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Year-end surge salvages earnings

TANKER companies ended 2007 on a high note. Shares in Frontline, the world's biggest crude-oil shipper, ended the year 55% higher than they started it. Shares in Overseas Shipholding Group (OSG) rose by 31% over the 12 months. Teekay's fourth-quarter initial public offering for its oil-tanker business, Teekay Tankers, raised $224m.

Things could have been very different. In the third quarter, a number of companies, including OSG America and Belgium's Euronav, were reporting losses, with demand falling as evidence of the US and global economic slow-down emerged. At the top end of the market, Frontline's third-quarter net income totalled $24.2m, with a cumulative $372m for the nine months ending 30 September 2007. The company said the earnings – released before the end-of-year surge – reflected a "substantially weaker spot market". In the fourth quarter, however, it posted net income of $202m, boosting full-year earnings to around $0.57bn, as demand picked up and the supply of available shipping – reduced because of an oil spill in South Korea – fell (see box). In 2006, Frontline's net income totalled $0.52bn, while two years earlier it surpassed $1bn for the first time.

More telling is the slump in day rates during the period, which compound the gradual decline seen in recent years. Frontline's very large crude carrier (VLCC) rates averaged $45,800 a day during the first nine months of 2007 and were just $36,100/d in the third quarter – improving only at the end of the year. Average VLCC rates in 2004 – the tanker market's best year – were around $95,000/d. However, by December, the 2007 average had received a late boost, with rates reaching as high as $270,000/d.

Time-charter contracts – involving long-term contracts and giving shipping firms greater income stability – offer some protection from spot-market volatility. General Maritime, which operates one of the biggest medium-size oil fleets – with 10 Aframaxes and Suezmaxes on its books, all double-hulled – has about 67% time-charter coverage.

Some tanker groups have also sought protection from the spot market through fleet diversification. Teekay, one of those least exposed to the 2007 day-rate fluctuations, has moved into the gas market, as well as floating production storage and offloading (FPSO) vessels and other areas.

The company still has around $10bn in forward fixed-rate revenues on its books, with contracts spanning up to 20 years, but just a tenth of this, or $1.4bn, is from conventional crude-oil tankers. The biggest chunk comes from the liquefied natural gas (LNG) sector, with 13 vessels tied to contracts that will earn $4.4bn. Shuttle tankers account for a further $2.3bn in forward fixed revenues, while FPSOs will contribute another $1.8bn with five-year contract terms. For Teekay, this means fixed-rate revenues alone will more than cover all operating expenses in the coming years. Spot deals will go straight to the bottom line.

A one-stop marine solution

The idea of providing a one-stop marine solution for offshore production and transportation is not Teekay's preserve. OSG, for example, is also active in the LNG segment. But few companies can boast as diverse an energy fleet as Teekay.

There has also been a general increase in interest in dry-bulk operations -- unpackaged bulk cargo, such as coal, ore, cereals and cement – another Teekay specialty, with significant order-book growth in the past year. One large oil tanker group, Top Tankers, even changed its name during the year to Top Ships, to reflect its move into the dry-bulk segment. The company has bought six dry-bulk vessels to add to its 19 oil tankers.

Practically all tanker companies have invested heavily in new tonnage in recent years, partly to replace older single-hull vessels with double-hull ships, but also in new vessel types, with the LNG sector seeing particularly strong growth.

Acquisitions have been more difficult because of higher stock valuations, says investment group Bear Stearns. Nonetheless, some deals are being struck, at least in the dry-bulk sector. Deals include Excel Maritime Carriers' purchase of Quintana Maritime.

According to Euronav, rates in the tanker market are likely to be boosted as single-hull oil tankers due to be retired by 2015 are transformed for use carrying dry bulk goods. This will effectively shift tonnage over from the oil-transport market to the dry-bulk sector, tightening demand for remaining crude tankers. In its fourth-quarter 2007 results, released in January, Euronav was more optimistic about the coming year than in previous months. "The main change is the high number of prospective conversions of single-hull VLCCs to dry-cargo ships," it says.

Timing critical

But the timing of the vessel removals will be critical. The negative stance on single-hull vessels in South Korea following the Hebei Spirit oil spill in December (see box) – the largest in the country's history – could accelerate this drive. "The earlier they [single-hulls] go, the more pressure will be put on the market before the new-builds to be delivered in 2008 operate fully in the world fleet," says an analyst at a shipping brokerage.

Economies of scale and fuel efficiency

THE FIRST Q-Flex liquefied natural gas (LNG) tanker, the Al Gattara, one of the world's biggest gas carriers, delivered its first cargo of Qatari LNG to Japan in late December. With a capacity of up to 216,000 cubic metres (cm), Qatar's Q-Flex vessels are a big step-up from previous LNG ships – with the largest capacity among the existing world fleet, at 155,000 cm.

More Q-Flex vessels will enter service for Qatar this year, but even these will be dwarfed by the 266,000 cm Q-Max class vessels on order. By 2010, Nakilat, Qatar's state-owned gas-shipping company, aims to have a fleet of 54 LNG tankers, with an option for two more – 27 wholly owned, and 29 under partnerships with some of the world's biggest shipping companies (see Table 1). Eight ships are in the latter stages of construction at various South Korean yards and are due for delivery in the first quarter of 2008. The vessels will be deployed on long-haul routes to Europe, Asia-Pacific and North America.

Operator of the first Q-Flex vessels, OSG Nakilat – a joint venture of Overseas Shipholding Group and Nakilat – says the larger size means economies of scale significantly lower overall energy requirements.

The Q-Flex ships employ low-speed diesel engines in contrast to most previous LNG ships, which generally run on conventional marine steam-turbine engines. They also incorporate a first-of-its-kind re-liquefaction plant that cools boil-off gas, converting it back to liquid for return to the tanks. With the high cost of bunker fuel, energy efficiency and fuel consumption are priorities.

In 2007, Hyundai Heavy Industries built what was the biggest LNG carrier at the time for BP. The 155,000 cm British Emerald incorporates the first Dual-Fuel Diesel-Electric (DFDE) propulsion system on an LNG tanker. Although more expensive to fit than traditional steam-turbine propulsion, the system is more environmentally friendly and can help lower fuel costs, running on conventional diesel or gas. At speeds of 20 knots, the DFDE system has a fuel consumption of around 36 tonnes a day compared with a similar size steam-turbine ship, which would use around 163 t/d of fuel.

But fleet owners are challenging ship designers to come up with ever more imaginative solutions. One idea being trialled on other commercial vessel types is the use of giant sails, or kites, to harness the power of the wind and reduce fuel consumption. German company SkySails claims its towing-kite propulsion system can cut energy use on vessels by as much as half depending on wind conditions. Although the system is yet to be commercially deployed, initial results from tests on the 10,000 tonne MS Beluga SkySails show a 10-15% fuel saving. On a lengthy voyage this could bring substantial cost savings.

Although the system might not be enough to drive the biggest oil tankers – which can be more than 50 times larger than the MS Beluga SkySails – it may offer potential for smaller products carriers, not just for fuel savings, but also environmental benefits (see box p23).



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