Archives for posts with tag: crude oil

Across the spectrum of seaborne trade, crude oil and containers could hardly be more different. The former is the classic raw material commodity, whilst the latter represents the shipping of all sorts of manufactured end products. Yet in 2017, total seaborne trade in each stood less than 170 million tonnes apart, with a combined volume of 3.8 billion tonnes accounting for 33% of overall global seaborne trade.

For the full version of this article, please go to Shipping Intelligence Network.

Shipping plays a major role in the world’s industries, facilitating the transport of large volumes of raw and processed materials. However, the maritime sector forms a much more important part of the global supply chain for some commodities and industries than others. Comparing world seaborne trade in a range of cargoes to global production helps to make this abundantly clear.

Still In The Limelight

Looking at a range of cargo types (see graph), less than 50% of global production of each was shipped by sea in 2015, with a significant share of output consumed domestically. However, seaborne transport still accounts for a sizeable proportion of many of these cargoes, and a wide range of factors influence the level of dependence on shipping of each.

Compelling Cues

One obvious driver is the location of production and consumption. Crude oil is the commodity most reliant on shipping, with some 46% of crude output last year exported by sea, with oil output concentrated in a relatively small number of countries. Similarly, around 41% of global iron ore production was shipped last year, with limited domestic demand in key producers Australia and Brazil. Absolute and relative regional productivity also has an influence. Just 15% of coal output was shipped in 2015, with half of the 6.5bt of coal produced globally last year output in China, nearly all of which was consumed domestically. Still, China was the second largest coal importer in 2015, with regional coal price arbitrages driving trade.

Another key factor is the availability and efficiency of other transport modes. Twice as much natural gas is exported via pipeline than in a liquefied state by sea, with just 9% of natural gas output in 2015 shipped as LNG. Meanwhile, the level of processing of materials also has an impact. Oil and steel products are less reliant on shipping than crude oil and iron ore, with refineries and steel mills often built to service domestic demand.

Raising The Drama

However, the growth of ‘refining hubs’ has raised the share of refinery throughput shipped by almost 10 percentage points since 2000. This kind of trend is an important driver of shipping demand. The share of output of the featured commodities shipped rose from an estimated 22% in 2000 to 26% in 2015, generating c.720mt of extra trade. This equates to an additional 1% p.a. of trade growth, boosting trade expansion to a CAGR of 3.7% in 2000-15. Trade in some cargoes is more sensitive to shifts in the share of output shipped than others, but across the featured cargoes, a further change of 0.5% in the share of output shipped could create another 130mt of trade, 2% of current seaborne volumes.

No Sign Of Stage Fright

So, while trade in even the cargo most reliant on shipping accounts for less than half of global output, the world economy today is still dependent on the seaborne transport of 11bt of all cargo types. Overall growth in production and the distance to consumers are also clearly important demand drivers for shipping, but for the world’s industries there’s no denying the main part that shipping still plays in the supply of raw materials. Have a nice day!

SIW1243 Graph of the Week

Last week’s Analysis noted that demand cycles are part of the shipping industry scenery, and 2015 so far has seen some fairly mixed trade data to say the least. China has been at the centre of this, and there’s little consensus on the way that things might head next. There are a range of possible scenarios; which one is closest to the outcome will be key – the health of world seaborne trade could depend on it.

Lead Driver Slowing?

China has long been at the heart of the expansion in global seaborne trade. Between 2002 and 2014, 4 billion tonnes were added to the world seaborne total. Chinese imports accounted for 94% of the increase in iron ore volumes, 35% of the expansion in coal volumes and equivalent to more than 100% of the growth in crude oil trade. Chinese exports accounted for around 60% of the expansion in container trade volumes. However, Chinese volumes have been under severe pressure in 2015 so far. Based on latest year to date data, Chinese seaborne coal imports are down 40% y-o-y, on the back of increased anti-pollution measures and slowing thermal power generation. China’s iron ore imports are down 1% (up 15% in full year 2014), with steel production flat, and its crude oil imports are up by just 4% (up 10% in 2014). Chinese container exports are estimated to be just 4% up, with trade to Europe down 3%.

Lack Of Consensus

Although most observers agree that Chinese volume growth will fall this year, there is a clear lack of consensus on the extent to which it will do so. A number of scenarios could unfold, and the graph shows how some of these could impact on world seaborne trade growth based on possible trends in Chinese ore, coal and crude oil imports and container exports. Scenario ‘A’ is based on our latest estimates for Chinese trade in these major cargoes. ‘B’ is based on the (reduced) rate of y-o-y growth in the year to date being maintained for the rest of the year. ‘C’ allows for trade volumes in the rest of the year to be flat compared to 2014 monthly levels. ‘D’ is based on the growth rate for the remainder of the year in each cargo reaching the full year 2014 level.

Scenario ‘A’ puts 2015 world seaborne trade growth at 2.9%. But, ‘B’ and ‘C’ suggest overall growth in 2015 of 1.6% and 2.1% respectively; much lower than has been seen in recent years, and tricky news for the shipping markets, with world fleet capacity growing by more than 3%. Moreover, Chinese import volumes in a range of other bulk cargoes are also under pressure in the year to date, and the failure of these to see improved growth could lead to downside to even the most pessimistic of the scenarios here.

Been Here Before?

So, looking at the data, there are some relatively negative scenarios. But some might argue that we have been here before, and each time Chinese expansion has pulled through, maintaining the impetus behind global seaborne trade. China is a big country, and previously government stimulus has provided support (though there is debate over the potential impact of this factor in the future). There are many possible outcomes, but one thing is for sure, if healthy growth in global seaborne trade is to be maintained, the world will be looking towards China for improved volumes. Have a nice day.

SIW1177

Money, or even love if you prefer, are claimed to make the world go round. For the shipping world, however, it’s trade that sets things spinning. Those wishing to grasp the magnitude of world seaborne trade might want to consider that it is projected to close in on 11 billion tonnes in 2015. Examining the statistics in more detail sheds further light on its role in the world economy.

What’s In The Basket?

Seaborne trade is made up of a wide range of commodities. Tankers and bulkers carry a huge amount of the tonnage. This year, the 11.0 billion tonnes (bt) will include of 3.2 bt of major bulks, another 1.5 bt of minor bulks and 2.8 bt of crude oil and refined oil products. But there’s plenty of room for other cargo too. Manufactures take their place with 1.7 bt of containerised cargo (which punches further above its weight in value terms) and another 1.1 bt of other non-bulk dry cargo (some still ripe for containerization). More specialised shipping completes the set, with 0.6 bt of liquefied gas trade and chemicals trade combined. These components tell us a lot about the shipping model, and the last two SIW feature articles noted the role of China: importing industrial raw materials in bulk, and exporting manufactures on containerships.

Popular Concept

This year world seaborne trade is projected to represent 1.5 tonnes of cargo for each person on the planet, up from 1.0t in 2000. As economic growth continues in developing economies, populations typically contribute more to world seaborne trade on a per capita basis, and as they ‘catch up’ with western world levels this drives increased trade (and a higher ratio). Even if the ratio remains unchanged, the current projection of 8.4 bn people on the planet by 2030 would mean an extra 1.7 bt of seaborne trade.

Multiplier Effect

Then there’s the ‘multiplier’ effect. Over the last 5 years, for example, the growth in world seaborne trade has clocked in on average at 1.13 times more than the growth in the world economy. As globalisation has taken hold, international trade has typically grown more quickly than world economic output. Seaborne container trade, for example, has enabled the connection of distant producers and consumers, and also the component trade enabling multi-location manufacture connected by low unit cost shipping. Discovery of natural resources in locations other than economic growth centres also helps. In 2015, the world economy is expected to grow by 3.5% but world seaborne trade is expected to grow more quickly, by 4.1%.

Keep It Going Round

Since the decline in 2009, seaborne trade growth has been quite consistent, averaging about 4%. Without the huge fleet dwt growth of 55% in the period 2008-14, the market downturn might have been less severe. On Shipping Intelligence Network, monthly tables and our Seaborne Trade Monitor report provide regularly updated seaborne trade statistics. At a rough estimate, seaborne trade constitutes over 80% of the global total volume by all modes. That’s some achievement, and until the world comes up with an alternative, it will keep on making the world go around. Have a nice day.

SIW1163

As the recent plunge in oil prices sees some operators tightening their belts and their appetite for exploration seemingly diminishing, can development drilling provide alternative demand amidst the doom and gloom? The North Sea serves as an interesting example of an active drilling market throughout E&P cycles. Could this observation have implications for rig activity within other regions?

Playing The Risk

The assessment of “risk”, both financial and operational, is one of the most important factors for International Oil Companies (IOCs) when considering future projects. In periods of high oil prices, when company revenues are high and debts are low, operators are prepared to take on higher risk, lower margin projects, and are more comfortable in increasing their exposure to exploration. In a low oil price environment however, companies focus on low risk projects and increasing returns on investment, as opposed to riskier exploration operations.

Produce A Winner

This lower tolerance to risk often results in reductions to exploration budgets and activity, in particular drilling operations. In the last 12 months, global drilling rig utilisation has declined from 95% down to 89% as oil prices have declined to under $70/bbl. This trend has been typical throughout history. In 1985-87, historical reports show that global rig utilisation declined drastically from almost 90% to around 50%, following the oil price crash of the mid-80s. Despite this, some areas have fared much better than others through the bust periods

As the Graph of the Month shows, the number of wells drilled per year in the North Sea during the years 1980-98 increased from 335 to 618, despite the oil price declining to $18/bbl (inflation adjusted to 2013 $/bbl). As companies focussed on increasing production from their portfolio of newly discovered fields, increases in development drilling far outweighed declines in exploration work.
Over the same period, the share of development drilling increased from 68% to 86%, and by end-2002 over 90% of wells drilled were for field developments. This increase, throughout a period of depressed oil prices, highlights the need for development work following exploration.

Develop Your Game

In areas where the number of undeveloped fields is high (the North Sea reached an estimated peak of 583 by end year 1992), it is inevitable that development drilling becomes more prominent, as exploration operations become riskier and thus more expensive. Today, areas such as West Africa and SE Asia, where the current number of undeveloped fields total 379 and 506, are examples of this, and could witness an increase in development drilling similar to that seen in the North Sea during the 80s and 90s.

Whilst reduced exploration will likely result in short-term declines in rig utilisation and dayrates, other sources of demand could exist. Though wildcat spuds and discoveries may dwindle in the near term, areas of previously high exploration activity could see alternative demand for rigs through development drilling. After that? Well, perhaps the world will still have to go and find more oil.

OIMT201412

In the outrageously camp film The Spy Who Shagged Me, made in 1999, super-spy Austin Powers battles with the forces of darkness in the form of Dr Evil. The doctor’s most outrageous tactic is to invent a new Time Machine which allows him to travel back to the 1960s where he steals Austin’s Mojo, leaving the unlikely sex symbol spy totally “shagless”. “Crikey!”, he expostulates, “I’ve lost my Mojo”.

Big Boy Boost

Over the years, investors in the VLCC market have shared an equally debilitating experience. The first of these miracles of modern shipping appeared in 1967. Over 1,000 feet long and carrying 2 million barrels of oil, they were the last word in efficiency, delivering Middle East oil to Europe and Japan, who were rebuilding their economies, for less than $1 a barrel. As US domestic oil production fell in the early 1970s it boosted imports even more, and to meet this demand Saudi Arabia increased output from 2.8m bpd in 1967 to 9.7m bpd in 1977. The VLCC market went mad. Investors queued to order 4 million barrel ships and the VLCC fleet grew faster than any other shipping fleet in history, from zero in 1967 to 193m dwt in December 1979.

Mighty Mojo Missing

Unfortunately, around that fateful date in the late 1970s, VLCCs, like Austin Powers, lost their Mojo. The problem was not Dr Evil and his Time Machine; it was two oil crises in quick succession. The first in 1973 pushed oil to $10/barrel, and after the second crisis in 1979 oil reached $30/barrel, by which time it was changing hands for 15-20 times more dollars than a decade earlier. These developments in the oil market triggered a double barrel downer for VLCC demand. First, a long and deep recession in the world economy undermined long-haul imports, and secondly a major round of oil saving technology cut demand even more (for example power stations switched from oil to coal, a massive structural change in oil’s market). By 1986 Saudi Arabia’s production had dropped by two-thirds to 3.6m bpd and VLCCs were in deep trouble. The fleet dropped 37% to 110m dwt in 1988, surely some form of record.

20 Years Out In The Cold

For twenty years from 1983 to 2003 the VLCC fleet struggled along in a grim and Mojo-less world. Then in 2003 a big dose of Chinese medicine got the fleet kick started again. Long-haul imports by the big three of Europe, USA and Japan were topped off by China and the Asian tigers, and from 2003 to 2013 the VLCC fleet grew at 4% pa. But since 2007 demand has been sapped by high oil prices, increased US production, a credit crisis, and a deep OECD recession. As a result crude oil tonne miles have only increased by 5% in total since 2007.

Dr Evil’s Wicked Way

So there you have it. Although it’s not the 1960s, Dr Evil is still at work on the VLCC fleet’s Mojo. Of course today’s Mojo surgery is not as dire as the 1980s, but the flagging crude demand growth since 2007 and brisk fleet growth have created spare capacity. Luckily some of it is soaked up by slow steaming, so when he’s in the mood, our hero can still enjoy a nice little spike. But sadly Austin’s still very short on stamina. Have a nice day.

SIW 1149

Energy is shipping’s biggest single market, accounting for 43% of the cargo moved in 2013 – 4.3 billion tonnes. Oil is still the big dog, with 2.8 billion tonnes of cargo and the coal trade has now reached 1.2 billion tonnes. Which leaves gas as the junior partner in the energy triangle with 307 million tonnes of trade in 2013, of which 244 million tonnes was LNG and an estimated 63 million tonnes was LPG.

The Crown Prince Of Energy

LNG may still be the junior partner in tonnage, but it is widely seen as a future “seed corn” trade for the maritime business. This positive perception rests on two foundations. Firstly there are enormous reserves of “stranded” natural gas located so far from the world’s major consumer zones that sea transport is the only way to bring the product to market. Secondly natural gas is a clean fuel, in an era which is becoming increasingly preoccupied with reducing emissions of carbon and other pollutants into the atmosphere.

Fight For The Title

But it’s not all plain sailing and LNG is up against some tough competition – coal and oil – and in the three way fight for market share which lies ahead it has a few strategic disadvantages. Oil, the ultimate portable energy source, has the land and air transport fuel market nailed down. In this market the need to maintain LNG at a temperature of -162°C makes competition extremely difficult, and creates limitations to the wider use of LNG as a transport fuel.

The other major market is power generation and here LNG is on firmer ground. Once the storage and re-gasification facilities have been installed, LNG is the ideal clean fuel. The problem is that in this market coal is a long established and devastating competitor. Coal is generally much cheaper than gas and more widely available. In contrast gas supplies are more limited, requiring major investment, and are often located in “difficult” geopolitical areas.

Speedy Growth

Despite these disadvantages, the LNG trade has turned in a spritely growth performance. Since 1984 imports by countries east of Suez have grown by a CAGR of 5.8%, and by 6.5% west of Suez (despite a slowdown in 2012-13). Compared with the growth of the oil trade when it developed more than a century ago, this is super-fast. 44 years since the first LNG shipment by sea to Asia, global trade in 2013 reached 532m cbm, or 244m tonnes, with a fleet of 31m dwt. For comparison, after 44 years seaborne oil trade only reached 55m tonnes and the tanker fleet was just 9.5m dwt (in 1928). This is a reminder that although LNG has not been an easy ride, things take time and LNG’s growth path is pretty dynamic (though not without its problems – in the 1980s one third of the fleet was laid up).

Trending But Tricky

If current growth trends continue, LNG trade could reach one billion tonnes in the 2030s. It is easy to believe that there will be demand in an energy hungry world for this clean fuel, despite its limitations. But in the meantime LNG is a niche player, trading luxury fuel to price sensitive markets. Which makes it tricky, even for the big boys. Have a nice day.

SIW1137

While the expanding role of Asia (especially China, see SIW 1132) in seaborne trade has grabbed headlines in recent years, developments in the US, still the world’s largest economy, have also had a significant impact. In a short space of time, changes in the US energy sector have dramatically altered global trading patterns in a number of commodities, significantly impacting the pattern of volume growth.

Putting On A Spurt Of Energy

For much of the last three decades, US oil production has been in decline, falling on average by 1% a year since 1980 to a low of 6.8m bpd in 2008. Yet technological advances have since led to huge gains in exploitation of ‘unconventional’ oil and gas shale reserves. In the space of just six years, the US managed to raise oil output alone by an astonishing 60% to almost 11m bpd, a new record.

Making An Oil Change

This has led to huge changes in US energy usage and import requirements. Crude oil imports have almost halved since 2005, and since 2010 have fallen on average by 11% p.a. to 260mt last year. Exports of crude oil from West Africa in particular have had to find a home elsewhere (unsurprisingly, many shipments now go East). Since US crude exports are still banned, US refiners have taken advantage of greater domestic crude supply to produce high volumes of oil products, especially for shipment to Latin America and Europe. Lower US oil demand since the economic downturn has also contributed, and seaborne product exports reached 120mt in 2013, up from 70mt in 2009. Alongside global shifts in the location of refinery capacity and oil demand growth, these trends have transformed seaborne oil trade patterns.

The impact could be similarly profound in the gas sector. As US imports of gas, mostly LNG, have dropped (on average by 34% per year since 2010), plans to add up to nearly 100mtpa of liquefaction capacity by 2020 could mean the US eventually emerges as a major LNG exporter, potentially accounting for 15% of global capacity (from 0.5% currently). Meanwhile, LPG shipments are continuing to accelerate strongly, rising by more than 60% y-o-y so far in 2014 to 6mt.

Miners Under Pressure

There has also been an impact in the dry bulk sector. Lower domestic gas prices have pushed the share of coal in US energy use to below 20%, leaving miners with excess coal supplies. US steam coal exports jumped to 48mt in 2012 from 11mt in 2009, contributing to lower global coal prices (cutting mining margins) and higher Asian import demand.

So What Next?

So the effects of the changing balance in the US energy sector have been far-reaching, and there remains scope for more shifts to occur as trade patterns continue to adjust to changes in commodity supply and prices. While the firm pace of expansion in US oil and gas output may start to slow, any change to existing export policies could have further impact. What is clear already, in terms of seaborne trade growth, is that the focus has shifted away from US imports, for decades a key driver of the expansion of global volumes, towards the country’s developing role as an energy exporter.

SIW1135

Currently, the news seems full of warnings about the health of the Chinese economy. If it’s not worries over the extent of lending by the so-called “shadow banking” system, pessimists would have us believe that China is on the brink of a catastrophic housing bubble, or point to the impact of pollution reaching new highs in major Chinese cities. How should the shipping industry evaluate these issues?

What’s At Stake?

Of course, anything which harms the Chinese economy will generally be bad news. As the Graph of the Week shows, the Chinese economic miracle has been built on an import/export boom some distance in excess of the rest of the world’s efforts at trade growth, with Chinese trade growth accounting for over 90% of global expansion in some commodities.

The two drivers of the Chinese economic miracle which has transformed the shipping industries have been consumer exports, fuelled by cheap labour, and infrastructure investment in construction in China. These two factors are mutually interdependent: the share of the Chinese population living in cities has increased from 35% to 50% since 2000. All these new urbanites need housing, boosting construction. And what does this require? Steel, of course. Construction of housing for urban migrants, along with factories to employ them and services from shopping malls to roads and railways, has spurred Chinese seaborne iron ore imports to nearly 900mt p.a. The effect on the Capesize fleet needs no repeating.

If You Build It They Might Come

The real problem is not all of the construction is where it is needed: there are several virtually uninhabited brand new cities in Inner Mongolia, and a replica of central Paris (with Eiffel Tower!) in Zhejiang province. Signs of a slowdown in these sorts of construction projects have contributed to iron ore prices at the lowest levels in nearly 2 years.

Much of the construction effort of the last few years has been fuelled by fairly easy access to credit, with less conventional “shadow” credit a worry for some. Consumers have also taken on debt to increase their spending power. As more citizens begin to drive cars, oil import demand is stimulated. As they gain disposable income, demand is also generated for goods which drive expanded intra-Asian container trade and a greater need for imported manufacturing materials.

Pollution is another problem China now seems to be taking seriously. This is a bearish sign for areas of heavy industry including iron ore and crude oil importers, particularly the large number of steel mills in Hebei province, near Beijing.

Bad News? Or Not?

So, negative talk about the Chinese economy abounds. But time and again in the last decade, China has surprised (sometimes with the help of a little fiscal stimulus, admittedly), and a controlled deceleration remains the most likely outcome. Reports suggest that GDP growth will struggle to meet Beijing’s target of 7.5% this year. But a near miss would still be a growth rate that most other economies would love to be faced with. Moreover, industrial production in June was up 9.2% year-on-year, the fastest rate this year: maybe China still has the ability to surpass expectations. Have a nice day.

SIW1132

OIMT201405Russia is forecast to account for 13% of world crude oil production and 18% of world natural gas production in 2014. While its prodigious Siberian flows tend to receive most of the credit for this feat, fields located off the country’s 16 million km of coastline are nonetheless projected to produce 390,000 bpd oil and 2.64 bcfd gas in 2014. So where exactly is Russian offshore production to be found? And what is the outlook?

Mastering the Arctic

As the Graph of the Month shows, offshore oil and gas production in Baltic & Arctic Russia stagnated after the break-up of the USSR, declining to 0.03m boepd in 2013, when it accounted for 4% of Russian offshore production. This trend was thrown into reverse when the Prirazlomnoye field came onstream in December 2013. Located 23km from shore in the Pechora Sea, the field is exploited via a ice-class platform and production is scheduled to reach 120,000 bpd by 2019. New technologies and robust oil prices are thus unlocking reserves hitherto stranded, and by 2023 Arctic oil and gas is forecast to constitute 11% of Russia’s offshore production.

Caspian and Crimean Conquests

Russia’s southern offshore fields, mainly in the Caspian, accounted for 9% of Russian offshore production in 2013. In the Caspian, as in the Arctic, harsh conditions have limited field development and disincentivised efforts to halt production decline. However, as in the Arctic, decline is now forecast to be arrested. Lukoil, for example, are planning substantial investment over the next four years at fields like Khvalynskoye and Yuri S. Kuvykin, where ice-class jack-up production units are likely to make development feasible. By 2023, the area is forecast to account for 24% of Russian offshore oil and gas production (excluding gas produced by fields off the Crimea, over which Russia now has de facto control, and which produced 410m cfd in 2013).

Expanding Eastwards

The Russian Far East is a relatively new area of offshore E&P. The Sakhalin-2 project started up in 1996 but offshore activity is still geographically limited, even if production volumes, at 0.78m boepd, are significant. The area accounted for 88% of Russian offshore production in 2013. Moreover, the Far East is Russia’s window on the developing economies of the Asia Pacific region, so companies are seeking to increase activity there, particularly with regards to LNG. In October 2013, the first Sakhalin-3 field, Kirinskoye, a subsea-to-shore development, began ramping up to 580m cfd. Further such field developments are planned out to 2023, when the area is projected to produce 0.95m boepd, its share falling to 65% despite new Capex due to faster Arctic and Caspian growth.

Thus production is forecast to grow in each of Russia’s offshore areas, driven largely by investment in high-spec jack-up, fixed platform and subsea field solutions. Total offshore oil production is projected to grow with a CAGR of 8.9% from 2014 to reach 890,000 bpd in 2023, and gas production likewise at 2.5% to reach 3.36 bcfd. Offshore would then account for 6.7% of the country’s oil and gas production, a far cry from the 2% nadir of post-Soviet decay.