May 08, 2014

Changing the tanker game

The oil tanker industry is in for a bit of a shakeout in the next decade or sooner.

The first reason is the likelihood that the United States of America will be likely swimming in oil on the back of the shale boom during this period. With the highest reserves today since the Great Depression (400 million barrels, excluding strategic reserves), US oil imports will be the lowest in two decades in 2014. They are still significant, though; the US will still import 42 percent of the oil it needs this year. Telling is another statistic- less than ten years ago, in 2005, the US imported 60 per cent of its oil.

This huge change is tempered by the fact that US laws (of WWII vintage, when oil was seen as a strategic asset) currently bar the export of crude oil, although refined products are not restricted- in fact, the US is already a net exporter of petroleum products.  Also complicating things is the fact that US refineries are built to handle the heavier oil it traditionally imports, not the lighter shale being produced at home. There is a move to reverse the export ban, though, and this may well happen if shale production continues to be on the ascendant and reserves become even healthier. I bet, also, that plans for new or modified refineries are already on the anvil. Resistance to the environmentally damaging fracturing process may put a spanner in the works periodically, though I am cynical enough to see that it will not make a significant impact on production.

Another very interesting news snippet that may change the oil game- the U.S. Naval Research Laboratory’s (NRL) says that they have developed a “game changing technology” for creating fuel from- hold your breath-seawater. This is not a pipe dream; the NRL has already flown a replica of a WWII plane using this fuel, which is extracted after removing the carbon dioxide from seawater while simultaneously producing hydrogen. 

Said the NRL’s Dr. Heather Willauer, “This is the first time technology of this nature has been demonstrated with the potential for transition, from the laboratory, to full-scale commercial implementation.” This fuel could be commercially viable (at 3 to 6 USD per gallon) within the next seven to ten years, the NRL says. 

It is probably too soon to herald oil from water as the next big thing; there may be many a slip along the way. But the oil industry will be stupid if it writes off the possibility that this can happen, or that this possibility is a huge threat that can change the game forever. 

What will all this do to shipowners?

Well, I am slowly getting convinced that owners of all kinds of ships are going to find it extremely difficult to identify, build and operate the kind of ships that will remain relevant over the next twenty years. This is because I believe that taking a long term call- on trading patterns, fuels, volumes, environmental regulatory costs, size of ships and a hundred other things- is becoming so complicated that it is already close to impossible. 

In the tanker market, this problem will be magnified manifold because it will not just be the traditional markets that will disappear or metamorphosise- the cargo itself might; to some extent, it already has. Added to this will be other variables to do with ships that cannot be predicted, some of which have been listed already. 

The possibility that new tankers delivered today are likely to be the wrong ones within ten years is real. The threat that a brand new ship costing tens of millions of dollars may be worth scrap within a decade should give tanker operators cause for concern, if it is not doing so already. Adding to the nightmare will be this sobering question- If cargoes and trading patterns cannot be predicted with sufficient accuracy any longer, will there come a time when the financial risk associated with long-term shipowning becomes unacceptable?

Is that time already here? 


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