Roger Vielvoye
International Editor
The world tanker industry has managed to maintain the momentum generated during the Persian Gulf war.
Freight rates for large vessels have regained the high levels seen during the first 2 months of this year, while the expected postwar decline in use of tankers has not materialized.
The health of the tanker industry is linked closely with the volume of long haul crude oil from the Middle East, which in turn depends on the fortunes of Middle East crude exporters.
While demand for Persian Gulf oil has eased in the main oil consuming countries, the tanker industry has been protected from the downturn by extensive use of vessels as floating storage by Saudi Arabia and Iran.
Owners of very large crude carriers (VLCCs)-vessels of 175,000-299,000 dwt-also have benefited from the continued closure of Iraq's pipeline outlets to the Red and Mediterranean seas. The shutdown has assured that alternative supplies from Persian Gulf sources are shipped around the Cape of Good Hope to Europe.
A reduction in the floating storage fleet and reopening of Iraq's pipeline outlets could take the edge off current freight rate levels as the year progresses.
Market sources point out that even at the Persian Gulf war peak of $43,000/day for a spot charter from the gulf to Europe, an owner would only break even on the cost of building and operating a new tanker to the highest environmental standards.
Owners currently can expect spot rates of about $40,000/day, excellent by the standards of the late 1980s and early 1990s but still below the level needed to justify new buildings. And there are many in the industry who think $40,000/day will be just a happy memory later in the year.
Owners are facing pressure for major changes in the industry. Governments and the public want better operating standards and new environmentally sound tankers to reduce the risk of oil spills.
At the same time, the industry has to learn to live with repercussions in the 1990 Oil Pollution Act in the U.S., which has opened the way for unlimited liability against tanker owners involved in spills off the U.S.
The search also is on for improved profits to make investments required by the changing world of seaborne oil transportation.
AGING FLEET
Another issue tanker owners must confront is the need to replace an aging fleet. About 70% of the current VLCC fleet was built before 1977. The average age of tankers in this class is 13.6 years.
In the past, pressure for scrapping old vessels has come from a massive surplus that depressed freight rates. In the mid-1980s about 30% of the VLCC fleet and 50% of the ultralarge crude carrier fleet were laid up.
Surplus is no longer a serious problem. At the beginning of this year there were only seven VLCCs still in layup after 27 new vessels had been delivered during the preceding 12 months.
Tanker owners and cargo owners are moving into an era of tough regulation by government and changing public attitudes that will not accept sloppy, low grade ship operations.
Cargo owners in particular will come under increased pressure to reject substandard vessels for time and spot charters and pay a premium for crude to be carried in modern, well maintained, well managed tankers.
Changing regulations on liability for spills should ensure that these problems are tackled head-on.
Ian McGrath, managing director of Shell International Marine, recently said liability for oil spills is the No. 1 issue facing the shipping industry.
MIXED FUTURE
Drewry Shipping Consultants, London, provides a mixed view of the future for supertankers. Larger tankers will benefit from an upturn in Middle East crude exports but could face new problems from a short term surplus of capacity.
Drewry predicts the international crude trade will decline from 27.2 million b/d last year to 26.8 million b/d this year before rising to 28.6 million b/d by 1996.
Supertankers will benefit from the fact that the Middle East's share of this business is forecast to rise from 50% to 55% with trade on routes to Europe declining in favor of increased shipments to the U.S. and Far East.
The potential benefit to the supertanker market from the rise in Middle East exports will be partly offset by a rise in shipments through pipelines to the Mediterranean.
After a fall from 3 million b/d in 1989 to 1.68 million b/d last year, pipeline volumes are expected to increase to 4 million b/d by 1996.
The report suggests that the supertanker fleet will increase from 120 million dwt in 1990 to 140 million dwt in 1994 before returning to 120 million dwt in 1996.
With demand stagnating, the surplus of supertankers will grow from a reasonably healthy 20% to an unhealthy 33% by 1994. After that, the surplus will start to decline significantly.
FREIGHT RATES
The Persian Gulf war boom in freight rates came as an unexpected bonus to owners who, like most others in the oil industry, greatly underestimated the speed and size of Saudi Arabia's response to the sudden disappearance of oil supplies from Iraq and Kuwait.
Most of Saudi Arabia's 3 million b/d of added production went through Persian Gulf ports, triggering a sharp increase in spot chartering by Vela, Saudi Arabia's state trading organization. Before Iraq's blitzkrieg of Kuwait last August, Vela had a little more than 1.4 million dwt of chartered tonnage. By the end of the year it had a peak of 4.3 million dwt.
The Saudi chartering spree ran parallel to similar moves by National Iranian Tanker Co., which had more than 9 million dwt of owned or time chartered vessels. By the end of 1990 it also had 4.8 million dwt of spot chartered tankers.
Most of this spot chartered tonnage formed the basis for the current floating storage of crude off main consuming countries. These vessels, taken on 30-90 day charters, helped the market achieve the high rates seen in January that continued into February.
Spot rates were also helped by the initial Japanese restrictions on voyages into the Persian Gulf war zone, which resulted in the short lived tanker shuttle services.
The long expected rundown of floating storage has not materialized. At the beginning of January, 71 tankers of 14.5 million dwt were involved in 1-3 month floating storage charters. By the beginning of March this had risen to 94 vessels of 19.8 million dwt.
Because Saudi Arabia and Iran have shown no inclination to allow production to decline in line with second quarter demand, the volume of floating storage has continued to increase. On Apr. 1, an estimated 98 tankers of 20.5 million dwt were acting as storage units. The number had risen to 101 vessels and 22.5 million dwt at the beginning of May.
Owners, while extolling the virtues of marketing flexibility provided by floating storage, know the situation cannot continue indefinitely. They hope the rundown of the storage fleet will take place gradually, preferably to coincide with late summer and early fall stockbuilding in consumer countries.
The freight market situation in mid-April showed how volatile the postwar tanker industry had become. Owners, expecting a postwar decline in rates began to accept lower rates with no fundamental change in the market. For several weeks vessels were chartered at half the peak war rates before the current recovery set in.
Market sources say the outcome of the Organization of Petroleum Exporting Countries meeting last week will help determine charter prices for the early part of the summer.
TWO TIERS
Soaring spot rates early this year have tended to overshadow the first signs of a two tier market in time charters.
New double hulled vessels entering the market command a premium over vessels built in the second half of the 1980s. Premium rates may be twice those of older tonnage built in the mid-1970s.
Leading operators and a number of oil companies hope this trend will lead to the phasing out of some substandard vessels operated by less reputable owners.
But there is no escaping the fact there are crude owners who are interested only in the lowest available charter rate and who pay little attention to the condition of the vessel, the management record of owners, and performance of the crew.
Shell International Marine's McGrath said Shell conceded that in the past freight rates had been too low to maintain or renew the tanker fleet and had been driven down by the large surplus of tonnage throughout most of the 1980s.
This situation could not continue, he said. Higher quality vessels demanded higher freight rates.
Shell companies accepted that this change must be made and were prepared to pay higher prices, provided they did so in a competitive environment. Shell companies wanted a level playing field where high standards of quality applied to all.
SHIP INSPECTIONS
Shell companies, which run a system to inspect the quality of vessels used by the group and owned by third parties, plan to make their procedures more rigorous.
McGrath said in 1990 more than 2,600 inspections were carried out.
Shell companies also introduced management reviews of health, safety, and environmental and other policies used by independent owners to support their vessel operations.
Inspections will be tougher and more frequent and will require additional performance information from management reviews of shipowners, which also will be expanded.
"We will be looking for quality management," McGrath said. "It will be a key element of working together with owners to develop the standards the industry needs.
McGrath said if other companies take similar measures it will encourage the committed, long term tanker operators and squeeze out poor quality operators.
LIABILITY AND QUALITY
The U.S. last summer focused the attention of the tanker industry on liability by passing the Oil Pollution Act.
Unilateral action by the U.S. followed the Exxon Valdez spill and bypassed various international initiatives on oil spill liability, including protocols from the International Maritime Organization.
Other countries also plan to take unilateral action. Norway has told ship owners of plans to require any tanker calling at a Norwegian port to have a quality management system in place.
The Oil Pollution Act opens the way for individual states to introduce unlimited liability for a spill against shipowners. The first repercussion was the decision by a number of oil company and independent tanker owners to withdraw from the oil trade with the U.S. except to Louisiana Offshore Oil Port.
Other owners who have not announced a formal boycott of U.S. trade are avoiding U.S. ports when that's possible.
Many tanker companies have started a process of restructuring to ensure that unlimited liability for a single spill does not bankrupt the whole group.
After several false starts caused by conflicting interests in the tanker industry, shipping interests are starting to grapple with the need for insurance in the face of unlimited liability.
The Oil Pollution Act also requires double hulls for vessels trading with the U.S. Alternative designs with equal or better protection than a double hull can be incorporated into the regulations later. The definition of a double hulled vessel will be left to the U.S. Coast Guard.
A report by the U.S. National Academy of Sciences showed that oil imported into the U.S. in a double hull vessel with hydrostatic control features, the most expensive of new designs, would cost the consumer an additional $3.41/ton.
A less expensive double hull design or a double sided vessel with an intermediate oil tight deck would add only 60-70/ton. But these vessels will cost 15-20% more to build, and the vagaries of the freight market do not guarantee the owners will recoup the added investment.
Shell supported campaigns to persuade the U.S. Coast Guard to incorporate into the Oil Pollution Act designs of environmentally safe tankers other than double hulls or double bottoms.
Many recent incidents have shown that the quality of officers and crew are at least as important as a well maintained vessel.
At one end of the scale, some operators are still searching for the cheapest crews available while there is a growing concern at the other end of the spectrum over the growing shortage of skilled seamen.
A study in the U.K. last year showed that the world shipping industry needs about 35,000 cadets each year. To meet this figure training facilities worldwide would have to undergo a three fold expansion.
CHANGING OWNERSHIP
The structure of the tanker industry is changing.
State oil companies and their tanker affiliates are becoming more heavily involved in shipping oil, while international oil majors have reduced their direct commitments.
Saudi Aramco Oil Co. recently placed an order in Japan for six VLCCs of 280,000 dwt each, while Venezuela also disclosed plans to add 22 vessels to its fleet of 17 small tankers with a total tonnage of about 700,000 dwt. Eight of the new vessels will be 85,000 dwt each. The rest will be smaller products, gas, and Orimulsion carriers.
Continuing change in the pattern of ownership could be followed by a change in composition of the VLCC fleet as older vessels are phased out.
In the first half of this decade 65% of existing tankers must undergo a third and fourth official survey to determine their fitness to continue trading. The alternative to these expensive surveys, often resulting in costly remedial work, is sale for scrap.
There is a general assumption that the U.S. requirements for double hulls, even with a long phase-in period, and increasing sentiment against older vessels will result in substantial volumes of new buildings and increased scrapping.
Since 1988, very few tankers have been sent to demolition. Vessels originally earmarked for breakers yards in India, Pakistan, and Bangladesh were reprieved by better freight rates and high prices for secondhand tankers.
On the spot markets these older vessels can compete with newer tonnage because in this area there is no premium for quality.
TANKER ORDERS
The current total order book for tankers and combined carriers is 341 vessels of 41.27 million dwt.
Last year 7 million dwt of new tankers were delivered, a substantial fall from the 17 million dwt delivered in 1989.
Shipyard schedules show there will be a modest revival in deliveries of new tankers during the next 2 years. By the end of this year 14.5 million dwt will be delivered, with another 18.1 million dwt delivered in 1992. The International Association of Independent Tanker Owners (intertanko) says deliveries will decline to 7.4 million dwt in subsequent years.
In this current period of high fleet utilization, the number of vessels sold for demolition remains small. In the first 3 months of this year only eight vessels-six tankers of less than 200,000 dwt and two combined carriers were sold for scrap. Total tonnage was 620,000 dwt.
A market survey by Maritime Strategies International and Stonehill Consultants, published by LLoyds Shipping Economist, found that fleet renewal predictions were at odds with the past pattern of scrapping behavior and with owners current thinking about vessels approaching their fourth classification survey. The major obstacle to longer life for existing vessels could be lack of repair yard capacity and the fact that before the Persian Gulf war owners were ordering new ships in anticipation that other owners would scrap old ones,
Drewry also questioned the ability of shipyards to meet a sustained surge in orders for new tankers. Worldwide yards, dominated by Japanese heavy engineering companies, can build only 40 supertankers/year.
The lead time between order and delivery is now at least 2 years.
The cost of a 250,000 dwt new building from a Far East yard rose from less than $35 million in 1985 to more than $90 million by the end of 1990 and could be more than $100 million, Drewry said.
In real terms, however, this represents only a return to costs of the late 1970s. But Drewry points out that aftereffects of the Middle East crisis and life extension programs for older tankers could limit future ordering and stem the rise in construction costs.
Copyright 1991 Oil & Gas Journal. All Rights Reserved.