March 28, 2012 1:20 am
At a time when nearly every part of the oil and gas industry has been handsomely profitable, one group over the past year has conspicuously failed to share in the bonanza.
Most owners of the vessels that ship the crude oil to refineries – and of the more sophisticated tankers that then take refined products to consumers – have lost such significant sums of money that several companies have been forced into bankruptcy protection.
Many owners have had to find significant sums to shore up their companies’ tottering balance sheets.
The reason for the industry’s decline lies in shipyards in Korea and China, which despite the miserable market conditions continue to turn out vast numbers of tankers ordered in the times of buoyant rates and easy finance before the 2008 financial crisis. The yards are expected to increase the world’s crude oil tanker fleet by 4.3 per cent this year, well ahead of the 3.2 per cent expected growth in demand to ship oil. Last year, when about 80 very large crude carriers (VLCCs), the largest commonly used kind, were launched, the fleet increase was 7.9 per cent, ahead of 3.8 per cent demand growth.
Paul Slater, a veteran shipping industry financier and a bear about oil tanker prospects, calls present market conditions a “self-inflicted wound” resulting from over-ordering by shipowners.
“They’ve created their own problems,” he says. “There hasn’t been a greater volume of oil being moved, yet we’ve increased the volume of the tanker industry.”
However, Erik Nikolai Stavseth, analyst at Arctic Securities in Oslo, says demand to ship oil in VLCCs has recovered to the levels of early 2007, one of the strongest years in shipping’s history, even if vessel supply has grown 30 per cent in the same period.
The practice of slowing down the ships to conserve expensive fuel – another result of the high oil price – is further soaking up spare capacity, he adds. Those factors, together with a sudden increase in efforts to charter crude oil carriers to substitute shipments cancelled because of the start of tough European Union sanctions against Iran, have created a rise in the rates owners can charge.
Spot market VLCC rates, which for much of the past year have languished too low to cover typical operating costs of $10,000 a day, have surged to about $40,000 a day, according to Mr Stavseth.
“As long as Iran remains an issue in terms of supply and potential decline there, I think that aberration in the market will keep freight rates at an elevated level,” says Mr Stavseth.
Yet, while there are arguments about the precise meaning of current market trends, there is no doubt about the financial damage market conditions over the past year have caused.
General Maritime, the second-largest US-based oil tanker operator by fleet size, was forced on November 17 last year to seek Chapter 11 bankruptcy protection, weighed down by debts from an ill-timed fleet expansion.
John Fredriksen, the world’s highest-profile shipowner, in December had to put up $505m in guarantees from his private holding company for a complex deal to restructure Frontline, the world’s largest specialist oil tanker operator.
In March, Indonesia’s Berlian Laju Tanker, which operates oil product and chemical tankers, sought bankruptcy protection both in Singapore and the US.
The worst-affected companies have been those with high debt level (such as General Maritime), high proportions of vessels on the short-term spot market, or significant numbers of vessels chartered from other owners at high prices (Frontline and Torm).
Despite the rise in demand following the Iran sanctions, Mr Stavseth expects to see further drops in the market, and further financial problems, before long.
“Gravity will pull the tanker market down sooner or later, although the short-term dynamics are creating a very valuable environment for shipowners, who surely needed the break,” he says.
The key question, meanwhile, is how long the market will remain depressed.
Mr Stavseth says his company’s calculations point to a trough in earnings in the fourth quarter next year or early next.
However, Mr Slater points out that large-scale scrapping – one of the prerequisites of a strong recovery – is unlikely while so many of the world’s tankers are relatively young. Tankers are generally scrapped at the age of 20 or 25, while the world fleet’s current average age is 8.3 years.
There are also signs that significant falls in prices at struggling shipyards, as well as significant engine technology improvements, are encouraging some shipowners, including Mr Fredriksen, to order new ships instead of buying those sold by struggling rivals.
That leads Mr Slater to predict several more years of draining cash reserves and miserable returns.
“In the next three to five years, it’s not going to be markedly better and therefore there’s going to be a big shake-up,” he says.
“We could even see a situation, as we did in the 1980s, where there are several thousand ships laid up not being used.”
Please don't cut articles from FT.com and redistribute by email or post to the web.