The contribution of shipping to the growth and prosperity of the global oil industry has been immense. Shipping has been and still is an integral part of the development of the oil industry for the simple reason that the main centers of oil demand tend to be a considerable distance away from the producing areas, and that shipping offers the most economical and most flexible way of transporting oil in bulk.
More than two-thirds of oil consumed worldwide is transported by sea from the producer to the consumer in a dedicated fleet of 2,619 tankers totaling 294 million deadweight tons1 (dwt). While the oil trade is dominated by the world’s super-majors, independent oil companies, traders and refiners, the vast majority of shipping is done by independent shipowners.
The tanker industry is nearly 120 years old and both the fleet and the volume of oil transported worldwide by these highly specialized vessels have grown dramatically since the first tanker set sail in 1886. The tanker industry has seen significant technological advancements since that time. Vessels have increased dramatically in size and carrying capacity and they have progressed from coal-fired engines via steam-turbines to diesel engines. Other innovations, including safe tank venting, inert gas systems, crude oil washing, sophisticated engine room control systems and satellite navigation all have had a significant impact on the safety and efficiency of tanker operations. One of the most significant innovations in recent years has been the double hull design, which became mandatory from the early 1990s. International regulations will lead to the phase-out of single hull tankers within the next 10 years.
International shipping is heavily regulated. As a result of shipping’s inherently international nature, regulations concerning the industry are developed at a global level. It is vital that companies worldwide are subject to uniform regulations on matters such as construction standards, navigational rules and standards of crew competence. In the shipping industry, the principal regulator is the International Maritime Organization (IMO), which is the United Nations agency responsible for the safety of life at sea and the protection of the environment. In recent years, safety and quality standards covering the seaborne transportation of crude oil and petroleum products have been raised significantly and mandatory international regulations have become much more stringent. This requires continuous investment in systems, equipment and training, an area on which large, public companies can focus. OSG, for example, employs a dedicated head of Global Safety and Quality who is responsible for setting, implementing and maintaining OSG’s worldwide policies and targets of safety, quality and protection of the environment. The increasing focus on safety and quality has reinforced a trend towards consolidation. While most tanker companies are still privately owned and control only a handful of vessels, a group of publicly listed owners have emerged that is actively consolidating an industry that has traditionally been very fragmented.
Bulk shipping markets in general, and the tanker market in particular, are highly cyclical. The balance between vessel demand and supply drives day-rates. Add market psychology to the mix, and it is no surprise that tanker rates can be quite volatile. During periods of high volatility, day-rates can move by 50 percent or more within a few days. While revenues can fluctuate significantly, most shipping companies have a high proportion of fixed costs. In these circumstances, well capitalized companies with strong balance sheets have an advantage. Tanker companies will try different strategies to maximize the utilization and profitability of their fleet. In this regard, shipping pools represent one strategy to manage the volatility in day-rates by creating greater asset utilization and cost efficiencies. OSG, for example, participates in VLCC and Aframax pools and a Panamax joint venture: Tankers International, Aframax International and Panamax International.
The growth in tanker demand over the years has been driven primarily by three main factors: increases in worldwide oil consumption, growing import dependency of the major oil consuming countries and longer voyages.
Increasing Oil Consumption. Since the early 1980s, global oil consumption has enjoyed sustained growth, driven primarily by demand for transportation fuels. Traditionally, the largest oil consumers have been situated in the established industrial economies of the world, such as the United States, Western Europe and Japan. However, demand for oil has increased the fastest among consumers in newly industrializing countries, including those in Southeast Asia, China and India. China, for example, currently consumes less than 10 percent of global oil but has absorbed the equivalent of more than 40 percent of every extra barrel produced since 1999. In 2004, China surpassed Japan to become the world’s second-largest oil consumer after the United States.
Increasing Import Dependency. The demand for crude is growing substantially faster than supply in the major consuming regions. Whereas Chinese demand has increased by an average of 9 percent each year since 1999, its domestic oil output rose by an average of only 1.6 percent. Similarly, in North America, which accounts for over one-quarter of world demand, oil consumption has grown by 1.2 percent per year since 1999, while annual production has not changed materially. This growing import dependency is further accelerated by the progressive run-down of commercial oil stocks, as oil majors have sought to minimize inventory costs.
Increasing Voyage Lengths. The fastest-expanding oil exporters are located in the Caspian Sea, Africa and the Arabian Gulf, at considerable distances from their fastest-growing customers (such as those in the Far East) and accordingly, the average voyage length has been rising. Almost 60 percent of world oil exports originate from the Middle East, the Former Soviet Union (FSU), and Africa. By comparison, exporters located close to large consumers, for example, those located in the North Sea (West Europe), the Caribbean Basin (the United States) and Indonesia (Far East), have been losing market share. The world’s largest proven oil reserves are located in the Middle East, from which almost 40 percent of all seaborne crude shipments currently originate, more than twice its nearest regional rival. By virtue of both volume and the distances shipped, Middle East exports exert strong influence on tanker employment and hence tanker rates. For example, whereas it would require a fleet of approximately 5 million dwt to transport 1 million barrels per day to the U.S. Gulf from the North Sea, it takes 13 million dwt to do so from the Arabian Gulf.
While there is no standard industry-wide categorization of vessel types, crude oil tankers are customarily divided into the following four market segments according to their deadweight size:
VLCCs (Very Large Crude Carriers) are typically used for the long-haul trades originating from the Arabian Gulf and West Africa, with occasional voyages from North Africa and the North Sea.
Suezmax tankers are mainly employed in the Atlantic Basin for exports from West Africa, the North Sea and the FSU.
As a result of their flexibility and size, Aframaxes are deployed in much more diverse trading patterns than the larger tankers and transport crude from virtually all the major crude exporting regions in both the Atlantic and Pacific. Aframax crude carriers are typically deployed on short haul or distributive routes where draft or other size restrictions prevent the use of larger tankers or where crude oil is produced or consumed in smaller quantities.
Panamax tankers are used for crude oil and petroleum products. Modern Panamax tankers employed in the crude and fuel oil trades have carved out a niche in the Caribbean and Latin American region as a result of their ability to transverse the Panama Canal and because size restrictions in certain ports restrict the use of larger tankers.
1 Tanker fleet as per April 1, 2005. Excludes vessels < 10,000 dwt, chemical tankers and special purpose vessels. Source: Clarkson Research Studies