One of the biggest challenges for the world this century may be to locate new sources of energy at a reasonable price. At some stage this century oil production will start to decline. There is considerable disagreement as to when this will happen and what its implications are for the energy transportation industry.

Figure 1 OPEC basket - average yearly price US$ per barrel

Source: US Energy Information Administration

Figure 2 US Oil import and production quadrillion Btu

Source: US Energy Information Administration

Figure 3 Increase in world oil demand in China and Rest of the World

Figure 4 Average monthly tanker spot rates

Figure 5 Tanker Fleet Development 1992-2008

The U.S. Energy Information Administration (EIA) mid December 2005 published a revised long-term forecast which dramatically altered its previous forecasts. In the Annual Energy Outlook (AEO) 2006 reference case, world petroleum demand is projected to increase from about 82 million barrels per day (mbd) in 2004 to 111 mbd in 2025 compared to a last year’s forecast of 121 mbd. The AEO 2006 reference case also projects OPEC oil production of 44 mbd in 2025 compared to last year’s forecast of 55 mbd. Both long-range forecasts are 10 mbd less than last year’s forecasts.

The dramatic events affecting the oil market in 2005 have caused the world to be more focused on energy security as well as a possible climate change. As we write in early 2006, new attacks on Nigerian oil facilities and tensions between Iran and the West over the oil producer’s nuclear programme, have pushed crude oil prices to new highs towards US$70/bbl. Oil has always been a political game, but 2005 saw the start of a new era of oil politics. The damage to U.S. oil installations by the hurricanes Katrina and Rita caused oil prices to spike. But actually there has been a longer-term price increase going on since the new millennium, which indicates that higher oil prices are part of a new trend rather than simply short term volatility.

Until recently the major oil companies based their investments on oil price projections below US$25 per barrel. Now OPEC has started to talk about a price floor of US$50 per barrel (see Figure 1). According to its Annual Energy Outlook (AEO) 2006, the EIA has increased its reference case for oil pricing to US$54/barrel in 2025, US$19/barrel (55%) higher than the US$35/barrel it was predicting a year ago. The higher world oil price in the AEO 2006 reference case is expected to lead to higher U.S. domestic crude oil production, lower demand for petroleum products, and consequently lower levels of petroleum imports (see Figure 2).

At the same time the International Energy Agency (IEA) notes that while OPEC spare capacity is expected to grow in 2006, effective spare capacity is likely to grow only slowly from today’s below comfort 1.5 mbd level, and may not reach 3 mbd until 2009. This puts pressure on the oil industry to maintain inventories at higher levels in order for the market to be able to respond to any supply outages and demand surges that may occur over the next few years. However, in practice, commercial inventories reflect oil prices and arbitrage opportunities as well as rational security factors.

It is a period of strong, global economic growth. The latest Consensus Forecast for GDP growth in 2005 is 3.1%. The U.S. is among the highest with 3.6% growth, Japan is doing better than expected with 2.4%, although the Eurozone is lagging behind at 1.4%.

Leading the growth surge is China which is overtaking the UK as the fourth biggest economy in the world after a recent upward revision of its GDP by a remarkable 17%, on the back of a strong dollar and stronger economic growth than was anticipated. And yet the GDP per capita of this emerging giant still ranks lower than one hundredth in the world.

China’s powerful and sustained growth has been driving the shipping markets. Oil imports to China have been representing about 8% of the tanker market in tonne miles. However, although Chinese oil demand increased less in 2005 (compared to the rest of the world) than any year since 2001, it is expected to recover in 2006 (see Figure 3). Nevertheless its oil demand is projected to be lower in 2006 than it was in 2003 and 2004.

The tanker market has been increasingly volatile during the last few years, affected by a variety of influences at any one time (see Figure 4). Drawing on the comments of the late Austrian economist Friedrich Hayek, market analysis is often "dispersed bits of incomplete and frequently contradictory information, and these scattered insights are communicated to everyone through shifts in rate".

Contradictory? Freight rates were strong at the end of 2005, despite what appeared to be relatively low demand and low activity levels in the tanker market. Why? Congestion in the Bosporus again caused delays which tightened tanker supply and boosted the aframax and suexmax markets. However the VLCC market remains a conundrum, with the relatively slow decline in freight rates towards the end of 2005 suggesting that owners’ resistance to accept low rates is greater than during quieter moments in previous years.

Thee average age of the tanker fleet is declining. Only some 4.5 m dwt of tankers were sold for decommissioning in 2005, but the tanker fleet increased by some 7% as some 30 m dwt of tankers were delivered. After a ten year period with a fairly steady tanker fleet until 2002, the fleet is now increasing strongly (see Figure 5) and it will increase further before 2009. In fact between 2004 and 2008 tanker fleet growth of over 25% will take the tanker fleet from 335m to 415m dwt.

After that there is a great deal of uncertainty as 2010 is the last year that single hull (SH) tankers can trade to the harder-line regions and countries such as the EU and Australia, as well as onshore ports in the U.S. A total ban in 2010 would mean phase-out of some 65 m dwt of SH tankers in that year. But if there are sufficient markets for trading SHs until the age of 25 years, or until 2015, that could instead mean only some 8 m dwt of compulsory phase-out.

Trading opportunities for single-hull VLCCs will be limited but as we write they can trade from the major oil exporters in the Middle East - except Saudi Arabia which has recently ratified MARPOL and may close the door on SH tankers. They can trade to Japan and Singapore as well as to LOOP and dedicated lightering areas in the U.S.

They will also be able to trade under Panamanian or Liberian flag.

But in fact many administrations have still not clarified their position on the special provisions contained in MARPOL 13G and 13H, which extend the trading life of younger SH tankers past 2010 to 25 years or 2015, whichever is earlier. We know for sure that Europe will not accept SH tankers after 2010, and neither will U.S. ports except LOOP and lightering areas, but actually we see that the number of SH tankers trading in these areas is already low. BP’s position of no longer accepting SH tankers for charter further complicates the situation for these tankers and some believe that it could set a precedent for others to follow. The INTERTANKO web page is being continuously updated as flag and port states notify the IMO of their intentions under MARPOL 13G and 13H.

Period chartering with longer periods

Figure 6 Period contracts

Figure 7 Pollution rate Tonnes spilt per bn tonne miles traded

Source: ITOPF spills, Fearnleys: Tonne miles

Figure 8 Reported tanker incidents 2005 Total 161

The change in the oil market has naturally also changed the chartering policies of the oil companies. Despite the high freight markets in recent years, the number of period contracts 2000 to 2005 (975) were 50% up on the number 1994 to 1999 - and six times higher than the 1981 to 1986 low-point when the tanker market was truly struggling (see Figure 6).

Tanker safety and pollution performance Figure 7 shows that accidental pollution from tankers has declined considerably since the 1990s and continues to do so. The decline over the most recent 5 year period 2001-2005 compared to the period 1996-2000 is a healthy 38%, but this significant rate of decrease is almost lost on the graph since both periods demonstrate a dramatically lower pollution rate compared to previous periods.

INTERTANKO recorded 161 tanker incidents in 2005 compared to 140 in 2004. While this increase of 15% by number looks negative for the industry, the fleet actually increased by 6% over the same 12 month period. There has at the same time been a reduction in the number of fatalities as well as in the amount of oil spilled.

Altogether we have recorded 26 fatalities on board tankers (including repair and demolition incidents) in 2005 compared to 65 in 2004. The most serious incident on a trading tanker was a fire on the 1981-built 85,925 dwt crude oil tanker Zhen Hua 11 in which seven people died. Six crew died aboard the 2000-built 1,892 dwt product tanker Kyokuyo Maru after a collision with an LPG tanker 350 km south-west of Tokyo.

The number of incidents among the oldest and the youngest tankers (i.e. those built in the 1970s and in the 2000s) is lower than their fleet share, whereas the number of incidents for tankers built in the 1980s and 1990s is higher than their fleet share (see table below). Thus 1970s-built tankers have 19% of the fleet but only 16% of the incidents, and 2000s-built tankers have 28% of the fleet but only 18% of the incidents. Conversely 1980s-built tankers represent 24% of the fleet but have 32% of the incidents and 1990s-built tankers are 29% of the fleet and have 35% of the incidents (see table below).

Decade built	Incidents 2005	%	Tanker fleet	%
1970s	25	16%	1592	19%
1980s	51	32%	1930	24%
1990s	56	34%	2414	29%
2000s	29	18%	2262	28%
Total	161	100%	8198	100%

The biggest single tanker pollution accident in 2005 occurred during Hurricane Katrina. The U.S. double-hull tank barge DBL 152 tore a 35-foot long by 6-foot wide hole in its starboard bow (puncturing both hulls) when it struck a submerged platform en route from Houston to Tampa. Initially three cargo tanks containing some 4,750 tonnes of number-six fuel oil (heavier than water) were damaged, but a total of some 9,500 tonnes of oil was released, settling mainly on the ocean floor.

The biggest pollution incident on a conventional tanker in 2005 was the 1989-built suezmax GenMar Kestrel which spilled some 1,000 tonnes after a collision with another tanker Trijata off Egypt’s Mediterranean coast.

Some of the quantities spilled in a number of smaller tanker incidents are still unknown, but according the information we have received so far, 2005 may have been the fourth lowest year ever for accidental oil pollution from tankers. According to the International Tanker Owners Pollution Federation (ITOPF) the previous lowest year was 2001 when 8,000 ts was spilt, 12,000 ts was spilt in the years 1982 and 1995, and a preliminary figure of 13,000 tonnes for 2005 - down on 2004’s 15,000 tonnes.

Looking at the detail and the causes of tanker incidents, (see Figure 8) the number of hull and machinery incidents increased strongly to 53 in 2005 from 23 in 2004, but some 30 such incidents in 2005 (57%) involved engine problems compared to only 11 in 2004 (48%). This means 19 more incidents a year involving engine problems which points to engine reliability becoming an increasing concern for the tanker industry.

An encouraging development was the reduction in the number of fires and explosions to 15 in 2005 from 31 in 2004 - such incidents have been the main cause of fatalities on board tankers. There has been a focus on such incidents after the relatively high number of fatalities in 2004 and an inter industry group has been formed (including INTERTANKO) to undertake a study on the causes of explosions on chemical and products tankers.

Looking ahead
The tanker industry looks to be in a better position than ever to meet future challenges. One important change for larger tankers is that there is no longer a serious backlog of old ships that can easily be removed should market prospects look unfavourable. Over recent years the average age of tankers sold for decommissioning has been above 27 years. Now SH tankers are being phased out by the age of 25 years, although in fact there are relatively few tankers that will reach this age each year over the next few years. However between 2006 and 2009 there needs to be high demand for tankers if we are to avoid a deterioration of the market balance. In 2006 the market will have to absorb the full impact of the almost 30 m dwt delivered in 2005 and of another 24 m dwt that will be delivered during 2006.

On the other hand, looking further ahead, high newbuilding prices and limited shipbuilding capacity have restricted ordering, while at the same time in 2010 there could be a great volume of sales for recycling as some owners of SH tankers throw in the towel.

It is also likely that high oil prices have been encouraging oil saving measures and switches to alternative energy sources. Such investments take time to implement but may start to impact oil demand over the coming years. It is unlikely that there will be any dramatic effect from fuel switching and energy saving, but relatively small changes could have considerable market impact. High oil prices have also spurred the exploration and development of new oil fields, which may mean that oil supply will enter a period with a higher degree of spare capacity. This could alter the oil supply/demand balance and herald a period with lower oil prices and a more relaxed attitude to energy saving and security.

Jeroen van der Veer, chief executive of Royal Dutch Shell, said recently in the Financial Times that, "The world’s energy needs must be met while cutting carbon dioxide emissions. My view is that ‘easy’ oil has probably passed its peak. But there are other reserves that are still a long way from their peak. So, while the good news is that there is a wide variety of energy sources to deal with the energy challenge, our industry has its work cut out for it. It will have to mobilise its experience and talents but also rely on governments and consumers to recognise that we share common concerns and have to respond to changing circumstances".

We have witnessed that the oil market is unpredictable. There has been a long period with good economic growth and high oil demand. But environmental concerns, energy security and the cost of oil imports will influence the political agenda, consumer behaviour and the development of new technology. Nobody has all the answers and tanker market players must therefore keep their options open.