TANKER OPERATIONS Why Tanker Operators Have Their Eyes on OPEC and IMO

By Nick Blenkey, Web Editor

Tanker operators are at a crossroads. Those that are in it for the long haul have to make critical investment decisions on what technology they will put into ships ordered today that will have to meet IMO emissions curbs that will get ever tighter throughout their service lives. Meantime, though, tanker owners are paying as much attention to the oil producers in the so-called “OPEC+” group as they are to IMO. That’s because what happens to oil production and oil prices will be key to future tanker demand.

Right now, as major tanker companies file their financials for the full year and fourth quarter of 2020, most are telling a story of a year that started off well, but that ended in pain.

Euronav, for example, reported a net loss of $58.7 million for the quarter compared to a profit of $154.2 million in the same quarter last year.

“The last quarter of 2020 and the present market conditions are amongst the most challenging in recent memory for crude tanker operators,” said CEO Hugo De Stoop. “COVID-19 restrictions continue to impact operations and more importantly the demand for crude oil. This has led OPEC+ to extend production cuts. As a result, the market remains unbalanced with too many ships chasing too few cargoes.”

“In 2020, Frontline recorded its strongest result since 2008, but the fourth quarter of the year reflect the challenging conditions tanker markets experience, as record volume of oil inventories are drawn,” Lars Barstad, Interim CEO of Frontline Management AS commented as that company released its full year and fourth quarter 2020 results.

“When global oil markets switch from drawing on inventories, to call on equal volumes from the marketplace, growing demand for freight should be expected,” said Barstad. “At this point in the curve, we believe Frontline is well positioned to capture a recovery for tankers with our low cash breakeven levels and a spot exposed fleet of modern fuel-efficient vessels.”

At Teekay Tankers, President CEO Kevin Mackay commented that “crude spot tanker rate weakness persisted into the fourth quarter of 2020 as a result of OPEC+ production cuts resulting from reduced oil demand related to the COVID-19 pandemic and the unwinding of floating storage.”

“Despite the pronounced weakness in the fourth quarter and unprecedented challenges faced throughout 2020,” he continued. “Teekay Tankers, nevertheless, reported one of our best ever annual results.”

Looking ahead, said Mackay, “we believe that the underlying tanker supply fundamentals remain positive and should result in meaningfully improved tanker market conditions as the global economy and oil demand return to more normal conditions. Based on our forward view, we opportunistically entered into a seven-year in-charter agreement for a newbuilding eco-Aframax at an attractive rate, which we anticipate will deliver into a strong

tanker market in the fourth quarter of 2022, enabling us to increase our scale in a less capital-intensive manner.”

What do analysts see ahead?

While the tanker market has started the year 2021 with historically low rates, Poten and Partners, in a note released February 26, says, “The outlook for oil demand has brightened in the face of several vaccines that are being administered worldwide and oil prices have recovered strongly as a result.”

However, Poten acknowledges that vaccines are only part of the story and says that ongoing production discipline from the OPEC+ countries (as well as a one million b/d bonus cut by Saudi Arabia) have also been a major contributor to the surge in oil prices.

At the time Poten issued its report, it seemed likely OPEC+ would ease production restraints. That didn’t happen. On March 4, the group released a statement that said, in part “The Ministers approved a continuation of the production levels of March for the month of April, with the exception of Russia and Kazakhstan, which will be allowed to increase production by 130 and 20,000 barrels per day respectively, due to continued seasonal consumption patterns.”

As this was written, it seemed likely to many observers that OPEC+ could soon raise exports.

Poten’s bottom line conclusion had been: “The timing of the tanker market recovery remains uncertain, but there are clear indications that a recovery in oil demand can quickly translate into higher tanker rates.”

The OPEC+ decision to keep production down, however, initially sent oil prices up. Bad news for those of us who can’t afford Teslas— and for tanker owners.

BIMCO sees low demand persisting

Taking a less rosy view of things than many, Peter Sand, an analyst at BIMCO, says that after a turbulent year, low demand looks set to plague the market in the coming months combined with too many ships fighting for too few cargoes in both the crude oil and oil product segments.

Sand’s full analysis can be accessed via the BIMCO website (bimco.org) and is worth some serious study, including his views of the prospects for U.S. crude oil exports, particularly in relation to Chinese demand.

“Unlike in Europe,” notes Sand, “Chinese refinery throughput was quick to rebound from its fall at the start of the pandemic ... Over the year, Chinese crude oil imports rose by 7.3%, slightly down from the 10% growth in imports in both 2018 and 2019, but still considerably outperforming the rest of the world.”

“Towering above the total growth rate of 7.3%, Chinese crude oil imports from the U.S. rose by 211.3% in 2020 compared with 2019, as Phase 1 of the U.S.-China trade agreement meant an extra 13.4 million tonnes of crude oil being sent across the world. Over the year, Chinese imports totaled 19.8 million tonnes, leaving the U.S. as the ninth biggest exporter of crude oil to China. This list is dominated by Saudi Arabia and Russia from where China imported 84.9m tonnes and 83.6m tonnes, respectively. The two provide 31.1% of all Chinese crude oil imports.”

“The many years of strong growth in U.S. crude oil exports has provided much-needed demand for tanker shipping,” says Sand. “This is especially the case when considering the much longer sailing distances between the U.S. and the Far East—the largest import market— compared with that between the Middle East and Far East.”

But Sand sees “worrying clouds on the horizon” for U.S crude oil exports, citing higher production costs compared with other producers, and the fact that 2020 has squeezed profit margins and investments.

Also worth study are Sand’s analyses of the tanker fleet size.

At 2.5%, the oil product tanker fleet growth expected by BIMCO is on par with the 2.4% increase in the market experienced in 2020. Crude oil tanker fleet growth is expected to decline from 3.3% in 2020 to 1.5% in 2021, closing in on its low point of 0.9% advance in 2018.

So far this year, 26 crude oil tankers have been delivered, totaling 3.7 million dwt, along with 16 oil product tankers with a combined capacity of 1.1m dwt. Over the year, BIMCO expects oil product tanker deliveries to reach 5.7 million dwt, and crude oil tanker completions to fall from 18.7 million dwt last year to 14.2 million dwt this year.

Sand notes that, since start of the year, the

orderbook for both crude oil and oil product tankers has dropped, as fewer new tankers have been ordered (2.5 million dwt) than have been delivered, reflecting concerns over the outlook and the current state of the tanker freight market for both ship types.

“The poor market conditions are also starting to be reflected in tanker demolition activity,” says Sand. “COSCO singled itself out in January by announcing that it was scrapping five VLCCs, three Suezmaxes, one Panamax and a Handysize tanker. This action alone brings crude oil tanker demolition so far in 2021 to levels comparable with those in the whole of 2020. Only four VLCC were demolished last year, along with three Suezmax, six Aframax and three Panamax ships. In all, 21 oil-product ships were scrapped in 2020.”

BIMCO expects crude oil tanker demolitions to rise to around 7 million dwt, this year, with product tanker demolitions expected to rise from one million dwt in 2020 to 1.3 million dwt this year.

As well as rising demolitions, the poor outlook for oil tanker shipping is reflected in the resale value of second-hand ships. In January 2020, the average resale value for a 5-year-old VLCC was $75.5 million; the average this year is $64.5 million—a loss of $11 million in 12 months. Values of second-hand oil product tanker ships have fallen slightly less, with a 5-year-old LR1 losing just under 10% of its value over a year.

“Compared to a straight-line depreciation over 20 years,” says Sand, “current VLCC values are between 10% and 20% lower, with a five-year-old VLCC closest to its straight depreciation value, and a 10-year-old ship the furthest away.”

Outlook

Sand’s conclusion? “The slow recovery in global oil demand means many months of hardship ahead for tanker shipping, with too many ships fighting for too few cargoes— unless something unexpected once again rattles the market.”

By Erik Hånell, President and CEO of Stena Bulk

When it comes to decarbonization, it is undeniable that the shipping community is collectively facing a challenge that requires us to do nothing less than consider how we alter our entire energy needs and move towards cleaner fuels. This issue will gain even further traction in 2021. The mantra for success is based on agility and flexibility; what are the opportunities to improve our current fleet, sell or recycle existing tonnage, and build more advanced and decarbonization friendly tanker designs?

In order to achieve the ambitious goal to decarbonize our industry—a goal that Stena Bulk fully supports—we believe that we must take every action necessary. As a progressive voice in shipping with a focus on sustainability excellence and a vision to have a sustainability impact, at Stena Bulk we constantly push boundaries in order to innovate and champion multiple pathways—even if not all of them will reach full market fruition.

That’s because, as sustainability pioneers, we do not want to wait and see what others in the sector do. We are advantaged by having access to our Stena Sphere partner organization Stena Teknik, which helps us guide and realize a range of newbuild and retrofit projects and allows us to see future fuels trials as sensible and achievable, rather than speculative.

Being one of the leaders in the maritime industry’s sustainability journey, we always support the idea that shipping needs to embrace more partnership and collaboration to tackle its biggest challenges. Decarbonization is no exception, and we always welcome initiatives that allow us to join forces with other industry partners to facilitate innovation and progress in this space.

In January 2020, steel cutting for our state-of-the-art IMOIIMeMAX methanolfuelled 49,900 dwt vessel Stena Pro Patria commenced. This vessel will be the first of the three methanol-fuelled tankers to be built under our joint venture with Proman Shipping. Each of these vessels will use 12,500 tonnes of methanol as a marine fuel per annum, significantly reducing emissions in their commercial operations compared to conventional marine fuels.

These new methanol-ready vessels will benefit from several design and technical improvements to optimize energy and fuel efficiency. The latest generation MAN dualfuel engines will feature revolutionary new water and fuel emulsion technology, which significantly reduces NOx emissions without the need for costly catalytic conversion technology. Additionally, the vessels will also be equipped with the latest energy efficiency technology, including continually controlled combustion, optimized tuning, redesigned and aerodynamic hull lines, and an energy shaft generator, reducing fuel consumption and helping to meet strict emissions criteria.

We also continue to explore other options in terms of future fuels and clean technologies. A recent trial we carried out of sustainable marine biofuel, for example, enabled an 85% reduction in CO2 across one voyage.

We believe that taking on big innovation challenges is in line with being commercially sensible against the backdrop of a radically changing maritime sector—and that taking these challenges on now will drive further commercial success in the future.