Oil, gas tanker industry responding to demand, contract changes

Warren R. True
Pipeline/Gas Processing Editor

Royal Maritime Corp., Liberia, took delivery at yearend 1997 of the Stena Commodore, a 105,750 dwt, LRS-class tanker built by NKK Corp., Tokyo. She represents a class of vessels contracted for or being built to serve anticipated growth in crude-oil shipments from West Africa.

The crude-oil tanker Eco Africa, owned by SNAM S.p.A., Milan, was built in 1994 and, at 150,000 dwt, represents the Suezmax classification of vessel especially suited for Mediterranean and West Africa trade. (Photo courtesy SNAM S.p.A., Milan)

Steady if slower growth in demand for crude oil and natural gas, low levels of scrapping, and a moderate newbuilding pace bode well for the world's petroleum and natural-gas shipping industries.

At yearend 1997, several studies of worldwide demand patterns and shipping fleets expressed short and medium-term optimism for seaborne oil and gas trade and fleet growth.

Changes in contractual relationships, especially involving the U.S., however, are altering some shipping trade routes, primarily for those served by very large crude carriers (VLCCs; 200,000 dwt and larger).

The studies were completed, however, with Asian financial markets in chaos from a series of currency crises that began in February 1997.

The extent of ultimate economic damage is unpredictable but seemed certain to restrain Asian energy demand growth.

And as 1998 began, there was no way to measure the effect that subdued energy-demand growth would have on crude oil and natural-gas transportation by ship.

Steady demand; shifting patterns

In its annual study of international oil markets and the tankers that serve them, Drewry Shipping Consultants Ltd., London, notes that worldwide supply of crude oil early in 1998 was continuing to grow, which could be expected to sustain demand by keeping prices relatively low (Table 1 [124,166 bytes]).

Drewry says growth of supply from producers outside the Organization of Petroleum Exporting Countries, especially in the Atlantic Basin, and expanding Asian demand appeared to be shifting world tanker transportation patterns away from long-haul toward short to medium-haul voyages.

Contraction of the world's crude-oil tanker fleet will accelerate, barring a sudden, unexpected surge in newbuildings, and will modestly buoy tanker demand through the beginning of the next century.

Drewry expects the strength of crude-oil demand and shrinking tanker supply to combine by 1999 to increase freight rates by at least a third over 1996 levels.

In another major end-of-the-year study of worldwide shipping, Clarkson Research Studies, London, states that strong tanker-demand growth combined with lower than anticipated short-haul production and resumed Iraqi exports would push up trade growth to 5% for the year.

Fleet size grew only 0.7% in 1996, which for the last 6 months of 1997 pushed up earnings for VLCCs by 37%. Earnings for tankers in the Suez Canal traffic ("Suezmax"; 120,000-200,000 dwt) rose 21%; those in the West Africa ("Aframax"; 80,000-120,000 dwt) routes, by 28%.

Clarkson forecasts for 1998 a slowdown in trade growth, to 2.2%, based on the company's assumptions of reduced refinery throughputs and slowed crude-oil demand growth. But fleet growth is expected to be even slower, 1.7%, taking total fleet size to 213.3 million dwt by yearend 1998.

Short-haul deliveries in 1997 are estimated to be 6.4% higher than the 1996 level. Long-haul exports are expected to be up 400,000 b/d at 13.2 million b/d.

Clarkson's report says rising imports, supported by growth in demand, lower bunker prices, and a relatively static fleet, helped raise crude-tanker earnings in 1997.

In 1997's last quarter, the world's VLCC fleet consisted of 439 vessels of 126.4 million dwt (Fig. 1 [84,662 bytes]). These vessels made up more than 45% of the world's fourth-quarter total tanker fleet of 279.9 dwt.

This followed deliveries of new VLCC tankers in 1996 of 6.7 million dwt, a 9.4% increase over 1995's figures, and 3.8 million dwt sold for scrap in 1996.

By late 1997, only six vessels had been sold for scrap, but Clarkson expected the VLCC fleet by yearend to stand at 125.9 million dwt and remain steady into 1998, as scrapping and delivery balanced.

Aging fleet

Clarkson's report makes much of the aging of the world's crude-oil fleet.

With many vessels dating from the building boom of the 1970s, owners were facing in 1997 and 1998 the choice of the expense of the fifth special survey (inspection) or demolition.

Average age of the VLCC fleet stood at 23 years at yearend 1997. More than 43% of the fleet was older than 20 years (Fig. 2 [118,312 bytes]).

Between 1997 and 1999, says the report, an estimated 79 vessels would be due for the survey. Given various market factors, Clarkson expects 1 million dwt in 1997 and nearly 5 million dwt in 1998 to be removed by demolition.

New orders were increasing by yearend 1997. At the end of August, orders for 31 vessels totaling 9 million dwt had been placed.

Besides the prospect of aging vessels failing to meet possibly more stringent requirements, this newbuilding push is also being driven by low newbuilding prices, relaxed financing, and rising freight rates, says the study.

Additionally, the number of VLCCs laid up was decreasing as 1998 began, to 2.2 million dwt from 2.9 dwt in March 1997. The number of vessels being used in storage also had decreased, to 5.5 million dwt from 8.1 million dwt in March.

The number of double-hulled VLCCs was increasing to about 65, approximately 15% of the VLCC fleet.

With complete 1997 figures months away from compilation, Clarkson says the year should have seen the highest level of newbuilding contracting since 1974: 1998 began with total volume of contracts placed at 20.7 million dwt.

A big boost to the market came from the oil majors. Units of both Chevron and BP have contracted four vessels at Samsung. France's Total had announced it planned to order up to four VLCCs by early this year.

Japanese domestic owners joined the crowd: Iino K.K., Naivx Line, NYK, and Nissho Shipping all placed contracts for 260,000-dwt vessels for trading into Japan. At yearend, pressure was increasing on Japan's owners to build more double-hulled tonnage after two spill incidents earlier in 1997.

In the Suezmax sector, 20 contracts of 2.9 million dwt were reported by fourth quarter 1997.

Among other contracts, an ARCO unit had ordered five 125,000-dwt vessels for protected Jones Act Trade, says Clarkson, fostering controversy about overpricing. The contract price-$166 million/vessel-roughly trebled the market value of a standard Suezmax newbuilding.

This reflected, says the study, the extremely high specification on vessels which have double engine rooms, duplicate control rooms, and up to 33% more steel than usual. In addition, the price of U.S. steel and components and the steep learning curve of the yard added to the cost, it says.

Contracts for vessels for the Aframax trade also raised some eyebrows at yearend. Driven by confidence in the future of short-haul crude and intra-regional products trade, 48 contracts of 5.1 million dwt emerged.

Products traffic slowing

Clarkson was predicting at yearend 1997 that trade growth in petroleum products would slow to 2.3% over 1996, which had seen 10.5% growth over 1995. It expected trade growth in 1998 to be 3.8%.

This prediction didn't account for turmoil in Asian financial markets, especially South Korea. At yearend, it remained unclear when these markets would find comfortable levels and the extent to which oil markets in the region would be affected by economic uncertainties.

The tanker-products trade, the report says, covers a variety of cargoes, from heavy fuel to light naphthas, and is difficult to define precisely because crude and chemical tankers as well as combination carriers can trade in products (Fig. 3 [74,363 bytes]) .

But for purposes of discussion, Clarkson defines the products fleet as handy tankers (10,000-60,000 dwt) and Panamax tankers (60,000-80,000 dwt).

The slower projected demand growth for tanker-shipped products is based on rising refinery throughput among countries that make up the Organization for Economic Cooperation and Development (OECD) and reduced long-haul import demand growth in Asia. Balancing this are rising Latin American and African import requirements and demand growth among OECD countries.

World's fleet

During second quarter 1997, the world tanker fleet edged up to 266 million dwt, as newbuilding deliveries slightly exceeded modest scrap sales.

Attractive freight rates provided shipowners with little incentive to scrap vessels and encouraged newbuilding. New orders during the first half of 1997 totaled approximately 17 million dwt; orders during all of 1996 totaled only 11 million dwt.

As a result, the international tanker order book for delivery over the next 3 years rose about 9 million dwt to 32 million dwt. During the second quarter of 1997, the order book reached its highest level in nearly 5 years, although the majority of the new tonnage would not enter the fleet until after 1998.

Gas carriers

The need for gas carriers naturally depends on demand for natural gas, especially in Asia, where gas in international trade takes the form of liquefied natural gas (LNG).

A study of LNG trade released near yearend 1997 from Ocean Shipping Consultants Ltd., Surrey, U.K., indicated that global demand for LNG would grow through 2010 and raise seaborne shipping capacity. Details of this part of its study appeared earlier (OGJ, Feb. 9, 1998, p. 53).

The consultancy based its outlook on gas demand projections made before the economic troubles in Asia, the world's main market for LNG.

The report from Ocean Shipping also looked at the LPG-carrier market, finding recovery there likely to be focused on the medium term. Near-term prospects are unsettled, it says.

The report expected LPG seaborne trade volumes to increase to slightly more than 69 million metric tons in 2010 from 45 million tons in 1995.

LPG demand

Ocean Shipping's base case for the LPG sector foresaw a weakening from the past. Average growth rates will slow from the 1997 rate of more than 8%/year to 3%/year to 2000.

Trade growth will recover to 3.5%/year to 2005, then decline to 2.3%/year in 2005-2010.

Demand growth through 2010 will center on developments in South and East Asia, with LPG import growth focused on China and India.

Japan will remain the single largest importer of LPG through 2010, accounting for slightly less than 26% of world trade in 2010. This represents a drop in Japan's overall share from 35% in 1995, mainly because of the expected growth in imports by developing countries elsewhere in South and East Asia.

Ocean Shipping's study says China's flourishing demand for LPG will lift imports to 5.5 million metric tons/year by 2000 and 10 million tons/year by 2010 from 3.6 million tons/year in 1995.

Indian LPG consumption will rise dramatically during the period, the study says. With 12 million potential LPG consumers, imports will increase to 3 million tons by 2005 from 1.5 million tons in 2000 and 700,000 tons in 1995. By 2010, Indian LPG imports will stabilize at 4 million tons/year.

In Indonesia, the largest regional supplier, a growing level of domestic demand combined with a decline in output will reduce exports to 1 million tons/year by 2010 from 1.8 million tons in 2005, 2 million tons in 2000, and 2.4 million tons in 1995.

This supply loss will accentuate the decline in the region's export surplus in the medium term, reinforcing the region's reliance on Middle East supplies.

The Middle East will dominate world LPG export expansion, increasing to 34 million tons in 2010 from 24 million tons in 1995. Not only will the established trade links to Japan, South Korea, and to a lesser extent Taiwan continue to rely on expanding supplies from the Middle East, says Ocean Shipping, but the key growth markets of China and India will increasingly depend on this supply source.

Modest growth in western European LPG demand will be more than satisfied by supply expansions in the North Sea and Algeria. By 2010, western European LPG deepsea imports will reach 13 million tons/year, accompanied by a decrease in the need for long-haul Middle East imports.

Total shipping demand will rise during the forecast period, with the strongest growth coming in 2000-2005.

LPG vessels

An implied gross fleet-expansion rate through 2000 of 2.7%/year would maintain productivity rates, the study says.

In the medium term (2000-2005), stronger demand will increase the fleet-expansion rate to 3.4%/year. During 2005-2010, the fleet will grow at about 2.7%/year.

Considering new orders, as well as the need to replace aging vessels in line with historic scrapping levels, a fleet deficit of slightly more than 2.3 million cu m is likely in 1995-2000.

During 2000-2005, an additional 3.9 million cu m will be needed to meet the proposed demand increase. And while the demand profile would indicate an increase in fleet capacity of 2.2 million cu m during 2005-2010, the need to replace aging vessels boosts this volume to more than 4.2 million cu m, says Ocean Shipping.

Fleet additions during the 1990s of small and large vessel led to a general surplus in LPG-fleet capacity. This in turn limited any sustained recovery in freight rates and lowered profitability during a period of rising demand.

The study says that continued restraint in newbuilding levels would be needed to ensure a medium-term recovery in freight rates.

Market conditions for owners are likely to remain difficult in the early part of the forecast period. The pace and extent of market recovery would largely depend on the scale of vessels scrapped in the interim.

Vessel-demolition levels need to remain high through the turn of the century if freight rates are to see a sustained recovery.

Freight rates in 1995-97 for very large gas carriers were depressed, resulting in profit averages of $212,000/month in 1995 and $79,000/month in 1996 despite a net decline in operating costs.