Energy Transport: The Boom Continues

Friday, July 09, 2004
With 21 percent of existing VLCCs and about 35 percent of both the Suezmax and Aframaxes fleets still on order, tanker owners may be starting to wonder how far today’s boom rates can last. However, according to the latest edition of BP’s stalwart Statistical Review of World Energy, now in its 53rd year, there will be hefty shipping requirements for a long time yet.

Energy demand continues to rise – last year, primary consumption rose by 2.9%, as a result of the “global economic recovery and the ongoing boom in China”. China’s oil consumption rose to 5.38m b/d, up 11.5% from 5.03m b/d in 2003, accounting for about 40% of the total global increase. Analysts’ forecasts with regard to China’s future consumption are staggering – the International Energy Agency believes China will be taking 13m b/d of oil by 2010.

There is plenty of crude oil left – more than 40 years’ supply at present consumption levels – but the reserves lie far away from the main consuming areas. Similarly, with natural gas, there is sufficient supply for over 60 years but again, much of it will require a long sea haul to bring it to market. Recent heavy capital investment in VLCCs, Suezmaxes and LNG carriers should prove to be money well spent.

The foreword to the Review, by group chief executive Lord Browne of Madingley, notes four key points. Firstly, the researchers have found that reserves continue to grow across the world year-on-year, and there is considerable scope for them to rise further in future, notably in Russia. Secondly, whilst we are all accustomed to moaning about the cost of petrol at the pumps, a price of $40 a barrel for crude oil today is still only half the cost in 1980, in real terms. And, since then, according to Lord Browne, “an effective global market and continued advances in technology have enabled the world to absorb a 25% increase in daily oil demand”.

Thirdly, the group’s chief executive notes double digit growth during 2003 in natural gas trade. “The energy mix is being balanced by continued growth in demand for natural gas”, he declares. “Technical advances have encouraged gas consumption, as has the desire to move to fuels that emit less carbon”. Lord Browne’s fourth point again relates to China, pointing out that oil demand there has doubled over the last ten years. “Chinese decisions on imports and trading links”, he says, “for both oil and natural gas, will be a major influence on the world energy scene from now on”.

It is perhaps with this in mind that China Ocean Shipping is believed close to signing contracts for ten VLCCs from Nantong Cosco KHI Engineering. If the reported price of around $700m proves correct, the company has struck a mean deal. Latest reports from some brokers indicate that prices for new VLCCs in the world’s main yards are now more than $90m and owners of a 2001-built vessel are currently inviting offers for prompt delivery, also in excess of $90m. Sale and purchase activity is frantic, with nearly as many second-hand VLCC sales so far this year as in the whole of 2003. And it’s not just single-hulled tonnage that is proving attractive: a number of companies have been buying up single-hulled tonnage, presumably hoping to milk the market at record rates until they are compelled to scrap them. Single hull prices have risen dramatically as a result – by almost 50% in the first half.

The $64,000 question – will the market last? Well, most analysts believe it certainly will for the foreseeable future, perhaps not at today’s rates, but nevertheless at good levels. Shipyards are full, they point out, and supply is therefore constrained. Energy demand is buoyant, meanwhile, and the phasing out of tonnage in various tanker categories will limit fleet growth over the next few years.

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