Market Actors & Behaviour by

Erik.Ranheim@INTERTANKO.comManager Research and Projects

Copenhagen Business School Oslo 19 February 2008 ‘

Tanker industry

Technology

Regulations

Finance

Market

Focus on the tanker industry

Tanker industry carries one of the worlds most strategic commodities from some of the politically most tense areas in the world .

Oil can potentially cause serious pollution .

After many years with negative or low profitability over the last years, the tanker industry has during this decade made extremely good profit and has even received attention in the world stock markets

Tanker market

Shipbrokers

Charterer

Shipowner

Cargo Owner/ Refiner/Trader

Pool/commercial man

IMO

International Regulations

IMO

What is IMO?• The International Maritime

Organization (IMO) is the specialized agency of the United Nations (UN) concerned with Maritime Affairs located in London, England.

• IMO (Formerly known as IMCO) was established under a 1948 United Nations convention that entered into force on 17 March 1958.

• IMO currently has 168 member states, 2 associate members, 51 Inter-Governmental Organizations which have concluded agreements of cooperation, and 66 Non-Governmental Organizations in Consultative Status with IMO.

Why is there a need for IMO?

• Shipping is international• Assets move between

jurisdictions• Need for universally

applied standards

Without IMO trade would be restricted

What does IMO do? IMO’s main objective is to facilitate co-operation among governments on technical and legal matters affecting international shipping Work to achieve the highest level of international standards for maritime safety, maritime security and protection of the marine environment.

This is accomplished through the development of international conventions, codes, and recommendations.

IMO has adopted 55 conventions & protocols, including:

• Safety of Life at Sea (SOLAS)

• Prevention of pollution from Ships (MARPOL) 6 Annexes

• Preventing Collisions at Sea (COLREGS)• Loadlines• Standards of Training, Certification,

& Watchstanding (STCW)

IMO Has Developed 25 Codes, Including:

• Ship and Port Facility Security (ISPS)

• Safety Management (ISM)• Standards for Training and

Watchkeeping• Maritime Dangerous Goods (IMDG)• Construction and Equipment of

Ships Carrying Dangerous Chemical in Bulk• Solid Bulk Cargoes

• High Speed Craft• Construction and Equipment of Mobile Offshore Drilling

Units

IMO has developed more than 700 recommendations & guidelines, including:

Safe access to and working in large tanks & large cargo holds

Emergency towing requirements – tankers Medical first aid guide for use in accidents

involving dangerous goods Safe use of pesticides in ships Packing Cargo in Freight Containers Provisions and Display of Manoeuvring

Some guidelines/recommendations are required to be followed by charterers

IMO Facts

• Annual Budget 24 m

• Member States fund IMO budget through assessments based largely on size of fleet(% of world’s gross tonnage)

• Secretariat – 320 Staff Members50 Nationalities

M aritim eS afe ty

D ivis ion

L ega l Affairs andE xtern a l R e latio ns

D ivis ion

A d m in is tra tiveD ivis ion

C o nfe ren ceD ivis ion

M arineE n viro n m ent

D ivis ion

T echn icalC oo p eration

S E C R E T A R Y G E N E R A L

IMO Secretariat

Structure of IMO

Subcommittees

LegalCom m ittee

FireProtection

(FP)

Ship Designand

Equipment(DE)

Dangerous Goods,Solid Cargoes &

Containers (DSC)

RadioCommunications

(COMSAR)

Training &Watchkeeping

(STW )

MarineEnvironmental

ProtectionCommittee (MEPC)

FacilitationCommittee

Safety ofNavigation

(NAV)

Bulk Liquidsand Gases

(BLG)

Stability ofLoadlines &

Fishing VesselSafety (SLF)

Flag StateImplementation

(FSI)

Maritime SafetyCommittee

(MSC)

TechnicalCooperationCommittee

Council (C)

Assembly (A)

IMO Process

Proposal by Member

State

Maritime Safety

Committee

Approval by Assembly or other Action

as Appropriate

Appropriate Subcommittee

Working Group

Major Issues on IMO’s Agenda

Air Pollution from Ships Role of the Human

Element Goal-based new ship

construction standards Maritime Security Member State Assessment Ballast Water Management

Recycling of Ships

New Approaches emerging at IMO?

• Proactive vs. Reactive Goal Based StandardsMaritime Security

• Performance Based vs. PrescriptiveBallast Water Management

Delegations to IMO Meetings

Delegations consist of Government and/or Industry/Public Sector Advisors

Decisions on who goes are made by the Head of the Delegation to each meeting

Decisions are based upon specific issues to be discussed at each session

Individuals are recommended based on a specific area of expertise or on organizational representation

Expenses to attend IMO meetings are normally covered by the individual

IMO demographics have changed

• Break up of USSR

• Establishment of “Bloc” groupsEuropean UnionGOLACC (Latin America)

• Developing nations wanting a bigger say

• Change in world’s fleet

World’s Gross TonnageTop Ten – 1982

1. Liberia

2. Greece

3. Japan

4. Panama

5. United Kingdom

6. USSR

7. Norway

8. United States

9. France

10. Italy

World’s Gross TonnageTop Ten – 2007

1. Panama (4)

2. Liberia (1)

3. Bahamas

4. UK (5)

5. Marshall Islands

6. Singapore

7. Greece (2)

8. Malta

9. China

10.Cyprus

INTERTANKO’S ROLE

As an NGO*, we represent tanker industry by:• Submitting proposals (w./without co-sponsorship)• Written comments on proposals• Verbal comments at meetings• Participating in working groups• Lobbying for support on issues• Demonstrating a proactive responsible role

*None Government Organisation

Tanker market

Tanker market

• Volatile• Dynamic, and• Open market • Congestions, storage slow steaming,

imperfect information

• Large number of actors• Great variety of players• Unpredictable? • Perfect market?

0

40,000

80,000

120,000

160,000

200,000

1.1.

02

1.1.

03

1.1.

04

1.1.

05

1.1.

06

1.1.

07

1.1.

08

VLCCsSuemaxAframaxClean

Development tanker ownership

• Wilh. Wilhelsen first tanker 1913 – 10 tankers by end 1st WW

• Norwegian pioneers (whale oil)• Independent owners increased activity

in the 1920s, mainly long term contracts• Greeks, liberty ships after 2nd WW

• Oil producers• Oil companies• Traders• Refineries

7%

4%6%

83%

Indep. Oil State Oil State

0102030405060708090

100

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2007

End user Independent

Seaborne Crude Oil Trade Flows 2006

Seaborne trade and Middle East oil production

bn tonne-milesmbd

0

5

10

15

20

2519

70

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

0

2,600

5,200

7,800

10,400

13,000

Tonne miles

Middle east oil production

Oil market

World oil importers - 52.6 mbd - 2006

Open markets for tankers

China quickly building up tanker fleet8.3 m dwt 4.6% of world oil tanker fleet

80% Japanese – long term contracts43.2 m dwt 11.1% of world oil tanker fleet

Mainly open markets for tankers

Source: BP, variousmbd

0 3 6 9 12 15 18

USA

Europe

Japan

China

RoW

26%

26%

10%

7%

32%

World largest oil exporters – 30.3 mbd35% of consumption - 58% of export

mbd

Saudi Aramco/VELA

Pemex

PdVSA

KOTC

Statoil

NIOC/NITC

Gasprom/Sovcomflot

0.0 2.5 5.0 7.5

Russia

Saudi Ar.

Iran

Norway

UAE

Kuwait

Nigeria

Venezuela

Iraq

Mexico

Canada

Development Shell controlled fleet

0

50

100

150

200

250

300

350

400

45066 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 99 07

TC smaller Owned smaller VLCCs on TC Owned VLCCs

No tankers

Marcus Samuel built Murex at Gray’s shipyard in UK 1892

Major oil company controlled VLCCsOwned and on long term contract (1 year +)

Source: J.G. Olssen KristiansandSource: J.G. Olssen Kristiansand

m dwtm dwt

0

50

100

150

200

250

1972 1973 1980 1985 1990 1995 2000 2003 2007

Tokyo TankersTexaco/StentexChevronMobilExxon(/Mobil)BPShell

1972: 334 VLCCs/35% control1980: 727 " /25% "1990: 433 " /23% "2000: 424 " /19% "2003: 439 " /13% "2007: 520 " / 6% "

Major oil company controlled VLCCsOwned and on long term contract (1 year +)

|

Source: J.G. Olssen KristiansandSource: J.G. Olssen Kristiansand

no VLCCno VLCC

SpotSpot45%45%

TCTCOilOil34%34%

20072007

Chinese and Middle east companies increasing their fleets

0%

20%

40%

60%

80%

100%

1972 1980 1985 1990 1995 2000 2002 2004 2006300

345

390

435

480

525

570

615

660

705

750

SpotTC*

Oil**

No VLCCs

* fixed for one year or more**oil include oil companies and state owend companies

Should oil companies own tankers • Vertical integration is most attractive when different types of market failure exist that threaten

profitability. Bringing production in-house allows a company to internalise and thereby overcome market failures. The strategy is not without its own costs in terms of efficiency and price .

• Vertical integration is best where the activity in question is complex and hard to define under conventional legal contracts.

• Vertical integration is attractive when outside suppliers are few and likely to behave opportunistic, exercise market power.

When economics means business, Sultan Kermally

Market value biggest oil cos $m(+ world 2nd 3rd biggest co, one tanker co)

Exxon merged with Mobil, small tanker fleetShell few tankersBP merged with Amoco – large tanker fleetTotal merged with Final/Elf, - few tankersChevron merged with Texaco - some tankersConocoPhilips US Jones act fleet (expensive)Petrobras – large tanker fleetStatoil sold tanker company

$ bnSource: FT500Source: FT500

0 100 200 300 400

Exxon

GE

Microsoft

Gazprom

Shell

BP

Total

Chevron

Conoco Ph.

Petrobras

Rosneft

Lukoil

Statoil

Frontline

2

3

6

10

11

22

42

50

50

68

95

125

1

Rank

Why oil companies by each other

• Horizontal integration merging of firms which are at the same level of production or are involved in similar processes

• Horizontal integration competitive to achieve positioning of the firm vis-a-vis rivals.

• Horizontal integration to achieve economics of scale.• Horizontal integration to acquire technology and knowledge

When economics means business, Sultan Kermally

20 largest spot charterers 2007– 57% of total

No fixturesSource: Poten&PartnersSource: Poten&Partners

Among the 20 biggest charterers are: - the major international oil companies (Shell, Exxon, BP) - typical tradersVitol/ Clearlake), - national oil companies (Indian Oil Co/UNIPEC/ Petrobras and- refiner Valero.

Largest market share Shell has 7.5% and Shell is among the biggest charters in all segments

0 100 200 300 400 500 600 700

UrsaCitgoKoch

RepsolPetrobras

LitascoUnipec

SKSun

ValeroIOC

ChevronConocoPh

ST ShipClearlake

TotalVitol

BPExxonShell 7.5%

5.3%4.2%

10 largest VLCC spot charterers – 47% of total

No fixturesSource: Poten&PartnersSource: Poten&Partners

Among the 10 biggest charterers are:- Oil importers Sinochem, SK IOC, UNIPEC -Major international oil companies, Shell, Exxon, BP- oil exporters, CPC, VELA

Largest market share ExxonMobil has 7.1% share

No Japanese charterers

Less than half the VLCC fleet is in the spot market

2007

0 20 40 60 80 100 120

Vela

ConocoPh

CPC

Sinochem

BP

SK

IOC

Shell

Unipec

Exxon

10 largest Suezmax spot charterers – 48% of total

No fixtures

Source: Poten&PartnersSource: Poten&Partners

Largest market share ExxonMobil has 3.2% share

Sun US importer

2007

0 20 40 60 80 100 120 140 160

Mercuria

IOC

Exxon

Petrobras

Repsol

Total

BP

Clearlake

Sun

Shell

10 largest Aframax spot charterers – 47% of total

No fixtures

Source: Poten&PartnersSource: Poten&Partners

Largest market share Shell has 8.2% share

Whereas it is the VLCC market which is highlighted, the activity in the Aframax market is 2.3 times bigger

0 50 100 150 200 250 300 350

Chevron

Lukoil

ConocoPh

ST Ship

BP

Total

Exxon

Vitol

Clearlake

Shell

10 largest Aframax spot charterers – 47% of total

No fixtures

Source: Poten&PartnersSource: Poten&Partners

Largest market share Shell has 8.2%

Whereas it is the VLCC market which is highlighted, the activity in the Aframax market is 2.3 times bigger

0 50 100 150 200 250 300 350

Chevron

Lukoil

ConocoPh

ST Ship

BP

Total

Exxon

Vitol

Clearlake

Shell

10 largest Clean spot charterers – 36% of total

No fixturesSource: Poten&PartnersSource: Poten&Partners

Largest market share the trader Vitol has 7.4% share

0 50 100 150 200 250 300 350 400

Exxon

Clearlake

Trafigura

Chevron

CSSA

BP

Litasco

ST Shipping

Shell

Vitol

Oil Industry stock declining

Days forward demand

Source: IEASource: IEA

Low stock – greater volatility – gives oil companies less bargaining power

50

52

54

56

58

60

62

64

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2006

VLCC freight rate/Brent Blend oil price

$/per day freight rate

Source: IEASource: IEAStrong volatility – great uncertainty

$/per barrel oil price

0

40,000

80,000

120,000

160,000

200,0002-

Jan-

01

8-M

ay-0

1

10-S

ep-0

1

15-J

an-0

2

17-M

ay-0

2

18-S

ep-0

2

23-J

an-0

3

28-M

ay-0

3

25-S

ep-0

3

30-J

an-0

4

3-Ju

n-04

1-O

ct-0

4

7-Fe

b-05

10-J

un-0

5

7-O

ct-0

5

13-F

eb-0

6

16-J

un-0

6

17-O

ct-0

6

21-F

eb-0

7

28-J

un-0

7

26-O

ct-0

7

26-F

eb-0

8

0

16

32

48

64

80

Oil price, Brent Blend

VLCC rate, 250,000 dwt, AG - Japan

Cost of oil freight insignificant

Gasoline prices at the pump $/gallon Dec-07

Source: IEA/VariousSource: IEA/Various

Volatility in the oil market more important than volatility in freight ratesOil price much more important for oil companies that freight rates

Real and nominal oil price and freight rate

0

10

20

30

40

50

60

70

80

73 79 85 91 97 03

Nominal price Arabian Light

Real Price Arabian Light

Nominal freight rates PG-West

Deflated freight Rates PG-West

0.0

2.0

4.0

6.0

8.0

USA Japan UK

Long haulfreight rates

Marketing/ refining/etc

Oil price

Tax

Cost elements making up the gasoline price:

Based on Dec. 2007 figures from IEA and the Baltic Exchange

13% 39% 63%

Oil company vetting

OCIMF* question whether flag, port and Class inspection can be trusted.

OCIMF has established a comprehensive ship database – SIRE** - sharing information

Both ships and operators inspected• If these entities enforced/followed the rules effectively

there would not be a SIRE Programme SIRE exists to minimise as far as possible, the risk to oil companies of chartering

*Oil Companies International Marine Forum host*Oil Companies International Marine Forum host****Ship Inspection Reports Programme database for inspection Ship Inspection Reports Programme database for inspection reports submitted by charterersreports submitted by charterers (some 1200 per year) started 1993 (some 1200 per year) started 1993

Source: Presentation by David Savage SIRE Director, Nov. 2007, INTERTANKO seminar

Oil company vetting

If these entities (Class, Flag/Port State) enforced/followed the rules effectively there would not be a SIRE Programme

• SIRE exists to minimise as far as possible, the risk to oil companies of chartering sub-standard tankers.

• Rise in Management Cos. resulted in lack of knowledge regarding operator, vessel condition and standards of operation in the 1980s

• Tankers that are never inspected • under SIRE comprise what is called “The Grey Fleet

(2,000 out of 8,00 tankers)

Source: Presentation by David Savage SIRE Director, Nov. 2007, INTERTANKO seminar

Tanker owners

Tanker ownership

Greece, Norway, Germany; UK

Japan, China, Singapore; HK

m dwtSource: LRFairplay databaseSource: LRFairplay database

Independent ownership concentrated in Independent ownership concentrated in few nationsfew nations

0 40 80 120 160

FSU

Other

M East

N Amercia

Asia

Europe

20 largest tanker owners 33 % of totalmore that 1000 owners489 owners 1 tanker146 owners 2 tankers130 owners 10 tankers+

i.e. great fragmentation

m dwtSource: LR/FairplaySource: LR/Fairplay

Strategies:* Shuttling oil to Japan(Mitsui/NYK)* Competing for cargoes in the open market* Bringing oil closer to the market (Saud Aramco)* Taking advantage if increased domestic import (CSG/India Gov)* Strategic alliance (Dr. Peters, OSG)* Carrying own Cargoes (BP)0 2 4 6 8 10 12

India Govt

Nat Ship Arabia

Novoship

BPSovcomflot

China Ship Gr

AP Moller

DynacomBW Shipping

Iran Govt

Saudi Aramco

Dr PetersEuronav

OSG

Anangel

Ship Fina IntTanker Pacific

Teekay

NYK

Mitsui

20 largest Aframax tanker owners

33 % of totalSome 190 owners67 owners 1 tanker32 owners 2 tankers

15 owners 10 tankers+

Strong fragmentation

Aframax tanker best suited for US ports

Pools;Aframax Internal 38 tankers 8 ownersTorm LR2 pool

Teekay 6%, market share, increased fleet by consolidation

m dwtSource: LR/FairplaySource: LR/Fairplay

6% share

0 1 2 3 4 5

Cardiff Lundqvist

OSGIndia Govt

VallesPDVSA

GenmarThenamarisSovcomflot

ArcadiaDynacom

TormAP MollerCentrofinMinerva

BPTanker Pacific

NovoshipAET

Teekay

20 largest VLCC tanker owners

58 % of totalSome 120 owners

14 owners 2 tankers52 owners 1 tanker

13 owners 10 tankers+

Two Japanese owners on topAramco largest oil co

One big pool:Tankers International47 VLCC 15 m dwtTMT bought many tankers for conversion to dry bulk

m dwtSource: LR/FairplaySource: LR/Fairplay

0 2 4 6 8 10

SK ShippingTMT

Saudi MariDynacom

KOTCAP MollerHyundai

Titan PetrochOSG

Nat Ship of S ATanker Pacific

EuronavNITC

Dr PetersBW Ship

Saudi AramcoAnangel

Frontline/Ship FinNipponMitsui

End remarks

• Close to a perfect market• A great deal of consolidation

but still fragmented tankers ownership

• National oil companies are becoming stronger

• Many companies with different strategies makes the market dynamic

Tanker market

Shipbrokers

Charterer

Shipowner

CARGO OWNER/ Refiner/Trader

Pool/commercial man

IMO

International Regulations

Tanker market players

• Oil producers (OPEC)• Oil companies• Traders• Refineries

• Tanker owners:– Independent– State owned– Oil companies

Tanker ownership

Tanker market – unique?

• Large number of shippers/charterers

• Large number of receivers

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