Archives for posts with tag: Fuel efficiency

The introduction of new environmental regulations is leading the shipping industry to look for ways of reducing its emissions of harmful gases. This week we focus on two separate but related issues: the way in which vessels are powered, and the type of fuel that they use. New technologies are being adopted, with certain ship types leading the way…

Electric Therapy

The majority (96%) of active merchant vessels are powered by mechanical systems in which a form of fuel oil powers a main engine (usually a 2 or 4-stroke diesel) which is connected to the propeller. Most other vessels are “diesel-electric”, in which the power generated by the (4-stroke) main engine(s) is converted to electricity before being transferred to propeller(s) or thruster(s) via electric motors.

By optimising the loading of the engines, diesel-electric systems can lower fuel consumption and emissions. These systems are well established in sectors such as offshore, tugs and passenger, where manoeuvrability, variation in power demand and engine noise are important considerations. For larger cargo vessels, where demand for power is generally higher and more consistent, conventional mechanical systems remain more efficient and cost-effective. Our Graph of the Week shows that against a backdrop of reduced contracting in the larger cargo sectors, electrically-driven ships have assumed a greater share of the newbuilding market, accounting for 22% of reported newbuilding contracts so far this year.

Battery Charged

The next step for electric power may be more widespread adoption of batteries in main propulsion systems. There are 22 vessels in service and 14 on order that use batteries, mostly alongside either conventional diesel or dual-fuel generating sets. As well as reducing emissions when using battery power, these can enhance efficiency by optimising engine loads and transferring surplus power to or from the batteries as required. For smaller ferries intended for short routes, all-electric propulsion systems are feasible.

Gas Treatment

LNG has been identified as a cleaner fuel capable of reducing vessel emissions in line with new regulations. Clarksons Research’s World Fleet Register currently identifies 542 merchant ships in the fleet and on order capable of using LNG fuel. 351 of these are LNG carriers, which can use cargo boil-off to fuel a choice of turbine, dual-fuel diesel electric or dual-fuel 2-stroke main engines. In other sectors LNG fuel has taken longer to gain market share, but there are signs that where ship designs and the supply of bunkers allow, it is becoming more popular. Out of the 130 contracts recorded so far in 2017, 21 are for vessels capable of using LNG fuel. These include 4 Aframax tankers, the largest vessels other than LNG carriers to adopt dual-fuel 2-stroke engines.

More efficient power systems and cleaner fuels are two examples of how the shipping industry is responding to the challenges set by new environmental regulations. Alongside other developments in vessel design and operating practices, shipping is steering towards a more efficient and cleaner future. Have a nice day!

SIW1266:Graph of the Week

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.

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For the golfers contesting this week’s Ryder Cup, the impact of bunkers can be minimised through skill, practice and a little luck. For shipowners, bunkers are unavoidable, and over the past few years high oil prices have ensured that they have been a major handicap. Shipowners are getting plenty of practice at dealing with high oil and bunker prices, maybe they are due a change in their “luck”?

When an onlooker suggested he may have been lucky holing three bunker shots in a row, golf legend Gary Player famously replied “the more I practice, the luckier I get”. Well, over the past few years a combination of low rates and high fuel costs have given shipowners plenty of “bunker practice”.

Par For The Course

The Graph of the Week tracks the share of freight revenue accounted for by bunker costs. In the early part of the period shown, the low and relatively stable oil price ensured that bunkers did not become too much of a burden, with peaks and troughs corresponding to the strength of the freight markets. Then in 2007-08 oil prices started to rise steeply, but the strength of the freight market helped to cover the impact of rising bunker costs and ensure that the share of bunker costs remained below 50%.

In The Rough

However, in the wake of the global financial crisis, a combination of high oil prices and weaker markets caused the share of freight revenues accounted for by bunker costs to climb to much higher levels. This peaked in late 2012 and early 2013, when bunker costs exceeded 80% of freight revenue on the example tanker voyage, with the extra costs of low sulphur fuels generating even higher shares on some routes.

Driving Down Costs

Well-practiced shipowners responded by finding ways to reduce fuel consumption: slow-steaming, retro-fitting fuel-saving equipment and ordering “eco-designs”. They have found environmental regulations pulling in the same direction, and in a way helping. After all, the risk of ordering a slower but more efficient ship is greatly reduced if everyone has to do so to meet regulatory targets.

Out Of The Woods?

Further help has come from the 15% fall in oil prices since June resulting in a reduction in bunker costs (Rotterdam 380cst currently stands at $540/t, down from $601/t in June). Oil prices are on track for their third straight monthly fall, with a combination of sluggish demand and ample supplies seeing the benchmark Brent crude spot price drop below $96/bbl this week, the lowest level for two years.

Bunkers’ share of freight remains volatile and dependent on market fluctuations. Recently the percentage has started to fluctuate in a slightly lower range than previously as lower bunker prices have helped to reduce the fuel cost burden. However, bunkers’ share of revenue is still uncomfortably high for many, and shipowners have had to learn to deal with high bunker costs. For those currently in a position to benefit from lower prices today, is it luck, or is it practice?

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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.

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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.

SIW1089The big issue (well, one of them) floating around the shipping market at the moment is the move to “eco-ships”. These technological marvels promise a step change in cost savings and environmental friendliness compared with their pre-crisis competitors. For example the latest Japanese Supramax offering does 14.5 knots on 28 tonnes per day. That sounds good, but how big a step up is that?

Thirsty Old Ladies?

The key is not so much outperforming modern ships; it’s the thirsty old ladies that investors hope the new super-ships will drive from the market, accelerating the return to balance. But this depends on whether the eco-ships are really that much better than the old ladies. To find out we analysed 1298 bulkers of 55-70,000 dwt delivered between 1965 and 2013. Some have been scrapped, but they help plot the long-term trend. To make the comparison more consistent, each ship’s fuel consumption was adjusted to a standard 14.5 knots, using the “cube rule”. The resulting bunker consumption for each ship is plotted against its delivery date. The dates run from 1965 to 2013, and the consumption levels range from below 25tpd to well over 60tpd.

Easy Pickings?

Back in the 1960s, when oil cost just $1.80/bbl and bunkers were only $17/tonne, ships were thirsty and getting thirstier. By 1973 the average consumption of a 60,000 dwt bulker was 49.3tpd. So when the oil price shot up to $10/bbl in 1973 and $40/bbl in 1979 improvement was essential and easily achievable. By 1987 consumption by new ships was down by one third to 35.5tpd at 14.5 knots. Then unexpectedly in 1986 oil prices slumped to $10/bbl and fuel economy was no longer such an issue. Consumption edged down to 33tpd in 1990, briefly touched 30.9tpd in 2005 as new Japanese Supramaxes came in, then shot back to 36 tpd in 2010 as top of the market Chinese-built ships were delivered.

The Bottom Line

These trends highlight three eco-ship issues. Firstly, the fuel consumption in the last 20 years was pretty flat and on paper at least, many of the modern ships are less efficient than older generations. Secondly the big improvement 1975-88 which started from $2/bbl gas guzzlers will be difficult to repeat because the technology has been squeezed so hard over the last 25 years. Thirdly the big fuel saver is slower speed and good old ships can play this game as well as new ships.

Bunker Bonus vs Big Balance Sheet

So there you have it. Most of the old fleet was built to operate in the 32-35tpd band, giving the 28tpd eco-ship a 15-20% advantage. But these new ships carry a lot of capital costs and in the long-term the return on capital counts, not who you beat at the loading point today. Against this background, and the many uncertainties over the true performance of the new eco-technology, it’s no wonder investors are struggling. Eco-features are definitely a nice bonus if you need a new ship, but it’s the “need” issue that’s tricky. Have a nice day.

SIW1064imagelIn 2012 US sales of electric and hybrid cars doubled, and we are told that before long more and more of us will be driving electric cars. The motor industry’s response to rising fuel costs and environmental legislation has been to develop new technology aimed at reducing emissions and fuel consumption. Sound familiar? What about electrically-powered ships?

Shock to the System

In electrical propulsion systems the power generated by the engines is converted to electricity before being transferred to the propeller(s) via electric motors. In conventional ships the engine is connected mechanically to a propeller either directly or via a reduction gearbox.

Vessels powered by electric systems are already well established in certain sectors. Our Graph of the Week shows that following a dip in 2008-09, contracting numbers for these ships have quickly recovered to levels seen during the height of the shipping boom. In 2011-12 464 new electric ships were contracted compared with 453 in 2006-07. Last year 1 in 8 new vessel contracts was for an electrically-powered ship.

Current Trends

Electric power is well suited to dynamically-positioned offshore development and support vessels, where manoeuvrability is a key factor and there is a large variation in the demand for power between transit and station-keeping. Increased demand for higher-spec units within these sectors, for example to explore and develop oil and gas fields in deeper waters, has helped to boost the share constituted by electric vessels.

Lower noise and vibration and the greater flexibility in terms of engine size and location makes electric-power well suited to cruise and seismic survey ships, while dual-fuel diesel electric systems are widely used on modern LNG carriers. Vessels that operate on short voyages and close to shore such as ferries and dredgers are also equipped with electrical propulsion, while higher torque at low speed can make these systems suitable for vessels operating in icy conditions, for example.

Against the backdrop of much lower contracting in the larger “volume cargo” sectors, the outlook for a number of specialised sectors has remained more robust, and this changing product mix is reflected in the growing share of electric ships seen in the graph.

What’s the Charge?

Cost and power limits mean that until now electric propulsion has not been a viable option for large vessels with heavy cargoes. However, with the market placing a greater emphasis on fuel efficiency, a number of innovative designs are being seen incorporating hybrid mechanical/electric propulsion, waste heat and exhaust gas recovery, alternative fuels and high voltage shore connection being adapted for larger cargo ships. Could this be the start of a long-term trend towards the increasing electrification of the whole fleet? Maybe the future is electric?