Oil supply and demand
The International Energy Agency (IEA), the Paris-based oil watchdog of the industrialised countries, has admitted that it has been paying insufficient attention to oil supply bottlenecks as evidence mounts that oil is being discovered more slowly than once expected. Total’s CEO, Christophe de Margerie, has warned that the world’s capacity to produce oil not is as big as the official prognosis. Why? Not because of a lack of reserves, he says, but the lack of capacity to develop these resources. In addition, the world has not understood that oil-rich countries might want to put by some of their reserves for the future. Then there is the fact that in a number of countries such as Iraq, Nigeria, and Venezuela, oil supplies are being limited due to security issues and also due to politics.

Doubts are also surfacing about the original estimates for new oil discoveries around the world that were calculated by the U.S. government-funded scientific body, Geological Survey (USGS). A USGS re-assessment of these statistics in 2005 showed that actual new oil discoveries averaged only 9bn barrels a year between 1996-2003, 60% less than the average annual estimates for the forecast period of 1995-2025. Dr Faith Birol, chief economist for the IEA, said the bulk of expected long-term oil supply expansion would be determined by the natural decline rates of discovered fields, which he said suffered from a lack of “transparency”. According to calculations by Goldman Sachs the price of producing the marginal barrel of oil has increased from some USD 20-30 in 2003 to USD 75 per barrel in 2007.

Increasing world population and continuing economic progress means that more and more energy will be needed. Even with significant improvements in energy efficiency, the world’s total energy demand is expected to be approximately 40% higher by 2030 than it was in 2005. However, demand growth should slow with time as, for instance, vehicles with better fuel economy penetrate deeper into the market, especially in OECD nations. While biofuels supply will increase rapidly, its use is limited by both cost and scale. Therefore mineral oil will remain essential to meeting transportation demands – fossil fuels are expected to continue to provide about 80% of the world’s energy in 2030. The U.S. crude oil production and import/export trends are increasingly being used as an example of the possible development of world oil production. The U.S. was once the biggest oil producer in the world and yet record high oil prices have failed to raise production levels. North America has been able to maintain production levels of late, but only thanks to Mexico and to Canada. We see here the same development as in other major production areas, such as the North Sea, where the oil production has fallen by almost two million barrels per day from its peak in 2000.

The fact that the oil industry has had to resort to venturing into more difficult areas where the geology is problematic, and that it continues to operate in difficult but oil-rich regimes, is an indication of just how much oil reserves are getting tighter.

Tanker supply and demand
Tanker rates end November and through December 2007 once again reached record heights. But the cause was not some profound change in fundamentals. It was quite simply that the combination of very low availability of VLCCs in the Middle East and a great deal of oil trading due to oil price discounting by Saudi Arabia took the market by surprise.

VLCC availability 22 November-19 December was only 48% of the VLCC availability 26-July to 15-November, whereas the total number of VLCC fixtures hit a record high (180 fixtures compared to an average 2002-2007 of 124 ).

Part of the reason for the low availability of VLCCs was the effect of slow steaming in a market where very high bunker prices coincided with low rates. The backwardation situation in the oil market also gave a lift to oil trading and to November spot chartering, which in November rose to 9.1 mbd, the highest in this decade and 30% above the average since 2002. According to OPEC, the average of Middle East spot chartering was however the same in 2007 as in 2006 (7.0 mbd) and lower than in 2005 (7.3 mbd) and 2004 (7.8 mbd). There is a strong correlation between Middle East oil production and tanker demand.

Tanker supply
The most significant development on the tanker supply side has been all the tankers that have been taken out of the market for conversion. We estimate that altogether some 10 m dwt of aframaxes, suezmaxes and VLCCs were taken out for conversion in 2007, mainly to be converted to ore carriers, but also to offshore oil facilities and heavy lift ships. We have only recorded some 3.6 m dwt sold for recycling.

In 2008 newbuilding deliveries will increase further, and while some believe that conversion activity may also increase, others report that conversions may slow down due to higher steel prices, an easing in the bulk markets, and limited conversion capacity.

Assuming that demand will increase by 2.5%, and assuming a balanced market as of end 2006, then the surplus of tonnage would increase both in 2008 and 2009 and continue beyond 2015 even taking conversions into account (see graph below). We have assumed that all SH tankers will disappear by 2010. In fact some SH tankers will probably continue to trade in some areas, but such opportunities have been further restricted by the December 2007 collision in South Korea between the anchored single-hull VLCC Hebei Spirit and a towed crane barge which has seen some South Korean refiners, until now one of the biggest charterers of single hull VLCCs, backing off from single hulls and turning towards double hulls.

Looking ahead
Prophecies and forecasts have an uncanny habit of turning out wrong – or at least only partly right. But those who wish to invest in the future need to make decisions about promised potential and threatened mishaps. There are a number of global developments that may affect the tanker industry ahead.

Issues that are high on the global agenda, and which a responsible industry must consider, include inter alia energy security, climate change and tight oil supply causing high prices – all issues which will stimulate saving oil and switching to alternative energy sources. Lower economic growth may also limit oil and tanker market growth in 2008.

The ship supply side on the other hand has seen the pressure of massive newbuilding books taken off by a huge number of conversions – at least for the biggest ships. Since the Hebei Spirit accident, with more charterers reluctant to take single hull tankers, the rate differentiation between single hull and double hull has increased. In the product tanker market, deliveries will peak in 2008 and the current orderbook may cause oversupply several years ahead, even with strong demand growth.

... those who wish to invest in the future need to make decisions about promised potential and threatened mishaps

Tanker incidents 2007
The number of tanker incidents increased by 22% in 2007 to 323 incidents. This increase compares to an increase of 65% in 2006 over 2005. Unfortunately both the number of fatalities and the amount of pollution increased as well.

Looking more closely at the type of incident, Hull & Machinery (H&M) represents 29% of the total number of incidents, up from 28% in 2006 but down from 33% of the total in 2005. But the total number of H&M incidents still increased from 74 in 2006 to 95 in 2007 – an increase of 29%. The biggest single cause of H&M incidents is engine failure – in fact half of the total H&M incidents (48/95). We have recorded 9 hull incidents which are mainly hull cracking.

Some 15 of the incidents involved rough weather/lightening and some 40% of the accidents were in port, or at anchorages, on rivers/canals or at the entrance to ports. 24% of the total accidents were related to product tankers, 22% to oil/chemical tankers, 15% to chemical tankers and 20% to crude oil tankers. What is most conspicuous for 2007 were the 25 LPG tanker incidents – in previous years we have seen very few gas tanker incidents.

Fatalities
Virtually every year there are serious collisions with fishing boats causing fatalities – four of the 2007 tanker collisions involve fishing boats. The greatest loss of life was nineteen people, missing after the handymax Formosa Ten collided with a fishing boat in the East China Sea; in addition the chemical tanker Keoyoung Chemi sank a Chinese fishing boat south of Shanghai – only one out of the seven crewmen on board was reported as rescued.

Other ship losses and collisions involving fatalities include fourteen seamen who are missing after the small chemical/oil tanker Eastern Bright sank in rough seas off South Korea. One person was reported killed and seven are missing from a Vietnamese ship which collided with a gas carrier near the mouth of the Saigon River. An explosion on the small products tanker Maulana, transporting diesel on Sumatra island’s Siak river, killed four crew members. In addition there were 5 more tanker incidents with 8 fatalities in total.

Pollution
The most serious oil spill was the VLCC Hebei Spirit which spilt some 10,500 tonnes of crude oil in December when it was hit while at anchor by a towed crane barge. Then in December, during oil loading from the Statfjord A platform in the North Sea to the ten year-old aframax Navion Britannia, about 4,000 cubic metres of crude oil was spilled when the platform’s loading hose split under pressure. In severe weather in November the twenty year-old 4,550 dwt products tanker Volgoneft 139 broke into two parts and spilt its cargo – the same storm in the

Black Sea and Azov Sea sank four freighters, three carrying sulphur and one with a cargo of scrap metal. We have also recorded 10 more small oil spills. The reports we receive contain too little information to undertake comprehensive analysis with regard to root causes or to reach a conclusion on why the number of tanker incidents – particularly the number of engine failures – are increasing strongly. One reason is increased trade, but this can only explain part of the increase.

We know that shipping has been expanding strongly during this decade, not only tankers, but all other shipping segments. Such a major expansion of the fleet is bound to place a strain on resources, not least human resources, with education and training of both ship and shore personnel running to keep up.