I.M. Skaugen - Annual Report 2004

A report by Maritime Strategies International Limited (MSI)
www.msiltd.com

The company has worked hard over the past 10 years to build up a credible and respected operation and the results of this work are now starting to be fully realised.

The Aframax market review, 2004

As oil tanker owners bask in the glory of another freight rate bonanza, the mood is extremely bullish, with many expecting oil demand to continue at late-2004’s run-away pace. The cause of the excitement is not hard to find – Aframax spot earnings have averaged nearly US$50,000 per day during 2004 and at end of the year a one-year charter could be had (in theory at least) for US$38,000 per day. Even more remarkably, an owner lucky enough to secure a three-year charter could expect to lock in at US$30,000 per day. This is in line with average spot earnings over the last three years but, if our predictions prove correct, represents a very generous offer for the next three years.

Prospects for tanker employment are bright. For 2004, the global economy is on target to grow by over four per cent. China has finally started to deliver on its promise as the ‘next big thing’ in the global economy and continues to drive our long-term outlook for oil consumption. With average annual consumption growth of 6.3 percent forecast to 2015, China will cement its position as Asia’s largest oil consumer. The stimulus from China will help to boost growth in tanker employment to an annual average growth rate of 2.6 per cent over the period 2003-15, compared with just 1.5 per cent per annum over the period 1993-02.

But the bullish long-term demand outlook cannot disguise the mounting dangers from near-term supply growth. Soaring freight rates have produced predictable supply-side responses from owners and total tanker new building contracting will approach 40 million dead weight tonnes (Dwt) again this year, the fourth time in five years it has passed the 30 million Dwt mark. For the Aframax sector, orders are likely to exceed 10 million Dwt for the third time in four years.

As 2004 draws to a close, tanker rates remain exceptional and it is possible that high levels of contracting will continue in the coming months despite rising vessel prices and higher financing costs - not to mention the shadow cast by the already mammoth order book.

To some extent, however, the damage has already been done. The Aframax segment is unusual in combining high levels of ordering with a large number of deletions (which will be close to three million Dwt in 2004, for the third year running), reflecting the disproportionate impact of the IMO regulations on this vessel size, compared with larger crude carriers.

The removal of so many old Aframaxes means the order book measured as a percentage of the fleet older than 20-plus years will exceed 300 per cent for this segment at the end of 2004. And, with so little left in the tank in terms of scrapping candidates, this ratio should be setting alarm bells ringing with regard to the possible depth and duration of the next tanker market downturn.

Total tanker fleet capacity is forecast to expand from 305 million Dwt at the end of 2003 to 373 million Dwt by the end of 2008 - the highest sustained growth since the 1970s. This net increase comprises a monumental 136 million Dwt of new deliveries, less only 66 million Dwt of scrapping. For the Aframax segment, the fleet is forecast to grow to 90 million Dwt from 64 million Dwt over the same five-year period.

Even if crude oil demand continued to grow at the rates seen in recent years, it would be a tall order to offset this much new supply. The bad news is that the latest forecasts from the International Energy Agency (IEA) predict that oil demand growth will slow next year and we expect employment rates to fall. Tanker earnings will remain healthy through much of 2005, but a fall from record highs is inevitable. Thereafter, we expect rates to deteriorate steadily, bottoming out in 2007 some 40-60 per cent below 2004 levels.

OIL TRADE AND U.S. IMPORTS
Global oil consumption expanded by 3.5 per cent in 2004 - a rate not seen for more than a decade. The result has been a second consecutive year of very strong trade growth. Much of the impetus has come from Asia - and especially China - but North American consumption has also taken off on the back of a buoyant economy. US oil imports rose 3.6 per cent in the first nine months of 2004. Moreover, during four consecutive months in 2004 (May through to August), US crude oil imports exceeded any other month since 1999.

The surge in demand boosted imports from the Middle East by 2.4 per cent during January to September, the increase partly reflecting the fact that there were no temporary dips in supplies as in 2002 and 2003. Middle East exports to the Atlantic were constrained, however, by high demand in Asia. Availability was also hampered by faltering Iraqi production, where the early post-war promise for exports faded during 2004. Iraq’s oil infrastructure continues to be subject to repeated sabotageattacks, with the northern export pipelineto Ceyhan a key target. Although southern exports via the Arabian Gulf have stabilised, exports via Ceyhan have been sporadic.

With the Middle East constrained, West African shipments rose impressively – by 14 per cent to 1.5 million barrels a day-while some of the minor suppliers shipped more to the US - notably Algeria and Ecuador, which recorded 194 per cent and 179 per cent increases, respectively.

Perhaps most surprising was a sharp fall in imports from the FSU and the North Sea. In the FSU, exports have been constrained by capacity on both pipelines and ports, while North Sea production declines may have hampered shipments.

MSI’s medium-term outlook for US imports predicts a reversal of this pattern. The FSU’s share is projected to grow based on the assumption that export capacity will expand during the second half of 2005 and much of the crude oil coming out of the Baku Tbilisi Ceyhan (BTC) pipeline ends up in the US.

Conversely, it is assumed that Asian demand sucks more oil east from West Africa. Consequently, our medium-term outlook for crude oil trade indicates that prospects for Arabian Gulf producers will be more limited after 2005, while fast expanding production in West Africa will also eat into the Arabian Gulf’s gains in market share made during 2003-04.