The Hindu Business Line : Tanker newbuilding goes full steam ahead

Crude oil prices are soaring and the prices of new-building tankers used for transportation of oil too have skyrocketed in past few years. Yet, there is no let up in shipping lines, including those carrying Indian flag, queuing up for acquiring new tanker tonnage. In shipping, the cost of acquisition is critical as the ship-owner has to service the cost of ship through its life in a highly volatile freight market.

SCI add to tonnage

Shipping Corporation of India (SCI) which, with a total tanker tonnage of 3.71 million DWT accounting for 44 per cent of the country's total tanker tonnage of 8.47 million DWT, proposes to add to its tanker tonnage by an additional 1.5 million DWT or so in next few years. The shipping line acquired two Very Large Crude Carriers last year and has placed orders for two more and plans to acquire four Aframax and two MR crude tankers and eight products tankers — six LR I and two LR II types.

Great Eastern Shipping, another major player in crude and petroleum products' transportation, has a total tanker tonnage of 2.87 million DWT and hopes to add another 0.37 million DWT between 2007 and 2009 by acquiring seven product tankers, five MR and two LR I types. Essar too is believed to be planning to add to its tonnage to facilitate crude and product transportation, especially in view of the imminent commissioning of its refinery.

Even a smaller player such as India Steamship, which operates only three tankers, has just acquired one Aframax crude tanker and placed orders for three more with the option to acquire a fourth. It proposes to build a fleet of 10 Aframax tankers.

International scenario

There are many reasons for this. First, the international scenario. World over, the fundamentals of the oil industry over the long term appear to be strong. True, the incremental rise in oil demand is on a decline — from 3.8 per cent in 2005 to 1.3 per cent in 2005, it is expected to be around 1.8 per cent in 2006, though on a higher base, but in absolute terms/value, it is growing. As per International Energy Agency estimates, the oil demand in terms of million barrels per day was 79.2 in 2004, 82.2 in 2005 and is expected to be 85.1 in 2006.

As long as oil is in demand, shipping will remain firm. There are some 88 industries such as paints, varnish, textiles, pharmaceuticals and engineering, which depend on raw materials extracted only from crude oil, requiring their transportation by ships in bulk.

The picture within the country is no less encouraging. In 2005-06, the country's total crude oil consumption was 129.84 million tonnes (mt), out of which 32.2 mt (24.8 per cent) was domestic production and the balance 97.64 mt (75.2 per cent) was imported.

Estimated to grow at seven per cent, the demand for crude is likely to rise to 195 mt in 2011-12 and 85 per cent of it is to be imported. Which means, India will need crude tankers in sufficient number for transportation of the projected volume of imported crude.

Traditional vs contemporary

Traditionally, Indian shipping used to handle the country's crude imports almost entirely. Subsequently, the share of the Indian lines started declining with the result that foreign flag now accounts for more than 70 per cent of the total imports. One reason for this is that the Indian lines do not have sufficient number of large crude tankers, particularly the VLCCs. Also, Indian shipping companies increasingly deploy their tankers in cross-trades. However, the Government is in favour of reducing the dependence on foreign flag, more so because the presence of Indian flag carriers ensures that foreign operators provide competitive rates.

Third, from an importer of petroleum products, India has become a net exporter. This has happened because of the huge refining capacity being built in the country — an estimated 240 mt within the next few years from 133.67 mt now.

At the same time, the developed countries are gradually withdrawing from refining activity for environmental and other reasons.

Time, therefore, is not far off when developed countries will have to depend on India, among others, for the supply of petroleum products. As a result, a large number of product carriers will be needed. According to some experts, the demand for large product tankers will increase to facilitate long haul movement.

Single-hull phase out

Finally, the double-hull tankers. After 2010, no Western country will allow single-hull tankers to call at their ports. Which means, these vessels will have to be gradually phased out. Some may operate in Asia and Africa but not indefinitely.

Ship-owners world over, therefore, are going for double-hull, modern tankers, pushing up their prices.

There is more good news for the shipping industry. Natural gas is fast emerging as the fuel of the future and LNG is set to become a critical energy source in the near future and with it the transportation of LNG too will become very important.

The shipping leg forms an important and integral part of the entire LNG supply-chain as ships are dedicated to projects and trade between two terminals goes on for decades as time charter contracts are signed for 20-25 years even before the construction of vessel starts.

As one of most highly capital-intensive segments, LNG shipping has high entry barriers for a new player. In India SCI is the only company to have successfully established itself in this area by forming three joint ventures for transportation of LNG for Petronet LNG.

Another area which holds out promise for shipping lines is offshore activity as high oil prices have led to surge in exploration, throwing up demands for rigs and other offshore assets.

It is interesting to note that the existing players in the field, mostly shipping lines, are being joined by new players.

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