STEADYBUTDIMINISHED growth in demand for crude oil and natural gas along with 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 extensive 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, were altering some shipping trade routes, primarily for those served by very large crude carriers (VLCCs; 200,000 dwt and larger).
The studies were completed with Asian financial markets in chaos due to a series of currency crises that began in February 1997. The ultimate economic damage, extent of which was unpredictable, was certain to keep Asian energy demand growth off the torrid pace forecast earlier.
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, noted 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).
Drewry said 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 expected 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, stated 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 by 37% earnings for VLCCs. 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 forecast 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 was expected to be even slower, 1.7%, taking total fleet size to 213.3 million dwt by yearend 1998.
Short-haul deliveries in 1997 were estimated to be 6.4% higher than the 1996 level. Long-haul exports were expected to be up 400,000 b/d at 13.2 million b/d.
Clarkson`s report said 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). 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 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 made 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.
Between 1997 and 1999, said the report, an estimated 79 vessels would be due for the survey. Given various market factors, Clarkson expected 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 was also being driven by low newbuilding prices, relaxed financing, and rising freight rates, said 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 said 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 had contracted four vessels at Samsung. France`s Total announced it planned to order up to four VLCCs by early 1998.
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 being reported by fourth quarter 1997.
Among other contracts, an ARCO unit had ordered five 125,000-dwt vessels for protected Jones Act Trade, said Clarkson, fostering controversy about overpricing. The contract price-$166 million/vessel-roughly trebled the market value of a standard Suezmax newbuilding.
This reflected, said 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 said.
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 said, 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. 2). 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.
Higher shipping rates
Similar patterns in demand, deliveries, and newbuilding contracts were identified by Overseas Shipholding Group (OSG), New York City. OSG for 1996 saw improvement in world tanker markets, as demand for oil rose while newbuilding deliveries and contracting for new orders remained at moderate levels.
Rates for most segments, particularly for VLCCs averaged significantly higher than in 1995.
Oil demand growth in the major importing regions accelerated to 3% in 1996 from 2% in 1995, led again by robust growth in developing Asia, which accounted for approximately 17% of total world oil demand in 1996.
In the OECD countries, oil demand rose 2% in large part because of strong U.S. demand for heating oil and gasoline. U.S. crude-oil imports in 1996 were up about 4% over 1995.
Despite the sharp rise in oil demand, ton-mile growth was tempered by changing trading patterns, said OSG. Such major importers as the U.S. and Western Europe increasingly obtained their crude oil from short-haul suppliers, particularly Latin America and the North Sea.
VLCCs suffered from the trend toward shorter haul, which replaced many shipments from the Middle East to the West with increases from the Middle East to the Far East.
Because of the shorter distances involved, less tonnage was required to move given quantities of oil to the Far East. Seeking additional trading opportunities, VLCCs gained market share in such non-traditional loading areas as the North Sea and West Africa.
OPA90 fallout
The trend toward shorter hauls particularly benefited Aframax tankers, said OSG. On shorter voyages, economies of scale of large vessels lose importance, and Aframax tankers provide substantial flexibility, including access to a wide range of ports and terminals.
While newbuilding deliveries were moderate, the world tanker fleet expanded by about 3 million dwt to 265 million dwt at yearend 1996, as higher tanker rates limited sales for scrap to 7 million dwt vs. 11 million in 1995, according to OSG.
Although higher freight rates also led to increased ordering in late 1996, at yearend the orderbook for delivery over the following 3 years stood at 19 million dwt, its lowest level in 8 years. Of this total, only 8 million dwt was scheduled for delivery in 1997, OSG indicated.
OSG also concurred with Drewry`s report that forecasts of strong growth in oil demand, coupled with an aging fleet, improved the outlook for VLCCs. Freight rates had generally improved since the end of 1995, but contracting for new tankers remained at moderate levels in 1996.
At the beginning of 1997, the newbuilding orderbook represented only 7% of the VLCC fleet, even though 54% of all VLCCs were at least 15 years old.
OSG expected VLCCs to be increasingly affected by regulation. Between 1995 and 2015, the Oil Pollution Act of 1990 phases in a requirement that all tankers entering U.S. waters have double hulls, while the International Maritime Organization`s MARPOL Regulation 13G mandates restrictions in carrying capacity for single-hulled vessels reaching 25 years of age.
These regulations, said OSG, would likely accelerate the scrapping of older tankers. This had positive implications for tanker markets and for OSG, which took delivery of six new double-hulled VLCCs between 1996 and first quarter 1997.
In mid-1997, OSG reported that rates in international tanker markets for crude carriers and large product carriers continued to move upward, reaching their highest levels in several years.
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 orderbook for delivery over the next 3 years rose about 9 million dwt to 32 million dwt. During the second quarter of 1997, the orderbook 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; Fig. 3).
A study of LNG trade released near yearend 1997 from Ocean Shipping Consultants Ltd., Surrey, U.K., indicated that global demand for liquefied natural gas would grow through 2010 and raise seaborne shipping capacity.
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 were unsettled, it said.
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.
LNG demand
World trade in LNG was expected to expand to 122.7 billion cu m in 2000 and 155.8 billion cu m in 2005 from 92.5 billion cu m in 1995.
By yearend 2010, LNG trade levels will reach more than 183 billion cu m, an increase of 84% and equivalent to an annual expansion rate of more than 4.5% for the 15-year period.
The Ocean Shipping study said LNG-trade expansion would be most dynamic during early years of the forecast period, supported by expansion projects in Indonesia and Malaysia and by new ones in Qatar, Oman, Nigeria, and Australia.
Main focus for LNG demand through 2010 will remain the developed nations of the Far East-Japan, South Korea, and Taiwan.
Japan will remain the world`s largest LNG importer, with imports totaling nearly 80 billion cu m/year by 2010, 36% more than in 1995.
South Korea`s commitment to gas use and LNG imports is reflected in growth of about 314% in trade levels to 29.5 billion cu m/year by 2010.
Taiwan`s imports are also set to see more than a threefold increase during 1995-2010, increasing to 14 billion cu m/year.
Japan, South Korea, and Taiwan combined will account for 70% of world LNG trade in 2010, the study said.
New markets in Thailand, India, China, and the Philippines will boost LNG trade, although their combined share of trade by 2010 will reach only 10%-equivalent to 17.5 billion cu m/year.
LNG-shipping demand growth, the study said, will be proportionately greater than trade-volume expansion because of the rise in relatively long-haul trades from such sources as Indonesia, Australia, Nigeria, Qatar, and Oman.
Trade-volume growth of 98.3% is likely through 2010. Average shipping distance will increase to 2,855 nautical miles in 2010 from 2,570 nautical miles in 1995.
LNG vessels
Demand projections, when combined with an increasing level of scrapping, suggest a steady rise in total newbuilding, the study said.
The average newbuilding need, in terms of the prevailing fleet capacity, will rise to 8.2%/year to 2000. Medium to long-term growth rates will moderate, falling to 5-6%/year to 2010.
With Middle East exports of LNG to the Far East set to expand through 2010, improved economies of scale are likely with the construction of larger LNG carriers.
Port restrictions will be the main constraint to size expansion, said the Ocean Shipping report, with the construction of 175,000-200,000 cu m vessels considered feasible with current expertise.
LNG newbuilding prices declined during the early 1990s but by 1996 recovered to within 2% of the peak 1991 level. Additional South Korean yards entered the LNG market with first delivery in 1994, and competition intensified.
Yards in France, Japan, and South Korea were tendering for new vessels, although the project-based nature of LNG trading still results in the majority of new orders being placed with domestic yards.
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 said 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 said. 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, said 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 said.
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, said 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 said that continued restraint in newbuilding levels would be needed to ensure a medium-term recovery in freight rates.
Market conditions for owners were 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 needed to remain high through the turn of the century if freight rates were 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.
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Royal Maritime Corp., Liberia, took delivery at yearend 1997 of a 105,750 dwt LRS-class oil tanker built by NKK Corp., Tokyo. The Stena Commodore is part of growth in Aframax tankers anticipated by several studies of worldwide petroleum and natural gas shipping published as 1998 began.
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