Tanker Shortage Spurs Freight-Rate Rise, Adds to High Oil Price

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11/10 11:43 Tanker Shortage Spurs Freight-Rate Rise, Adds to High Oil Price By Bradley Keoun

Stamford, Connecticut, Nov. 10 (Bloomberg) -- In an office building overlooking the Long Island Sound, shipbroker Keith Fischer surveyed a white marker-board where the names of three oil tankers had been scribbled in erasable ink.

A major oil company had just told his firm, Odin Marine Inc. of Stamford, Connecticut, that it wanted to ship 600,000 barrels of crude oil from the Arabian Gulf to Thailand in late November. According to Fischer's charts, the three tankers on the marker- board were the only ones available for the trip.

``These two ships were built in the 1970s,'' Fischer said, pointing to the first two names on the list. ``They're so old, the oil company won't even touch them.'' The third vessel, a late- 1990s model, ``might be the only ship that meets the company's standards,'' he said.

That lone boat won't come cheap.

A limited supply of modern tankers has led to a tripling of shipping rates to their highest level since the 1973 oil crisis. That's made it more expensive to import oil into the U.S., the world's largest energy consumer, and boosted the cost of oil already close to its highest price since the 1991 Gulf War.

At the heart of the rally is mounting concern by companies about the high costs of oil spills, from the expense of cleanups to the risk of being labeled a corporate polluter. Since last December's spill of the tanker Erika off the coast of France, companies such as Exxon Mobil Corp., BP Amoco Plc, Chevron Corp. and Total Fina Elf SA have stopped chartering 1970s-era ships that don't have the anti-pollution features of modern tankers.

Rising Costs

It now costs almost $2.50 a barrel to ship oil to the U.S. Gulf Coast from Saudi Arabia, according to Bloomberg estimates. That's up from about $1 a year ago. The difference translates to an increase of about 4 cents in the average U.S. price of gasoline, which now fetches about $1.50 a gallon.

Rising freight prices are ``just another thing that's causing spikes in oil prices right now,'' said Marianne Kah, chief economist at Conoco Inc., the fourth-largest U.S. oil company. ``If it costs more to deliver crude oil, the refineries have to pay for it, and they pass that on to the consumers.''

While consumers are paying more, higher freight rates have revived profits in the $30 billion tanker industry, which slumped during the 1990s when there was a glut of ships. Shares of Teekay Shipping Corp., based in Nassau, Bahamas, have more than doubled in the past year. Stamford, Connecticut-based OMI Corp. and Hamilton, Bermuda-based Frontline Ltd. also have doubled.

Tanker companies with the most modern ships are seeing the most demand. Since December, Teekay has raised its day rate to $40,000 from $12,000 for an Aframax-class tanker, a mid-sized ship that carries about 700,000 barrels of crude oil.

Oil companies are willing to pay top dollar because they are ``extremely sensitive to their reputations, and they're competing to get the modern tonnage,'' said Bjorn Moller, president and CEO of Teekay, which owns 2.5 percent of the world's tankers.

Freight rates are expected to remain high for at least two more years because shipyards are full and cannot meet demand for new tankers, analysts say.

Growing Demand

Demand for tankers is expected to grow by 2 percent this year as oil companies are shipping more oil than last year, said S. Magnus Fyhr, a shipping analyst with Jefferies & Co. in Houston.

The Organization of Petroleum Exporting Countries, whose member nations account for 40 percent of the world's oil, have boosted production by about 15 percent from a December 1999 low of 25.5 million barrels a day as global energy use has increased.

``Unless you use the old tankers, you're going to have a scarcity of available tonnage,'' said Peter Anker, managing partner at Oslo, Norway-based shipbroker R.S. Platou. ``There is a shortage in the sense that you have to keep paying more and more for the ships.''

While there are hundreds of older ships available among the world's 3,750-tanker fleet, oil companies have grown increasingly unwilling to use them.

The Erika was a 25-year-old Maltese tanker that broke in two in heavy seas off the coast of Brittany, France, on Dec. 12. About 70,000 barrels of heavy fuel oil spilled into the sea, fouling about 250 miles of French shoreline and killing hundreds of thousands of birds and shellfish, according to Greenpeace International.

Soon after the Erika sank, French authorities began calling for tougher restrictions on tankers. French President Jacques Chirac renewed that call after the Oct. 31 sinking of the Ievoli Sun. The 1989 Italian tanker was carrying about 40,000 barrels of toxic chemicals when it foundered in a severe storm. The extent and damage of the spill is not known.

Double Hulls

Since 1979, tankers have been required by international maritime rules to have segregated ballast tanks -- special compartments that isolate the oil from ballast water that is discharged into the sea. Tankers built after 1993 must have a double hull, with an inner layer of steel separating the oil from the outer hull.

A series of proposals now being considered by the United Nations' International Maritime Organization would speed up the scrapping of older tankers without these features beginning in 2003. About 35 percent of the world tanker fleet's tonnage would be scrapped in the next five years if the toughest proposals are approved, said Stephen D. Gengaro, an analyst at ING Barings in New York.

Even without stricter regulations, oil companies already are avoiding pre-1980 ships, said Jeff Goetz, head of research and consulting at New York-based shipbroker Poten & Partners Inc. About 800 of the world's tankers, or 21 percent, were built before 1980, according to InterTanko, the international association of independent tanker owners.

Pre-1980 models of Suezmax tankers -- a large class of tankers that can carry up to a million barrels of oil -- have all but disappeared from trans-Atlantic routes, Goetz said. The number of such ships chartered on the spot market for routes between West Africa and North America dwindled from 30 during the first half of 1999 to 2 in 2000, he said.

Western oil companies ``just don't want to engage the services of a vessel that might have a pollution risk,'' said Doug McCormick, assistant general manager of Texaco Oil Trading & Transport.

Insurance

Most insurance policies for tankers cover up to $1 billion for the cleanup of an oil spill, said John Sandercock, vice president of Shipowners Claims Bureau Inc. in New York. And while such policies may help with clean-ups, they offer little or no guarantee a company can rebuild its reputation after a spill.

The 1989 Exxon Valdez spill of 11 million gallons of crude oil into Alaska's Prince William Sound cost Exxon Corp., now Exxon Mobil, $3.5 billion in damages and cleanup costs. The company is appealing an Anchorage jury's award of $5 billion in punitive damages -- the largest in the history of the U.S. federal court system.

Freight rates probably will remain high for the next few years, until shipbuilders can catch up with demand for boats with more of safety features, shipping analysts say.

That's welcome news to tanker companies, which endured sluggish shipping in most of the years after the last shipping boom, during the 1991 Persian Gulf War. During the slump, ship owners were unwilling to place orders for new tankers that can cost as much as $77 million, said Jim Winchester, a transportation analyst at Lazard Freres & Co. in New York.

Now, rates have recovered, and shipbuilding companies have been deluged with orders for new tankers, Winchester said. South Korean shipbuilder Daewoo Heavy Industries Ltd. has received 25 orders for tankers this year, up from 11 in 1999, said Jin Han Lee, the company's regional representative in West Caldwell, New Jersey.

Most shipyards already are booked for at least the next two years with orders for container and dry-cargo vessels, as well as cruise ships, Winchester said. And it takes about six to nine months to build a new tanker. Daewoo is now taking tanker orders for delivery in the second half of 2003, Lee said.

``I don't see tanker rates coming down for the next several years,'' Teekay's Moller said.

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-- Martin Thompson (mthom1927@aol.com), November 10, 2000

Answers

I think the last freighter to slide down the ways was in 1988. The US shipping industry does not have the dry docks to build a tanker. The US does not have 1 graving yard. Our merchant marine is non existant. I remember about a year ago Norfolk tried to build a passenger ship but finally stopped on the project. The US does not have one deep water port which means no supers can visit our ports. The supers lay off the coast and discharge into smaller tankers that shuttle back and forth until the cargo is discharged. I don't think the trades could support a ship building campaign. One of the problems the US has now is most jobs are service orientated or white collar. Shipyards are nasty places to work. I don't think professionals could be recuited to work in these environments.

-- David Williams (DAVIDWILL@prodigy.net), November 11, 2000.

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