Tanker transport

The sate of this regional shipping industry, specifically the tanker business, was the subject of a speech made by Ahmed Al Falahi, CEO, Gulf Energy Maritime (GEM).

“Gulf Energy Maritime’s expertise has been in the clean products and chemical transportation business and I must say, without sounding boastful, that GEM has had a great record so far – be it profits, time charters, newbuilding delivery schedules, health, safety and environment or the overall business,” said Al Falahi.

Al Falahi cited the increasing investment in oil refining capacity as one of the key reasons.

“Regional oil refineries are stepping up their production to meet rising demand – these projects are valued at US $122 billion, due for completion before 2013,” said Al Falahi.

“Reports say that once completed these GCC projects alone will have the total capacity to produce the equivalent of six million barrels of petrochemicals a day.”

“The Middle East accounts for the highest increase in commodity chemical plant capacity.”

“By 2010 the potential capacity for this region is expected to be 45 million tonnes, as against 16 million tonnes last year – a direct reflection will be an increase in refining capacity.”

Al Falahi said that with new refineries being announced so often, ship owners have been encouraged to order new vessels in anticipation of the growing demand for energy transportation.

These circumstances influenced GEM’s decision to place an order to take its fleet strength to 19 by end of 2009, growth that will make it the largest private commercial tanker operator in the region.

“This decision was based on the demand for new oil and chemical tankers due to the gap created by IMO’s regulations on phasing out single-hulled tankers by 2010 and the forecast of new refineries being established,” said Al Falahi.

GEM’s venture into the new building market is not a lone one. Other companies are following a similar path thanks to the relative ease of acquiring funding for high capital investments.

“Among the largest ‘shipping banks’ approximately US $150 billion is outstanding to the shipping industry – and expected to increase due to the finance requirements of ongoing orders being placed,” said Al Falahi.

“Regional banks even provide attractive and lower interest rates for ship financing as compared to say real estate financing. Margins range from 0.65% to 1.25%.”

“Even the terms are attractive – 7 to 10 years for tankers with balloon payment at the end of the tenure. I have seen deals made for up to 25 years for gas carriers.”

Despite the fact that new ship orders cost considerably more than those ordered three years ago, and with the increase in bunker costs, and operating costs, the industry is still able to achieve a profit.

Al Falahi believes the figures speak for themselves.

“The industry has never had it better. New building contracts for 2006 topped US $75 billion, of which 35% was arranged by German banks, followed by Scandinavian countries with 17%,” said Al Falahi.

“Middle East new building financing orders have been mainly dependent on regional banks who allocate, as reports say, close to a double digit percentage figure for ship financing.

“The energy transportation sector, specifically, is enjoying a high, which is just about peaking off.”

However, this is totally dependent on the increase of demand and refineries. And on a cautious note let me ask – what if, as the case is, some of the refinery projects don’t take off? What do we do with all those newbuilds?”

With figures showing that roughly 60% of the world’s crude exports leave terminals in this region combined with the global expected growth in demand for oil means trade is only expected to grow.

“Production of ethanol is highest in this region with trade growth expected to go up by 14% until 2010,” said Al Falahi. “Trade in styrene, another important product, will increase by 12% while methanol will go up by around 4%.”

“The region’s reserves can still outlast most other world oil and gas reserves. All OPEC countries are committed to getting the highest quality products to consumers through a series of petroleum increment expansion projects that will bring millions of additional barrels per day to the global energy stream in the coming years.”

“However, the energy supply will face even tougher challenges in terms of demand increase, mix shift and potential environmental impacts to be posed by a sustained fast-growing economy in light of India and China’s blueprint for future development.”

“And this concern is not just limited to the oil and gas industry. The energy transportation industry faces similar challenges.”

“With 19 vessels [GEM has] sufficient employment for the future, but until then we will follow the demand-supply rule and be more focused on what we deliver and watch the market closely.”

“Our decisions for newbuilds will be based purely on a careful analysis of market trends. We will not follow any speculation in this market and neither should anyone else. So, until there is a justified demand we will be careful how we order new ships.”

“We were on top of the wave three years ago in terms of newbuilds. While industry trend has been a major factor in this growth, bank financing has aided that growth and we need to ensure in keeping with market trends that financing be given where it’s most needed – and right now it’s towards the support infrastructure for all those ships sailing the seas.”

“It is natural that the handling capabilities, logistics and facilities improve to cope with this traffic. From supplies, bunkering and repair, to ship finance and maritime law, the region has become a sophisticated global shipping environment, thanks to the strong leadership and vision in the Middle East.”

“And this is where I think bank lending should now concentrate on. What we need is also adequate infrastructure to support it and adequate regulation to govern ship ownership.”