Oil tankers heading into rough waters in 2002; gas carriers' prospects bright

Dec. 24, 2001
Slumping world economies and increased deliveries of new oil tankers during second half 2001 threaten healthy tanker profit margins for early 2002.

Slumping world economies and increased deliveries of new oil tankers during second half 2001 threaten healthy tanker profit margins for early 2002. The prospects for gas carriers, however, especially those carrying LNG, appear somewhat brighter as 2001 draws to a close.

Clarkson Research Studies in its semiannual Shipping Review & Outlook says the main concern is that "weakening global oil demand and higher short haul output will lead to OPEC cutbacks just as tanker deliveries start to pick up in 2002."

The company's latest review of worldwide shipping goes on to say there has been little activity in tanker demolition and many owners seem "determined to take full advantage of the life extension opportunities offered by MARPOL Regulation 13G" by leaving longer in service tankers that eventually must be scrapped.

For now, "shipyards are buzzing." Deliveries of new vessels in 2001 will reach 49 million deadweight tonnes (dwt), more than three times as much as the industry produced in the late 1980s. Combining with this activity to increase the tonnage available for service, says the study, tanker scrapping is 22% below 2000.

"Record shipbuilding deliveries combined with an economic recession usually mean hard times ahead." As a result, shipping rates will "take another sizable step down" in the first 6 months of 2002.

Looming oversupply

In the 6 months through Sept. 30, 2001, covered by the study, tanker earnings fell by 37%, compared with the previous 6 months. Despite this reduction, the 6-month average of $26,777/day was "more than generous," given that most tankers cost less than $8,000/day to operate.

Earnings at this level "left ample surplus cash for capital repayments and a useful margin for profit."

Figure 1
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Very large crude carriers (VLCCs) took the biggest hit, with rates down to $36,000/day for a modern vessel. The Aframax tanker sector, however, managed to average almost $30,000/day. Fig. 1 provides a breakdown in tanker classifications; Fig. 2 shows a decade of tanker earning trends.

Figure 2
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For total shipbuilding in 2000 (including oil tankers, gas carriers, bulk carriers, container vessels, and other categories), the industry booked a record 70.3 million dwt of orders, says Clarkson, compared with 49.3 million dwt in 1999 and 40 million dwt in 1998. By the end of August 2001, 43 million dwt had been placed, which on an annualized basis was about 8% down from 2000.

The research group says it is not surprising that in 2000 oil tankers were the main investment target with 36 million dwt ordered, and another 23.7 million dwt have been ordered so far in 2001.

With a total order book for oil tankers at Oct. 1 of 65 million dwt, that industry has now covered 80% of the replacement demand called for by IMO Regulation 13G. "If the new ships are assumed to be more efficient than the old ones, ellipsean even higher percentage has been covered."

So that leaves further tanker investment focused exclusively on meeting trade growth, a prospect that "at present is sufficiently uncertain to unnerve even the most intrepid investor."

Revision of Regulation 13G of the Marine Pollution Act (MARPOL), completed in April 2001, is having a major impact on tanker supply, Clarkson notes, by changing the progress in tanker scrapping (OGJ, May 28, 2001, p. 32). There remain 80 million dwt of crude oil and products tankers built in the 1970s, all prime scrapping candidates.

Following the sinking of the Erika in December 1999 (OGJ, Dec. 20, 1999, p. 38), the research group says pressure mounted to revise Regulation 13G, which deals with the age to which old, non-double hulled tankers may trade. Central to the revisions are:

  • A timetable to accelerate the mandatory phase out from a maximum age of 30 that falls off to 26 by the end of 2007.
  • Extending the range of vessels to include small tankers (down to 5,000 dwt).
  • Enforcement of anniversary of construction, rather than at the start of the year as previous.
  • Introduction of Condition Assessment Scheme (CAS).

By the end of 2007, the vast majority of old vessels (those built before 1982) will have been retired from the fleet, says Clarkson; "tanker owners appear to be taking full advantage of this latitude."

Scrapping as a result has slowed sharply during 2001. In 2000, 14 million dwt were scrapped, mainly in the first half of the year. Through third quarter 2001, 8.4 million dwt had been scrapped, of which half were VLCCs and a quarter Suezmaxes.

Figure 3
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Fig. 3 presents more than 20 years of VLCC fleet development; Fig. 4, the fleet's age profile as of late 2001.

Figure 4
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Scrapping of VLCCs in 2001 will be 11.6 million dwt. "This is a moderate rate and suggests that tanker owners will try to squeeze as much life as possible out of the old ships."

After a decade of generally subdued investment in the gas-carrier segment, the LNG business in 2000 suddenly came alive, ordering 19 new gas tankers with a capacity of 2.6 million cu ft. At Oct. 1, 2001, an additional 24 LNG tankers had been ordered, ensuring the rapid expansion of this fleet.

In the LPG market, there was also a surge of activity, with orders doubling from 300,000 cu m in 1999 to 750,000 cu m in 2000. By Oct. 1, orders for LPG tankers were running at twice the level of 2000.

Tanker demand, supply

The driving force behind the tanker market in 2000 was the 4.9% increase in seaborne crude imports, says Clarkson, reflected in substantial growth in the US and Asia. But the market was also helped by the "timing of the US energy crisis which brought a surge of intense import activity, especially in the products tanker market." For a brief spell, from fall 2000 through spring 2001, US products imports increased by 1 million b/d.

During 2001, signs have indicated tanker demand is easing. The cutback in Iraqi exports in July-August severely affected the VLCC market and crude oil supply will shrink quite sharply for the year.

"After a 6% increase in [Persian Gulf] OPEC production in 2000, we expect a fall of 2.6% in 2001. Overall this gives a net reduction in crude oil supply, likely a 1% growth in crude tanker demand, or about 2.5 million dwt of tonnage in 2001."

As so often happens, says Clarkson, "ships are delivered just when they are least needed." In 2001, the tanker market benefited from a low level of deliveries (16.7 million dwt) due to the subdued ordering in 1999. But 23 million dwt are due for 2002.

"The large volume of contracting over the past year should ensure that the tanker fleet will receive an influx of new tonnage just when it doesn't want it." With earnings coming down, May and June 2001 saw an encouraging upturn in demolition levels that were, however, not sustained over the summer. With owners now able to take advantage of the life extension opportunities offered by IMO Regulation 13G, as stated, scrapping may not pick up again "unless we see a prolonged downturn in earnings for 1970s built tankers."

The outlook for VLCCs appears uncertain. As the Clarkson study was published, it was unclear if OPEC would take any meaningful action to reduce the supply of crude oil moving by tankers. Clarkson notes, however, that even if OPEC does nothing, "adhering to self-imposed quotas would see production fall by anything up to 1 million b/d."

December will "be an important month for spot rates as the current (10th) phase of the Iraqi food for oil program draws to a close. This could result in a stoppage of Iraqi exports."

In general, the VLCC fleet will grow to 130.3 million dwt by the end of 2001 and to 133.6 million dwt by the end of 2002 as tonnage delivered far outweighs tonnage being scrapped.

Suezmax demand will benefit from completion in 2001 of the oil pipeline from the Tengiz field to Russian Black Sea port of Novorossiysk (OGJ, Dec. 3, 2001, p. 8), as Turkey imposes additi on al restrictions on vessel size and age passing the Bosporus and Dardanelles, says the Clarkson study.

The fleet will grow by the end of 2001 to 42 million dwt and by the end of 2002 to 43.3 million dwt. A total of 2.8 million dwt will be delivered by yearend 2001, while 1.5 million dwt are being scrapped.

The Aframax fleet has grown in 2001 by 1.3 million dwt deliveries, but that has been matched by 1.3 million dwt scrapped by yearend 2002. The fleet will reach 54.2 million dwt and will also benefit from completion of CPC pipeline, as overall economic slowdown and OPEC cuts affect general tanker market.

Gas carriers

Very large gas carriers (VLGCs) primarily carry propane and butane in cargo lots of approximately 40,000-43,00 tonnes, although some of the newer vessels on order have slightly large capacities.

Figure 5
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The sector is served by a fleet of 102 VLGCs with an aggregate capacity of 7.89 million cu m, 57% of the entire LPG fleet by capacity; Fig. 5 shows more than 22 years of LPG fleet development. With 5 vessels already delivered, another 3 scheduled by yearend 2001, and no demolition recorded or anticipated, Clarkson expects fleet growth in 2001 to be about 8%.

The outlook for VLGC demand remains generally optimistic. The East is likely to continue in deficit as LPG demand grows, including China despite its recent slowdown.

Meanwhile, LPG supply is set to expand in the West, though will be mainly lower in the East following increased Saudi Arabian consumption. For several years, Saudi Arabia has been building toward greater domestic consumption of LPG by increasing petrochemical capacity, thus diverting much of its LPG exports.

Supply will expand strongly from Africa (up from 9.5 million metric tonnes in 2000 to 13.5 million metric tonnes by 2005), notably Nigeria, and more steadily from the North Sea (around 0.5 metric tonnes/year).

The LNG market strengthened rapidly in the year through the end of third quarter 2001, says Clarkson, resulting in "unprecedented levels of shipyard activity." Vessel investment hit all-time highs, with the ordering in 2000 of almost 1.5 million cu m of shipping capacity and the biggest order book since the mid-1970s.

Figure 6
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Fig. 6 presents views of LNG trade, both supply and imports, through 2000.

On the demand-side, trade has continued to grow. In 2000, worldwide LNG trade amounted to 137.0 billion cu m, an increase of 10.3% over the previous year. On a longer time-scale, total demand for LNG increases by nearly 8%/year between 1980 and 2000.

The world's largest LNG importer remains Japan, the study says, with 72.5 billion cu m in 2000 (53% of the world total and 5% higher than in 1999). With imports by Korea (19.7 billion cu m in 2000) and Taiwan (5.9 billion cu m in 2000), Asia accounts for almost three quarters of global imports. These are primarily supplied from Southeast Asia and the Persian Gulf.

Europe imported 32.68 billion cu m in 2000, says the study, 24.2% of total trade and 6% more than in 1999, mostly from North Africa, but with significant quantities now coming from Nigeria. France and Spain are the largest European importers (11.23 billion and 8.47 billion cu m, respectively, in 2000).

The US, while only importing 6.24 billion cu m in 2000, is by far the fastest growing market, says Clarkson, with a 37% increase year-on-year and with most of this demand supplied by Trinidad, Algeria, and Qatar.

Clarkson notes that until recently, LNG ships were always ordered against specific project requirements.

The combination of rapidly accelerating demand for energy, especially in the US, and relatively low newbuilding costs, however, has led several owners to order vessels before fixing them on long-term charter. These have been either oil majors, with sufficient LNG interests to guarantee employment for the new vessels or entrepreneurial owners, some of whose new orders remain unfixed.

Although Clarkson says it expects these vessels ultimately to be used within projects, "owners will have the flexibility to operate them profitably spot or short-term before commencement of long-term employment."

New demand should come from Asia, particularly India, China, and Japan, and also from the developed world where LNG is gaining popularity because of its relatively environment-friendly credentials and as a result of power industry deregulation, says the study.

Spot opportunities are no longer as prevalent as they were in 1999, when 8.8% of LNG was traded spot compared to the 5.4% in 2000.