Independent tanker owners may have to accept that a large chunk of that independence will be ceded to IMO on 1 January 2020
One of the more philosophical take-aways from the 12th Annual Capital Link Shipping & Marine Services Forum held during London International Shipping Week was that IMO 2020 is another blow to tanker owners’ ability to act as they see fit.
The process has been underway ever since the Exxon Valdez incident and the introduction of the double hull tanker, a process that took a decade and cost crude oil tanker owners an estimated US$200Bn.
This time around, the impact of IMO 2020 legislation will be felt across the whole of the shipping industry. Marsoft’s president Dr Arlie Sterling illustrated the magnitude of the forthcoming event with two carefully chosen questions*:
Dr Sterling noted that the event panel owned and operated over 200 tankers. The panel comprised of:
Dr Sterling said that banks now play an increasingly regulatory role in the make-up of a tanker company’s fleet. Under the Poseidon Principles, a bank will declare the carbon footprint of its portfolio, driving banks toward financing lower carbon-emitting tankers. Of course, this is to be lauded, but it does take away flexibility. He noted that the banks involved have also commented that it will become more difficult to finance ships after applying these principles.
Mr Durham, standing in for the company’s found Nikos Tsakos, admitted to not being a shipowner himself, but observed that the highly regulated banking sector was imposing regulations on the tanker sector. In his opinion, that seemed to be an extension of a bank’s role, and clearly stepped into IMO territory.
Mr Burke had a different view, pointing out that in the past, the expected life of a tanker was 20 or even 15 years. In contrast, the life expectancy of a railcar was 40 years and an aircraft 30 years. No one ever questions how old an aircraft is before buying a ticket – but 20 years is imposed on the tanker fleet. This imposition of a finite life expectancy stemmed from phasing out the single hull tanker fleet, but he questioned the orthodox view, noting the environmental impact of scrapping and replacing tankers at 20 years old. He pointed out that it takes an enormous amount of energy to produce the 40,000 tonnes of steel that goes into a VLCC, but there has been no environmental study on the impact of such activity.
As per the product tanker panel, the moderator asked the panellists about investment plans. Dr Sterling felt that as this was a crude oil tanker panel, the amount of free money to invest was US$100M.
Mr de Stoop said: “I would buy an LNG-powered VLCC.”
Mr Pribor noted: “We renewed our fleet at the bottom of the cycle at the cost of US$600M and US$50M allocated for scrubbers. If I had another US$100M more it is now time for capital allocation and deleveraging and to return cash to shareholders.”
Mr Burke added: “If return on equity is going to be higher for lower risk, as we are being told, then that is what I would do.”
Mr Durham said: “Some conferences ago I said we were going to expand into LNG and in a year or two have six LNG carriers. That did not happen. So this time, I would use the money to put a deposit on three or four new LNG carriers. That is the direction we are going in.”
The Bloomberg view
Also speaking at LISW on the subject of crude oil tankers was MSI’s director, oil and tanker markets Tim Smith. Bloomberg hosted the event at the news providers’ new and stylish headquarters in London and opened with a look at the winners and losers in shipping stocks.
Bloomberg Shipping Stocks year-on-year % change:
Bloomberg Marine Shipping Index +3.92%
Source: Bloomberg (Sept 2019)
As can be seen, many of the winners were tanker stocks, and Mr Smith picked out some of the oft-overlooked elements that are driving the crude oil markets.
He noted that so far in 2019 there had been a divergence in the fundamentals. On the supply side, the first two quarters of 2019 saw an increase in deliveries of tanker of 10,000 dwt, but in the same period there was a fall in output from the main OPEC centres due to enforced cuts and turbulence in some key countries.
Mr Smith noted that the falls in output from the headline regions of Iran and Venezuela are not necessarily balanced by a huge increase in US crude oil production from the shale oil basins. That production is mainly exported to Asian countries, increasing ton-mile demand for tankers. It is in India, South East Asia and China that the expansion of refinery capacity is taking place. That will lead to an increase in crude oil tanker demand. Some of this refinery capacity increase will be immediately absorbed by the expected demand from IMO 2020, said Mr Smith.
These headline increases mask, in Mr Smith’s opinion, an important feature of the crude oil trade and explain why there has not been an increase in earnings that higher exports might normally generate.
The reason for this is that US crude oil imports have been dropping sharply and could decline by as much as 10% in 2019. This decline in imports has been a shadow feature since 2015, and the reduction in US crude oil imports from the Middle East is having an important dampening effect on crude oil tanker demand. This is having the knock-on impact of not absorbing tanker supply. Had the rise in US crude oil exports been against a background of steady US crude oil imports, that would have had a positive impact on the absorption of tanker supply.
* Answers to Marsoft questions: