Roger Vielvoye
International Editor
A surge in construction of large crude oil tankers is well under way.
It started during the first 6 months of this year, when shipyards' order books for vessels of more than 200,000 dwt nearly doubled while orders for tankers of 100,000-200,000 dwt climbed by more than 25%.
The burst of orders was a response by tanker owners to the belief that growing world dependence on crude oil imports from the Middle East in the 1990s will bolster freight rates.
One of the prime growth markets predicted for Middle East crude is the U.S., easily the world's biggest customer for crude oil and petroleum products exports. But an increasing number of tanker owner/operators are withdrawing from that trade rather than face the financial jolt of unlimited liability for oil spills in U.S. waters.
At least five tanker owner/operators-three oil companies and two independent shippers-will not trade with mainland ports in the U.S.
A midyear report by the American Petroleum Institute underscored the potential seriousness of a widespread U.S. boycott by tanker owners.
U.S. dependence on imported oil climbed to a record high in the first 6 months of 1990, API said.
Imports, driven by a continued decline in domestic crude production and a strong buildup in inventories, met 49.9% of the nation's oil needs in January-June, breaking the 48.8% high mark set in first half 1987. What's more, about 90% of U.S. imports-all but those from Canada-arrive in tankers.
Industry sources say the boycott of U.S. ports and the possibility that other owners will take similar action won't slow the trend toward ordering new tonnage. The main effect will be a change of ownership in U.S. trading, with large tanker owner/operators that adhere to the highest standards pulling out in favor of much smaller companies whose only asset, in the case of an oil spill claim, is a single tanker.
AGING FLEET
Another factor that fueled the rush of orders is the increasing age of the tanker fleet.
In the category between 255,000-319,000 dwt, 150 out of the 187 available vessels are between 13-16 years old. In some parts of the industry, vessels more than 20 years old are deemed to be approaching the end of their working lives.
Data on tanker age compiled by Clarkson Research Studies, London, show a large number of ships-about 150-in the 255,000-320,000 dwt ton range that are 13-16 years old. They have a combined tonnage of 41.1 million dwt, amounting to 17% of the total work tanker fleet of 240 million dwt.
If all very large crude carriers (VLCCs) of at least 200,000 dwt and more than 13 years old are included, the total rises to 308 ships of 82.8 million dwt, or 34.5% of world tanker tonnage.
Clarkson's figures cover all oil tankers of 200,000 dwt or more as of July 1, 1989.
Owners also are concerned that U.S. pressure for introduction of double hull tankers will restrict the operating parameters of older tankers and may lead to a two tier freight market with modern tankers commanding a premium over older ones.
BULGING ORDER BOOKS
A tally by the International Association of Independent Tanker Owners (Intertanko), Oslo, shows that on July 1 there were 338 tankers and combined carriers on order around the world representing 40 million dwt. At the start of this year the total order book was 255 vessels of 25.4 million dwt.
At the lower end of the market for vessels of 15,000-50,000 dwt the numbers have declined slightly from 106 vessels at the start of the year to 102 July 1. Tonnage was down slightly from 3.5 million dwt to 3.45 million dwt.
As tanker sizes increase so does the order book.
In the 50,000-100,000 dwt class the number of vessels on order jumped to 98 with 8.5 million dwt from 57 and 4.8 million dwt at the start of the year. Two years ago only 37 vessels of 2.8 million dwt were on order.
Orders for vessels of 100,000-200,000 dwt rose to 73 on July 1 from 58 at the start of 1990 and the tonnage on order jumped to 10.3 million dwt from 8.2 million dwt. At midsummer 1988, only 40 vessels of this class were on order with a total tonnage of 5.3 million dwt.
The biggest increase is seen in orders for the largest tankers.
At the start of 1990, order books for vessels of more than 200,000 dwt stood at 34 tankers with 8.9 million dwt. The buying boom by owners in the first 6 months of the year increased the number on order to 67 with 17.8 million dwt.
Two years ago the order book for such tankers stood at 29 vessels of 7.4 million dwt.
The prospect of better times also has put a stop to the sale of vessels for scrap. In the first 6 months of this year no vessels of more than 200,000 dwt were sent to the breakers, while there were only 17 tankers in the 10,000-200,000 dwt class sold for scrap. These had a total weight of 830,000 dwt.
At the depth of the tanker depression, 30.5 million dwt of capacity was scrapped in 1985. Total scrappings throughout the 1980s amounted to 142.8 million dwt.
Intertanko said less than 6 million dwt has been scrapped since the start of 1988. Almost 13 million dwt/year has to be replaced, assuming that the average life of the fleet is extended to 22 years.
The upturn in tanker construction started several years ago, and the number of new tankers being delivered reflects the earlier revival. In the first half of this year 39 vessels of 4.3 million dwt were delivered, compared with only 27 tankers of 2.7 million dwt in the first half of last year.
BACK TO THE 1970S?
Lloyds Shipping Economist, a publication of Lloyds of London, said the surge of VLCC orders in the early months of 1990 inevitably raised fears of a repetition of the unbridled tanker fleet expansion of the 1970s.
The results of that period of speculative excess were so disastrous that the tanker industry remains inordinately sensitive to any sign that the supply of new ships, particularly VLCCS, may again be threatening to get out of control.
The publication said this deep seated neurosis is increasingly counterbalanced by a conviction that this time around things are different.
Forecasts of tanker demand are nowhere near as optimistic as they were in the early 1970s.
There clearly is a need to replace a substantial segment of the fleet during the 1990s, and shipyard capacity constraints and rising prices will place a reasonable ceiling on the rate at which new VLCCs will be delivered.
Intertanko Chairman Seigo Suzuki said demand for tanker transportation has been growing steadily during the last couple of years, recovering from a long depression. Recovery of the tanker market and optimism about the future call for caution, he said, because the most serious mistakes are made during good times.
"Decisions made by the industry today will affect the market for the next 10-15 years," he said.
CONSTRUCTION COSTS
Intertanko has charted the dramatic growth in tanker construction costs.
Three years ago a tanker could be built in Japan or Korea for $42-43 million. During the great ordering boom of first half 1990 owners were committing to pay $85-90 million/vessel. And reports from Japan say shipbuilders want to boost prices even further with the target of $100 million/vessel.
Strongest growth in orders for new tankers occurred during the first 3 months of the year. But the momentum was not maintained into the second quarter and after taking in account departures from the yards, the June order book was slightly thinner than in the previous month.
Nevertheless, business for shipbuilders remains extremely good. Industry sources say it is too early to attribute a small decline in June ordering to high construction prices.
Of greater interest to the industry is the attitude of tanker owners who have not yet joined the ordering spree but will need to replace part of their fleet during the 1990s.
The Royal Dutch/Shell Group, one of the largest oil company owners, has made its position clear on tanker construction.
It said there is no case on economic grounds for a VLCC replacement program. And in the short term, shipyard capacity does not exist to handle a major replacement program.
Shell figures that to earn even a modest 8% return on a $90 million investment in construction of a new tanker, a charter rate of about $35,000/day would be needed.
This compares with averages of $10,000-15,000/day in recent years. Shell expects rates to average about $20,000/day this year.
Instead of new buildings, Shell plans to extend the life of its VLCCs. The company contends that the age of a vessel is not relevant in an assessment of its reliability-if effective maintenance and repair programs are followed.
Last spring, Shell International Marine Ltd. bought four Onassis tankers built in 1972-77. At the time, Shell said thorough inspections confirmed hull integrity and general good conditions that would enable the vessels to meet standards required to ensure safe operations.
In another instance, an independent owner, Hellespont Shipping Corp., last January took delivery of six ultralarge crude carriers (ULCCs) built in 1975-77. The vessels were formerly owned by Majestic, a subsidiary of Loews Corp.
Papachristidis Ship Management Services, which is responsible for technical management of the vessels, said the 315,700 dwt Hellespont Paradise entered dry dock last month for scheduled surveys, repairs, and completion of a hull renovation program. By mid-1991 a number of the ULCCs will have undergone life extension.
Jerry Sample, fleet manager for the ULCCs, said the excellent condition of the vessels after 15 years had encouraged the company to explore life extension.
Hull renovation and life extension projects involve a full structural survey followed by detailed evaluation of gauging data against 1989 ship construction rules.
Not all companies share Shell and Hellespont's enthusiasm for older tankers.
Intertanko reported that after almost continuous growth since 1986, second hand tanker prices have leveled off in 1990 and even declined for older tonnage despite high freight rates. Intertanko said this indicates a skepticism about older tonnage.
SHIPBUILDING CAPACITY
World shipbuilding capacity declined throughout the 1980s. A number of European yards were closed, although the boom in the Far East and the upturn in prices is encouraging some companies to reenter the tanker construction business.
Lexmar France is evaluating the prospect of reopening the La Ciotat shipyard in France. The company is working with GVA Consultants of Sweden on design for a double hulled vessel that would be simple to build and operate.
Yoshiro Manabe, managing director of the shipbuilding division of Kawasaki Heavy Industries, told a conference earlier this year that prices of $85 million/vessel were 10-20% below the level required for an adequate return, and the tightening supply/demand balance in the shipbuilding industry should boost prices even further.
SHELL'S CASE
In making the case for extending the life of VLCCs, Shell said closure of many shipyards in the last decade reduced construction capacity to 15 million dwt/year. Not every yard can build VLCCs, so the upper limit of larger tanker production probably is nearer 10 million dwt/year.
Replacing 80 million dwt of existing VLCC capacity would take 8 years if all yards capable of doing so built nothing but VLCCS. In practice, there are other demands on shipbuilding capacity from buyers of bulk carriers, container ships, and cruise ships.
Shell said new tankers should not automatically be regarded as structurally sounder than older tankers. Intense competition among shipbuilders in the last decade, compounded by heavy losses on the part of shipowners, resulted in pressure to reduce vessel costs by cutting steel content.
The weight of steel in a new VLCC is about 4,500 metric tons less than that of a similar size ship built 15 years ago. As a result, Shell said, reductions in reserves of strength and corrosion margins can be expected.
Shell believes arguments that an old ship is an unsafe ship are groundless, if legislative and classification requirements are implemented rigorously.
And because it is impossible to replace all older VLCCs with new ships quickly, their continued use for many years is inevitable.
HIGHER RATES
The surge in tanker orders took place against a background of rising short term freight rates.
The tanker industry benefited from the Organization of Petroleum Exporting Countries' unofficial policy of maintaining high production levels throughout the second quarter of the year when liftings traditionally decline.
The effect on freight rates for VLCCs was startling. Rates shot up to 21,000/day on average for the first half of the year, a 233% gain on the $9,000/day in first half 1989.
Increases for medium sized vessels were substantial but less dramatic.
The first half 1989 average of $13,000/day grew to $17,000/day, an increase of 31%.
Rates for product carriers in the 30,000-35,000 dwt range were unchanged at $10,000/day, while there was a small increase in rates for large product carriers from $14,000-15,000/day in the first half of last year to $16,000-17,000/day during the first 6 months of 1990.
OPEC's production policies also were reflected in the amount of tonnage used for floating storage.
At the start of the year there were only 46 vessels with a combined 8.5 million dwt operating as floating storage, the lowest level since the early 1980s. But by June 1 the number of storage tankers had grown to 68 with a combined 15.5 million dwt, the highest level since the middle of 1987.
Having overproduced during the first half of the year, OPEC will be required to throttle back on liftings during the third quarter. That will mean lower freight rates, although the tanker industry is confident the average for the year will be very much higher than in 1989.
U.S. BOYCOTT
Tanker industry fears of unlimited liability for spills spawned Royal Dutch/Shell's decision to restrict tanker trade with the U.S. to vessels offloading at Louisiana Offshore Oil Port.
Shell has since been joined by two other large oil companies, Petrofina SA of Belgium and Ste. Nationale Elf Aquitaine of France and two independent owner/operators, A.P. Moller of Denmark and Teekay Shipping of the U.S.
The effect of the shippers' actions is limited, but industry sources say a number of other companies are watching the situation in the U.S. very carefully. The liability issue, combined with impending action on double skinned vessels, could make U.S. trade even less attractive and force other operators to boycott U.S. ports.
Much of the oil imported into the U.S. comes in tankers time chartered to large and small oil companies. Under charter terms, tanker owners are obliged to deliver oil to any safe port nominated by the oil company.
It is the owners of these vessels that would be at risk in the event of a spill. Elf Aquitaine said there have been indications from owners that when charters came up for renewal, clauses might be inserted to exclude vessels from U.S. ports.
API's midyear report showed that total U.S. imports averaged 8.425 million b/d during the first 6 months, up 7.2% from January-June of last year.
U.S. crude oil production compared with last year was down 7.3% in June at 7.065 million b/d and down 5.9% at 7.292 million b/d in the first half. About 54% of current oil imports are from OPEC members. Saudi Arabia is the largest contributor at 1.2 million b/d.
Saudi Arabia also is the biggest crude oil supplier to Japan, the world's No. 2 oil importer.
Japan's Ministry of International Trade and Industry last week reported the country's crude oil imports amounted to 3.009 million b/d in June, up 4.1% from the same month in 1989. Saudi Arabia's share of the latest month's volume rose 67.3% to account for 21.1% of total crude imports for Japan, which depends on OPEC for 81.7% of its crude supply.
U.S. SPILL LEGISLATION
U.S. House and Senate conferees were working last week to finish comprehensive oil spill legislation.
Only minor issues remained after conferees resolved the two major issues: voting to require double hulls on most new and existing tankers and to retain states' rights to impose unlimited liability on tanker owners.
Staff members have resolved many other conflicts between House and Senate bills. They agreed to drop a provision in the House bill that would make the cargo owner as well as the vessel owner liable for spills.
The liability limit for tanker owners is likely to be $1,200/dwt of the vessel. The staff agreed citizens should be allowed to sue in court to compel governments to seek compensation for natural resource damages caused by spills.
Several issues relating to the oil spill cleanup fund were unresolved. Although the government is collecting 5/bbl on crude entering the refinery to build a $1 billion cleanup fund, legislation that created the spill fund often conflicts with the spill cleanup bills. The Senate bill proposes the existing Trans-Alaska Pipeline System cleanup fund be rolled into the oil spill fund, giving tax credits to oil companies for money they have paid into the TAPS fund. Some House members oppose that.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.