A SHATTEREDMARKETfor crude oil and petroleum products in 1998 spoiled the near-term outlook for petroleum tankers.
Surplus resulting from surprise economic slumps in Asia and Latin America-which slashed demand in oil`s growth markets-suppressed crude prices and put pressure on the Organization of Petroleum Exporting Countries to cut members` production.
A related surplus threatened the tanker market. Delivery was due in late 1999 and early 2000 of several vessels contracted in 1997 and early 1998 in response to expectations about demand in Asia and elsewhere that failed to come true.
As 1999 began, therefore, a glut of both crude oil and the tankers to move it threatened the profitability of tanker owners and operators.
Similar forces were eroding the petroleum-product tanker industry at year-end 1998.
Products trade over the first 9 months of 1998 slowed to 10.06 million b/d, a decline of 4.4% from the previous year, on reduced demand in Asian and higher refinery throughput in the West, particularly the U.S. Trade in 1997 had risen by only 1.3% to 10.5 million b/d.
Year-on-year clean product tankers` average earnings for the same period were down 30% over 1997 with dirty (mixed) products earnings down 20%. Worst hit were vessels in the 28,000-dwt class.
Overall price weakness in 1998 was battering the LPG-tanker trade, while the economic crisis in Asia appeared to be spreading and threatening planned LNG projects, including the specialized tanker industry in that expensive chain of commerce.
These are the broad strokes of a picture of the world`s tanker industry painted in Clarkson Research Studies` Shipping Review & Outlook, a major study of the world`s shipping industry published near year-end 1998.
Deepening crisis
In 1998, the effects of the economic crisis in Southeast Asia spread to Japan and began to encompass countries in other regions, principally Russia and Brazil.
As 1999 began, the U.S. and, to a lesser extent, Europe seemed to be escaping the effects of the crisis. But Clarkson said that overall the world economic outlook was decidedly darker than a year earlier.
Global trade growth for 1998 had been revised down to 2.3% as oil-producing countries cut output in a bid to bolster global oil prices. Global oil demand was forecast to grow by only 1% in 1998 and 2% in 1999, a figure susceptible to considerable downward revision depending on the world economy.
Oil supply was to have grown 1.9% in 1998, to 75.9 million b/d. Even with OPEC cutbacks, it seemed likely to grow only 1.7% to 77.2 million b/d in 1999.
For crude-oil shipping, short-haul exports seemed likely at year-end 1998 to increase by only 2% for the year with production cutbacks taking hold in Latin America and Asia.
The market in 1999 was expected to see an increase in both short-haul production and exports, particularly from the North Sea, which was to increase output by about 600,000 b/d. Increases in output and exports were likely from non-OPEC Latin America, particularly Colombia, which was set to hike output by 160,000 b/d.
Long-haul exports appeared likely to have increased in 1998 by 3% as Iraq had come back on to the market in a big way. Its oil production and export capacities appeared virtually unscathed by the bombing campaign in December. These long-haul exports were predicted to fall 2% in 1999 on the assumption that producers would stick to agreed cuts and possibly implement more.
Tanker demand
Clarkson estimated that for 1998 long-haul crude exports from the Middle East would have grown faster than short-haul exports. As a result, crude-oil tanker demand would still measure a 2% growth over 1997. This was in large part helped by imports by the U.S., particularly from the Middle East, which had registered a 16% year-on-year increase through mid-year.
In 1999, however, with Latin American and North Sea exports growing, short-haul exports were expected to outrun those from the Middle East.
Clarkson summarized oil-production trends in 1998 by saying that, thanks largely to the severe downturn in Asian oil demand, the world at year-end 1998 was awash with oil. Despite efforts of OPEC countries to reduce production and exports, the price of oil remained low and looked likely to stay down well into 1999.
Estimates of global supply in 1999, said the review, assuming OPEC producers held to roughly 80% of their promised cuts, were for 77.2 million b/d, a rise of 1.7%.
Short-haul producers, particularly the North Sea and Latin America, were forecast to make up the bulk of global oil supply growth in 1999.
Despite slowdowns in Asian demand, low oil prices encouraged consumer nations in 1998 to stockpile crude. Global inventories showed remarkable increases in the year, said Clarkson, particularly in the U.S. where crude inventories had risen by around 8% at the start of fourth quarter 1998. Even Japan`s crude inventories showed a 2% rise through midyear.
The oil market in 1999, however, was expected to see a fall in Middle Eastern exports as consumer countries drew down inventories instead of importing crude. The predicted rise in short-haul production in 1999 would inevitably lead to an increase in short-haul exports; short-haul growth in exports would be around 3%, up from 1998`s 2%.
Crude oil imports
The U.S. in 1998 and into 1999, according to Clarkson`s Review, continued to provide a lifeline to the tanker market with ever increasing imports of crude oil. Most significantly for the tanker market, particularly for very large crude carriers (VLCC), U.S. imports from the Middle East began increasing in 1998 and were likely to continue.
Figures through first half 1998 showed the U.S. had imported 16% more crude oil from the Middle East than it had in the same period of 1997. With major quantities from Kuwait and Saudi Arabia, said Clarkson, it seemed that on political grounds alone Middle Eastern imports probably would not decline in 1999.
Other countries increasing exports to the U.S. included Canada, Nigeria, and Venezuela. Countries registering decreases included both the U.K. and Norway. But as the North Sea increased production in 1999, exports to the U.S. were likely to increase by about 1.6%.
Figures for the major importing countries of the European Union (EU; Germany, France, the U.K. and Italy) showed a 4% increase by mid-1998 but were likely to slow to slightly more than 1% in 1999. Middle East imports by these countries were likely to decline as producers opted for deliveries to the U.S. and Asia. North Sea exports were expected to increase through 1999.
In Asia, Japan`s demand for oil had been weakened by economic stagnation. The country`s imports of crude through mid-1998 were down by 5% from 1997. Imports from the Middle East remained static, however, thanks largely to steady levels from Saudi Arabia, the U.A.E., and increases from Qatar.
For the rest of Asia, imports in 1999 were expected to fall by as much as 100,000 b/d.
VLCC market
The general outlook for VLCCs from the perspective of late 1998 was mixed, said Clarkson`s Review.
On the one hand, there was the noticeable downturn in world oil demand, particularly in Asia, which had been the driving force in the VLCC market. On the other hand was the amount of tonnage on order that threatened rates by increasing the pool of available vessels.
The downturn in the market, however, was expected to encourage those 38 ships reaching 25 years of age in 1999 to contemplate scrapping.
The VLCC fleet at Sept. 1, 1998, totaled 436 vessels of 125.8 million dwt, up 1 vessel, or 500,000 dwt, since Mar. 1, 1998. As a percentage of the total fleet, VLCCs made up 43.2%, down slightly from 6 months earlier (Fig. 1).
Total deliveries to September 1998 amounted to 2.4 million dwt, only slightly down on full year 1997 of 2.9 million dwt. By year-end 1998, as much as 3.5 million dwt were to have been delivered.
And by fourth quarter 1998, eight VLCCs had been delivered to the fleet, with four more scheduled before the end of the year. In 1999 deliveries were expected to jump to 35 vessels, 10.3 million dwt.
Scrapping by the last quarter of 1998 had taken out only four vessels of 1.2 million dwt with the forecast for the full year to remain a relatively low 2.7 million dwt, according to Clarkson.
Of all VLCCs, 45% were older than 20 years in 1998, the oldest of any sector within the total tanker fleet (Fig. 2).
Increased scrapping levels could not, therefore, be postponed for much longer, said the Review.
And with some 50 VLCCs facing their 5th Special Survey over 1998-99 at an estimated cost of $5-6 million, scrapping levels were expected to rise considerably in 1999. Forecast figures for 1999 stood at 7.7 million dwt, largely as a result of so many vessels passing the 25-year-old age barrier.
VLCC contracting slowed in 1998, although less steeply than in 1997. By fourth quarter 1998, total VLCC tonnage ordered had dropped to 15 vessels, or 4.2 million dwt.
The number of double-hulled VLCCs continued at 14-15% of the overall fleet. With newbuilding levels high, however, and the age profile of the fleet making higher scrapping levels inevitable, said Clarkson, that figure was likely to increase.
Products-tanker activity
In the 1998 petroleum products tanker market, the combination of lower demand and low world oil prices brought about a dramatic downturn in the fortunes of world products trade. This trade was estimated to shrink by 4.4% compared to 1997 as all the major importing regions experienced marked declines in imports.
Particularly noticeable were the U.S. and Japan with estimated declines of 14% and 9%, respectively. The Japanese figure was expected to fall even further, possibly as low as 20%.
The products trade itself covers a wide variety of cargoes: heavy, dirty cargoes such as fuel oil to light, clean, and highly specialized products, such as naphtha, which require different tanker characteristics.
There is no ready definition of the products tanker fleet owing to the ability of crude and chemical tankers, and even combination carriers, to trade in products. Similarly, "products" tankers may also trade crude oil. The products fleet is defined as handy tankers between 10,000-60,000 dwt and Panamax tankers of 60,000-80,000 dwt.
Apart from some minor short-lived upward trends, clean-tanker average earnings fell steadily in 1998. Near year-end, they had fallen by 30%. The fall for dirty tanker earnings was 20%.
Clarkson estimated that imports of petroleum products would decrease by almost 5% in 1998. This would be the result of a combination of dramatic demand slowdowns in the countries of the Far East and greatly reduced global oil prices, which provided refiners with the incentive to import cheap crude, as opposed to relatively expensive products.
Data from the U.S. Energy Information Administration (EIA) showed total U.S. seaborne product imports to mid-1998 were 13% down on the equivalent period a year earlier. This followed a 4% increase in refinery throughput for those seven months. Refining margins fell from yearly highs of $3.46/bbl in June 1998 to $1.71/bbl in August.
Year-to-date EIA figures showed declines in imports from all countries and all regions of the world (Fig. 3). Total U.S. Far Eastern-Asian product imports were down 28% over 1997. The Middle East, where Saudi Arabia is the main exporter of products to the U.S., registered a 14% decline in exports near year-end 1998.
Latin American exports to the U.S. were also down in part because of increased demand within the region. Total imports from South America and the Caribbean region posted a 20% fall at the end of third quarter 1998, compared with 1997.
The outlook for product imports in 1999 was mixed. Preliminary estimates were that product imports might rebound in 1999 to register 1-2% growth.
Products-tanker market
Overall, product-tanker average earnings suffered considerably in 1998 in a yearonyear comparison with 1997, said the Clarkson report. Average earnings for clean products at the beginning of fourth quarter 1998 had fallen 30%, and average earnings for dirty products fared only slightly better with a fall of 20%.
Activity in the eastern markets had been dominated by the impact of currency devaluations and the subsequent economic repercussions, which sharply reduced demand throughout the region. Most notable was reduced demand in Japan, South Korea, and Thailand which had registered year-on-year declines of 5%, 8%, and 14%, respectively, into third quarter 1998.
The large clean-products tankers, carrying 55,000-ton cargoes in 1998, recorded sharper earnings declines than their smaller counterparts. Rates for the 55,000-ton Arabian Gulf-Japan route fell from February to May. For 30,000-ton clean cargoes, rates fell as well.
Indications for 1998 were that Indian demand was up 2%.
European markets remained weak over the middle 6 months of 1998 with the cross-Mediterranean market registering the sharpest rate decline. Likewise, the transatlantic markets both registered year-on-year declines of 25% as a result of the dramatic slowdown in U.S. imports.
The cheap crude oil and wide refining margins (at least by fourth quarter 1998) in Europe were major contributors to the lack of product imports by Europe and thus the sharp downturn in product-tanker profitability.
Earnings in the dirty-products market also weakened, said the Clarkson report, by an average of around 20%. The fundamental story behind the decline was simply a lack of enquiry and a lack of cargoes. Moreover, the plummeting clean markets affected the dirty markets, and tonnage for too few cargoes was noticeably abundant.
Product-tanker status
The handy (10,000-60,000 dwt) and the Panamax fleets (60,000-80,000 dwt), representing the majority of products trading vessels, stood at 70.6 million dwt as year-end 1998 neared (Fig. 4). Within this total, 203 vessels of 14.2 million dwt were sized 60,000-80,000 dwt. The fleet sized between 10,000 dwt and 60,000 dwt totaled 1,848 vessels of 56.3 million dwt.
At the same point in the year, deliveries had totaled 1.4 million dwt, off from the full year 1997 of 2.8 million dwt. Near the end of third quarter 1998, 1.4 million dwt had been delivered, and 700,000 dwt remained scheduled for delivery.
And for 1998, 200,000 dwt was forecast for removal. Consequently, the fleet sized 10,000-80,000 dwt was likely to grow only slightly, to 70.7 million dwt by year-end 1998.
Clarkson said the volume of deliveries was expected to rise sharply in 1999 to 4.5 million dwt which, combined with little growth in the year-to-year removals figure, would boost the fleet to 72.3 million dwt at year-end 1999.
Only 200,000 million dwt was removed from the fleet by fourth quarter 1998. As a result, the average age of vessels sold for demolition shrank to 26 years, compared with 30 years in 1997.
As the third quarter 1998 ended, the orderbook consisted of 259 vessels totaling 7.6 million dwt. Despite deliveries of approximately 1.4 million dwt during the first 8 months of the year, the orderbook had expanded. Of this, 2.4 million dwt was scheduled for delivery in 1999, 1.1 million dwt in 2000, and 300,000 million dwt in 2001 and beyond.
Contracting of Panamax tankers increased markedly during the first 9 months of 1998, totaling 1.3 million dwt, compared with l.1 million dwt over the whole of 1997. Panamax tankers are the only sector of the fleet to have grown faster in 1998 than in 1997.
The age profile of the fleet remained largely unchanged through the middle 6 months of 1998. The volume of tonnage between 10,000 dwt and 60,000 dwt aged more than 20 years stood at 31% of the fleet, while 19% of the fleet sized 60,000-80,000 dwt fell within this category.
Seaborne gas transportation
The middle 6 months of 1998 witnessed tightening liquid petroleum gas (LPG) supplies in the Middle East coupled with lower Asian demand and rising Atlantic basin supplies. It all led to weaker prices.
The LPG market was generally poor along with the petrochemical market, at least until third quarter 1998. Production cutbacks at the supply end and lower market demand on the discharge end spelled lower tanker utilization when 1999 began.
Moreover, the Clarkson report said the age profile of certain sectors of the fleet remained of concern as tonnage moved into the 30+ year age bracket. Fleet growth of around 1% was expected by the beginning of 1999.
LPG demand, pricing
The Middle East remains the most important supplier of seaborne LPG. Some change in export volumes, however, was observed over the middle 6 months of 1998 as Saudi Arabian cargoes were contracted on rising domestic demand for petrochemical feedstock (Fig. 5).
Elsewhere in the Persian Gulf, slightly higher exports were noted from the U.A.E., as supply from projects that commenced production in 1997 accelerated. Middle East supply overall was tight, reflecting crude-oil cutbacks.
Prices for LPG and NGL in general fell or remained flat through 1998, creating problems that were compounded by economic problems in Asia.
Depreciation of the South Korean won combined with reduced levels of demand in industry and commerce and higher levels of domestic production to lower Korea`s requirement for imports.
Actual figures for first half 1998 revealed a 32% decline in import volumes compared with 1997.
Demand in Japan, the largest LPG importer, was stagnant. More positively, Chinese import volumes rose into fourth quarter 1998 by almost 35%.
A notable feature of the LPG-tanker market, said the Clarkson report, was the continuing expansion of LPG supply in the Western Hemisphere, including the start-up of exports from the new Oso project in Nigeria and continuing export expansion from Algeria.
Given tight Middle Eastern supply, volumes from the North Sea, Africa, and Nigeria were moving to the Far East over third quarter 1998; and by fourth quarter, there were prospects of U.S. Gulf Coast product moving East.
For the immediate future, said the report, further Middle East crude cutbacks carried the real risk of cutbacks on LPG contract volumes. This raised the potential for increased movements of western cargoes to the East. Weather factors were also likely to affect the state of the product market.
LNG trade, projects
The Clarkson Review reported that seaborne imports of liquefied natural gas (LNG) rose in 1997 by 8.7% to 111.3 billion cu m. Japanese imports totaled 64.3 billion cu m, 57% of global seaborne trade, compared with 62% in 1996.
European seaborne imports rose 20% year on year in 1997, supported by rising imports by Italy, France, Belgium, and Turkey. Southeast Asian import demand also continued to rise, with Korean and Taiwanese imports both up 21%. On the export side, volumes from Algeria registered the largest increase, rising 24% to 24.3 billion cu m, although Indonesia remained the largest single exporter.
Malaysian exports also increased, rising 14% to 20.1 billion cu m. Qatari export flows also grew, following start-up in 1996, totaling 2.9 billion cu m of which Japan imported 2.7 billion cu m. Export volumes from the U.S., Libya, Australia, Indonesia, and Brunei shrank.
Deepening economic problems in Asia, as expected, placed pressure on new projects. Among the surviving projects is the second Qatari plant, scheduled for start-up in July 1998. The two-train, 5-million tonne plant started shipments to South Korea under long-term contracts. Oman also expected to begin exporting to Korea under long-term contracts in 2000, following start-up of a two-train, Shell-operated, 6.6-million tonne/year plant.
Although not currently importing, India and China were likely to become markets for LNG.
In India, import volumes of 5 million tonnes from Qatar to the Dabhol power plant in Maharashtra were to commence in 2001. Imports were also to begin into Gujarat state to supplement domestic supplies. No import projects had been approved in China.
LNG fleet
The LNG carrier fleet late in 1998 comprised 108 vessels of 11.4 million cu m. This was an increase of two vessels totaling 200,000 cu m since March. These were, in fact, the only vessels delivered by the end of third quarter 1998.
The fleet saw steady growth in the 1990s with an increase of 31 vessels of 4.2 million cu m from January 1990 to January 1998. Clarkson said this trend would continue, with 22 vessels of 2.8 million cu m due to come into service by the end of 2000. It was unlikely that any vessels would be scrapped.
The orderbook near year-end 1998 stood at 22 vessels of slightly less than 2.8 million cu m. In capacity terms, this was 24% of the existing fleet.
Further analysis revealed that three vessels of 289,158 cu m were expected by year-end, while 1999 had nine vessels of 1,226,554 cu m scheduled for delivery. The most popular year was 2000, with 10 ships totaling 1,239,100 cu m due to be completed. Of the 22 on order, 13 vessels were earmarked for the Korea Gas project.
Clarkson reported that the Asian economic turmoil had caused some observers to question whether all 13 vessels would be built. No vessels were on order for 2001 or beyond.
The Asian economic crisis had taken its toll on contracting. No new orders had been placed through third quarter 1998 and only two in the last quarter of 1997.
The economic slowdown in Asia had killed any increase in LNG demand, resulting in pending projects being put on hold. Malaysian state oil company Petronas had reportedly been talking to shipyards in Japan and Europe concerning a requirement for up to six LNG carriers, but it looked unlikely that this order would go ahead, at least in the short term.
The building of LNG carriers is almost exclusively nonspeculative, said Clarkson, and it was difficult to see from where any new demand was likely to come. Although discussions regarding Indian imports had been continuing, it was anticipated that the requirement would be small in comparison to recent projects.
With this scenario, some shipyards that had relied on a heavy load of LNG building to fill up berth space were looking elsewhere.
Near year-end 1998, LNG scrapping was virtually nonexistent. With the majority of vessels in the 25-30 year age group fully committed for 12 years at least, there was little immediate prospect of demolition sales.
The age profile of the fleet was 42 ships of 3,535,891 cu m aged 20 years or older; 17 vessels totaling 796,223 cu m were 25 years or older; and 2 of 52,900 cu m were 30 years or older.
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The 65,000-cu m LNG Lerici was built by Fincantieri and delivered in 1998 to SNAM to serve the Italian LNG terminal of La Spezia. The vessel derives its name from the village of Lerici in the Golfo di Spezia. (Photograph from Fincantien Shipyard, Genoa, and Ciba Specialty Chemicals, U.K.)
