Outlook For Construction Of U.S. Coastal Tankors
Building tankers for the domestic trade has traditionally been a profitable market niche for U.S. shipbuilders. The market is limited to U.S.
builders and prices have not been driven down by low cost competition. Construction of tankers for Jones Act trade has remained profitable in an international market where prices have fallen 20 percent over the past several years. The following is a brief forecast of construction requirements in this market niche for the next five to ten years. Crude Carriers The major oil producers in Alaska have long claimed that output of the Alaskan fields has been in an irreversible long term period of decline since peaking at 2.0 mbpd in 1988. To some extent this is true, as production in 1996 was 1.42 mbpd — down from 1.49 mbpd in 1995, 1.56 mbpd in 1994, 1.58 in 1993 and 1.71 mbpd in 1992.
Recent analyses have suggested a "renaissance" is underway in Alaska that will stabilize production in the foreseeable future. For example, Arco expects to stabilize its production at 350,000 bpd over the next five years, whereas last year the company forecast its Alaska production would fall below 300,000 bpd in 1999. Reflecting this upbeat outlook, Arco plans to invest $1.7 billion and BP plans to invest $3.5 billion in Alaskan fields over the next five years.
A number of factors are driving field production stabilization. Perhaps most important has been traditional underestimating of field potential by major producers to pressure the State on royalty payments. There have also been significant improvements in reducing costs for field development.
According to Arco, lease and support costs in Alaska have been cut from $2.29/bbl in 1991 to $1.54/bbl in 1996. Development costs have been cut from an average of $3 million to $2 million per well and facility hook-up costs have been cut from $1.5 million to $0.6 million per well over this period. In addition, there have been a number of recent discoveries of small to midsize oil accumulations on the North Slope.
The stabilization of Alaskan crude production has coincided with OPA 90 regulations that are cutting into the number of ships available to transport crude to California and elsewhere. This has produced a need for replacement tankers.
There are currently 34 tankers operating in the Alaskan trade, with total capacity of 4.1 million dwt. Taking into account OPA phase-outs and the addition of two Arco tankers, which are now firm orders at Avondale, 20 tankers with 2.5 million dwt will be available for the trade in 2002. The number will decline to seven tankers with one million dwt in 2007.
In other words, 61 percent of today's capacity will be available in 2002, and 24 percent of today's capacity will be available in 2007. These figures will be 67 and 29 percent respectively if S/R Mediterranean is permitted to return to the Alaskan trade. The question: Will this much lower capacity be adequate to accommodate the transport requirement? While remaining capacity may be adequate for 2002, it will likely be lower than needed in 2007, assuming new fields and improved techniques continue to stem the downturn of production in Alaska well into the next decade. The capacity problem will be particularly severe in the years following 2007, as only S/R Baytown and the two Arco ships now on order will remain after 2010.
To meet future requirements, International Maritime Associates envisages Arco exercising its option for three ships at Avondale and BP/Exxon ordering four to six tankers through an intermediary. Assuming these ships are delivered over the next five years, capacity in 2002 would be 83 to 88 percent of the current level and 46 to 51 percent of the current level in 2007.
If these orders occurred and S/R Mediterranean reentered the trade, the percentages would be five to six percent higher.
Should environmental restrictions on developing the wildlife Our best estimate is that the trade in 2007 will require five to 10 more product tankers than currently in service or on order refuge be removed, there could be further requirements for building new crude carriers five to 10 years out.
Product Tankers While refinery throughput in the U.S. has been rising, refinery capacity in the U.S. has not grown over the past 10 years. As shown in Figure 1 (below), capacity in 1996 is slightly below that of 10 years ago. In contrast, U.S. product consumption has increased significantly during this period — with increased refinery utilization handling part of the increase.
There is little possibility that U.S. refinery capacity will increase significantly in the future, as environmental restrictions continue to create a serious constraint on adding new capacity. With tightening refinery capacity and growing product consumption, output from U.S. refineries will be increasingly destined for consumption centers in the Midwest via pipeline — with consumption centers in the Northeast and Southeast increasingly satisfied by product imports.
As a result, there is little likelihood that demand for coastal product tanker shipping will increase in the near future. At best, demand for coastal product tanker transport will remain relatively steady over the next five to 10 years. The more likely situation is continued gradual decline in requirements for coastal product tankers.
There are now 48 product tankers in coastal service, with total capacity of 1.9 million dwt. Taking into account OPA phaseouts and counting the five ships on order for Hvide, there will be 43 product tankers in service in 2002 with capacity of 1.8 million dwt. If the five T-5 tankers now on charter to MSC are redelivered to the owner, the number of ships and total product tanker capacity in coastal service in 2002 will be the same as at present.
Looking 10 years out, the number drops to 29 tankers with capacity of 1.2 million dwt. Assuming the T-5 tankers are employed in the coastal trade, there would be 34 tankers with capacity of 1.4 million dwt. These figures represent 64 and 72 percent, respectively, of current capacity.
Based on these numbers, there does not seem to be a requirement for additional coastal product tankers through 2002.
Capacity five years from now, without any additional orders being placed, will be equivalent to that of today. However, demand for domestic tanker shipping in 2002 will likely be somewhat lower than today's demand.
There appears to be a requirement for additional ships between 2002 and 2007. Our best estimate is that the trade in 2007 will require five to 10 more product tankers than currently in service or on order. Orders for 5 to 10 ships would bring capacity to 1.4 to 1.6 million dwt in 2007, which would be 75 to 85 percent of current capacity. This would accommodate a decline in demand for shipping of 15 to 25 percent.
Redelivery of the five T-5 tankers could negate the requirement for additional orders. With these five ships in coastal service, orders for five to 10 new tankers would bring capacity of domestic product tankers in 2007 to 85 to 93 percent of current capacity, which seems on the high side given the declining demand for coastal shipping.
Chemical Tankers There is a relatively small but stable flow of chemicals and specialty liquids in U.S. coastal trade. Currently, 18 tankers are employed in this business, with total capacity of 590,000 dwt. OPA 90 restrictions will result in about 25 percent of these ships being phased out over the next five years and another 10 percent phased out between 2002 and 2007.
Some of these vessels are expected to be replaced in order to continue to service the chemical/specialty liquids trade.
International Maritime Associate's best estimate is that two or three chemical/specialty tankers will be ordered over the next five years to replace ships taken out of service. ELECTRONIC MARINE SYSTEMS, INC.
800 Ferndale Place Rahway, NJ 07065 732.382.4344 732.388.5111 fax [email protected] e-mail Jones Act All of the above is based on the assumption that "build American" restrictions continue to remain in effect. Eliminating these restrictions could impact the possibility of building replacement tankers for the coastal trade.
Even the threat of the Jones Act restrictions being eliminated could impact the timing and/or flow of orders. At this time, the Jones Act appears to be intact — but there is a strong opposing force trying to get it changed.
A new study by IMA, Shipbuilding Industry Outlook 1998, examines future demand in major shipbuilding market niches, forecasts construction requirements and assesses the competitive posi- 10 Circle 239 on Reader Service Card tion of key players.
The study is available for $1,350. To order, please contact International Maritime Associates, Inc., 700 New Hampshire Ave., NW, Suite 118, Washington, DC 20037 USA (tel: +202-333-8501; fax: +202-333-8504; e-mail imaassoc@msn. com GE Capital Services And Sea Containers To Form Joint Venture Sea Containers Ltd. and GE Capital Services have signed a memorandum of understanding to create GE SeaCo Ltd., a joint venture company which will operate the companies' marine container fleets.
The proposed deal is subject to various conditions, including the conclusion of definitive agreements which are now being drafted and regulatory approval.
The GE capital fleet is currently operated by Genstar Container Corp., a GE Capital company. GE SeaCo will acquire Sea Containers' container depots and may also acquire certain Sea Containers' subsidiaries engaged exclusively in marine container leasing.
GE SeaCo will establish a wholly-owned U.Kbased service company to be called GE SeaCo Services Ltd. which will provide management services. Bermuda-based GE SeaCo will operate the existing combined marine container fleets, totaling approximately 1.2 million TEUs equivalent units under master lease agreements with the existing fleet owners. All current container leases to customers will remain in force.
Sea Containers' fleet consists in large measure of specialized container types while GE Capital Service's fleet is weighted more towards standard dry cargo and refrigerated containers. The combined fleets had an original cost of $3.5 billion.
In 1996, the combined rental revenue of the existing Sea Containers and Genstar marine container fleets was $590 million. Future profits from these fleets after master lease payments will be apportioned approximately 30 percent to Sea Containers and 70 percent to GE Capital.
GE SeaCo expects to purchase approximately $200 million worth of containers in 1998, with profits on the GE SeaCo-owned fleet to be shared equally between the joint venture partners. A 15-year revolving credit, guaranteed 50 percent by Sea Containers and 50 percent by GE Capital Services, will be put in place to fund such purchases. Securitized financing may also be used in due course to fund container additions. At closing, GE Capital Services will also be investing $10 million in newly-issued Sea Containers' Class