Pipe-dreams and nightmares in the tanker markets

While market research in shipping is usually pre-occupied by analyses for tonnage supply and demand, events in complimentary industries to shipping often can have equally important implications. 

For instance, in the pipeline industry in the North America, while Keystone XL planned pipeline to bring crude oil from Canada to the Gulf Coast run aground with regulatory concerns, the acquisition by Enbridge Inc. of a 50% stake in the Seaway Pipeline from ConocoPhillips, and the ensuing decision by the new owner to reverse the flow of the pipeline from Cushing, Oklahoma, to the Gulf Coast (Freeport, Texas), the impact to the tanker market cannot be ignored.  It is still difficult to precisely quantify to impact to the shipping markets and pinpoint which asset classes in shipping will be affected most, but, based on current information, in Captain’s opinion, tanker vessels will negatively be impacted by the events while product tankers have the most to hope from.

As a very brief primer to the oil industry, the high quality West Texas Intermediate (WTI) oil usually trades at a premium to Brent oil; however, WTI is priced in landlocked Cushing, while Brent oil is the international (and mobile) benchmark for oil pricing.  However, due to a drilling boom induced by the $150 / bbl pricing during the pre-crisis years and increased domestic oil production in the inland US and advanced hydraulic fracturing techniques, there has been a flooding of WTI oil in landlocked Cushing that could not meaningfully transported to refineries besides those in continental US.  As a result, during the last two years, there has been the paradox of Brent oil trading at a premium to WTI, a premium that reached almost $28 / bbl in October.

The pipeline network in the US has mainly been intended to transport oil from south to north, primarily from the US Gulf Coast to Cushing and petroleum products mainly along the Atlantic Coast to the North / New York area.  The reversal of the flow, of Seaway Pipeline from Cushing to the Gulf Coast, means that WTI oil can now be refined along the many refineries in the Texas / Louisiana region or pumped along the pipeline network to the North for processing.  The Seaway Pipeline is planned to move about 150,000 bbl per diem by 2012 Q2 and 400,000 bbl per diem by the end of 2013 Q2.  To put the quantities into perspective, in 2012 Q2, the cargo of one suezmax tanker per week will be supplemented by the reversal of the pipeline, and, in 2013 Q3, a VLCC cargo every four days will be substituted by the reversal.  It has to be noted that crude oil cannot be exported from the US without onerous permits, and thus, the Cushing-originating oil cannot be exported and will end up processed in the US.  Without getting into a fine-tuned analysis, it becomes obvious, that crude oil tankers will negatively be affected by the reversal, with, most likely, VLCC and suezmax tankers as the biggest targets of the impact.

Refineries in the US, in general, are geared to process lower quality oils, and that’s how they can maximize their margins.  The ‘traditional’ output of the US refineries moves along the rule of thumb of 3-2-1, where a barrel of crude oil is refined to yield two-thirds of a barrel of gasoline and one-third of a barrel of distillate such as heating oil or diesel.  However, with the Gulf Coast refineries now having access to cheap and high quality WTI, in order to maximize their margins, they likely will switch to 2-1-1 ratio, where one barrel of crude oil will now yield one-half of barrel of gasoline and one-half of barrel of distillate.  The US is a big consumer of gasoline but always has excess capacity for distillates, especially for diesel.  Europe, on the other hand, is an area where diesel is more widely used and always in need for additional capacity.  Thus, most likely, refineries now will produce excess distillate that will end up in the export market, and most likely, product tankers stand to benefit from the switch.  Since the cross-Atlantic petroleum products trade is dominated by the MR2 tanker market, MR2 tankers likely will be the asset class to benefit the most.

Who ever said that to understand and assess shipping one only has to focus on the shipping markets?  The beauty of the shipping industry is not as magnificent and encompassing as the three-quarters of our planet that covers our planet, but also as elevated as the remaining one-quarter of lands where consumers live and dream.  Some times their dreams are long as a pipe…unlike the dreams that keep the Captain company with a pipe in his mouth on the cold nights on the bridge…   

© Basil M Karatzas, 2011.  No parts of this blog can be reproduced in any way by any means under any circumstances without the prior written approval of the owner of the blog.  Copyright strictly enforced.

This blog is only intended for entertainment and discussion purposes; no responsibility can be assumed for taking or failing to take any action upon information contained in any part of this blog.

Should you desire to discuss contents of the blog or obtain commercial advice or opinion, please feel free to contact us at info@bmkaratzas.com.

Electric Boats and Technological Obsolesce

The wide publicity of the grounding and the ensuing environmental damage by the tanker MT EXXON VALDEZ in 1989 brought the implementation of MARPOL regulations and the OPA 90 Act which effectively mandated the use of double hull tanker vessels.  Since there have been very few high profile maritime disasters since then, disasters that could trigger another round of regulatory reforms, newcomer players in shipping with short institutional memory assume that today’s vessels are meant to be traded for their whole design life of usually 25 years.  It is assumed the risk for technological obsolesce is minimal, and more or less a straight depreciating line over twenty-five years defines residual values.

A recent article on well established technologies for electric boats in Königsee lake in Bavaria since the beginning of the century and new technologies for ‘mass-made’ speed boats in Zürich Lake with 120 kilowatts (162 horsepower) and 60 km per hour top speed, made the Captain ponder whether electric tankers and dry bulk vessels might not be so far in the future.

The design of tankers, and all types of vessels in general, has evolved tremendously over the several decades, especially with the use of computers, AutoCAD and Fine Element Analysis (FEA), to provide for an almost pollution-free movement of commodities and finished products due to pollution that may be caused by the cargo itself when in an accident.  However, ‘forced’ technological evolution may come not only from regulators concerned with the cargo and the cargo holds/tanks arrangements, but also from regulators concerned with emissions and also the market place itself.

The Energy Efficiency Design Index (EEDI), adopted by the International Maritime Organization (IMO) in July 2011, mandates that newbuilding vessels delivered from 2015, 2020 and 2025 should have energy efficiency improvements of 10%, 20% and 30%, respectively, over the EEDI baseline index.  Possibly, in the present turmoil in shipping, 2015 and later years might seem a very lengthy proposition, especially for owners who may be financially insolvent by then; however, since shipping is an industry better planned in terms of decades, a great deal of vessels will be affected by such implementation, including vessels that are being delivered now or even in the last decade.  There will be waivers, no question, and the industry will be given time to adjust, just as it happened with the transition from single hull to double hull tankers that almost took more than a decade.  However, single hull tankers got lucky as the first decade of this century was one of the best ever in shipping with tight tonnage supply and single hull tankers proved to be much more profitable than any other type of vessel.  However, the EEDI implementation comes at a time when the market is extremely oversupplied with modern tonnage, and likely will not enjoy the luxury of time or be given the benefit of the doubt.  And, more importantly, while single hull tankers actually enjoyed the preference of the charterers due to their lower cost, the EEDI index works against the vessels and the owners and in favor of the charterers.  While there may be people who still question ‘global warming’ evidence or may be less than motivated to make an effort to reduce Greenhouse Gas Emissions (GHG), when an EEDI vessel offers 10% savings over a comparable vessel, it’s a no-brainer which vessel a charterer will choose, especially in an oversupplied market.  By way of illustration, 10% efficiencies for a VLCC that usually burns ninety tons per diem of bunker fuel translates to savings of nine tons of fuel per diem, which, at today’s price of more than $600 per ton, it economizes almost $5,500 per diem.  For a typical trip from Middle East to US Gulf, the savings can typically be almost $200,000 for the trip.  Maybe the day of a Prius VLCC may not be such a farfetched thought, after all.

© Basil M Karatzas, 2011.  No parts of this blog can be reproduced in any way by any means under any circumstances without the prior written approval of the owner of the blog.  Copyright strictly enforced.

This blog is only intended for entertainment and discussion purposes; no responsibility can be assumed for taking or failing to take any action upon information contained in any part of this blog.

Should you desire to discuss contents of the blog or obtain commercial advice or opinion, please feel free to contact us at info@bmkaratzas.com.

'Liner shipping business’

The first decade of this century has been characterized not only by the best shipping times ever, but also by a new breed of shipowner who was financially astute, capital markets cognizable and friendly, and with a mission statement of shareholder value optimization hanging high from the yardarm of their ships and their roadshow presentations. 

True to the spirit of the decade that made securitization of debt a very profitable alchemy of the financial industry by slicing risk into different ‘trade-able’ tranches, the shipping industry was fast at catching up with the ‘divide and conquer’ strategy.  While private shipowners stack to what had worked for them in the past, publicly traded owners devised business models that were appealing and sale-able to Wall Street and the institutional investors.  There were companies that were paying out based on spot VLCC market exposure, companies that were ‘yield driven’ irrespective of underlying shipping market conditions, capesize shipowners with full spot market exposure and a ‘China play proxy’ positioning, dry bulk owners to reflect the ubiquitous Baltic Dry Index (BDI); there were even owners that moved into the ice-class products tanker market, and post-crisis, there were plans for crude oil ice-class tanker IPO to exploit the lightness of such being in the public capital markets…

‘Mono-line’ shipping business models definitely have their advantages.  They optimize economies of scale, operational leverage, cost savings, and critical mass of modern tonnage to entice major charterers and trading houses, etc One additional benefit of such business models is that it’s easily understood and explained to the investment community, without undue complications and multiple layers and overlaps with inputs from other market segments and industries.  For example, for a VLCC owner of ten vessels trading on the spot market, the financial model was nice and neat: capital investments and financial expenses were known, operating expenses contracted to third parties at known daily rates were plugged to the financial model, and only the projection of future VLCC rates was the big unknown. Modeling out a year or so was rather easy…and unquestionably worked lively when the times were great.

Fast forward to the lower arch of the business cycle, and canvassing the publicly traded shipping companies, it seems that shipping companies active in markets with a narrow focus that appealed to the investors in the past, have their fair share of problems.  After all, if the VLCC market is oversupplied and in a burning cash mode for more than a year now and with the underlying economics of the market still unfavorable, a narrowly focused VLCC owner has few options…the market is the market, and no much can change in shipping in the short term (sparing a geopolitical or macro-economic event or event of unforeseen nature).  However, if this particular VLCC owner had also exposure to other market segments such as product tankers or dry bulk vessels, or possibly in other horizontally integrated business such as ports, terminals, storage facilities, etc., then, they might have had a better chance… Of course, all shipping segments are highly correlated, and any diversification, whether vertical or horizontal, would not save from low freight rates, but might have increased the chances of survival…maybe ‘lard’ rather than ‘leanness’ make better buffers in shipping…

© Basil M Karatzas, 2011.  No parts of this blog can be reproduced in any way by any means under any circumstances without the prior written approval of the owner of the blog.  Copyright strictly enforced.

This blog is only intended for entertainment and discussion purposes; no responsibility can be assumed for taking or failing to take any action upon information contained in any part of this blog.

Should you desire to discuss contents of the blog or obtain commercial advise or opinion, please feel free to contact us at info@bmkaratzas.com.