full responsibility for this work in accordance with Johnson and Christensen (2014).

2.8 Trustworthiness

The trustworthiness of this research shall be used in order to demonstrate the qualitative measures of this study. For proofing the qualitative research reliability and validity of this study, the following criteria of trustworthiness have been applied (Bryman and Bell, 2011).

Credibility is a quality of being worthy of believing. In order to ensure the same, the usage of multiple theoretical perspectives was conducted by investigating in various different theories and disciplines as assistance for interpretation the available data. Further, the either created or chosen scenarios are depicted with a close sense towards reflecting reality.

Transferability is about if the findings of this study may be transferred in other contexts. The research takes scenario planning as a methodology approach which can be generalized to numerous settings and environments. Moreover, the scenarios and the assumptions central to this study remained focused on the natural gas shipping, industry however may also be useful to the overall maritime branch of trade as well as the natural gas sector, if sensible.

Dependability means basically that if the study was reviewed and produced a second time, whether the outcome would be the same. Yet, since the same research cannot be measured in the same way twice, this qualitative measurement is fulfilled by the peer review. This study was discussed with disinterested peers who reviewed the explanations and conclusions of the researcher.

Confirmability is to assure that the personal values of the author to this study is kept to minimum if not non-existing level. The exclusion of personal influence or opinion may be difficult to demonstrate. But, first, can be circumvented by avoiding selective sourcing through triangulation, which means using multiple data sources, methods and theoretical perspectives. And, secondly, the bias can be reduced by the corroboration of using peers, as well as thirdly, the author remains critically reflected throughout the entire study (Johnson and Christensen, 2014).

Part 2: Theory

The aim of the second section of this paper is to give an insight into the natural gas energy markets concerned as well as an overview on the theoretical frameworks applied. First, a review of the global energy and the natural gas market next to the natural gas shipping industry are outlined. This section grants valuable insights into the trends, changes and the current state of affairs of the interconnected segments which are to be addressed. Secondly, the economic models and theories to be applied are explained prior scenario evaluation.

Additionally, sub research question 1 and 2 are given answers to.

3. The global energy market

Energy and its consumption have always been and will be crucial to all the nations worldwide. Deriving from an abundance of energy resources, fossil materials such as coal, gas and oil, renewables out of biomass, wind, hydro, solar or biofuels, and nuclear energy with nuclear fission, radioactivity, and atomic fusion constitute the determining sources of the energy supply.

Considering the fact that global energy consumption is predicted to accelerate by 41% until the year of 2035 as per BP Energy Outlook 2035 (BP p.l.c., 2014), the enormous need for energy in the future seems to be further fueling economic and social growth, securing industry production, transportation, and serving the demand of the public as well as the private. Main demand derives from non-OECD countries, hence predominantly economies of emerging countries steadily growing in rapid steps, therefore, requiring 95% of the estimated increase for feeding their extensive development projects, aspiration after higher wealth standards as well as population growth. The OECD states are continuing to play a vital role in energy consumption, however not in a predominant position as in the last century. For instance, Germany shows intensifying efforts towards its independency from oil. The European country is predicted to decrease its fuel consumption for cars and heating by 40% until 2025, therewith displaying the increased commitments to energy cost savings and substitution towards less CO2 emitting renewable resources since 2010 (Brandis, 2012). Especially in terms of oil consumption, China and India compensate next to other emerging economies for stagnation of energy demand in highly industrialized countries.

Globalization, competition, climate and environmental protection as well as technology have depressed the usage of energy in OECD member countries specifically towards becoming continuously more efficient and effective. Otherwise this would have driven prospective increments of energy demand to vaster extents. Notably, technological progress has occurred across all segments of the energy carriers. As per the current state, wind power passed the threshold to becoming competitive and the photovoltaic industry is on positive ways of enhancing the productivity scale (eWorkz Power Pte Ltd, 2014). Furthermore, fossil resources have seen encouragement in the production processes of conventional oil fields from 40% to up to 70% exploitation rate. Deep-sea oil production in great ocean depths of the Brazilian coast has benefited from ground-breaking technological developments for piercing the salt formations of the Atlantic Ocean in order to reach the offshore oil deposits. In terms of mobility, the fuel and propulsion industry upstream the supply chain reported precedent-setting economic developments in the utilization of various energy sources such as natural gas, coal, oil and biofuels, thereby reducing overall energy expenditure.

The predicted hunger for energy requires adequate satisfaction accordingly. Current supply projections by the World Energy Council (2013) visualize growth of energy provisions of 22% from 2011 to 2020 (see figure 3). All fuels are said to increase over the forecasted period, yet the fastest pace is seen in renewables (6.4% p.a.). When it comes to fossil fuels, oil (0.8% p.a.) and coal (1.1% p.a.) show the slowest upwards movement, while natural gas exceeds both with 1.9% of annual enlargement. Less coalintensive industrialization has led to market slowdown in coal growth, whereas non-fossil fuels account accumulatively for rapid rises in energy supply.

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Figure 3 Total energy supply by resource 2011 and 2020⁷,⁸

The consumer choices are said to soar likewise due to greater establishment of renewable resources which perpetually leaves its former position of being a minor player. Whereas the sourcing segment of nuclear power is projected to remain without significant increment, the usage of fossil fuels, most notably in oil usage, is about to undergo significant cuts, yet, remaining in the lead supply position among the energy providers. In the 1970s, oil covered approximately half of the energy consumption around the globe, leaving coal (30%) and natural gas (20%) in second and third place. Today, the newly arisen global excess consumption will most notably be covered by coal, natural gas and renewables. The overall supply of energy through the latter is calculated to reach 7% (through biomass, wind, solar, or biofuels) by 2030, and even 14% if hydro energy is included (BP p.l.c., 2014). Another 7% of energy contribution is found in nuclear energy. This sector plays a fundamental role in provisioning energy in numerous countries like

France, Czech Republic and the United Kingdom. Poland and China plan the establishment of their first nuclear power stations. On the other hand, the federal authorities of Austria, Germany as well as Switzerland have decided to phase out nuclear power, mainly as a consequence of the Fukushima accident in Japan in 2011.

Despite the climbing demand and the subsequent supply of energy, further trends within the global energy market are to be seen in the following areas. First, the major economic regions drift apart in terms of self- supply through own energy resources as per figure 4. From the current point of view have the Americas accomplished energy autarky. Canada and North American profit of relatively balanced resource occurrence in natural gas, coal and oil, while primarily offshore oil will further dominate energy input in Central and South America. The Russian Federation holds the largest conventional natural gas resources worldwide and ranks in coal as well as in oil among the leading supplier nations (Bundeszentrale für politische Bildung, 2014a). Also China and India are capable of providing extensive coal deposits. On the other hand, Europe and Japan have encountered and will further sense to a greater extent their impecuniousness in energy resources. In between the leading world power nations are Europe and Japan comparatively weakly equipped with inaccessible coal and natural gas as well as limited oil, and have therefore been forced decades ago to import necessary energy. These created dependencies on international trade have bred a certain attitude in regards to the efficient and economic use of energy and an expansive initiative towards the implementation of preferably renewable energy resources such as wind, solar and biomass (Brandis, 2012).

Figure 4 Export and import balances of energy sources per continent from 1990 to 2030⁹

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While the escape from energy competition on importing energy resources results in innovations and need for technologies, this enforced shift contributes to a long-term global energy objective as a ‘side effect’ as follows.

The second development is set to happen within the context of the global climate protection. Until 1992, the energy sector was a global energy development framework which had caused significant implications specifically for the environment. After the United Nations conference on environment and development in Rio de Janeiro, principal drivers agreed upon beginning to shape the energy sector towards a sustainable future. Yet, until today the 195 participating nations of the world have so far faced struggle in finding a common ground on an international climate change agreement, namely the UN Framework Convention of Climate Change (UNFCCC). The diplomacy in meeting the targets of the legally binding emission reduction of the obligating Kyoto protocol of 1997 includes 38 developed countries. The United States, Canada, Russia, Japan and New Zealand denied their efforts in the second commitment period, whereas more than 70 developed and developing countries have pledged their endeavor in several non-binding commitments to either minimize or confine their greenhouse gas emissions. Reaching conclusions in the finalization and the implementation of Kyoto protocol have seen weaknesses in terms of requiring only developing countries to participate. Therefore, negotiations towards a new global climate agreement are set to be underway and presumably adopted in Paris in December 2015 with subsequent implementation until 2020 affecting and including all UNFCCC nations. The attitude, hesitation and reluctance in refraining from placing a country under the obligation of the UNFCCC could be reasoned in countries envisioning a loss due to a tradeoff. Because in between striving for economic growth, keen competition or trade disputes among countries and confining sovereignty may emerge and cause the refusal to participate. However, on this background competitive distortions for the participating countries of the Kyoto protocol appear which bear greater economic costs than the non-signers. Despite the slow movements in resolving in an international climate consensus is the trend towards prioritizing reduction of greenhouse gas inevitable and undeniable by any nation (European Council, 2015).

4. The natural gas market

While the vivid international energy markets face interplays of growing competitive forces, a subindustry has emerged to attract greater attention than ever before. A gas which was thought to be a by-product within the oil production process yet is a geological fossil resource in itself, stepped on the market place as a valuable and competitive fossil fuel in the 20th century: Natural gas. Over the past years, the natural gas sector has emerged to become one of the most active and prominent fields in the energy domain (Schaefer, 2015). The industry has faced major developments towards becoming a competitive product with a wide variety of usages. The needed security in energy supply contributed to a greater attention to natural gas, while environmental concerns began to grow in importance in the early 1990s (Bhattacharyya, 2011). Natural gas is the most environmental friendly compared to other fossil fuels. Within the burning process of natural gas are only half as much CO2 emissions produced compared to the production of coal. Due to its greenness, efficiency and nurtured by an increasing preference for low- carbon engines as well as uncertainty over nuclear development in various countries, the demand for global natural gas has been running an upwards development. These advantages next to increasing new extraction technologies of reaching greater deposits compared to other unconventional natural gas types promotes the market position of natural gas.

The potential inherited by this natural resource is seen as tremendous, both flexible and plentiful next to the fact that it is stated as the cleanest fossil-based fuel. In general, natural gas functions as an energy source for power generation technology, as well as a transportation fuel, as fertilizer and within manufacturing processes or feedstock of various industries. Even though it is believed that natural gas has been around for many centuries, its prominence has come to flourish over the past 30 years.¹⁰ Natural gas is marketed around the globe which has not always been the case, but provided by continuous discovery of reserves outlooks foresee a prosperous future. The World Energy Council (2013) predicts that as per the current state more than 209,741.9 billion cubic meters (bcbm) of recoverable natural gas reserves are below the earth’s surface, either under land or under sea, of which approximately near 1.6% have been successfully traced, produced and consumed until now. Already in 2004 headlines stated that The future ’ s a gas (The Economist, 2004) and scenario planners at Royal Dutch/Shell believed that natural gas could become the world’s energy source of highest importance surpassing oil by 2025. More than one decade later, market happenings have proven that natural gas has been chosen more frequently over, i.e., oil.

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² DET NORSKE VERITAS AS 2012. Shipping 2020. In: DET NORSKE VERITAS AS (ed.). Høvik, Norway.

³ VAN DER HEIJDEN, K. 2005. Scenarios: The Art of Strategic Conversation.

⁴ The definite outline of the scenario method applied in this study can be found under ‘2.5 Description of methods’.

⁵ See JOHNSON, R. B. & CHRISTENSEN, L. 2014. Educational Research: Quantitative, Qualitative, and Mixed Approaches, SAGE Publications, Inc. for strengths and weaknesses of quantitative and qualitative research, respectively.

⁶ A detailed description of the economic frameworks applied can be found in Part 2: Theory.

⁷ WORLD ENERGY COUNCIL 2013. World Energy Resources London, United Kingdom: World Energy Council.

⁸ One million tonnes of oil equivalent (mtoe) is able to produce approximately 4,400 gigawatt-hours of electricity as per BP P.L.C. 2015. BP Statistical Review of World Energy 2015.

⁹ BRANDIS, R. 2012. Globale Energietrends und deren Auswirkungen auf die deutsche Energieversorgung. et - Energiewirtschaftliche Tagesfragen.

¹⁰ According to Chinese tribal knowledge, natural gas existed already 500 BC where it was used for salt water desalination. In more recent history, natural gas was discovered and identified in the United States in the 17th century in the areas of Lake Erie as seen in STOPFORD, M. 2009. Maritime Economics, Routledge.