Tanker Owners Scramble to Keep Up With Energy Boom; Rising North American Energy Exports Lead to Shipbuilding Frenzy

Tanker Owners Scramble to Keep Up With Energy Boom

Rising North American Energy Exports Lead to Shipbuilding Frenzy


Updated Oct. 30, 2013 9:53 a.m. ET


As the energy boom continues in North America, shipping operators and investors are now pouring billions of dollars into building new oceangoing tankers. Costas Paris explains the transforming product-tanker shipping demand. Photo: Getty Images

LONDON—Shipping operators and investors are pouring billions of dollars into building new oceangoing tankers to transport diesel, gasoline and aviation fuel—scrambling to keep up with North America’s energy boom. The shipbuilding frenzy is another knock-on effect of an energy revolution unfolding in the U.S. and Canada, where new drilling and extraction technology has unlocked vast new reservoirs of crude oil and natural gas.The U.S. still imports part of its crude-oil needs, but the newly tapped American oil has lowered costs for refiners. That is allowing them to better compete with their overseas rivals, ratcheting up exports and fueling demand for new tankers.

New York-based Scorpio Tankers Inc.STNG -0.84% has grown from a little-known firm of around a dozen ships in 2010 into one of the world’s biggest products-tanker operators, with about 50 vessels. Scorpio has an order-book of 65 new ships, worth between $3.5 billion and $4 billion, expected to be delivered by the beginning of 2016.

“In its simplest terms, the U.S. exports—and refinery expansions around the world—are transforming product-tanker shipping demand,” said Robert Bugbee, Scorpio’s president.

In July, U.S. refiners exported a record 3.8 million barrels of products a day, according to the latest monthly data from the Energy Information Administration. That’s up nearly two thirds from 2010 exports.

Nikolay Dyvik, head of shipping research at Oslo-based DNB Markets, expects that to translate into demand growth for product tankers of 7% in terms of capacity on average annually over the next three years. In comparison, demand for crude-oil tankers will likely decline by 1.5% over the same period, partly on the expectation that U.S. imports of crude will continue to fall.

It isn’t just U.S. refining exports driving tanker demand. Across the globe, growth in refining capacity is likely to rise to 2.1% a year over the next 10 years, up from 1.1% a year in the past decade, according to industry estimates.

That has already boosted the global fleet of refined-product tankers in recent years, according to global maritime advisers Drewry. New ship orders shot up from 68 vessels in 2010, to 116 in 2012. With 80 ships already ordered in the first nine months of the year, 2013 orders should top that, analysts said.

The combined tonnage of new orders rose to 5.8 million in 2012 from 3.3 million in 2010. Meanwhile, industry officials estimate private-equity players have pumped around $5 billion into financing product tankers over the past three to four years.

For some analysts, the shipbuilding is raising red flags amid gluts in other sectors such as container ships, crude-oil tankers, and bulk carriers used for transporting commodities such as coal and grain.

“The combination of rock-bottom prices to build new ships and the fast-growing investment in product tankers will lead to excess capacity,” said Lars Jensen, chief executive of Copenhagen-based SeaIntel Maritime Analysis. “In a cyclical industry like shipping, overcapacity is part of the game.”

But for now, growing exports is driving investment from both traditional shipping players and outsiders.

Maersk Tankers, a unit of Danish shipping giant AP Moller-MaerskMAERSK-B.KO +0.28%plans to invest around $400 million for up to 10 product tankers, while trying to sell a number of crude oil tankers, people familiar with the situation said.

Blackstone Group BX -4.23% LP and Greek shipping firm Eletson Holdings teamed up this month to form Eletson Gas, a new shipping company said to be worth around $700 million that will transport liquefied petroleum gas, or LPG, a refined product used in cooking and heating. Blackstone will provide the capital to build new ships or acquire used ones.

The new demand is even luring back some tanker operators who gave up on refined products years ago. Athens-based Metrostar Management Corp. exited the tankers market in 2010, but now has 10 ships on order, plus options for two more. “The dynamic change in the crude and products market was the defining factor leading us to re-enter the specific sector,” said Ioannis Theodorakis, an executive at Metrostar.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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