Tanker Market 2006
The tanker market and the other shipping markets have been enjoying a glorious run. Earnings have been among the best since the early 1970s. Yet while the torrid expansion of the early 1970s led to a massive surplus of tonnage that lasted right up to the 1990s, today’s market is better balanced - although a huge run of newbuilding deliveries to replace phased-out single hulls threatens this balance, coming as it does at the same time as extremely low demolition sales which are discouraged by high earnings.

Behind the strong tanker market there has been a resilient world economy. Since the turn of the century, it has weathered stock market traumas, wars and terrorist attacks, recession and stagnation; massive oil price increases. Despite all these storms en route, world economic growth was 4.1% in 2003, 5.3% in 2004 and 4.9% in 2005. In the International Monetary Fund’s World Economic Outlook, it is estimated to have reached 5.1% in 2006.

That the strong tanker market has lasted for such a prolonged period has been caused not only by a robust world economy and high oil demand. Since 1999, there have been many significant incidents and dramas affecting the market balance. The Erika accident created a differentiated freight market where new ships obtained a premium over old ones: Venezuela’s oil strike; Bosporus Straits congestion and waiting time; Caribbean monster hurricanes; Nigerian strikes and sabotage; Prudhoe Bay’s partial closure after BP pipeline leaks; oil producers using VLCCs for temporary storage. Most of the time market supply/demand has been tight with relatively low stocks and just-in-time oil company inventory policies. Over the last year there has been a continuous expectation of increasing prices resulting in stockbuilding.

Tanker owners invested almost fifty billion dollars in new tankers in 2006 at record ship prices, more than double the investment in any previous year and more than one third of total investment over the last 10 years.

In 2005 the International Energy Agency (IEA) was continuously revising upwards the projection for oil demand. In total contrast the 2006 demand increase revisions were downwards. Oil demand increased by only around one million barrels per day in 2006, with the demand increase mainly concentrated in China and the Middle East, whereas oil demand in the U.S., Europe and Japan declined marginally.

However during the second and third quarters of 2006 there was stockbuilding of, on average, one million barrels (or one suezmax load) per day. Partly because of this stockbuilding in advance of the hurricane season and partly because Iran used its large VLCC fleet for storage, the summer tanker market was strong. After last year’s hurricanes Katrina and Rita, paper traders were speculating on an active hurricane season - that never happened. Then the Prudhoe Bay partial closure turned out to be less serious than had been anticipated (with the oil field back on stream by October). As a consequence oil prices declined and the tanker market subsided.

In 2006 oil demand was mainly supported by China and the Middle East (See graph Increase in world oil demand). In 2007 oil demand in the U.S. is expected to recover. But at the same time, European oil consumption has been declining over the last two years, along with North Sea oil production.

Sources of oil supply and trading routes are just as important for the tanker market as fundamental oil demand. According to the Paris-based IEA, the U.S. took more oil from Mexico, Canada and Africa in 2006 and less from Europe. U.S. crude oil imports from Africa have almost doubled since 2002 as sweet Atlantic crudes remain more popular than Middle East sour crudes. Moreover Canada has strong ambitions to increase production of oil which is exported to the U.S. by pipeline. These trends are not great news for tanker tonne-miles. (See graph Sources of U.S. crude oil imports).

On the other hand, European oil imports from all major areas have been declining, except from Russia. European oil imports from the Former Soviet Union (FSU) - mainly Russia - increased from 1.8 mbd 10 years ago, to 3.7 mbd 5 years ago and finally to 4.6 mbd in 2006 based on 1Q- 3Q06. (See graph Sources of European crude oil). In 2007 a large part of increasing FSU production is likely to come through the Baku/Tblisi-pipeline to the Ceyhan loading terminal in the Eastern Mediterranean. However, at the same time as FSU oil supply has been increasing, supply to Europe from the North Sea has been declining - these movements peaked in 2000 at 3.6 mbd and were down to 2.8 mbd during three first quarters of 2006.

The IEA forecasts that non-OPEC production in 2007 will increase by 1.2 mbd. Europe will likely continue to take more oil from FSU and the U.S. more oil from Africa. As a result long-haul crude transportation from the Middle East could suffer.

Strong demand for product tankers
The warm winter across the northern hemisphere has knocked the oil products markets. Demand for heating oil in the U.S. and Europe and for kerosene in Japan as of end 2006/early 2007 was hundreds of thousands barrels a day lower than during a normal cold winter.

Nevertheless despite this seasonal blip, demand for products tankers has increased significantly over recent years - and by more than crude oil tanker demand - with increased products imports both to Europe and to the U.S.

Product imports to Europe have increased by some 44% to 6.2 mbd over the last 10 years - an increase of 1.9 mbd (see graph European products oil imports) whereas crude oil imports have increased by only 7.6% to 13.1 mbd over the same period (an increase of 0.9 mbd).

In comparison, U.S. gasoline imports have more than doubled over the last 10 years to 1.1 mbd, while crude oil imports have increased only by some 21% over the same period. U.S. domestic crude oil production seems to have mainly recovered since the devastation of the hurricanes in 2005, now achieving almost 5.4 mbd.

There are many driving forces in the complex products tanker market. Tight refinery capacity, the implementation of stricter product standards and demand for different product mixes around the world all encourage arbitrage trading - for instance Europe has a deficit of diesel oil and the U.S. a deficit of gasoline.

While refinery expansions will be rather moderate over the next couple of years, big expansions are underway from 2009 in India, the Middle East, Taiwan and possibly also South Korea. These new expansions, coming at the same time as a continuing lack of refinery investment in Europe and the U.S., may mean a structural change in the products tanker market.

There may be increased long-haul trade of products from these new refineries, mainly to Eastern destinations, but perhaps also to the U.S. and Europe. This will happen at the expense of long-haul crude oil trades.

It is important to note however that, despite a lack of investment in new refineries, the U.S. has managed to increase refinery capacity virtually every year for the last 10 years, from 15.3 mbd in 1995 to 17.3 mbd in 2005. It is not distillation capacity that is lacking but conversion capacity to break down low value heavy fuel oil into higher value transportation fuels.

China’s ongoing industrial expansion and booming transportation sector will continue as one of the main growth engines for this sector in 2007. China has been Asia’s largest exporter of gasoline, but fast-growing domestic needs halved exports in the first nine months of 2006 to 69 kbd, and China is expected to become a net importer of gasoline by 2010. Its booming petrochemicals sector is likely to increase demand for feedstock by over 10% this year. China’s target for refining capacity, currently at about 6.7 mbd, is 7.6 mbd by 2010, which may not be sufficient to keep up with its increasing oil consumption. That could mean that India and the Middle East may become suppliers of products to China.

Phase-out and fleet growth
We have run the figures for one phase-out scenario where only double bottom (DB) and double side (DS) tankers will definitely trade beyond 2010. This is probably not realistic, as good single hull vessels are likely to trade on where their flag permits (Singapore, Japan, India, Panama so far). But we have used this scenario to demonstrate that all single hulls (except DB and DS) phasing out in 2010 would generate a demand for newbuildings in 2009/2010 that cannot be satisfied and therefore would bring about a tanker supply squeeze. The graph below shows deliveries until 2010 and the theoretical tanker newbuilding requirement to maintain balance 2010-2015, contrasted with demolition up to 2006 and projected phase-out 2007-2015. Figures have been calculated assuming a balanced market end 2006 and a 4.5% annual increase in tanker demand from 2007.

The graph shows that 15 m dwt of additional newbuilding orders is required for 2010 in addition to the 21m dwt already on order for that year, making 36 m dwt total deliveries for 2010 to maintain balance - plus 20m dwt of newbuildings a year 2011-2015 to maintain that balance. It can therefore be deduced that no single-hull tankers will need to trade beyond 2010 to avoid a supply squeeze - although some undoubtedly will.

The phase-out and delivery situation differs according to the market sector. With regard to the smallest tankers it is hard to obtain good data. There are a large number in the market that should already have been phased out. Fearnleys says in its November report that "these vessels are trading, mainly coastwise, in Nigeria, China, Indonesia, and Mexico". Until 1 January 2007 they have also been able to trade in vegoils. The revised MARPOL Annex II entered into force on this date and thereafter vegoils have to be carried in either IMO Type 2 tankers with double hull or IMO Type 3 tankers, with operational limitations.

The phase-out figures we offer here are based on the list of tankers used by the IMO Group of Experts who evaluated the phase-out effects, which was later corrected by INTERTANKO for sales for decommissioning, conversion and others. All figures are given as of 01.01.2007.

Included on this list we have 626 SH tankers (including tankers with only double bottom or double sides) of 5,000- 24,999 dwt, which is 43% of all SH tankers. Some 240 of these should already have been phased out according to our list.

There are 219 SH tankers of 25,000-39,999 dwt left (some 40 of these should already have been phased out) and an orderbook of just over 70 tankers. Tankers in this segment are, to a large extent, being replaced by larger ships.

In the 40,000-54,999 dwt sector, there are 102 SH tankers and an orderbook of more than 360 tankers. The size range was chosen as we had no record of any tankers being ordered between 55,000 dwt and 59,999 dwt. Peak phaseout in this segment is 2010 when 18 tankers are scheduled to go. Peak for deliveries is currently 2008 when some 130 are due for delivery, following on from some 100 deliveries in 2007. A surplus of ships may, therefore, build up in this segment.

There are 110 SH panamaxes and an orderbook of about 120 tankers. However, whereas as the number of ships on order is only slightly larger, the dwt orderbook is some 24% larger as the newbuildings tend to be larger than the SH ones. If only DB or DS SH tankers continue to trade until the age of 25 years old, peak phase out will be 2010 when 45 are due to go, whereas peak deliveries currently occur in 2009 when close to 90 are due to be delivered. A surplus may, therefore, build up during the period 2007-2009 in this sector - a surplus which may be cleared away in 2010.

There are 161 SH aframaxes and an orderbook of more than 200 tankers. However, whereas as the number on order is 26% higher than the number to be phased out, the dwt orderbook is actually close to 50% larger. The aframaxes on order are from 104,000 dwt to 116,000 dwt whereas the average aframax phasing out is 93,619 dwt. Peak phase-out will be 2010 when 78 are due to go, whereas peak delivery is currently 2009 when close to 90 are due to be delivered. As with the panamaxes, this points to a likely fleet build-up 2007-2009 which could be corrected during 2010.

The aframax fleet increased by just under 6% in 2006, continuing an increase that has run from 55m dwt in 2002 to 72m dwt in 2006. The relatively tight market despite the strong fleet increase proves that demand for aframaxes has been very strong over recent years. The current balance in this sector was demonstrated at the beginning of December when aframax spot rates shot up by more than USD100,000 per day in one week. Part of the reason was congestion in the Bosporus Straits and substantial delays in the Caribbean caused by fog which combined to reduce tonnage availability significantly.

There are 65 SH suezmaxes left and an orderbook of around 100 tankers. However, whereas as the number on order is only marginally higher than the number to be phased out, the dwt orderbook is more than 50% larger. Peak phase-out is 2010 when 41 are due to go, whereas peak delivery is currently 2009 when some 40 are due to be delivered. A surplus may, therefore, also build up in 2007-2009 in this segment.

The most critical sector is the VLCCs because of the size and the number of the ships. There are 156 SH VLCCs and an orderbook of around 170 tankers. However, whereas the number on order is 10% higher than the number to be phased out, the dwt orderbook is some 20% larger. Peak phase out is 2010 when 145 are due to go, whereas peak delivery is currently 2009 when close to 60 are due to be delivered. A surplus may, therefore, also build up in 2007- 2009 in this segment. As for the panamax and aframax sectors, this surplus may be cleared away in 2010 - depending on how operators view market prospects for SH tankers.

Sales for decommissioning in 2006 were only some 2m dwt, the lowest since 1990. However in addition we have recorded six VLCCs, six suezmaxes and four aframaxes totaling some 3m dwt sold for conversion to offshore facilities. This means that, with deliveries of some 27m dwt, the fleet increase was some 22m dwt or 7%.

Period chartering takes stronger control
Period contracting increased for the third year in succession. INTERTANKO recorded 186 contracts in 2006, 25 above 2005 (16.5% up).

New TC contracts of 6 months and above - averages per year
Year	Average age	Total m dwt	Average dwt	Number contracts	Average Period	Average $/day
2000	9.5	18.385	114,194	161	1.4	20,351
2001	8.5	23.441	106,880	219	2.4	23,437
2002	7.3	23.570	111,707	211	1.9	16,172
2003	8.7	13.046	120,799	108	2.0	18,047
2004	8.7	18.521	111,706	143	2.4	26,203
2005	5.1	16.201	106,586	152	2.8	30,803
2006	6.2	21.485	115,510	186	2.6	28,952

Despite the increase in the fleet of some 48 tankers since spring 2004, the number of VLCCs in the spot market has actually been reduced from 220 to 204 as of November this year. The number of long term contracts of one year and above has increased by 15 to 106, and the oil company/stateowned fleet has increased by almost 40% to 178 VLCCs. The number of suezmaxes on long contracts has increased by some 45% to 110 tankers, but also here the oil company/state-owned fleet has increased by around 33%. The number of aframaxes on long contracts on the other hand has been reduced by some 10% to just over 100 tankers, but also here the oil company/state-owned fleet has increased by more than 40% (Source: JG Olsen Shipbrokers).

The increased number of period contracts may indicate that some tanker owners are less optimistic about the future as period rates have been at a far lower level than the average spot rates. It could equally indicate that charterers believe that a relatively strong spot market may be sustained for some time to come.

The future
Tanker supply for the next three years is to a great extent decided. The shipbuilding berths are full which mean that there can only be a few additions. The fleet is relatively young and only some 16.5 m dwt is due for phase out over that period (including 4.6 m dwt that were due 2006 and earlier) compared to deliveries of almost 100 m dwt. In addition there will be some conversion to offshore facilities, and perhaps also some conversion to double hull. It is the high rate of newbuilding deliveries that is the greatest worry overall for the tanker industry for the next three years. It will take a prolonged poor market to generate significantly more sales for decommissioning other than those set by MARPOL phase-out with no extensions.

Tanker demand is driven by the situation in the global and regional oil markets. Supply/demand strategies, complex political and economic issues, environmental concerns, as well as weather influences, climate change, technological development and traffic flows will all contribute to influence the long-term demand trends.

Market factors and uncertainties - 2007 and beyond Robust/resilient world economy or weakening Chinese economy due to overinvestment and knock-on effect in the U.S.? Hostility hot spots more or less volatile? Natural disasters/weather patterns create/reduce energy demand? Tonne mile reductions as U.S. and Europe source closer to home - unless energy security concerns drive a different portfolio mix. Environmental drivers (lower CO2/GHG/Exhaust gas emissions) reduce tonne-miles for tankers, but increase for foodstuffs etc. as public move against air freight. Large orderbook creates supply build prior to enforced phase-out of single hulls in 2010. Other states (besides Japan, Singapore, India, Panama) permit flag and port entry beyond 2010? Slow demolition/decommissioning due "reasonable" freight markets, high book values and relatively young fleet, while newbuilding prices remain high and orderbooks full for several years.

Tanker Incidents 2006
Fortunately there were no massive and catastrophic pollution incidents in 2006. The biggest oil spill involved the VLCC Bright Artemis. The 1992-built tanker went to the assistance of a general cargo ship Amar, which had
suffered a serious fire. A strong gust of wind blew the Amar against the Bright Artemis, inflicting a long gash in the VLCC’s starboard side about 1.7 metres above the waterline, puncturing two cargo tanks. 4,500 tonnes of Omani and Saudi crude oil was spilled before the crew transferred oil within the vessel to prevent further spillage.

INTERTANKO records all tanker incidents reported and it can be seen that trends are changing. Altogether 40 people were reported missing or killed in connection with these incidents, up from 26 in 2005. Over the last two years, fires and explosions have involved only 9% of the incidents, whereas this category peaked in 2004 when it represented 22% of all incidents.

Hull & machinery (H&M) represented 28% of incidents in 2006 - down from 33% in 2005 but still well up from only 16% in 2002. The most frequent H&M incident was engine trouble - 32 incidents - whereas only three incidents could be traced back to structural failure. Some 40% of all incidents happen in connection with arrivals or departures, in port (entrances), rivers or canal. Collisions (including contacts) and groundings continue to represent approximately 50% of the total incidents.

That there has been a significant increase in the number of incidents reported and recorded in 2006 is not in doubt. Fortunately most of these incidents are small and involve no fatalities, pollution or major damage to property. But
it is not yet clear what has caused this increase. INTERTANKO is taking this change seriously and will be working with the wider tanker industry interests to pool information, to try to identify trends and where possible to draw conclusions on causes.

It could be that increasing transparency and the increased focus on safety means more incidents being reported and recorded. The review exercise will involve the detail and background of these incidents, where available, and will also include a close look at the human involvement in these incidents and how much comes down to training and work schedules.

It may be noted that more than half of the incidents involve tankers below 10,000 dwt and that the number of reported incidents for this size category doubled in 2006 compared to 2005. There was also a significant (60%) increase in the number of reported incidents involving tankers above 30,000 dwt.

Reported tanker incidents 2002-2007 by type, dwt and age

Incident	2007		2006		2005		2004		2003		2002
Collision	9	25%	88	33%	53	33%	42	30%	32	24%	41	16%
Grounding	8	22%	46	17%	33	20%	26	19%	32	24%	39	15%
Fire/Explosion	5	14%	24	9%	15	9%	31	22%	17	13%	14	5%
Hull & machinery	10	28%	73	28%	53	33%	23	16%	34	26%	41	16%
Misc/unknown	4	11%	31	12%	5	3%	17	12%	16	12%	12	5%
Hostilties	0	0%	2	1%	2	1%	1	1%	0	0%	2	1%
Total	36	100%	264	100%	161	100%	140	100%	131	100%	149	56%
dwt range
Below 10,000	15	42%	138	52%	69	43%	32	23%	36	27%	59	40%
10-29,999	5	14%	33	13%	34	21%	34	24%	38	29%	26	17%
30-99,999	9	25%	63	24%	40	25%	51	36%	40	31%	38	26%
100,000+	7	19%	30	11%	18	11%	23	16%	17	13%	26	17%
Total	36	100%	264	100%	161	100%	140	100%	131	100%	149	100%
Age
Unknown	2	6%	13	5%			4	2%	2	2%	4	5%
Built 1970s	4	11%	34	13%	25	16%	31	22%	25	19%	35	11%
Built 1980s	9	25%	67	25%	51	32%	38	27%	48	36%	48	31%
Built 1990s	11	31%	81	31%	56	34%	39	28%	43	33%	45	31%
Built 2000s	10	28%	69	26%	29	18%	28	21%	13	10%	17	22%
Total	36	100%	264	100%	161	100%	140	100%	131	100%	149	100%