Q&A: Euronav chief executive skeptical on scrubbers
New York, 18 May (Argus) — Shipowners have taken several strategic approaches to comply with the planned International Maritime Organization (IMO) regulation on capping marine fuel sulphur content to 0.1pc from 3.5pc, commencing in January 2020. Argus spoke with Euronav's chief executive officer Paddy Rodgers, who shared his view on the issue, as well as on ballast water treatment regulation, vessel overcapacity, and other issues surrounding the oil tanker market.
Antwerp-based Euronav is a New York Stock Exchange listed crude oil tanker owner. Euronav is a founding member of the Tankers International VLCC pool and of Suezmax Chartering, a commercial joint venture with Diamond S. Management and Frontline. Below is an transcript of the interview edited for clarity:
Maersk recently announced in a presentation that they will use low-sulphur bunkers to comply with the global marine fuel sulphur cap commencing in January 2020, rather than installing exhaust scrubbers. By contrast, BP said in a presentation that scrubbers are very effective on bigger vessels and the company is now looking at retrofitting scrubbers on a large number of vessels in the company's fleet. What will be Euronav's do to comply with the 2020 marine fuel regulation: use 0.5pc sulphur bunkers, marine scrubbers, LNG for bunkering, or some combination of these?
The debate on solutions remains very fluid at present but Euronav's view is that this is primarily an issue for the refiners.
Therefore, we expect to comply with the proposed 2020 regulations using 0.5pc sulphur bunker fuel. We do not believe the cost and installation of a scrubber makes economic or environmental sense and the safety of this technology needs further investigation. Scrubbers are dependent on proper installation, operation, repair, and waste disposal, all of which raise questions of practicality when operating at sea in heavy weather.
We believe the need for scrubbers is exaggerated, as most refiners need to dispose their heavy fuel oil (HFO), while diesel is rather oversupplied. So selling low-sulphur HFO may be the most viable option. Euronav does not have plans to retrofit our existing fleet with scrubbers or to use LNG for bunkering engines.
What percentage of your 2016 marine fuel purchases were on a spot basis versus term basis?
We are 100pc spot.
Do you buy high-sulphur 500cst and high-sulphur 700cst grade bunkers (RMK), or Emission Control Area-compliant 0.1pc sulphur fuel oil?
We do not buy any RMK or 0.1pc sulphur fuel oil.
Do you see any changes to the widespread practice of slow steaming?
No, we believe the benefits of slow steaming are now well understood by tanker operators. Apart from short term tactical solutions, we do not expect this trend to reverse.
Is Euronav scrapping any vessels?
Not at this stage. Our fleet is relatively young, though we have three Suezmax vessels approaching the 20 year mark.
How widespread is the practice of floating storage?
We believe concerns over the volume of tonnage and stored oil to be released are overemphasized, and that there are likely only around 40 or so VLCCs engaged in longer term or strategic storage.
Other data sources have estimated a higher number by accounting for idle vessels and vessels headed to and from dry docks. In addition, despite the market being in contango for the most of the past three years, there is been very little financially-induced storage activity.
How big is the Euronav tanker fleet?
Euronav operates 55 tankers, with two Suezmaxes in our orderbook to be delivered in the first quarter of 2018. We own 53, and two are joint ventures. We charter 12 of these tankers, and operate three tanker vessels as floating storage.
The IMO's ballast water convention will enter into force on 8 September 2017, requiring all existing international vessels to install a ballast water management (BWM) system at their next special survey. Special surveys take place every five years and involve a close inspection of the ship, which must be placed in a dry dock during the process. The BWM system could cost millions of dollars for each vessel, depending on the vessel size. How many of your vessels are compliant with the ballast water convention, and how will this impact your operations?
Six of our vessels are compliant with the ballast water convention. We will continue to monitor developments, but we do not see a material impact on our operations, nor does this incentivize us to scrap any ships. The tanker market will see ballast water treatment systems phased in as a retrofit over a number of years, since the technology is not fully proven.
How significant are tanker pools?
We believe pools are the most appropriate means to operate large fleets and allow a low risk means for commercial consolidation which can benefit all shipowners.
The real power of pooling comes from better market knowledge and the opportunities that come with it. Not only is it better to optimize the voyage earnings through synergy, but also to price the whole market at adequate economic levels through better knowledge and more transparency.
Delays in demurrage payments are a persistent problem for shipowners. What can the industry do to coerce oil traders to pay their demurrage fees in a timely manner?
Owners should collectively put pressure on the oil companies.
What is your outlook for the VLCC and Suezmax markets for 2017-2018?
We anticipate 2017 will be challenging, as this calendar year will see peak order deliveries for VLCCs and especially for Suezmaxes. Demand for crude, increasing ton miles, and strong oil supply despite the OPEC cuts, provide a positive backdrop. But vessel oversupply will impact owners' sentiment and potentially impact freight rates. We expect these headwinds to lessen into 2018, but we are mindful of current vessel order patterns, especially in VLCCs.
What are some opportunities and threats for Euronav's VLCC and Suezmax fleets?
Opportunities are two-fold. First, we can improve our fleet, as we have access to a stronger balance sheet compared with our competitors. And second, we can expand our pooling through our membership in the Tankers International pool, and take advantage of our Suezmax marketing joint venture.
As for threats, extended periods of OPEC production cuts and increased vessel ordering will reduce the value of everyone's fleet and delay sustained recovery in tanker freight rates.
Can you talk about the problem of shipyard capacity?
Tanker owners should hold their nerve and be careful not to get spooked into a new round of ordering. Saving one shipyard today condemns all shipyards tomorrow, and possibly a shipping sector or two along the way. Banks must either grant yards refund guarantees for new contracts at lower prices, probably at below shipbuilding cost, or accept their losses and close down these yards. Yards may restructure, but they need to build ships for sale, even at lower prices, because no revenue is no business plan.
This disconnect is caused by bank stress and overcapacity at shipyards. The banks have held buyers out of the market by reducing available capital, but that has yet to happen at the shipyards, so the overcapacity remains. Shipyards continue with their sales pitch, that "this is the last berth, at this price, for this delivery window". This time, the reasoning is that ballast water treatment systems and the need for scrubbers after the 2020 fuel reforms will be the equivalent of the single-hull phase-out behind the last tanker boom. Shipyards pitch that their pricing cannot go lower and "someone else will order if you do not - you will have missed your chance". This explains the recent rush of rather ghostly orders.
What can shipowners do to support this market?
Do not get spooked into ordering. The world fleet got rid of single hulls early, bringing forward scrapping normally due between 2012 and 2019. The tanker sector will get back into a normal cycle post-2019. Orders placed now risk expanding the global fleet and entrenching current shipyard overcapacity and world tanker fleet overcapacity. But this will only happen if new orders are delivered ahead of scrapping. If there is a rush in orders because of a political crisis or opportunistic storage in the second or third quarter of 2017, shipowners should be careful not to misread the market. It might not be the market moving early. Shipyards need shipowner support — but only after rationalization.