Petroleum markets' turmoil spawns tanker glut

Warren R. True
Pipeline/Gas Processing Editor

The vicious economics at work in crude-oil markets in 1998 and early 1999 are likely to be reflected in petroleum tanker markets by mid-1999 or early 2000.

In 1998, crude-oil prices suffered from economic uncertainty and currency devaluations in Asia, Latin America, and Russia and from over production, especially among members of the Organization of Petroleum Exporting Countries (OPEC).

Similarly, by mid-1999 and early 2000, the world's supply of crude-oil tankers will likely increase upon delivery of several new vessels contracted in 1997 and early 1998 in response to anticipated higher demand in Asia and elsewhere.

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 was slowing significantly to 10.06 million b/d, a decline of 4.4% from 1997, on reduced demand in Asia and higher refinery throughput in the West, particularly the U.S. Growth 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 spreading and threatened planned LNG projects, including the specialized tanker industry in that expensive chain of commerce (OGJ, Feb. 8, 1999, p. 58).

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 released near year-end 1998.

Deepening crisis

The year 1998 saw the effects of the economic crisis in Southeast Asia spread to Japan and begin to encompass countries in other regions, principally Russia at mid-year and Brazil at year-end.

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 has been revised down to 2.3% as oil-producing countries significantly cut back output in a bid to bolster global oil prices. Global oil demand is forecast to have grown by only 1% in 1998 and will grow by only 2% in 1999, a figure susceptible to considerable downward revision depending on the world economy.

Indeed, just as 1999 began, the International Energy Agency (IEA), Paris, reduced its forecast for world oil demand in the year (OGJ, Jan. 25, 1999, Newsletter). In its Monthly Oil Market Report for January, IEA predicted world oil demand would grow by only 1.5%, or 1.1 million b/d.

Clarkson had reported that oil supply in 1998 was to have grown 1.9%, 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 year 1999 could 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 stick to agreed cuts and possibly implement more.

Tanker demand

For 1998, Clarkson estimated, long-haul crude exports from the Middle East will 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 into the U.S., particularly from the Middle East, which registered a 16% year-on-year increase through mid-year 1998.

In 1999, however, as Latin American and North Sea exports grow, short-haul exports will significantly outrun those from the Middle East which will attempt to prop up weak oil prices by cutting production and exports.

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 the best 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 hold to roughly 80% of their promised cuts, were for 77.2 million b/d, a rise of 1.7%.

Short-haul producers, particularly in 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 mid-year.

The year 1999, however, was expected to see a fall in Middle Eastern exports, and consumer countries will draw-down inventories instead of importing crude. The predicted rise in short-haul production in 1999 will 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), imports from the Middle East began increasing in 1998 and are likely to continue.

Figures through first half 1998 showed the U.S. had imported 16% more crude oil from the Middle East, compared with 1997. With major quantities from Kuwait and Saudi Arabia, said Clarkson, it seemed that on political grounds alone it is probable that Middle Eastern imports will not decline in 1999.

Other countries exhibiting significant export increases to the U.S. include Canada, Nigeria, and Venezuela. Countries registering significant decreases included both the U.K. and Norway. But as the North Sea increases production in 1999, exports to the U.S. should increase, said the Review, by about 1.6%.

Figures for the major importing countries of the European Union (Germany, France, the U.K., and Italy) showed a 4% increase by mid-1998 but will likely slow to slightly more than 1% in 1999. Middle East imports will continue to slow as producers opt for the long-haul market to the U.S. and Asia. North Sea exports will increase through 1999.

In Asia, Japan's demand for oil has been weakened by its stagnant economy. The country's imports of crude through mid-1998 were down by 5% over 1997. Imports from the Middle East remained static, however, thanks largely to steady levels from Saudi Arabia, the U.A.E., and significant increases from Qatar.

For the rest of Asia, oil-import demand in 1999 should continue very weak, falling 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 on 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 [88,269 bytes]).

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.

In its monthly update for December 1998, Clarkson reported that November saw two VLCC newbuilding orders placed. Also, Minerva Marine Inc. placed orders for two 151,000-dwt tankers (Suezmax) for delivery in July and October 2000. And Naviera F. Tapias placed an order for a Suezmax tanker for delivery in 2000. Teekay Shipping, Canada, ordered two in the Aframax class to be built at Onomichi dockyard.

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. In its December update, Clarkson reported three VLCCs, two Suezmax vessels, and one Aframax tanker were sold for scrap.

Of all VLCCs, 45% are older than 20 years, the oldest of any sector within the total tanker fleet (Fig. 2 [101,797 bytes]). Increased scrapping levels cannot, therefore, be postponed for very much longer, said the Review.

And with some 50 VLCCs facing their 5th Special Survey over 1998-99 at an estimated cost of $56 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 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 around 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 is going to increase substantially in the next few years.

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 refined-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 10-60,000 dwt and Panamax tankers of 60-80,000 dwt.

Apart from some minor shortlived upward trends, clean tanker average earnings were falling steadily. Near year-end, these earnings had fallen by 30%. The equivalent fall for dirty tanker earnings was only a slightly better 20%.

Clarkson estimated that imports of refined 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 have 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 had followed a 4% increase in refinery throughput for those 7 months. Refining margins fell from yearly highs of $3.46/bbl in June 1998 to $1.71 in August.

Year-to-date EIA figures showed declines in imports from all countries and all regions of the world (Fig. 3 [59,272 bytes]). 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 between 1 and 2% growth.

Products-tanker market

Overall, product-tanker average earnings suffered considerably in 1998 in comparison with 1997, said the Clarkson report.

Activity in the eastern markets has been dominated by the impact of currency devaluations and the subsequent economic repercussions which have sharply reduced demand throughout the region. Most notable has been 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 registered year-on-year declines of 25% as a result of the dramatic slowdown in U.S. imports.

The cheap crude oil and profitable refining margins (at least by fourth quarter 1998) in Europe were major contributors to the lack of product imports into 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, said the report.

Product-tanker status

The handy (10-60,000 dwt) and the Panamax fleets (60-80,000 dwt), which comprise the majority of the products trading vessels, stood at 70.6 million dwt as year-end 1998 neared (Fig. 4 [89,289 bytes]). Within this, 203 vessels of 14.2 million dwt were sized 60-80,000 dwt. The fleet sized between 10-60,000 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 another 700,000 dwt remained scheduled for delivery.

And for 1998, 200,000 dwt were forecast for removal. Consequently, the fleet sized 10-80,000 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 significantly 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 were 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 were scheduled for delivery in this year, 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 1.1 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 and 60,000 dwt that is older than 20 years old stood at 31% of the fleet, while 19% of the fleet, 60-80,000 dwt, fell within this category.

Seaborne gas transportation

The middle 6 months of 1998 witnessed tightening 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 and older 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 contracted on rising domestic demand for petrochemical feedstock (Fig. 5 [104,743 bytes]).

Elsewhere in the Arabian 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 Korean Won, combined with reduced levels of demand in industry and commerce and higher levels of domestic production, saw Korean imports' requirements lowered. 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 risk of cutbacks on LPG contract volumes. This raises the potential for increased movements of western cargoes to the East. Weather factors were also likely to have a significant effect on the state of the product market.

LNG trade, projects

The Clarkson Review reported that seaborne imports of 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 into 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; Japan imported 2.7 billion cu m of these volumes. Export volumes from the U.S., Libya, Australia, Indonesia, and Brunei shrank.

Deepening economic problems in Asia have, as expected, placed pressure on new projects (OGJ, Feb. 8, 1999, p. 58). Among the surviving projects is the second Qatari plant, scheduled for start-up in July 1998 (OGJ, Apr. 27, 1998, p. 33). The two-train, 5-million ton plant started shipments to South Korea, under long-term contracts.

Oman is 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 ton/year plant.

Although not currently importing, India and China will likely become the new import-demand markets.

In India, import volumes of 5-million tons from Qatar to the Dabhol power plant in Maharashtra will commence in 2001. Imports will also begin into Gujarat state to supplement domestic supplies. No import projects, as of yet, have been approved in China.

LNG fleet

As fourth quarter 1998 began, said Clarkson, the LNG carrier fleet stood at 108 vessels of 11.4 million cu m. This is an increase of two vessels totaling 200,000 cu m since March 1998. These were, in fact, the only vessels delivered by the end of third quarter 1998.

The fleet has seen steady growth so far in the 1990s with an increase of 31 vessels of 4.2 million cu m January 1990 to January 1998. Clarkson said this trend would continue into the next century when 22 vessels of 2.8 million cu m are due to come into service by the end of 2000. It is unlikely that any vessels will 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 3 vessels of 289,158 cu m were expected by year-end, while 1999 had 9 vessels of 1,226,554 cu m scheduled for delivery. The year 2000 is the most popular year, 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 vessel 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 until now relied on a heavy load of LNG building to fill up berth space, were looking elsewhere.

Near year-end 1998, LNG scrapping is virtually nonexistent. With the majority of vessels in the 25-30 year age group fully committed for 12 years at least, there was little prospect of demolition sales in the immediate future.

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.