1. Leading the way; making a difference Singapore Council meeting May 10, 2012 Tanker market review Erik Ranheim Senior Manager Research & Projects

2. Leading the way; making a difference Its unwise to pay too much, but its worse to pay too little. When you pay too much, you lose a little money that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot it cant be done. If you deal with the lowest bidder, it is well to The Common Law of Business Balance John Ruskin (1819-1900) add something for the risk you run, and if you do that you will have enough to pay for something better. prominent social thinker and philanthropist

3. Leading the way; making a difference Sustainability Economics Environment Society/Equity Transparency Accountability Responsibility

4. Leading the way; making a difference An occurrence such as price ceilings, price floors, or tax subsidies that involves an intervention in a specific market by a governing body. A market distortion can have the ultimate effect of creating a market failure, where resources cannot be efficiently allocated due to the breakdown of price mechanism caused by factors such as establishment of monopolies. However, it can also enhance the welfare of society and the availability of resources and presence of conditions required for reasonably comfortable, healthy, and secure living and it includes government support for the poor and otherwise disadvantaged members of the society, usually through provision of free and/or subsidized goods and services Market distortion

5. Leading the way; making a difference Failure in the tanker marker The tanker market is to a great extent part of the oil market the oil companies among the world biggest, and The oil companies do to a great extent set the standard Commercially Technically Demand development relatively steady Strong fluctuation in freight rates and values Fragmented ownership Spot market dominance Zeor tolerance for

6. Tanker Demand

7. Leading the way; making a difference Contracting by Country/Region (all types of ships) m cgt contracting 1996 – 2004, 519 contracts 13.6 m cgt $ m price 2005 – 2008, 234 contracts 2008 – 2012 283 contracts

8. Leading the way; making a difference % growth World GDP. Oil demand and seaborne trade growth

9. Leading the way; making a difference mbd World GDP. Oil demand and seaborne trade growth bn tonne-miles Source: Fearnleys/ Platou

10. Leading the way; making a difference mbd Middle East oil production OPEC production Mar 2012 31.43 mbd OPEC production sustainable production capacity: 34.91 mbd OPEC spare production capacity Feb. 2012 3.48 mbd Of which Saudi Arabia spare production capacity 1.88 mbd, Nigeria 2 nd biggest 0.50 mbd Source: IEA

11. Leading the way; making a difference mbd World increase in oil demand China, Middle East, USA, ROW* and increase in world bio-fuel production Source: INTERTANKO/IEA Other Asia:0.24 L America:0.17 Africa:0.16 FSU0.13 Mexico/Canada-0.22 Europe-0.33 Middle East0.21 USA-0.01 China0.36 Others:0.06 Total0.77 Main Changes: Area mbd

12. Leading the way; making a difference mbd World oil demand 2012 (and production self sufficieny %) 27.3% 16.5% 31,8% 8.5% 7.3% 4.8% 3.8% OECD China Other Production

13. Leading the way; making a difference mbd Oil import to selected areas

14. Leading the way; making a difference mbd US net crude oil import and production Jan 83 - Feb 12 N American oil production +1.1 mbd 2010 - 2012 – demand declined 0.5 mbd

15. Leading the way; making a difference US product import and export mbd Trade: 2000 3.0 mbd – 2006 4.5 mbd – 2012 4.9 mbd

16. Leading the way; making a difference mbd Oil price and freight rate 27.3% 16.5% 31,8% 8.5% 7.3% 4.8% 3.8%

17. Leading the way; making a difference Oil market hightlights Arab light oil price 1990-2004 $20.0 per barrel 2005-2012 $73.0 per barrel now $110.0 per barrel Energy efficiency measures accelerated Oil is in the process of losing its almost total domination as a transportation fuel The US oil import the lowest since 1998 Chinas growth rate curbed Still – positive growth and Increased dependency on the Middle East

18. Tanker Supply

19. Leading the way; making a difference Projected Tanker Fleet Development 1992-2013 m dwt number

20. Leading the way; making a difference Tanker deliveries and removals m dwt

21. Leading the way; making a difference Tanker phase out, deliveries, scrapping tankers 10,000 dwt + balance(surplus) assuming various demand increases m dwt

22. Leading the way; making a difference VLCC - 15 years old and scrap value m $ Source: Clarkson/SIW

23. Leading the way; making a difference Tanker contracting by segment in bn USD and m dwt $ bn Source: Clarkson/SIW m dwt

24. Leading the way; making a difference Contracting by Country/Region (all types of ships) m cgt contracting $ m Afra price Average 18 m cgtAverage 58 m cgtAverage 30 m cgt

25. Leading the way; making a difference Deliveries by Country/Region (all types of ships) m cgt contracting Average 18.3 m cgtAverage 38.8 m cgt 13.6 m cgt

26. Leading the way; making a difference Average age tanker fleet Years

27. Leading the way; making a difference Tanker trends - fleet, VLCC price, oil demand, and tonne-miles indices

28. Economics changed

29. Leading the way; making a difference Historical VLCC hire and bunker costs

30. Leading the way; making a difference Bunker price Fujairah and basis bunker price WS 380 Cst $/t

31. Leading the way; making a difference High fuel oil price change economics in shipping The combination of low freight rates and high fuel prices since 1973 has made it abundantly clear that one can no longer assume constant vessel speed when analysing shipping markets. Professor Victor Normann/Research Associate Tor Wergeland - Norwegian School of Economics 1977.

32. Leading the way; making a difference High fuel oil price change economics in shipping Real fuel prices virtually all time high Fuel costs increased from 20% of freight to 70% of freight in 20 years Reduced speed periodically equilibrate the VLCC market Optimum speed for each ship depend only on the ratio of the freight rate to the price of fuel Consumption profile can vary strongly from ship to ship High pressure on the industry to reduce CO 2 emission High oil prices has a negative effect on demand

33. Conclusion

34. Leading the way; making a difference Strategic consideration World economy, The risks remain high - the situation fragile IMF boss Ms. Lagarde High oil prices despite weakening demand High bunker prices change economics in shipping Age >15 years becoming an issue Shipbuilding over-capacity Oil demand North America retracting/Asia expanding Some risks and opportunities cannot easily neither be quantified nor identified - markets are never completely rational nor efficient – success requires the use of sound reasoning and trusting your gut feeling The only predictable thing about futures tanker market is its unpredictability

35. Leading the way; making a difference

36. Assumptions for optimal speed Bunker consumption (BC) : Net freight : (formula developed by MAN) Ships should monitor to decide actual consumption

37. Leading the way; making a difference Charterers costs Interest rate 5% Bunker $700 per tonne, oil price 117 per barrel, TC $20,000