The economics of Oil & Gas Sea TransportationABSTRACT

Dr K.G.GkonisResearch DepartmentBarry Rogliano Salles

Presentation layout

�Oil & Gas sea transportation in a global context

�Main aspects and idiosyncrasies

� The economics of energy shipping� The economics of energy shipping

� Reflections on latest and upcoming developments

Taking a global view

� The economics of the SHIPPING industry are closely associated with GLOBAL economic developments

5,0%

10,0%

15,0%

World GDP Growth vs Trade

World GDP

World Trade

Seaborne Trade

developments

� …even more so when we are talking about ENERGYcargoes(add the GEOPOLITICS of energy dimension)

-15,0%

-10,0%

-5,0%

0,0%

2008 2009 2010 2011 2012*

* prospects

Taking a global view

Shipping rates are not irrelevant to global economic indicators

100

110

120

950

1000

1050

1100

US

D/b

bl

an overall noticeable correlation, but tanker

market systemics (e.g. ships supply-demand)

can have a disturbing effect

BDTI WTI spot

price

60

70

80

90

600

650

700

750

800

850

900

Main aspects and idiosyncrasies of Oil & Gas shipping

ENERGY cargoes (Crude Oil, Products & LPG, Steam Coal, LNG)

Oil and Liquefied Natural Gas shipping: similar, yet so different as two extremes

� Some similarities

� Both liquid cargoes transported with tankers� Both liquid cargoes transported with tankers� Both with international “energy- critical” trade patterns

� Many differences

� Oil: traditional and established / LNG: developing, the future� Oil: perfectly competitive and fluid / LNG: rigid structure� Oil: many players / LNG: few layers , “closed” club� Oil: not expensive to transport / LNG: the most expensive bulk

shipping segment

� The energy trades dominate (more than 50%) bulk shipping (the international shipping industry is responsible for the carriage of about 90% of world trade)

� The cost of carrying small cargoes is much higher than the cost of large cargoes: economies of scale dominate shipping economics

The economics of energy shipping

Oil tankers LNG carriers

Source: hofstra.edu

Oil tankers LNG carriers

� The mechanisms

The economics of energy shipping

the Newbuilding market

the Sale & the

• Steel prices• Shipyards

industry• Scrapping

industry

• the money markets (shipping finance)

the Sale & Purchase

market

the Freight market

the Demolition

marketThe Shipping

Business

• World economy (growth, recession, regional patterns)•Energy industry (oil production, refining, regional demand, other sources)

•“Crises” (geopolitical, military)•Charterers behaviour

•Operating costs, voyage costs � BUNKER PRICES

other segments

Reflections on latest and upcoming developments

In the CRUDE OIL SHIPPING market

CRUDE OIL PRODUCTION* (‘000 CRUDE OIL PRODUCTION* (‘000 bblsbbls / / dayday))

N.America

Europe & Eurasia

M. East

* based on BP data for 2010

S.& C.America

M. East

AfricaAsia - Pacific

REFINERY CAPACITIES* (‘000 REFINERY CAPACITIES* (‘000 bblsbbls / / dayday))

N.America Europe & Eurasia

* based on BP data for 2010

Africa

S.& C.America

M. East

Asia - Pacific

700

800

900

1000

1100

1200

120

140

160

180

(m. USD)(USD/tonne)

(USD/ldt)

Low newbuilding prices offer investment opportunities in crude oil tankers

VLCC newbuilding prices failed to catch an upward trend during the last year (shaded area), and instead experienced a consistent downwards

200

300

400

500

600

700

60

80

100

120

01/2

008

07/2

008

01/2

009

07/2

009

01/2

010

07/2

010

01/2

011

07/2

011

VLCC newbuilding price (320,000 Dwt) (LH axis)

Tanker demolition price (Pakistan/India) (RH axis)

Steel price (Hot Rolled Coil) (RH axis)

12

/20

11

a consistent downwards path.

This was otherwise the case for the other tanker sizes as well

ALREADY DELIVERED TO BE DELIVERED

TANKER DELIVERIES PER SHIPYARD

...and one should also keep in mind what is happening in the shipyards

S. Korea holds 49% of all tanker orders , China33%, Japan 8% .

Comparing deliveries since 2008 to the since 2008 to the pending orderbook, an expansion in volume is witnessed only for a couple of shipyards.

40

50

60

70

80

90

4

5

6

7

8

9

No

of

ship

s

Dw

t To

nn

ag

eM

illi

on

sTanker flags (2010 & 2011 Deliveries)

Then decide on other issues

Most flags attracted less tankers in 2011, but this should be expected given the reduction by more than 20% of

0

10

20

30

40

0

1

2

3

4

No

of

ship

s

Dw

t To

nn

ag

e

Dwt 2010 (LH axis) Dwt 2011 (LH axis)

Ships 2010 (RH axis) Ships 2011 (RH axis)

more than 20% of deliveries (all tanker categories).

Greek flag (11th from 7th place, with 65% less tonnage and 77% fewer tankers).

What happened in Year 2011 after all

80 000

100 000

120 000

Tanker Annual Average TCE Earnings

VLCC 260,000 T MEG/KOREA SUEZMAX 130,000 T WAF/US AFRAMAX 100,000 T BALT-UK/CONT

US$/day

13,7

11,8

7,7

11,3

3,3

8,1

11,1

16,2

20,6

7,2

21,4

27,6

16,9

15,2

Aframax 80k dwt

EMED/WMED

Aframax 100k dwt

BALT/CONT

Suezmax 130k dwt

CROSS-MED

Suezmax 130k dwt

Average Daily

TCE earnings

2010 - 2011

0

20 000

40 000

60 000

2007 2008 2009 2010 2011

8,0

-5,0

8,7

3,1

-7,5

6,4

13,1

-2,5

11,1

31,2

16,6

21,4

-10 0 10 20 30 40

AVERAGE 2010 AVERAGE 1st sem.2011

AVERAGE 2nd sem.2011 AVERAGE 2011

'000s

USD/day

Suezmax 130k dwt

WAFR/US

VLCC 275k dwt

MEG/CONT

VLCC 260k dwt

MEG/KOREA

What happened in Year 2011 after all

120

140

160

180

(m. USD)

TANKERS NEWBUILDING PRICES

(Monthly)

0

20

40

60

80

100

01/9

3

09/9

3

05/9

4

01/9

5

09/9

5

05/9

6

01/9

7

09/9

7

05/9

8

01/9

9

09/9

9

05/0

0

01/0

1

09/0

1

05/0

2

01/0

3

09/0

3

05/0

4

01/0

5

09/0

5

05/0

6

01/0

7

09/0

7

05/0

8

01/0

9

09/0

9

05/1

0

01/1

1

09/1

1

51,000 Dwt 115,000 Dwt 157,000 Dwt 320,000 Dwt

Reflections on latest and upcoming developments

In the LNG SHIPPING market

The LNG chain

Source: Shell

LNG economic aspects

• A 150,000 cu.m. LNG carrier transports:~ 62,000 tons LNG or ~ 0.09 bcm of natural gas

300

325

350

LNG CARRIERS AVERAGE NEWBUILDING PRICES

138-147,000 cbm

(million US$)

100

125

150

175

200

225

250

275

LNG PRICES

LNG prices usually expressed in US dollars per millionBTU (USD/mmBTU).

No international price for LNG. Gas “hubs” of both LNGand pipeline gas:

•United States (Henry Hub)

•The United Kingdom (NBP)•The United Kingdom (NBP)

•Europe (Zeebrugge in Belgium)

Long-term: gas prices driven by gas supply options, economic growth and political issues

Short term: depend on storage and flexibility

�Opportunities for price arbitrage and eventualconvergence of price between various markets

Recent developments

� Japan earthquake – tsunami catastrophe: nuclear off, LNG annual imports increased by 12.2% (to 78.5 m.tons in 2011)

� US shale gas discoveries� West –East gas price differentials: below 4 USD/mmBTU to above

14 USD/mmBTU

a few years ago

Price arbitrage now

The Greek element

357

250

300

350

400N

o o

f sh

ipsGREEK PRESENCE IN GLOBAL FLEET

GREEK

OWNERSHIP

ALL

12

28

66

0

50

100

150

200

DELIVERED ON ORDER

No

of

ship

s

3% of

TOTAL 42% of

TOTAL