The State of the Tanker Industry

Oslo IMSF May 22, 2012 The State of the Tanker Industry Erik Ranheim Senior Manager Research & Projects

The Common Law of Business Balance It s unwise to pay too much, but it s 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 can t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better. John Ruskin (1819-1900

Sustainability Environment Transparency Responsibility Accountability

Tankers serve the oil industry Fixed line telec. Food producers Retailers Mining FT 100 Chevron General Electric China Mobile Shell Market value ($m) 10 largest March 2012 Beverages IT Technology Pharmac. Banks Oil & Gas I&C Bank of China IBM Microsoft PetroChina Exxon Mobil Apple 0,0 0,5 1,0 1,5 2,0 2,5 1000 bn market value 0 100 200 300 400 500 600 $bn

Safety & the environment

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Tanker incidents - all tanker types and sizes Number incidents 1050 1,000 ts oil spilt 600 840 630 Miscellaneous Fire/Expl Hull & Machinery Grounded Coll/Contact Oil pollution 480 360 420 2012 is a projection based on 142 days 240 210 120 0 0 Source: INTERTANKO, based on incident reports from LMIU and pollution figures from ITOPF Accidental oil pollution from tankers was record low in 2011 and again in 2012

Safety 70 60 50 40 30 20 10 0 Number reported fatalities 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Accident rate highest for highest for ships built in 2000s, lowest for pre 1980s built tankers Accident rate highest for tankers 10-29,000 dwt, lowest for the VLCCs Engine failure the biggest hull & machinery type of incidents (many un-reported?) Reduced pollution to a little extent related to double hulls

The environment Emission from shipping is dirty and harmful for the health and the environment MARPOL Annex Vi - sox/nox GHGs emission from shipping is not directly regulated under the Kyoto protocol EEDI SEEMP MBMs Ballast water

Tanker market

Tanker market index $ 1,000 per day 70 60 50 40 30 20 Weighted by dwt 10 0 YtD12 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Source: RS Platou

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 World GDP. Oil demand and seaborne trade growth % growth 15 GDP 10 Oil demand Tonne miles 5 0-5 -10

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 World GDP. Oil demand and seaborne trade growth 24 mbd bn tonne-miles 13 000 21 18 Middle East Oil Prod mbd 11 200 9 400 15 Tonne miles 7 600 12 Asia 50% dependent on Middle East Europe 18% US 17% 5 800 9 4 000

1995 1996 1997 1998 World increase in oil demand China, Middle East, USA, ROW* and increase in world bio-fuel production 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 mbd 3,0 2,6 2,2 1,8 1,4 1,0 0,6 0,2-0,2-0,6-1,0-1,4-1,8 Main Changes: Area mbd Other Asia: 0.24 L America: 0.17 Africa: 0.16 FSU 0.13 Mexico/Canada -0.22 Europe -0.33 Middle East 0.21 USA -0.01 Rest of world* USA China 0.36 Middle East China Others: 0.06 World Biofuels demand Total 0.77-2,2-2,6 Source: INTERTANKO/IEA

Oil import to selected areas mbd 14 12 10 8 6 4 2 USA down 1.0 mbd since 2007 (peak) Europe* down 1.2 mbd since 2003 OECD Asia** down 0.7 mbd since 2000 China up 2.7 mbd since 2000 * includes intra European import ** Japan/Korea 0 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994

jan.83 des.83 nov.84 okt.85 sep.86 aug.87 jul.88 jun.89 mai.90 apr.91 mar.92 feb.93 jan.94 des.94 nov.95 okt.96 sep.97 aug.98 jul.99 jun.00 mai.01 apr.02 mar.03 feb.04 jan.05 des.05 nov.06 okt.07 sep.08 aug.09 jul.10 jun.11 US net crude oil import and production Jan 83 - Feb 12 mbd 10 8 6 4 Production Net crude import 2 0 N American oil production +1.1 mbd 2010-2012 demand declined 0.5 mbd

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Oil price and freight rate mbd 120 Nominal price Arab Light Real price Arab Light 100 Nominal freight rate AG-West Real freight rate AG-West 80 Deflated by the Consumer Price Index (USD) CPI* index 1982-84=100 60 40 20 0 27.3% 16.5% 31,8% 8.5% 7.3% 4.8% 3.8%

Oil market highlights Arab light oil price 1990-2004 $20.0 per barrel 2005-2012 $73.0 per barrel 18 May $105.0 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 China s growth rate curbed New Middle East export refineries New Abu Dhabi oil pipeline by-pass Hormuz Increased dependency on the Middle East Strong stock building beginning 2012 Tension in the market Iranian sanctions Still positive growth? and

Tanker Supply

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Projected Tanker Fleet Development 1992-2013 m dwt 545 number 6 400 491 5 780 dwt Number 437 5 160 383 4 540 329 3 920 275 3 300

Tanker deliveries and removals m dwt SH phase out 35 Scrapping/ conversion 15 Delveries Balance deliveries - deletions -5 Assumed removal of double hull -25 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 year

Tanker phase out, deliveries, scrapping tankers 10,000 dwt + balance(surplus) assuming various demand increases m dwt 75 Assumed market balance end 2008 Last phase out 50 25-1.8 % growth in 2009 3.8% growth in 2010 0.5% growth in 2011 Deletions Delveries Surplus zero trade growth Surplus 2.5% trade growth Surplus 4% trade growth 0 Surplus 6% trade growth -25 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Assumed removal DH tankers year

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1Q12 Tanker contracting by segment in bn USD and m dwt $ bn m dwt 55 85 44 Handy Aframaxes 68 33 Suezmaxes VLCCs m dwt 51 m dwt 22 34 11 17 0 0 Source: Clarkson/SIW

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Average age tanker fleet Years 16 14 12 10 8 6

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Tanker trends - fleet, VLCC price, oil demand, and tonne-miles indices 175 170 165 160 155 150 145 140 135 130 125 120 115 110 105 100 95 90 85 80 75 70 65 Oil demand index Tonne miles crude tanker index Tanker fleet index VLCC price index

Economics changed

Historical VLCC hire and bunker costs 100 % 90 % 80 % 70 % 60 % Bunker 50 % 40 % 30 % 20 % TC hire (+port costs) 10 % 0 % 1992 2002 2012

Bunker price Fujairah and basis bunker price WS 380 Cst $/tonne 800 700 600 380 cst Fujairah Annual average Fujairah WS basis 500 400 300 200 100 0 02.07.1999 02.11.1999 02.03.2000 02.07.2000 02.11.2000 02.03.2001 02.07.2001 02.11.2001 02.03.2002 02.07.2002 02.11.2002 02.03.2003 02.07.2003 02.11.2003 02.03.2004 02.07.2004 02.11.2004 02.03.2005 02.07.2005 02.11.2005 02.03.2006 02.07.2006 02.11.2006 02.03.2007 02.07.2007 02.11.2007 02.03.2008 02.07.2008 02.11.2008 02.03.2009 02.07.2009 02.11.2009 02.03.2010 02.07.2010 02.11.2010 02.03.2011 02.07.2011 02.11.2011 02.03.2012 02.07.2012 02.11.2012

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.

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 CO2 emission High oil prices has a negative effect on demand

Conclusion

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 Will energy efficiency create multi-tier market EEDI -10% 1 Jan 2015 / -20% 1 Jan 2020 / -30% 1 Jan 2025 Shipbuilding over-capacity - - further pressure on prices 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 Leading tanker the way; making a difference market is its unpredictability

Indicative tanker freight rates $/day 100 000 90 000 VLCC AG-Japan, 250,000 ts Aframax N Sea-UKCont, 80,000 ts Suezmax Wafr-US 130,000 ts Product Caribs-US, 38,000 ts 80 000 70 000 60 000 50 000 40 000 30 000 20 000 10 000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Middle East oil production mbd 24 23 22 21 24 20 23 19 18 22 17 21 16 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 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 jan.10 apr.10 jul.10 okt.10 jan.11 apr.11 jul.11 okt.11 jan.12

World oil demand 2012 mbd 30 25 Mexico OECD 20 Canada 15 62% China 10 29% 5 USA 25% Other 0 N America Europe Asia/Pacific Middle East Latin America FSU Africa 27.3% 16.5% 31,8% 8.5% 7.3% 4.8% 3.8%

Ship deliveries - m cgt m cgt 50,0 40,0 S Korea China Japan Europe Others 30,0 20,0 10,0 0,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Clarkson World Shipyard Monitor Aerage 30 m cgt

US product import and export mbd 4,0 3,5 3,0 2,5 2,0 1,5 Export Import 1,0 0,5 0,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Trade: 2000 3.0 mbd 2006 4.5 mbd 2012 4.9 mbd

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 4m12 VLCC - 15 years old and scrap value m $ 60 50 40 30 20 10 0 Source: Clarkson/SIW

Contracting by Country/Region (all types of ships) m cgt contracting cgt 100 Japan Contracting by Country/Region (all types of ships) South Korea $ m Afra price $ m price 75 P.R.China Europe 80 Others Aframax NB price 60 60 45 40 30 20 15 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Est12 0 Average 18 m cgt Average 58 m cgt Average 30 m cgt

Deliveries by Country/Region (all types of ships) m cgt contracting 50 40 30 Others max 2.6 2013 Europe max 6.2 2008 China max 19.7 2011 S Korea max 16.1 2011 Japan max 9.9 2006 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2014 Average 18.3 m cgt Average 38.8 m cgt 13.6 m cgt

Worldscale A chartering tool

Purpose of Worldscale To enable a tanker to obtain the same net return per day at the same WS percentage regardless of the voyage actually undertaken.

Why use a freight scale? Ease of conducting business Standard of reference Faster response to quotations Facilitates competition Geographical options included

Freight Scales History Originally, tanker fixtures had several pages of freight rates covering many optional ports Freight scales developed by UK and US government during World War II Basic principle: owners should receive the same net daily revenue irrespective of voyage performed

WS Organisation Produced by two non-profit making organisations in London/New York aiming at independence from external bias and narrow market views Financed on subscription basis Boards, major shipbrokers in London and New York

WS Basic An Index of Reference Rates with common calculation factors Flat rate expressed in USD per tonne of cargo carried Market rates are expressed as a percentage of the published flat rates Amended yearly for changes to bunker prices, port charges and exchange rates Issued early January WS book contains 73,000 rates, web-site has over 500,000 rates Further rates available from the WS Associations Rates for particular ports may be corrected over the year if substantial changes WS circular issued Available on annual subscription basis only

WS Basis for calculation Tanker size 75,000 dwt Average speed 14.5 knots Bunker consumption Steaming 55 ts per day 100 ts per round voyage for other than steaming 5 ts for each port Port time, 4 days from one loading to one discharge port, +12 per extra port Fixed hire element: $12,000 per day Bunker price 380 cst (606.56 per tonne 2012) Ports costs based on specific exchange rates Canal transit times: 24 hours for Panama Canal 30 hours for Suez Canal

Conclusion China still the driving force Scrapping of first generation of double hull tankers started Age becoming an issue Shipbuilding over-capacity, but perhaps also Limited access to capital 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 Global economy is certainly not yet in rude health. In Ms Lagarde s words: The risks remain high; the situation fragile. The only predictable thing about futures tanker market is its unpredictability

Core activities 2006/2007 US oil import peak 13.7 mbd 2011 11.4 mbd Safety/technical Security/piracy Regulatory/Legal Tanker Information

Oil import to selected areas mbd 14 12 10 8 6 USA down 1.0 mbd since 2007 (peak) 4 2 Europe* down 1.2 mbd since 2003 OECD Asia** down 0.7 mbd since 2000 China up 2.7 mbd since 2000 * includes intra European import ** Japan/Korea 0 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2006 2006 55 Tanker contracting by segment - m dwt 85 7% increase in the tanker fleet Record ordering $64 bn/69 m dwt Iran used tankers for temporary floating storage Start of slow steaming 44 33 22 11 Handy Aframaxes Suezmaxes VLCCs m dwt m dwt 68 51 34 17 2007 Peak US oil import Record ordering Hebei Spirit accident 7 December 2007: charterers reluctant to take SH tankers 0 14 13 12 11 10 9 8 7 6 5 4 Total US oil import - crude and products - mbd 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

2008 Oil price peaks July 3, 2008, at $145.3/bbl Primo 2008, low oil stocks, 8 m dwt tankers sold for conversion 4 m scrapped Tanker contracting by segment - m dwt 2009 Deliveries of tankers 10-6,000 dwt peak at 11 m dwt Storage on tankers peak Dec at 154 m barrels Total US oil import - crude and products - mbd

2010 Strong reduction in floating storage Many tankers sold for conversion 8 m dwt sold for conversion 4 m scrapped Tanker contracting by segment - m dwt 2011 Deliveries of tankers 10-60,000 dwt peak at 11 m dwt Storage on tankers peak Dec at 154 m barrels Total US oil import - crude and products - mbd