Tanker Shipping & Trade April/May 2018 by rivieramaritimemedia

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contents

April/May 2018 volume 12 issue 2

35 11

Regulars 5 COMMENT 6 CONTRACTS & COMPLETIONS 8 ANALYSIS 57 LEGAL BRIEFING 60 LAST WORD

Greece 11 Our annual review shows that Greek tanker owners are still at the top of the tanker tree, and reviews the technological changes are taking place in Greek shipmanagement

Cyprus 24

19 Cyprus has become a hub of shipmanagement, and debate centres on merging to increase scale, or remain small to provide a â&#x20AC;&#x153;familyâ&#x20AC;? service. 24 Tanker Shipping & Trade exclusively interviews the new deputy minister, Natasa Pilides

Power and propulsion 27 Hybrid propulsion makes an appearance in the engine room, providing low speed power without straining the main engine

Green tanker tech

29 The decision to fit scrubbers depends on many factors. ABS has developed software that will aid making that important decision 32 Knowing the precise amount of liquids on board is vital if a tanker is to perform with optimum efficiency. In this article, PSM explains the best practice in the placement and use of gauges

Cargo control and monitoring 35 Taking and retaining cargo samples can make the vital difference in settling off-spec disputes. Gard P&I explain that training and following procedures could save owners and charterers millions of dollars

Inert gas 39 The inspection of the tanks before loading is fraught with statistical error, according to L&I, and that entry into tanks can be avoided by examination of the washing water

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Tanker Shipping & Trade | April/May 2018

contents 43 There are several methods of generating inert gas, and each requires a different amount of space. Coldharbour produces a unit with a particular small footprint

Product tankers 45 As the product tanker fleet moves towards a more balanced supply demand outlook, Tanker Shipping & Trade looks at the reasons behind the changes in the fleet

Outlook 52 Tim Smith, director, oil and tanker markets at Maritime Strategies International looks at the structural changes that could affect tanker demand 54 CargoMetrics’ algorithm to model shipping supply and demand is a closely guarded secret, but enough hints were dropped at CMA 2018 for a picture to be painted of the hedge fund’s capabilities

Finance 58 Overdue demurrage claims settlement can be a strain on owners’ working capital. C Dem Finance has found a way to provide an alternative financing method for working capital using demurr age claims 59 Virtual arrival was the subject of a prize-winning paper presented at the CMA 2018. Delaying arrival could be the key to reducing emissions and capex

Next issue Main features include: sustainability and corporate social responsibility, ballast water management, Denmark & Sweden area report, tank coatings

April/May 2018 volume 12 issue 2 Tankers & Markets Editor: Craig Jallal t: +44 20 8370 1717 e: craig.jallal@rivieramm.com Brand Manager – Sales: Paul Dowling t: +44 20 8370 7014 e: paul.dowling@rivieramm.com Sales Manager: Chris Tims t: +44 20 8370 7015 e: chris.tims@rivieramm.com Head of Sales – Asia: Kym Tan t: +65 6809 1278 e: kym.tan@rivieramm.com Production Manager: Richard Neighbour t: +44 20 8370 7013 e: richard.neighbour@rivieramm.com Subscriptions: Sally Church t: +44 20 8370 7018 e: sally.church@rivieramm.com Chairman: John Labdon Managing Director: Steve Labdon Finance Director: Cathy Labdon Operations Director: Graham Harman Head of Content: Edwin Lampert Executive Editor: Paul Gunton Head of Production: Hamish Dickie Published by: Riviera Maritime Media Ltd Mitre House 66 Abbey Road Enfield EN1 2QN UK

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Tanker Shipping & Trade | April/May 2018

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donia Visit us at Posi .115 Hall 4, stand 4

COMMENT | 5

The conference season gets underway

I Craig Jallal, Tankers and Markets Editor

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f you have never been to Posidonia, and everyone in shipping should go at least once, then you have missed an opportunity to enjoy “Sun, Sea and Ships”; also (by no little coincidence) the title of this issue’s review of the Greek tanker scene. Greek owners remain at the top of the tanker tree in terms of fleet value and numbers, and at Posidonia they are treated like royalty. But if the Greek tankers owners are the kings of the shipping world, their Cypriot counterparts must be considered ambitious princes. The appointment of a deputy minister of shipping shows the island is now recognising the substantial contribution its maritime hub makes to the economy. In this issue, Tanker Shipping and Trade has an exclusive interview with the new deputy minister of shipping Natasa Pilides, who explains her aims and strategy for shipping in Cyprus. While Posidonia only takes place every other year, the Connecticut Maritime Association conference and exhibition (CMA 2018) is an annual extravaganza. While the name might suggest a parochial event limited to the East Coast, CMA is now the de facto US version of Posidonia, but without the sun (it takes place in March). CMA also features a more varied range of speakers and subjects than its Mediterranean alternative and in this issue, we feature the academic work of SUNY maritime college student Andreas Stasinopoulos, who presented a paper on “Virtual Arrival” at the CMA. The research points to the massive gains in efficiency that could be reaped from the digitisation revolution. Staying with innovation, hybrid propulsion is now up and running in some small product tankers. The hybrid technology described in this issue has been developed by the Finnish company WE Tech. Tanker Shipping & Trade would like to hear from other companies working in this sector for future issues, and not just for small product tankers. Product tankers feature heavily in this issue. The sector is now emerging from a cyclical

trough and according to owners and operators, the fleet is moving towards supply and demand balance. Talking of which, a balancing act exists between those that want to buy second-hand tonnage and those who are selling.

“If the Greek tankers owners are the kings of the shipping world, then Cyprus could be seen as the ambitious prince”

Many will be understandably surprised to see the words “exciting” and “demurrage” in the same sentence, but another innovation discussed in this issue involved funding working capital for tanker operations through demurrage claims. Demurrage claim settlement tends to balance tanker owners trying to avoid being treated as a source of interestfree loans by charterers on the one hand, and maintaining relationships by tempering the aggressive pursuit of payment on the other. C Dem Finance seems to have found a third way, which balances the two conflicts while boosting working capital. In a related article under Legal Briefing, Ince & Co partner Jeremy Bigg and associate Adam Swierczewski explain the options available to tanker owners when disputing payments. In Last Word, Høglund Marine Automation chief executive Børge Novga argues that while the large-scale automation of tankers is already here, its application is often misunderstood. Finally, your editor of Tanker Shipping and Trade will be at Posidonia, so make sure you swap business cards. Remember, Posidonia is not all Sun, Sea and Ships, it's about networking, too. TST

Tanker Shipping & Trade | April/May 2018

6 | CONTRACTS AND COMPLETIONS

TANKER MARKET TILTS TOWARDS EQUILIBRIUM M

ounting evidence points towards a slowdown in tanker contracting, suggesting fleet supply is trending towards market equilibrium. We anticipate a sustained recovery will commence 2020, when many ships in the current global trading fleet will pass on for demolition. The average lifespan of a tanker is edging 15 years now, which would have been unthinkable just three years ago. However, with so many vessels taking advantage of spot freight rates and time charters offered for longer periods, owners will exploit the market right to the end. Even with recycling rates recently exceeding US$400 per ldt, not many owners have yet been tempted to dispose of their assets, which is disappointing. This is partly explained however by increased second-hand asset values that now match or exceed demolition prices. New compulsory legislation regarding tighter emissions controls at the start of 2020 should see more enforced retirements, but this is not guaranteed. A plethora of new ships have been ordered with Tier II emission engines specified. This will qualify them for at least five years, until the next classification survey after commissioning, saving additional expenditure over Tier III engine models of between US$1M-US$3M per vessel, in terms of upgrading to lower emissions outputs. That said, it really is remarkable how the emission qualification rules have been exploited by builders. This story has been told before with falsified keel laying dates, which may have skewed figures. Japanese construction rates are the third largest globally, with 182 tankers under construction aggregating 14,432,552 dwt. Dozens of these are own-account vessels for the trading houses or builders. Technically, they are not speculative, as eventually they are picked off by domestic owners and some overseas customers on

Tanker Shipping & Trade | April/May 2018

BRL reviews the latest contracts and completions, and believes there is mounting evidence of a significant change in the direction of the tanker market

a leasing or bareboat charter basis, with purchase options. Deliveries stretch as far ahead as 2021. However, it remains a struggle for Japan to compete with rivals China and South Korea, both of which receive cash inducements from substantial subsidy schemes. Overall, the global order backlog at the end of March stood at 949 vessels, aggregating 88,322,637 dwt, compared with 948 totalling 86,511,463 dwt at the end of January. The virtual parity in numbers here is also evidenced by deliveries in the first calendar quarter of 2018, which stood at 83 vessels commissioning 7,128,406 dwt into the global fleet compared to 87 tankers totalling 8,335,836 dwt ordered in the same quarter last year. The near parity in deliveries in the first quarter of this year should not be misinterpreted as a permanent slowing down. With 949 vessels still scheduled, there is still the danger of over-kill. It has happened before. From 2020, the industry will have to cope with new and far tighter environmental emission controls, prompting charterers to hire the youngest and greenest tankers. This obligation of conscience has played its part in the rush of ordering in the last three years. However, the trend in contracting is still down since its peak of 482 vessels aggregating 50.4M dwt in 2015, when the recovery really took off. The subsequent years of 2016 and 2017 yielded 374 and 316 units, aggregating 23.9M dwt and 34.8M dwt respectively. The increase in deadweight tonnage between the two years reflects a surge in VLCC business in 2017, when 62 vessels were added totalling 19.5M dwt. So far in 2018 this trend has continued, with a further 16 added which will commission another 8.3M dwt into the global fleet. There was palpable relief among shipbuilders that the tanker revival kept orders ticking over in 2016/2017,

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CONTRACTS AND COMPLETIONS | 7

following the collapse of the bulk carrier business orderbook which bankrupted many builders and left tanker owners with little in the way of choice. Even the biggest builders experienced huge debts, but in the last six months, bulk carrier orders have seen a revival and, for the first time in over a year, the big three South Korean builders are enjoying quarterly operating profits again. All this has taken the heat off tankers somewhat. Many owners will be encouraged at the prospect of increased scrapping and growing demand for green passport vessels, especially with ports becoming more selective in receiving older tonnage. Change must and will

happen, but many still believe the pace is too slow. And while owners claim political interference and onerous regulation remain significant hurdles to overcome, the reality is that resistance is waning. Larger fleets are becoming the order of the day, with mergers and acquisitions constantly on the rumour mill and this will ultimately force smaller owners who have traded on a specialist small customer base to finally give in. For the best part of two years, shipyards have been unable to raise prices sufficiently to yield a profit, while having to content with tail-end 70% payments on completion of vessels. In China, there have been several mergers among builders, bringing

TANKERS CONTRACTED JANUARY 2018 by vessel type and vessel count

VLCC Suezmax Small products Small chemical Panamax LR1 Panamax Crude Medium Products Handysize MR1 Handysize MR2 Aframax Crude Aframax 0

TANKERS DELIVERED JANUARY 2018 by vessel type and vessel count

VLCC Suezmax Small products Small chemical Panamax LR1 Panamax Crude Medium Products Handysize MR1 Handysize MR2

all but two under the state umbrella, which has upset competitors; given the tight financial climate, South Korea and Japan are having to follow suit. Leasing schemes, with bareboat charters to owners building in China and joint ownerships between owner and shipbuilder, are becoming more common, with the advantage also of circumventing difficult negotiations with traditional banks. Elsewhere, several unlucky owners have seen their orders forcibly removed from orderbooks by courts conducting receivership proceedings. Sungdong is the latest casualty, now under court protection having stopped work last November. Only five Aframax tankers are currently on order for Greek owner Kyklades Maritime; four of these are reported sold, but this is in doubt due to the receivership. The quintet is unlikely to deliver and receivership was induced by the South Korean government, even though refund guarantees had been secured. The court may allow a slimmed down role of ship repair only. This is not the first time Sungdong has hit financial trouble, having previously abandoned 20 tankers. The builder scored its success through a sole concentration on tankers. STX Offshore & Shipbuilding is also under the microscope, having only been rescued a year ago. The principal creditors in each are two state-owned banks, but the government has determined it will stop subsidising huge losses. Once again, STX at Jinhae has a dependency solely on tankers, with a mix of small- and medium-size chemical/products carriers. This yard has been given permission to continue receiving orders, but only on a profitable basis and of small sizes. Similar situations are occurring in China, while in Japan the financial crises are being countered by mergers. A salient point, often missed, is the relatively high total of tankers since the shipbuilding crisis that have been forcibly withdrawn, after owners signed contracts in good faith and secured refund guarantees. Confidence in certain yards was also hurt when committed owners were looking at delivering ships into a bullish trading environment. It is difficult to forecast the outcome of wet-sector traders in the next two years, but 2020 should mark the beginning of the dramatic change they all hope for. TST

Aframax Crude Aframax 0

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Source: All data is from BRL Consultants. Data is at 28 March 2018.

Tanker Shipping & Trade | April/May 2018

8 | ANALYSIS

USING BLOCKCHAIN TO REVOLUTIONISE THE CAPITAL FINANCING OF TANKERS MODEL

TRANSACTION

Fractionalized 1:1 derivative of asset ownership of X%

NOTE: Client Money Deposit and Key Custody is held with a licensed & trusted 3rd party – typically a bank or a reputed Law Firm / Notary with Escrow facility.

Global participants

Seller shipowner.io ecosystem legal title / asset ownership X%

Current asset owner

Vessel Owning SPC / Securitization vehicle

Cash Withdrawal

legal title / asset ownership (1 - X%)

Buyer

Shipowner.io Ecosystem (Issuance & Administration Platform) Cash Tracking

Equity Tokenization

Client Money Deposit & Key Custody Ownership & Derivative

Cash Market Earnings

ince the onset of the financial crisis, shipping has struggled to “scale back” exposure. With the tanker market facing a decline in utilisation rates, the tanker sector's traditional sources of financing are either retreating or exiting altogether. Alternative sources of finance must be developed and quickly, to avoid the catastrophic damage that a credit crunch could inflict on the tanker industry. New financial technology strategies are being deployed in various industries, but shipping has remained relatively insulated from such endeavours – until now. Shipowner.io is the world’s first distributed ledger platform; it aims to revolutionise ownership of maritime assets and services, using cutting-edge blockchain technology. Access to the platform is via SHIP (SHipping Industry Participations) tokens built using Ethereum’s smart contracts. Participation is broken down into small fractions, depending on the underlying tanker or service, whereas traditional financing routes involve millions of dollars per ticket, usually provided by large liquidity providers. In summary, this platform democratises the way ships are owned, sold and operated. Shipowner.io aims to solve core industry issues while allowing all participants the possibility of achieving portfolio diversification, superior liquidity and an equitable sharing of benefits. The platform’s built-in efficiencies bring down the overall costs in a transaction while diminishing the role of the intermediary. Furthermore, the system allows for extreme levels of transparency, something which is not usual in the shipping industry. Further, the system aims to disrupt industry consolidation, granting smaller tanker owners a level playing field, creating an environment for the better operations to win out. Financing and crew costs can be further optimised through equitable revenue-sharing models. Typical participants on this platform will include maritime investors such as funds, high-net-worth individuals, private equity

Tanker Shipping & Trade | April/May 2018

Cash Deposit

Equity

Signed Tokenized Equity Transaction Tokenized Cash Payment

Cash Allocation NOTE: We can eliminate this step if the transaction is done in Ethers

Distributed Ledger Ethereum Blockchain (Security Depositary)

Tokenized Equity Tracking

Cash Deposit & Tokenization

Client Money Deposit & Key Custody Tokenized Equity Transfer Signed Tokenized Cash Transfer

firms, pension funds, shipmanagers and small investors. They all have the same level of access to information in a transparent way. For shipowners the asset monetisation process is straightforward. Following an initial evaluation - employing asset selection based on artificial intelligence algorithms and proprietary risk-reward models - final terms are agreed upon. The asset(s) is then transferred to a dedicated legal structure, tokenised and divided into fractions, at a low cost versus bank financing or capital markets. These fractions are then bought by Shipowner.io’s platform participants using SHIPs. As soon as the sale of portions is completed, funds are transferred to the shipowner. To ease the entry for non-crypto participants, the platform provides dedicated 'wallets' that are unique to each participant. These wallets will be used to buy/sell within the platform and store SHIP tokens, in addition to other fractional assets and services. Shipowner.io is working on the next phase of its development – the online exchange. This exchange is expected to begin testing in 3Q 2018 and will facilitate the direct, seamless transfer of one portion with another. This provides exit possibilities to participants, without having to physically sell the tanker. Currently, such a possibility does not exist at a broken-down fractional level. Additionally, the exchange envisages allowing levering up of individual fractions, similar to margin trading, while allowing the underlying physical asset to remain debt free. This ensures a higher probability of achieving positive cash flows through market cycles, compared to traditional capital structures, where the “straight-line amortisation” of exposure provided by lenders is agnostic to market cycles. Unlike other entrants, Shipowner.io is a fully constructed product, which has been extensively tested and is being rolled out in phases. Shipowner.io has already secured commitments in excess of US$200M for marine assets and services. The target is to finance US$14Bn of assets and services by 2023. TST

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Greece AREA REPORT | 11

SUN, SEA, AND SHIPS

reece is slowly emerging from economic collapse, which forms the background for the largest tanker fleet in the world. According to Eurobank of Greece, shipping accounted for 3.7% of the country’s economy between 2000 and 2013. By way of comparison, the more familiar sector of tourism, contributed 4.2%. Therefore, changes in world trade, and the demand for shipping, has a direct impact on the Greek economy. Greece enjoyed a GDP growth as high as 5.7% in the recent past, according to the World Bank. But in 2008, the financial crises suckerpunched both shipping and the Greece economy, and the country was plunged into a long, drawn out bailout.

Such is Greece’s position in global shipping that the biennial Posidonia exhibition in Athens is one of the industry’s “must attend” events. But it is not all sun, sea, and ships

Greek Shipping Law 27/1975 status

The European Commission “invited” Greece to better target its tonnage tax and related support measures in the maritime sector, as the Commission found that certain current provisions on the taxation of ships (for instance, Law 27/1975) may breach EU state aid rules, as specified in the Maritime Guidelines. This is one of the deliverables required as part of the bailout, and while some of the issues have been addressed, it remains an ongoing issue.

Economic turnaround?

Maybe economic turnaround is too strong a phrase, but there are signs of a definite improvement. Unemployment has dropped below 20% from 30% in 2013, and the economy is forecast to grow by 2.5% in 2018. In February 2018, Greece issued a new seven-year bond and raised €3Bn (US$3.72Bn) at a yield of 3.5%. The issuance proved to be oversubscribed, a positive indicator of overseas investor confidence in Greece.

Greece number one in tankers

Fiscal waterboarding

This was the term used by Yanis Varoufakis, the shavenheaded, leather-jacketed, motorbike-riding, former finance minister, to describe the

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third bailout from the Trioka of the EU (represented by the European Commission), the International Monetary Fund, and the European Central Bank, representing the countries that use the euro as a currency. The third and last bailout, which commenced in 2015, was a loan of €85Bn, with around 100 key deliverables required by the Trioka for the release of the bailout. Some of these deliverables were felt by many to be anathema to the traditional way of business in Greece; they included changes to Greek shipping law.

Theophanis Theophanous (BSM Greece): training soft skills as well as the necessary requirements for the job

Such is the quantum of Greek shipping, in almost every category, Greek owners will be at the top of the list, or at the very least in the top 10. Tankers are no exception. Greece is the global number one provider of tankers, with over 1,500 vessels in its tanker fleet; second-placed Japan, and third-

Tanker Shipping & Trade | April/May 2018

12 | AREA REPORT Greece

placed Singapore are a long way behind with a third fewer tankers. In total deadweight terms, the difference is even more stark. The Greek tanker fleet totals over 161M dwt, more than that of China, Japan and the USA combined. This reflects the prominence of the larger tanker sectors preferred by Greek owners. According to VesselsValue, the Greek tanker fleet is also the most valuable (as at March 2018), with a total value of US$35Bn. This translates into an average value of US$23M per tanker. In terms of the average value per tanker, this is only beaten by the US-owned fleet, which is the fourth most valuable tanker fleet. However, the US figure reflects the higher replacement value of US-built tankers sailing under the US Jones Act.

Nikos P Tsakos, (president of Intertanko): fears for the long-term status of Greek shipping

Greece number one in VLCCs

As noted above, the Greek tanker fleet is skewed toward larger vessels in deadweight terms, with a quarter of the tanker fleet in the VLCC sector. Indeed, 75% of the tanker fleet lies in the postAframax sectors. The VLCC is the favoured sector, worth just under US$9Bn.

Angelicoussis number one in Greece

Top of the tanker ownership tree is Angelicoussis, with a tanker fleet value of US$2.7Bn, according to VesselsValue. Not far behind is the Dynacom Tankers group, but all the top 10 Greek tanker owners have substantial fleets, valued at US$1Bn or higher. On the trading side, tankers with a value of around US$2Bn have changed hands, with Olympic Shipping and Management being the most heavily involved in the sale and purchase market since the start of 2017 (2017

is used as the reference point, due to the low level of sale and purchase activity since the start of 2018). According to VesselsValue, 66 tanker newbuildings have been ordered since the beginning of 2017, with Maran Tankers holding contracts valued at US$560M on seven VLCCs on order at Daewoo. These VLCCs are due for delivery in 2018 and 2019. Kyklades Maritime also has two VLCCs on order, at Sundong, plus five Aframax and Suezmax tankers, worth nearly US$400M in total.

Greek shipping and technology Speaking at the 9th Annual Capital Ling Greek Shipping Forum in Athens in February 2018, Nikos P Tsakos, chairman of Intertanko, and managing director of Tsakos

Tanker Shipping & Trade | April/May 2018

Energy Navigation pointed out that Greek shipping, especially tanker owners, were not afraid to adapt. “We have an example from the 1990s,” he said, “After the Exxon Valdez incident, the double hull design was accepted by the tanker industry. In the space of 10 to 15 years, the whole tanker fleet was replaced, at a cost of around US$250Bn, without any subsidies.” In his opinion, it proved to be the correct decision and led to a 98% reduction in oil spills. Nor does he fear Sulphur Cap 2020, which he considers an opportunity: “There will be a movement of low sulphur fuel from Asian refineries to regions that do not have the refinery capacity. This will be good news for the tanker fleet,” he said. However, it does seem somewhat ironic that carbon emissions will be increased in

order to lower individual ship emissions elsewhere. Still, Mr Tsakos warned of dangers to Greek shipping that cannot be immediately fixed by technology (see below). “The danger I see is that we are becoming a non-seafaring nation…30 or 40 years ago in Greece, we had about 150,000 seafarers, and now we are down to around 10% of that.” He likened the future of Greek shipping to a giant without legs and questioned how it will be possible to support a huge body of ships, without the fundamental knowledge of what it is to be a seafarer. One suggestion is for the EU to use the Guidelines on State Aid to limit the growing influence of Asian shipping. Of course, the Guidelines on State Aid are being used against certain elements of Greek shipping policy, including Shipping ›››

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Greece AREA REPORT | 15

››› Law 27/1975, so it seems only right and fair that it should be applied in both directions.

Greek shipmanagement

Along with the large tanker owners and operators located in Greece, there are a number of substantial shipmanagement companies. BSM Hellas has been established in Athens for 13 years, and managing director, Theophanis Theophanous, served on VLCCs. He too sees a need to provision for a new generation of seafarers, notably through effective training: “I strongly believe that a vessel is undoubtedly only as good as the crew who sails on her. The implementation of a structured integrated training programme for life-long learning is the ideal way forward in developing and retaining skilled seafarers,” he said. Developing strong IT skills is also important,

as digitisation enters the mainstream in shipmanagement. “It is important to focus on ‘soft skills’ development for our leading crew members, apart from their strict operational duties,” said Mr Theophanous.

Greece and IT

Indeed, the unavoidable pressure of digitisation is now a key concern among the industry, and Greek shipping is not immune. “Digital technology rules everything and data is generated by almost every system on board,” said Navios Group IT director Katerina Raptaki, one of the new generation of Greek managers. Collecting the correct data and using data analytics can lead to shipping companies becoming more competitive, efficient and safe for seafarers. “Charter rates during the last six years have dropped and shipping companies

Posidonia: A celebration of the shipping industry organised by the Union of Greek Shipowners

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are searching for new ways of improving margins and making extra profits. Without deep knowledge of the exact figures, this is not possible,” she said.

Navios digitisation

Navios is using digitalisation and data analytics to reduce fuel costs and improve voyage planning and on-board machinery maintenance. “Even the slightest deviations on a vessel’s route can make a huge difference in bunker consumption and hull fatigue,” Ms Raptaki explained. “Modern systems used in bunkering operations can result in tremendous savings through the accuracy of bunker supply and invoicing,” she added. However, digitisation is not a one-way street; Ms Raptaki concluded that seafarers “tend to consider the company as family and give their utmost potential and

capacity” if they have internet access for social media and to remain in contact with friends ashore.

Tanker innovation

Innovations in the Greek maritime sector go beyond software solutions. Greek tanker companies have been at the forefront of new hardware technology; this April Almi Tankers of Greece took delivery of Almi Atlas, a VLCC complete with a Tier III-compliant engine and a SOx scrubber as standard. Most VLCC newbuildings delivered so far this year have been fitted with an older, less environmentally friendly Tier II-compliant engine design, with the option of fitting a SOx scrubber at a later date. In most cases, the subsequent retro-fitting of scrubbers requires dry-docking and could add days to the Special Survey regime. The 315,221 dwt Almi Atlas is the first of two VLCCs of the Costas Fostiropoulosled company’s newbuilding project at Hyundai Samho Heavy Industries. The two VLCCs were ordered in September 2016 for a reported US$85.5M each, and have been chartered-out on a longterm contract for US$27,000/ day, according to broker reports. The Almi Atlas is fitted with the HYUNDAIB&W 7G80ME - C9.5 - EGRTC (Tier III) Greentype ultra-long-stroke engine, which, in conjunction with a larger diameter propeller, is said to offer significant fuel savings and produce less emissions than engines with the same output, thus classifying it as one of the most environmentally efficient propulsion systems. The DNV GL-approved VLCC is fitted with the Hyundai HiBallast HiB 6000ex ballast water treatment system. TST

Tanker Shipping & Trade | April/May 2018

16 | AREA REPORT Greece

THE GREEK TANKER FLEET TOP GREEK OWNERS BY VALUE (USD BN) $2.69 $2.30 $1.87

$1.81

$1.50

4 Economou Group

5 Minerva Marine

2 Dynacom Tankers

3 Tsakos Group 1 Angelicoussis Group

GREEK FLEET (USD BN) VLCC $8.85bn Suezmax $7.79bn Aframax $7.73bn Handy Tanker $7.00bn Panamax $2.27bn Small Tanker $1.41bn Post Panamax $0.11bn

All data only includes Tanker vessels from 1,000+ DWT

Greece AREA REPORT | 17

Source: vesselsvalue.com as of March 2018

GREEK RANKS NO. 1 AS TOP TANKER OWNING NATION

1 2 3 4 5

Greece 1,526 vessels USD $35.17bn China 999 vessels USD $18.81bn Japan 1,077 vessels USD $17.63bn USA 499 vessels USD $15.77bn Singapore 1,005 vessels USD $15.54bn

6 7 8 9 10

Norway 484 vessels USD $10.14bn South Korea 512 vessels USD $7.82bn Denmark 375 vessels USD $6.35bn Russia 591 vessels USD $4.98bn Bermuda 122 vessels USD $3.95bn

TOP GREEK SPENDERS (S&P) SINCE JAN 2017

TOP GREEK NEWBUILD ORDERS SINCE JAN 2017

Olympic Shipping and Management SA (USD $274m)

Maran Tankers (USD $560m) Kyklades Maritime (USD $383m)

Dryships (USD $194m) Ionic (USD $110m)

Capital Maritime and Trading (USD $340m)

Allseas Marine SA (USD $100m)

Enesel SA (USD $332m)

Centrofin (USD $90m)

TMS Tankers (USD $300m)

Others (USD $1,186m)

Others (USD $1,853m)

All data only includes Tanker vessels from 1,000+ DWT

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Cyprus AREA REPORT | 19

BSM developing LNG bunker deliveries

Shipmanagement in Cyprus warms to the task ahead The Cypriot shipmanagement sector is reacting to the technological changes that are taking place in shipping, but there is no clear consensus on the best path to follow

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he maritime hub in Cyprus is dominated by shipmanagement, and like shipmanagers everywhere, they are faced with a conundrum: how to optimise efficiency and cost savings while meeting the requirements of their client operators and owners. At the same time, they must also react to a changing regulatory environment. Applying economies of scale One tactic has been to consolidate operations, but consolidation means different things to different people. In March 2017, two German in origin, Limassol-based shipmanagement companies, Columbia Shipmanagement and Marlow Navigation, announced they were to merge. At the 2nd Annual Capital Link Cyprus Shipping Forum, Mark O’Neil, president and chief executive, of the newly formed Columbia Marlow, was asked to describe the elements of a successful alliance. Mr O’Neil's explanation involved a twopronged question: what is an alliance, and how do you judge success? In his opinion, at a basic level, an alliance is a simple form a cooperation, and

proceeds all the way up to a full-blown legal and physical merger. He noted however, that there is now another form of alliance, the “co-opetition”, where companies cooperate on providing certain services, but compete on others. The success of a maritime alliance can be judged by “whether all or some of the expectations and objectives have been satisfied,” he told delegates. To do that, the expectations and objectives must be clearly defined and realistic. Relating to the Columbia Marlow experience, he said that the new organisation sits in the middle of the spectrum between the basic cooperation alliance and the fully integrated legal and physical merger, because both companies had strong brands and company cultures. In this respect, it is notable that while there is a joint website for the new entity, there are separate links to both companies, which have retained their own websites. If brands and cultures are not to be shared, then synergies must be sought elsewhere. Where cooperation can be achieved without compromising these two important elements

Tanker Shipping & Trade | April/May 2018

20 | AREA REPORT Cyprus

is in the “back office” side of any company. Mr O’Neil listed information technology, training, procurement, insurance, and the physical offices as elements that offer synergies and access to economies of scale. But achieving these synergies and economies must be done without degrading the customerfacing side of the business. He stressed the importance of maintaining the value of the service provided to the client operator or owner: “That has been a focus of ours throughout the (alliance) process,” he told delegates.

The counter argument

Consolidation to increase the economies of scale is a persuasive argument, but not everyone in the Cyprus shipmanagement industry is convinced. Petros Monogios, director & chief executive of Lemissoler Navigation, has a different viewpoint. “It’s important to avoid acts under pressure,” he said, “as these can lead to difficulties later.” He felt that smaller companies can effectively maintain a low-cost structure, without incurring dis-economies of scale. The main dis-economy of scale for Cypriot shipmanagers is, perhaps ironically, the opposite of that which first attracted companies to the island, ie a quick decision-making process, both externally with local government agencies, and internally through the size of the organisation. In Mr Monogios’ opinion, the decisionmaking process in a small company is a cost saver, a feature that could be lost when a business scales up or consolidates. Achieving the economies of scale mentioned above can also impact the human element of an organisation, according to Mr Monogios: “Shipping is a human business, and maintaining good relations is an investment.”. This can be interpreted as a warning that economies of scale may create distance between the provider of services and the client.

Tackling new regulations

Shipmanagement in Cyprus is not immune to the wave of regulations pounding the shores of shipping centres worldwide. Ballast water treatment and low sulphur fuel dominate the discussions of maritime stakeholders. What kind of skills can shipmanagers develop to meet these challenges? Speaking as the owner of a small shipmanagement company, Captain Eugen Adami, managing director of Mastermind Shipmanagement, offered a different perspective to that of larger operators on the island. In the case of Mastermind Shipmanagement, the vesselowning company is run by former seafarers, and they take it upon themselves to be involved directly in decisions when it comes to equipment

Tanker Shipping & Trade | April/May 2018

onboard the vessels. This means there is a degree of conservatism, which Captain Asami alluded to when he told delegates at the Shipping Forum: “We know early birds pay a lot of money.” He cited the example of GMDSS; when units first became available they cost more than US$100,000, but now they cost around $20,000 per unit. “It’s a matter of timing,” he said, noting that small companies look to maximise the potential of new equipment. For instance, will fitting a particular make or type of ballast water treatment lead to savings elsewhere? Is a particular model carbon neutral?

Mark O'Niel: chief executive of Columbia Marlow talks of "co-petition"

Utilising technology

There is a flood of new technology entering shipping at the moment and shipmanagement companies are at the forefront of managing this transition. Mr Dieter Rohdenburg, chief executive, Intership Navigation, explained how this change is being handled by shipmanagement companies in Cyprus. Intership has the full range of digital technology on its ships, from crew wifi to CCTV in the engine room, aiding real-time diagnostics and assisting with maintenance and repairs. Mr Rohdenburg told delegates that he ›››

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Cyprus AREA REPORT | 23

››› foresaw autonomous ships sailing soon, but he felt the biggest inefficiency at present was in the commercial side of the industry. Mr Rohdenburg noted the paper bill of lading was obviously a historical throwback and cited blockchain technology as a first step in resolving this issue, but one which required a champion to bring all the stakeholders into the process. Bernhard Schulte Management (BSM), a key supplier of services in the management of LNG carriers, is another player currently driving change. In 2018, the group expanded its portfolio by acquiring the specialist LNG ship manager, PRONAV. BSM is also involved in LNG bunkering through the joint venture, Babcock Schulte Energy (BSE). BSE is working in the LNG bunker supply sector and is expecting to

take delivery of a gas supply vessel from Hyundai Mipo shipyard in September 2018.

Digitisation or Optimisation

Shipmanagers in Cyprus are coming to understand that digitisation need not be feared; rather it is a tool that presents myriad opportunities if used in the right way. Mark O’Neil of Columbia Marlow, shipmanagers in Cyprus feels digitisation can help chip away at the inefficiencies in the shipmanagement process, optimising the service to the client / owner. He concludes: "This is why you are seeing the management services companies getting bigger and bigger. Not for any other reason than to try and optimise the service they do." TST

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Tanker Shipping & Trade | April/May 2018

24 | AREA REPORT Cyprus

A NEW BEGINNING FOR CYPRUS SHIPPING In an exclusive interview, Natasa Pilides, deputy minister of shipping, relays her thoughts on the role to Tanker Shipping & Trade Cyprus is currently undergoing such a transition. In a clear message of political support for the country’s shipping sector, the creation of the deputy minister of shipping role was unanimously approved by parliament in July 2017 and was established as of 1 March 2018.

On the role of the deputy minister for shipping

Natasa Pilides (deputy minister of shipping): Aiming to strengthen Cyprus shipping

n an industry continually challenged by new and increasingly rigorous regulation, flag states must evolve with the times and ensure shipowners and operators have easy access to the support and resources they require to protect, and even enhance, their business interests. After 40 years of progress,

“This is the first time that shipping has a cabinet position of its own in the Cypriot Government and taking this important step will afford us the dedicated and focused resource to drive multiple initiatives that will increase the functionality, effectiveness, and flexibility of our public shipping administration,” said deputy minister Natasa Pilides. Expanding on the theme, she explained that the cabinet position will have a direct and immediate effect in the further development and expansion of both the Cypriot flag and the maritime cluster. “We believe that there is significant potential to increase the contribution of the shipping sector to the Cyprus economy beyond its current annual 7% of gross domestic

Tanker Shipping & Trade | April/May 2018

product (GDP),” she said. The maritime cluster in Cyprus can, “rely on the support of a dedicated deputy minister who is wholly devoted to shippingrelated issues.”

Adding value to the flag

According to Ms Pilides, the services the ministry can lend support to extend far beyond registration and certification. She said it was a core value of the Cyprus flag that the ministry will proactively share intelligence with shipowners and operators, offering the best advice to directly support the protection of their business interests. Whilst the promotion of the Cyprus flag is a high priority, deputy minister Pilides made the point that the ministry is also maintaining a keen focus on ensuring that the quality and range of shipping services is upheld and raising awareness of the complete services that are available in Cyprus. There is an advanced maritime cluster in Limassol, with more than 200 companies covering the full spectrum of maritime activities and the ministry is keen to maintain the pool of

highly qualified and trained people who are available to offer support.

Third largest fleet in Europe

According to the deputy minister, Cyprus now ranks as the 11th largest merchant fleet worldwide and the third largest fleet in the EU. Currently, Cyprus flags more than 80 tankers with a total gross tonnage of 2.7M gt, which represents 11.36% of the Cyprus fleet. It flags over 1,000 oceangoing vessels with a total gross tonnage exceeding 23.9M gt. More than 3,500 vessels are currently managed from Cyprus, with a total net tonnage of around 50M gt.

Strategic goal

With the above aims in mind, deputy minister Pilides has a clear strategic plan. “The ultimate goal of the deputy minister is to strengthen [the] shipping [sector] and [drive] its consolidation as an advanced, global shipping service centre. Backed up by a dedicated resource, we are confident that we will achieve significant growth for Cyprus in the near future,” she told Tanker Shipping & Trade. TST

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ost of us are now familiar with the concept of hybrid cars, where an auxiliary electric motor provides low speed propulsion, with the main petrol or diesel switched off. With the internal combustion engine running, the auxiliary electric motor can provide turbo-like additional power at higher speeds, or increased traction in slippery conditions. Now WE Tech Solutions Oy of Finland, has applied the same recipe to tankers. The result is a hybrid propulsion system providing an efficient power distribution for marine vessels and tankers. WE Tech claims to be lead provider of hybrid solutions in this sector. According to WE Tech, the variable frequency WE Drive provides ships with unmatched options in electrical power generation. “Our main five solutions focus on shaft generator applications for fourstroke and two-stroke main engines that use a permanent magnet shaft generator,” explained Mr Mårten Storbacka, the managing director of WE Tech Solutions. “Our solutions provide ship

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owners with the option to use flexible hybrid propulsion systems that include Power Take Out (PTO), Power Take In (PTI), Boost Modes, as well as efficient power distribution.”

industry) from on-shore generated power, can typically save 50% of power costs, compared to power which is generated on-board the vessel, according to WE Tech.

Multi-mode solutions

Solution applied to LNG-fuelled product tankers

The multi-mode approach provides a range of solutions. The PTI system ensures a safe return to port (aka take-me-home mode) using auxiliary propulsion drive when the main engine is out of commission. Similar to the use of electric motors in hybrid SUVs, the hybrid system can provide auxiliary power to the main engine when sailing in demanding conditions, such as ice-navigation, or provide an additional power boost for the main engine optimised for low load conditions. A key feature is the common DC-link, that eliminates traditional design limitations that hinder high levels of efficiency in the distribution of electrical power. Further, the option of a shore-to-ship power connection, or alternative maritime power (also known as ‘cold ironing’ in the cruise

It is not just conventional internal combustion engined vessels that can benefit from the addition of a hybrid propulsion system. WE Tech’s solutions have been fitted to a series of four LNGfuelled product tankers owned by Terntank Rederi AS. These vessels have the option of PTO, as well as PTI in take-mehome mode. “WE Tech’s shaft generator solution is working well,” says Tryggve Möller, chairman of the board of Terntank Rederi AS and managing director of Terntank Ship Management AB, adding: “Terntank has set huge expectations on this technology and believes this will be the future for the shipping industry”. According to WE Tech, the system increases the vessel's energy efficiency by 20%-30% compared to

those without such a system. Therefore, fuel consumption and operational costs are reduced, by the order of hundreds, if not thousands of dollars per vessel per day. “In each case, we look for ways to improve energy efficiencies and increase the vessel’s competitiveness,” said Mr. Storbacka. “This is becoming more critical, as maritime vessels strive for innovative ways to be more efficient with their fuel consumption.” With WE Tech’s Energy Storage Solution, the batterybased solution provides an energy reserve, used for electrical load peak shaving and providing energy for black-out prevention. “We have seen increasing demand for Energy Storage Solution in the marine industry,” says WE Tech Solutions’ sales manager, Mr Martin Andtfolk. “Our Lithium-ion battery-based solution can easily be added to our other solutions. This makes vessel-based electric power generation even more efficient and cost-effective.”

Chemical tanker fitment

In January 2017, WE Tech delivered a hybrid solution to two 17,500 dwt chemical tankers belonging to the Norwegian Shipowner, Rederiet Stenersen AS. Commenting on the implementation, Rederiet Stenersen’s Director Ship Management, John Stenersen said: “At Stenersen, we take pride in being at the forefront of achieving the best energy efficiency in our segment. As far as we are aware, Stenersen is the first company to have installed such equipment on this type of vessel. We believe that energy storage solutions will contribute to a stronger market position for Stenersen, through sustainable competitive advantage. This is a catalyst for other companies to commit to ‘greener technology’ for the future.” TST

Tanker Shipping & Trade | April/May 2018

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GREEN TANKER TECHNOLOGY | 29

Arinjit Roy (ABS): the Techno-Economic Evaluation tool can be changed to evaluate different assumptions

NEW TOOL SIMPLIFIES EVALUATING THE COST OF TANKER COMPLIANCE

he upcoming global sulphur cap presents a major compliance challenge for shipowners, who must choose carefully between various solutions; a wrong decision could have a significant impact on the bottomline further down the road. While achieving compliance with the global cap might seem a straightforward matter of switching to low sulphur fuel, there are issues of cost, availability and potentially of fuel quality to consider in the short term. For vessels with an expected trading life of 20 years or more, installation of an exhaust gas cleaning system (EGCS) or use of LNG as fuel are also viable considerations. In addition to the global requirements, owners must also consider compliance with reference to the amount of time their vessels will spend

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The solutions for achieving 2020 sulphur cap compliance are varied, and owners must consider a multitude of options before taking the plunge. The process is made harder for owners of small chemical tankers, which are tight on space, adding complexity when it comes to fitting scrubbers. Here, Mr Arinjit Roy of ABS Global Marine provides an overview of the available routes to compliance and explains how a new tool can make the decision easier

inside an emission control area. Newbuildings that need to comply with IMO NOx Tier III emission requirements while operating inside a NOx ECA must use a NOx abatement technology, such as exhaust gas recirculation (EGR) or selective catalytic reduction (SCR) systems, or install gas or dual-fuel Otto cycle (low pressure) engines with LNG as fuel.

Tight Spaces

The small size of chemical carriers creates challenges in terms of installing additional large equipment, such as scrubbers and regasification skids for LNG fuel, as well as ballast water management systems. Asset valuation versus the cost of any modifications is an important consideration when deciding whether to modify or scrap a vessel.

With these considerations in mind, ABS undertook an analysis of the options available for compliance on a 13,000 dwt chemical tanker, including a comparison of the anticipated costs of retrofitting an open and hybrid loop EGCS against LNG and compliant fuel. The actual costs for compliance with the global sulphur cap and ECA regulations will vary

Tanker Shipping & Trade | April/May 2018

30 | GREEN TANKER TECHNOLOGY

significantly, based on a vessel’s characteristics, trading patterns and the options chosen to achieve compliance. However, the results suggest a considerably shorter payback period for this type and size of vessel by using an open-loop or hybrid EGCS, compared Vessels_W124xH190_EN._posidoniapdf.pdf to using LNG as fuel, or the base scenario of switching to

compliant low sulphur fuel. For the analysis, capex levels for an open-loop scrubber were assumed to range from US$1M-US$1.3M, depending on whether the installation was for a main engine, a main and auxiliary engine, or a main and auxiliary engine and the 1 auxiliary 2018/05/01boiler. 11:41:24 For a hybrid system, the typical capex cost

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increases to around US$1.8M. Assuming installation costs of US$200,000 for a newbuilding, ABS estimated 100%-140% of this capex for a retrofit, with design and associated costs of US$125,000 for an open loop and US$150,000 for a hybrid scrubber. Total capex estimates include installation, design and class costs and a cost for the initial NaOH to fill the tank.

Assumptions

The EGCS was assumed to have a life expectancy of 20 years, with the calculation based on an estimated fuel cost in 2020 of HFO at US$320/tonne, LSFO at US$490/tonne and MGO at US$540/tonne. Additional consumption was included, due to increased back pressure and additional electrical load. Additional costs in the calculation include system consumables, maintenance, service engineer and crew training and cost of lost cargo, due to the additional weight of the EGCS. In terms of discounted payback, the analysis of compliant fuel versus an openloop EGCS gave a return of one year for a main engine, auxiliary engine and auxiliary boiler, two to three years for a main and auxiliary and one to two years for a main engine only. For a hybrid scrubber, the equivalent for a main engine, auxiliary engine and auxiliary boiler is one to two years and three to four years for a main and auxiliary engine. By contrast, the total capex for

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GREEN TANKER TECHNOLOGY | 31

an LNG fuel solution, including machinery, storage and outfitting, is estimated at US$5M. The discounted payback for the LNG as fuel installation covering a main engine, auxiliary engine and auxiliary boiler is estimated at four to five years.

Unique considerations

Commenting on the findings, Mr Roy said: “The results of the study are not surprising, as we have seen similar payback periods for scrubbers on other sizes of tankers. But a key point is that each fleet profile has its own unique considerations and there is no blanket answer for every ship.” While the study primarily considered the costs of compliance, it is important to remember that other factors must be considered. These include the impact of future regulatory changes, the operational reliability of the equipment and the availability of the supporting infrastructure. Ultimately, the owner must make the final decision on which compliance solution best fits its requirements, but an understanding of the available technical options and economics of each alternative is critical. ABS believes that such analysis is key to supporting owners during the transition to low sulphur shipping, which is why ABS developed its TechnoEconomic Evaluation solution. This is a unique decisionsupport process that identifies technical feasibility and key parameters, such as lifecycle costs, net savings, payback period and rate of return on investment. “The ABS TechnoEconomic Evaluation approach requires extensive analysis for each ship and fleet, based on criteria such as operational characteristics, machinery configurations and economic considerations. Once the model has been made though, inputs and variables can be easily changed to evaluate results

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from different approaches and assumptions,” said Mr Roy.

Evaluating the alternatives

The evaluation considers ship design, equipment details, trading routes, fuel-cost trends and fleet analysis to establish a base trading case and

alternative technology and fuel scenarios. This information can help owners make a meaningful comparison of the options and select their preferred solution for retrofitting, or new construction projects. ABS has published guidance to help owners understand the steps they will need to take to implement exhaust gas

scrubbers on board, as well as an advisory paper on the 2020 sulphur cap itself. In addition, ABS offers the LNG Fuel Ready and the SOx Scrubber Ready notation concept for newbuilds, which allows an owner to prepare a vessel for the implementation of LNG as fuel or SOx scrubber options at a later date. TST

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GAUGING THE CAPITAL COST OF TANK MANAGEMENT

Gauges can help control costs

he new IMO Ballast Water Standards have left many ship owners and operators facing considerable financial outlay to ensure compliance over the next few years. PSM Instrumentation's sales director, Mark Jones, looks at the operational and cost implications and how digital tank gauging can help with effective management.

Ratification of the convention

Ballast water is an essential component of ship operations in steel-hulled vessels, with large vessels requiring many thousands of cubic metres of water to maintain stability and maneuverability, both at sea and in port. Aimed at preventing the transfer of aquatic organisms and pathogens, the newly enforced International Convention for the Control and Management of Ships Ballast Water and Sediments comes at a time when the potentially devastating effects of introducing unwanted elements into marine environments are becoming increasingly clear. Finland’s ratification last September saw the entry into force of the Convention , some 13 years after the standards were first developed. The subsequent ratification of Qatar into the treaty earlier this year brings the number of countries adopting the Convention to 68, accounting for three quarters of global shipping tonnage. While not party to the Convention, the US is also clamping down on the issue, following the introduction of stricter guidelines late last year.

Ballast water management plan

The new Convention requires that an approved water treatment system be fitted to minimise the uptake of organisms and to remove sediments and unnecessary discharge. In addition, ships are required to carry a ballast water management plan and to record and report on ballast exchanges. The cost of compliance extends beyond the initial investment in treatment systems, to the ongoing costs of processing the vast amounts of water involved. Water treatment systems operate at high voltage: depending on the treatment method, energy consumption can be considerable, to which the cost of additional consumables such as chemicals can be added. The result is that ballast water can no longer effectively be considered as a free commodity; rather it has become an overhead that needs to be incorporated into growing operational costs. Moreover, older vessels may have limited space, limiting the power available to drive these systems, making it essential to rationalise their use.

Real-time digital accuracy

Modern tank-level gauging systems can help cut costs by continuous measurement of ballast water levels, to ensure that the treatment is run for only as long as required. In addition, they provide accurate data in real time to enusre ship systems comply with new recording

Tanker Shipping & Trade | April/May 2018

and reporting standards, which require vessels to hold data in a ballast water record book. A failure to produce such data could lead to delays in port, as well as the infringement of regulations. The new legislation presents an opportunity to upgrade to the latest digital tank-gauging systems. Although ballast water management systems currently being fitted to new ships may incorporate tank-gauging equipment, this assumption cannot be made where existing ships are being refitted, which potentially leaves up to 40,000 ships affected.

Preventing crew and ship stress

Implicit also in the introduction of the new standards is the issue of safety. Maintaining the ship’s stability during ballast water exchange is paramount. Tank-level gauging systems enable the process to be monitored and the correct sequencing of tanks to be observed, with automatic start/stop and high/low alarm functions built in to prevent stresses on the hull which might lead to deformation. An unexpected change in trim during ballast water exchange operations could under- or over-submerge propellers. Undue stresses on the hull or the propeller could result in repair costs. Ballasting a vessel is also essential during voyages to optimise its manageability and to ensure safe navigation during poor weather conditions. The latest digital systems incorporate a range of transmitters, gauges and switches to enable balancing of the ship, compensating for weight loss due to consumption of water and fuel and maximising fuel efficiency through control of the ship’s draft and trim. Where these tank gauging systems are part of a ship-wide system, such as PSM/Scanjet’s Intelligent Tank Management System ITAMA, vessels also benefit from additional synergies, which can assist in satisfying these legal requirements while maximising efficiency and energy consumption. TST

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CARGO CONTROL AND MONITORING | 35

Critical aspects of cargo sampling

hey say that prevention is better than cure, and this is especially true when the cure may run into the millions of dollars, as is the case with off-spec liquid cargoes. P&I Club Gard details one of the critical aspects of prevention â&#x20AC;&#x201C; sampling cargoes.

shipowners and operators implement proper procedures for taking, and retaining, their own duplicate samples for all cargoes loaded on the vessel and train their crew in performing the sampling process. An experienced officer may be able to identify a poor-quality sample by visual inspection alone, and early intervention may

prevent an expensive claim arising later on.

Case Study

Gard found that samples were often not taken by the vessel at the start of loading, and where they were taken, procedures were either incorrect or discarded altogether. In a recent Gard case, a

chemical carrier arrived at a terminal with its cargo tanks and lines cleaned and ready for loading. The vessel was inspected upon arrival and found to be suitable for the nominated cargo. No manifold samples were taken at the commencement of loading, but first foot samples were taken from the designated tanks that were being loaded. Upon

Off-spec, but who is to blame?

Disputes relating to off-spec or contaminated liquid cargoes are a recurring problem and shipowners may have no independent evidence as to the cause. The source of the problem could be in the shore tank at the load port, in the shore pipeline during loading, or on board the vessel itself. The cargo could even have been manufactured out of specification. However, if the cargo was found to be offspec when the vessel arrived at the discharge port and there was no evidence of contamination from the load port, the vessel could be faced with a claim, even if the vessel was not at fault. Samples drawn at the load port and retained on board, which demonstrate that the condition of the cargo has not changed between loading and discharge, provide the best defence against cargo claims. It is therefore important that

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The â&#x20AC;&#x153;million dollar sampleâ&#x20AC;?

Tanker Shipping & Trade | April/May 2018

36 | CARGO CONTROL AND MONITORING

analysis of the first foot samples, the cargo was found to be offspec, resulting in stoppages and delays on the vessel’s account for further tank cleaning. The vessel was held responsible for contaminating the cargo. The cargo in the vessel’s tank was pumped back ashore and the vessel was instructed to leave the terminal to clean the cargo tanks and lines. The chemical tanker returned and loading resumed. This time, manifold samples were taken and analysed and found to be in order. However, upon detailed analysis of the sample from the contaminated cargo, the cause of the contamination was suspected to be from the remains of previous cargo in the shore tanks and lines. Given that there were no manifold samples on the first occasion, there was no way for the vessel to prove that the first load of cargo may have been contaminated prior to loading.

Protecting the vessel’s interests

The transfer of custody of the cargo from another vessel, or the terminal to the vessel, and vice versa, normally takes place when the cargo passes the vessel’s manifold. A manifold sample taken at the start of loading and discharge can, in principle, determine responsibility for the contamination of a cargo. It should be noted that manifold samples should be taken outboard of the manifold valve. During this process, the loading rate should be very low, preferably by gravity. Gard has found that even though a manifold sample may have been taken, it could be disposed of by the crew if it does not appear to be of the expected quality. A new sample is then drawn once the cargo quality appears as expected, and becomes the

manifold sample “on record”. Thus, the only available evidence indicates that sound cargo was loaded. While this practice appears to be counterintuitive, it is nonetheless prevalent.

First foot samples

First foot samples should be taken to confirm that the vessel’s systems and pipes are clean. This is particularly important where sensitive and/or expensive cargoes are loaded, to reduce the risks associated with contamination of the entire cargo parcel.

Tank samples

Taking a final tank sample after completion of loading and prior to commencement of discharge will enable the vessel to determine the cause of any potential contamination on board. The officer in charge should also, if possible, request specimens of samples taken by the terminal’s surveyor. If the quality of the cargo samples from the ship and shore appear different, loading should stop and be investigated.

Recommended procedure

To ensure the best possible defence of a cargo claim against the vessel, it is recommended that shipowners create awareness among the crew of the problems related to improper sampling and have written procedures in place. An improper sampling method can result in a poor-quality sample which is not necessarily representative of the cargo itself. The procedures should include and emphasise the following points: • Involvement of vessel's crew. The crew should participate in the taking of cargo samples, and should be competent in checking and verifying the

Tanker Shipping & Trade | April/May 2018

quality of the samples. The chief officer should preferably be involved in all cargo sampling. • Independent cargo samples to be taken by the vessel's crew. As a minimum, the crew should, for each grade of the cargo, take: - Pump stack samples, if taken by a surveyor, the vessel should take own duplicate samples. - First foot samples, taken once the cargo level reached the first foot in the tank(s). - Final tank samples, taken after completion of loading. - Cargo tank samples prior to commencement of discharge. - Manifold samples, taken at a vessel’s manifold at the start of loading, preferably with the manifold valve in a closed position. Spot checks should be carried out at the manifold during loading whenever practicable, e.g. after shore stops and / or change of shore tanks.

The “million dollar sample”

The importance of the manifold sample cannot be under-estimated. It is often referred to as the ‘milliondollar sample’. Where a proper sample of the first products loaded has been drawn and retained onboard, any uncertainty about the quality of the cargo at the time of loading can usually be clarified at relatively low cost. Vessel procedures should therefore be specifically formulated to ensure this manifold sample is never disposed of, regardless of its apparent quality.

Gard recommendations for handling samples • Always flush the sampling point prior to drawing a sample. • Always use clean and appropriate sampling equipment and properly label, seal and store the samples in

designated areas. • The labelling should always state where, type and when the sample was drawn, e.g. “manifold at commencement of loading” or “final tank sample drawn in the middle of cargo tank 4P”. • Ensure sufficient sample amounts for retesting if necessary. It is recommended that there is a clear policy in place that takes into consideration the storage space, the vessel’s schedule and the number of grades loaded for each voyage. Samples should be retained for at least three months, longer if there is a complaint, and not disposed of without confirmation from the insurer. Recordings should be made in the cargo log-book to ensure traceability of samples taken. Sample bottles should, as far as possible, be suitable for the cargo in question. For example, use amber coloured glass bottles for UV-sensitive cargo to prevent deterioration due to the effects of UV lights. For cargo that is oxygen sensitive, the bottles should be purged with nitrogen prior to sampling.

Sample report

On completion of sampling, a sample report should be produced by the vessel. This should list the unique identifier number of each sample retained on board and of any samples given to the charterers’ surveyor. The sample report should be jointly signed by the vessel’s Master, or their representative, and the charterers’ surveyor. Shipowners and operators should instruct their officers on board that whenever they are in doubt as to the apparent quality of a liquid bulk cargo, they should seek expert advice and have any samples analysed at the loading port. TST

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INERT GAS | 39

Inspecting tanks after inert gas injection On 1 January 2016, the IMO implemented a ruling pertaining to the injection of inert gas into cargo tanks of vessels over 20,000 dwt. The goal of the edict was to reduce the risk of explosion and fire, by dampening down the cargo vapours with a blanket of inert gas. However, the exclusion of oxygen in cargo spaces is a well-known risk for those inspecting tanks. Is there another way to verify the pre-loading inspection, without physically entering the tanks?

The aftermath of a cargo tank explosion (right). Preventable with a working IG system

Why enter tanks?

Multiple cargo tank entry during tank cleaning operations on board a tanker only occurs to ensure compliance with the pre-loading inspection specifications for the next nominated cargo. Regardless of whether these specifications are for a visual inspection or wall wash, the cargo tanks still have to be entered. An alternative is to remotely analyse the washing water. This has numerous advantages, including reduced risk, quicker cleaning turnaround times, a reduction in the amount of cleaning fluid used, and less instances of ‘overcleaning’. The washing water technique also reduces the energy requirement and bunker consumption. Therefore, if a vessel’s washing water analysis is good enough to determine that cargo tanks and lines are clean and free from the last cargo, can the same method not be used for the pre-loading inspection?

Wall wash analysis

The traditional wall wash analysis is considered the strictest pre-loading inspection. Solvent is splashed onto the bulkheads of the cargo tank and then tested to meet a series of pre-determined test specifications. But how reliable is this process and what information does it actually provide?

nert gas generation is now mandatory on tankers below 20,000 dwt. The gas, usually nitrogen, is pumped into the tanks, where it will force out the potentially explosive vapours from previous cargoes. However, excluding air from the cargo tanks brings its own risks when it comes to certifying the tanks are ready for the next cargo. The atmosphere in the tanks could be a mixture of nitrogen and cargo fumes, requiring double manning and breathing equipment, as per the code on safe work in confined spaces. In a white paper, Responsible Cargo Tank Cleaning – Washing Water Analysis Guy Johnson, managing director of L&I Maritime (UK) Ltd, argues that current pre-loading inspection techniques are redundant, and could be replaced by UV/visible spectrophotometer analysis. An abridged version of the white paper appears below.

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Random by design

First, and by design, the wall wash inspection is a random process, because it is impossible to write a procedure that exactly and precisely defines which places of a cargo tank should be wall washed; particularly when no two cargo tanks are the same.

Random results

Second, the wall wash inspection is highly subjective, as no two inspectors will conduct identical tests. If the wall wash inspection is random and subjective, it follows that it is not reproducible and therefore, it has no legal value in the event of a cargo contamination claim, unless it can be proven that the inspector/surveyor acted negligently. Furthermore, if only 1% of the internal surface area of the cargo tank is actually being wall washed, it follows that the remaining 99% of the cargo tank will not be tested; this portion of the cargo tank is

Tanker Shipping & Trade | April/May 2018

40 | INERT GAS

therefore, by definition, an ‘unknown’. With 99% of the cargo tank untested and potentially un-clean, one has to ask why there are not more off-specification cargoes.

Dilution effect

The answer is the dilution effect, which is a quantification of the relationship between surface contamination and how this contamination becomes diluted into the fully loaded volume of cargo. Once this concept is recognised and understood, it becomes apparent that the wall wash inspection has no value nor place in determining whether a cargo tank is suitable for loading. A dilution factor can be calculated for any cargo tank as follows: a cargo tank has a total internal surface area of 1,000 m2 and a fully loaded volume of 1,000 m3. If it was then possible to wall wash each square metre of this tank with 0.5 litres of methanol, the total volume of the wall wash sample would be 1,000 x 0.5 litres = 500 litres = 0.5 m3 . If this wall wash sample was then diluted into the fully loaded tank, the dilution factor for the cargo tank would be 1000 / 0.5 = 2,000 times. Clearly, this is an extreme example, but in theory, the cargo could be loaded even though the wall wash sample has 2,000 times the level of allowed contamination. It would appear that passing the wall wash inspection does not guarantee that the next cargo can be loaded successfully.

First foot

The most likely source of contamination is the line system through which the cargo is delivered from the loading terminal to the vessel. Neither the shore nor the vessel’s lines can be inspected or wall washed prior to the start of loading, meaning any contaminant that is trapped inside any part of the line system will be flushed into the cargo tank(s) at the start of loading. It is vital to identify that the loaded cargo has become contaminated as quickly as possible to minimise losses, which is why the first-foot sample is so important

for satisfactory loading operations. The owner/operator of the vessel is likely to bear the brunt of any off-specification cargoes unless this can be contested by the first-foot samples.

Washing water analysis

Washing water analysis is the complete opposite of wall wash

analysis. It is the identification (by UV spectroscopy) of what is being removed from the cargo tanks/coating during the tank cleaning process, rather than finding out what is left behind after the tank cleaning is complete. When there are no longer any traces of the previous cargo in the washing water, tank cleaning can be stopped, as continued washing will not make the cargo tank any cleaner.

Faster analysis

The amount of residue remaining on, or retained in, the surface of the cargo tank after cleaning becomes far less relevant, because all the cargo tank and the cargo lines must be free from previous cargo before the washing water samples are clean. This is also the mechanism that vessels employ to monitor tank cleaning without cargo tank entry. Each step of any tank cleaning procedure needs to be confirmed as complete before the next step can commence. Without using washing water analysis, this confirmation requires at least one crew member to go inside the cargo tank, while a second stands watch in accordance with confined space entry procedures. Using washing water analysis, each step of the cleaning process can be monitored by looking at successive UV traces, which of course does not require any cargo tank entry and takes less than one minute per sample to analyse. When the graph becomes a ‘flat-line’ or does not change between consecutive samples, this is the trigger that the cleaning step needs to be changed, or that tank cleaning can be stopped. If this trigger can be used to change a tank cleaning step early, there are significant time savings and reduced environmental impact. TST

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INERT GAS | 43

Coldharbour targets smaller footprint with new inert gas generator When Coldharbour began to design the next generation of its inert gas producer, it was able to call upon 50 years of combined experience in the marine sector. The result was a unit with a smaller-than-usual footprint system.

espite being smaller than previous versions and existing alternatives, the Sea Guardian Inert Gas Generator can adapt to all current and foreseeable legislation regarding inert gas specifications.

Multi-fuel capable

The inert gas generator has multi-fuel capability and the burner can be configured for use with a variety of fuels, such as low sulphur MDO/MGO, LNG and boil-off gas. A specially developed venturi-type burner is used, incorporating axial flow-staged fuel and low NOx atomisation. The venturi burner ensures controlled, accurate, clean combustion across the full range of inert gas generator sizes, including any turn-down regimes it may be operated under. The burner is a Coldharbour development of a type originally designed for use in the power generation sector; hence it offers long in-service life, lower emissions and reliable operation.

Zero soot

Older burner technologies frequently struggle to achieve stable, low residual oxygen outputs, while simultaneously generating zero soot. The gas outlet content of the Sea Guardian is typically

0.2% oxygen with zero soot, as measured on the Bacharach scale. Robust, stable operation is available with oxygen levels as low as 0.2% across the entire range of sizes, from 500NmÂł/hr. up to 20,000NmÂł/hr. gas capacity, making Sea Guardian suitable for chemical, LNG/LPG carriers and product tankers. The new unit was engineered from the outset with all typical operating issues designed out. As a result, the unit has no burner cone, no demister pads and no scrubber tower. With nothing to clog and far less to corrode, the unit should have a longer life and be less susceptible to breakdowns, according to Coldharbour.

Water curtain

Hot gas from the burner is passed through an entirely new, compact, patented quench scrubber design, which is based on an inclined water curtain system incorporating a high temperature, corrosion-resistant expanded metal mesh screen matrix. The cooled gas then enters a swirl vane separator for the removal of any liquid droplets.

Roots-type blower

The Coldharbour inert gas generator system uses a Rootstype blower of compact design. According to Coldharbour, the blowers were selected for their low noise and low maintenance characteristics. The inert gas generator has a programmable logic controller, which provides control functions and the designated selective acceptance of alarms. The instrumentation and control panels can be located in the engine room, cargo room, or bridge.

Deck seal

The Sea Guardian inert gas generator is smaller and cleaner than some alternatives

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The Coldharbour deck water seal is a wet-type design, with an external seal pipe for added safety. Water is displaced during normal gas flow, forming a semi-wet seal. Water is expelled by swirling the gas in the vessel and passing it through an integral demister, with the option of double block and bleed valves, if required. A pressure/vacuum breaker provides the final protection within the system, by releasing excessive pressure or vacuum from the cargo tanks. This ensures that the tank design conditions cannot be exceeded. The pressure/vacuum breaker is fail-safe in operation, accord to Coldharbour. The gas delivery and control valves are of the butterfly type, with bonded rubber linings and corrosion resistant discs and shafts. Where remotely controlled, the valves use double acting actuators. The unit holds a Lloyds Register-type approval certificate, confirming performance parameters for the unit. TST

Tanker Shipping & Trade | April/May 2018

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PRODUCT TANKERS | 45

THE MR2 FLEET AT A TIPPING POINT The fundamentals are looking good for the MR2 product tanker market, which may achieve supply growth and demand balance this year. But owners and operators must still resolve the 2020 Sulphur Cap and the fitment of ballast water systems in the near future. Tanker Shipping & Trade reviews the latest developments in the MR2 sector

Has the economic storm subsided for product tankers? (Credit: Maersk Tanker A/S)

he 50,000 dwt Medium Range (MR2) is the key vessel in the product tanker fleet, able to call at most petroleum product ports and refineries. The live MR2 fleet currently stands at just under 1,500 vessels, with a total capacity of 72.5M dwt, according to VesselsValue. The MR2 fleet is also relatively young, with an average age of nine years, compared to an average age of 13 years for the tanker fleet as a whole. However, deliveries are now declining: in 2015, 108 MRs entered the fleet; the following year this figure had fallen to 86 and in 2017, just 67 MRs entered the fleet.

Fleet development

So far in 2018, 13 MR2 product tankers of 649,000 dwt have entered the fleet, with another 56 on the schedule for delivery by the end of the year. Compared to the 2000s, the orderbook

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is very light, with only four vessels scheduled to be delivered in 2021. As it stands, the MR2 orderbook is around 10% of the current fleet and this is unlikely to change in the foreseeable future. According to one MR2 owner Tanker Shipping & Trade spoke to at the Connecticut Maritime Association annual conference and trade show 2018, who did not wish to be named, there are only two shipyards in South Korea currently showing any interest in building MRs. There has been a considerable number of shipyard bankruptcies in South Korea, and the remaining yards are choosing to wait, or already have slots reserved for higher-value vessels.

Catch 22 in the S&P market

Ardmore Shipping Corp founder and chief executive Anthony Gurnee explained that there are now some good value vessels in the market. In

Tanker Shipping & Trade | April/May 2018

46 | PRODUCT TANKERS

Poten and Partners head of research Erik Broekhuizen: middle distillates are still the largest export product

his opinion, prices are currently low due to capital constraints. “It’s a Catch 22,” he said, referring to the fact that prices are low because of the lack of funding, but it is difficult to take advantage of the low prices, due to the lack of lenders willing to finance a project. As a result, just 14 MR2 product tankers have changed hands to date in 2018. If this level of S&P activity is aggregated for the whole of 2018, it implies a modest sum of 56 MR2 product tankers will be sold throughout the year. This would be the lowest level for five years. Commenting on the situation, AG Shipping & Energy Pte director/freight trader and global head Mangish Kakodkar said: “Asset prices have [bottomed out] in the current cycle [and] that makes it favourable to enter this sector. Furthermore, we feel the Sulphur Cap 2020 will be disruptive for the shipping industry, with only 2% of the world fleet scrubber-ready.” AG Shipping bought the 2006-built MR2 product tanker Phoenix in April 2018 for a reported US$15M.

Selling to make a point

For some owners, the current situation is an opportunity to sell and realise any increase in the value of their assets. Speaking at the 12th Annual Capital Link International Shipping & Offshore Forum, Scorpio Tankers president Robert Bugbee made no secret of the fact that his company was looking to sell two vessels. These assets had appreciated in value and it was an asset play, fulfilling two purposes. “We are selling two older ships, which will establish a net asset value substantially above our share price, generating liquidity. This will allow us to take advantage of the arbitrage in the share price,” he said. As the voice of a public company, Mr Bugbee had to choose his words carefully, but this statement may have implied that the company believed its share price was too low (half net asset value), and that by selling two ships and producing a positive yield on the assets, it could signal to investors that the share price was at a discount. At the same time, the company could release funds to buy back its own shares, at a discount.

“When the drawdown cycle of inventories stops, then the market will pick up”

Demand environment

The general opinion of the product tanker panel at the above-mentioned Capital Link International Shipping & Offshore Forum, held at New York’s Metropolitan Club in March, was that demand for MR2s remains relatively stable compared to other tanker sectors. During the conference, Navig8 America managing director Jason Kloper noted: “Q4 2017 was the first time we saw tonne-mile demand

Tanker Shipping & Trade | April/May 2018

outstrip supply on the water. That was mostly a factor of export capacity, which has swung export demand sharply upwards from a low basis. The arbitrage opportunities are there, especially from the US to the Far East.” Mr Kloper felt that naphtha trade in particular had benefited from this situation (naphtha trade increased 13% from the US and 10% from China in 2017. The growth in exports from China was due to a change in local regulations, according to Mr Kloper, but he noted that new refineries in the Middle East are now coming on stream, which will push exports not only to China and the Far East, but also into Europe. Ardmore’s Mr Gurnee felt that the fundamentals were in place to add up to 4% to 5% underlying demand growth for the product market, but he noted that the most interesting developments were to be found in the small, more complex trades: “North to south trades are interesting, as the volumes aren’t huge, but the distances are long and the delays are significant once you get there,” he told panel host, Deutsche Bank director and senior research analyst Amit Mehrotra. Concordia Maritime group chief executive Olaf Helgesson observed: “When the drawdown cycle of inventories stops, then the market will pick up; the volatility will kick in and the arbitrage will really start going. We believe it will be in the second half of this year.” Robert Bugbee pointed to the historical benefits for product tanker trade stemming from the up-scaling of the refinery sector. Whether in Europe or the US, when a large refinery base is created, it stimulates arbitrage and product trading, which in turn stimulates the product tanker market. He pointed to the process now taking place in China, following the lifting of controls on the import of crude oil and the export of products: “We have never seen the LR2 market trading independently from crude oil. The VLCC market fell to US$2,000/day and the LR2 market actually moved up into the mid-teens on a triangulated route.” He pointed that the LR2 and MR2 markets are being supported by strong demand in the East, as outlined above. Pyxis Tankers is an MR2 tanker company quoted on NASDAQ and its chief executive Valentios “Eddie” Valentis said that growing independence from the crude oil sector and the current relative stability was one of the reasons the company entered the sector. “This year (2018), the fundamentals are pointing towards a better market. It is pure supply and demand. We project supply (growth) of 2.8% annually and demand growth of 3% annually,” he told BDP1 Consulting chief executive Barry Parker in a postCapital Link online interview. In the shorter term, product tanker companies like Pyxis are looking to take advantage of the ›››

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PRODUCT TANKERS | 49

››› short-term market driving arbitrage opportunities. These can be seasonal, such as gasoline flows changing direction across the Atlantic, due to refinery maintenance and/or weather conditions. “This is not something we can predict,” said Mr Valentis. “Maybe others can. We just react.” These short-term changes can move day rates into the US$20,000/day or US$21,000/ day category, and time charter rates toward the US$18,000/day level. Pyxis has several product tankers coming off charter in the middle of 2018 and it will be interesting to see if they re-fix on the short-term charters to oil majors, or play the spot market. Aarbitrage is also being driven by the level of inventories, which have been declining. “We believe this will make the market a little volatile,” said Mr Valentis.

US oil product exports

The lack of growth in US refining capacity is one of the factors driving the arbitrage that supports the MR2 tanker fleet. US refining capacity in 2017 grew by only 2.3%, to just under 20M barrels per day (b/d), but utilisation grew to 91%. However, domestic demand has remained stable and the additional production has been exported,

according to US broker Poten and Partners head of research Erik Broekhuizen. The increase in refined exports commenced 10 years ago and middle distillates remain the largest export product. In 2017, the US exported 1.4M b/d according to the US Energy Information Administration, 17% more than 2016 volumes. Gasoline is the second largest commodity, with average daily exports of 747,000 b/d in 2017, 18% higher than in 2016. Other export products include jet fuel and residual fuel oil. LPG is the fastest growing export and in the last five years, LPG exports increased more than six-fold, from 196,000 b/d in 2012 to 1,225,000 b/d in 2017. European demand for US exports has fallen from almost 20% in 2012, to a little more than 12% last year. The uptake has been in Asia and the near Americas. In 2017, 21% of US product exports went to Asia and more than 50% to nearby countries in the Caribbean, Latin America and Central America.

“The lack of growth in US refining capacity is driving the arbitrage that supports the MR2 tanker fleet”

Ballast water viewpoint

A pressing issue in the MR2 market remains the fitment of ballast water treatment systems. “About 10% of the fleet in 2019/20 will be 20 years old,” says Mr Valentis. “Owners will be considering whether to take the vessel through a fourth survey

The product tanker fleet is moving into calmer waters

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Tanker Shipping & Trade | April/May 2018

50 | PRODUCT TANKERS

“When the upturn in the market comes, product tanker companies should be well placed to reap the benefits”

BELOW: High clouds and high hopes for the product tanker market (Credit: Maersk Tanker A/S)

and add the ballast water system; for an MR, the cost [of doing so] is in the region of US$750,000.” By 2019, there will be no more extensions from the US Coast Guard for vessels not fitted with ballast water treatment systems. Will the market at that time support the capex necessary to fit ballast water treatment systems, plus the expense of dry docking for the fourth survey and the loss of earnings?

2020 sulphur fuel

With the 2020 Sulphur Cap looming ever larger on the horizon, the requirements for compliance are now a very pressing concern. Pyxis Tankers believes that fitting a scrubber is not an option, as there is not the available space in the engine room of a MR2 tanker and the cost/payback ratio is not economical. In Mr Valentis’ opinion, the solution will fall on the refineries to supply a fuel product that complies and is cheap enough. He felt that most product tankers will switch to marine gasoil in the short term, until the new fuel is available and predicts that most owners and charterers will switch to slow steaming to lower consumption, which will benefit the market. “If the fleet decreases speed by 10%-15%, there will be an additional demand for between 60 to 80 MR2 vessels approximately,” said Mr Valentis. He pointed out that moving the fuel from the refineries to the ports where it is required will increase tonne-mile demand, a hidden benefit to the MR market. AG Shipping’s Mr Kakodkar took a different view: “We will be looking to retrofit scrubbers on existing second hand MR. A pre-sale survey will be able to determine that,” he said. He also felt that charterers will pay a premium. “We see a differential of about US$450 tonne between high-sulphur fuel and lowsulphur fuel. A measure of that difference will have to be built in to the timecharter rates for vessels fitted with scrubbers. This premium will even out as more vessels get fitted with scrubbers,” said Mr Kakodkar.

Tanker Shipping & Trade | April/May 2018

Consolidation and pools

A significant portion of the MR2 fleet operates in pools, the purpose of which is to derive commercial and marketing efficiencies. Scorpio Tankers’ Mr Bugbee said that his company had seen efficiencies following the merger of the Scorpio Tankers and the Navig8 product tanker LR fleets: “We are [now] able to negotiate better with charterers and put together triangulations that could not have been done for the fleet we had before. This is a clear benefit of size and consolidation in a relatively small (LR2) market.” In the MR2 market, the situation is different, according to Mr Bugbee. “You need a certain critical mass to (gather market) information and win charters,” he said. He also warned that the MR2 market is more consolidated than it appears, with a number of companies that operate MR2 also running pools. The inference is that this gives them crucial access to market data, more so than if they were independent of pools. Citing his own company as an example, he said: “Scorpio Tankers may own 109 product tankers, but we run around 180 product tankers in pools. While the product tanker market appeared weak in the last quarter, none of the companies earned an income below their operating costs. Every single day the product tanker market has been contributing to capital, unlike what we have been seeing in the dry market and the crude oil market.” His point was that there are far more product tankers behaving in concert, due to the pool system, than is apparent and when the upturn in the market comes, the product tanker companies should be well placed to reap the benefits, due their positive position on earnings at the low point in the cycle. Indeed, according to VesselsValue data, 325 MR2 product tankers are operated in pools, which equates to around 20% of the live fleet. This appears to confirm Mr Bugbee’s point concerning the opaque nature of consolidation in the MR2 market. TST

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ROTORTUGS TRIDENT, TRINITY, andTRITON THE FIRST OF THEIR KIND IN U.S. HARBOR SERVICES

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52 | OUTLOOK

COULD PIPELINES DRINK THE TANKER MARKET DRY? The world is not about to witness the imminent decline of oil demand, but there are other structural factors impacting tanker demand, writes Tim Smith, director, oil and tanker markets at Maritime Strategies International (MSI)

road-based macroeconomic expansion and benign economic conditions are supporting oil demand growth, including areas dominated by OECD countries such as North America and Europe. Despite some deceleration from 2017 rates of growth (of 1.6%), MSI expects global oil demand in 2018 to increase at a respectable 1.4% - a modest upward revision from our previous forecast.

MSI's Tim Smith: oil’s demise is exaggerated

Rate of expansion slowing

However, MSI continues to expect the trajectory of global growth to be downwards. To be clear, this does not mean oil demand will decline across the five-year horizon, rather that the rate of expansion will slow. There are of course risks to this view, in particular a downside macroeconomic shock or a sharp spike in oil prices could dramatically reduce the growth forecast. Fuel substitution (such as electrification of vehicles, LNG bunkering, etc) is expected to play a part in reducing oil consumption, but given the base level of effectively zero that these technologies are coming from, their effect over the five-year horizon will be limited, even with rapid adoption rates. Efficiency of oil-based engines will also play a part in reducing oil demand growth per unit GDP. Alongside this, higher oil prices per our revised forecast, and the waning macroeconomic cycle post-2019, also feed into the view that growth rates will drop towards and then below 1%.

Tanker Shipping & Trade | April/May 2018

Oil’s demise exaggerated

However, this forecast does not reinforce the idea that we are about to witness the imminent decline of absolute oil demand as a result of some of the factors mentioned above. In general, forecasting agencies (including MSI) tend to underestimate oil demand, rather than overestimate it. It has been in OECD regions, like Europe, where this tendency has been most prevalent. For example, the International Energy Agency (IEA), for many the global reference on oil market dynamics, produces a five-year forecast once per year covering its expectations for oil demand. MSI has looked at the track record of these forecasts, particularly for Europe, where it has been perennially bearish. The chart titled IEA forecast for OECD Europe oil, shows the IEA’s forecast for OECD Europe for every year from 2011 to that made around Q1 last year. It also shows its most recent forecast from its monthly oil market report. The red line effectively shows the actual history and the IEA’s most recent short-term estimates for 2018. Between 2014 and 2017, OECD Europe’s oil demand expanded by 6%. This development sits in stark contrast to the perennially bearish forecasts of the IEA. As a forecasting agency, MSI is aware of the difficulty in predicting the future. However, it is crucial to look at the track record. What is clear here is the error is consistently on the downside, rather than distributed symmetrically around the actual value. In fact, no forecast even comes close to 2017 levels, and even more recent forecasts, such as 2015, underestimate volumes

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OUTLOOK | 53

two years out by more than 1M b/d, or 8%. As a result, MSI is cautious of being too bearish on oil demand, despite the drumbeat narrative of efficiency and electrification which dominates discussion about the longer-term future for oil.

Overland alternatives

In January this year, total Russian crude production was almost flat month-on-month, totalling 46.3M tonnes. Nonetheless, Transneft, Russia's pipeline operator, stated that Russia's seaborne crude shipments to Europe will fall sharply this year. The reason being that loadings from key Baltic outlets, Primorsk and Ust- Luga, are expected to fall as Urals exports are diverted to pipeline routes to the east, principally China. Black Sea exports from Novorossiysk are also forecast to fall, whilst volumes going east via the Eastern Siberia Pacific Ocean pipeline and Kazakhstan will increase by just over 10M tonnes to 38.3M tonnes. This development goes to the heart of crude trade and tanker demand. Whilst there are very promising developments for long-haul trade from the Americas to Asia, seaborne trade growth itself is being curbed by overland trade. Deadweight demand is therefore growing fast, but from a lower base than it would without the influence of pipelines.

Growth in pipelines

The chart titled Overland vs seaborne crude shows global crude trade flows, split by overland and seaborne, with the red line denoting the relative proportion of overland. Until 2010, overland crude flows were effectively static, but, relating back to the wide-ranging influence the shale boom had from around this point, things have changed.

Direct substitution

Heavy Canadian crude being shipped down to the US Gulf Coast has been a major driver in recent years, as Canadian output has grown. Further large increases beyond 2020 are likely, assuming the Keystone XL expansion goes ahead, although this is subject to ongoing negotiations. In the near-term though, the increase will consist of FSU crude moving to China, and this is bad news for tankers as it is a direct substitution for their employment. On the flipside, MSI does expect deadweight demand growth to benefit from increased tonne-miles. The obvious example here is US crude to Asia. This has seen very strong growth to countries such as China and Singapore. However, MSI also views the reorientation of other ‘Atlantic’ crude sources east as a major support to distance trades. There is an expectation that both European and North American crude imports will drop. Therefore, even if production levels in regions such as Latin America and Africa do not see major growth, their crude is likely to be redistributed further afield.

“MSI is cautious of being too bearish on oil demand”

Americas to Asia tonne-miles hope

With limited refinery capacity growth (after the Brazil corruption scandals put paid to major expansion in Brazil) Latin America is a major candidate to support tonne-miles. The chart Crude oil demand versus deadweight shows the global growth rates of various measures of crude transport demand. MSI expects seaborne crude trade growth to underperform total crude trade growth as a result of rising overland trade. However, tanker deadweight demand growth will overperform seaborne trade as long-haul routes, particularly from the Americas to Asia, continue to expand. TST

LEFT: IEA forecast for OECD Europe Oil

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Tanker Shipping & Trade | April/May 2018

54 | OUTLOOK

Is an algorithm stealing your lunch The direction of the market is inherent in the tanker supply /demand balance. In theory, if you know where all the tankers available for work are located, and cargo demand, you could predict the market

n 2010, Dr Scott Borgerson, a US Coast Guard Academy graduate with an impressive array of educational qualifications had an idea on how to use the fact that demand for shipping is predicated on the micro and macro supply situation. This is essential knowledge for tanker brokers. Although he was an experienced mariner, in order to put the theory into practice, he needed to understand in detail the commercial side of the business. He went along to the Connecticut Maritime Association conference and exhibition (CMA Shipping 2010), to meet and talk to the assembled shipping community.

CargoMetrics is creating a "searchable Google of trade”

Hedge fund/technology hybrid

The result of this research, and thousands of hours of coding, is CargoMetrics Technologies LLC. This is a hybrid technology and hedge fund organisation that has written algorithms to examine vessel movements and to generate metrics on vessel and cargo supply and demand. The results are used by the hedge fund side of the business to trade freight, commodities and equities on stock exchanges around the world.

be generating government-scale quantities of fresh data every day. According to Dr Borgerson, an early investment in Amazon cloud servers is paying dividends. He refused to say more about the inner workings of CargoMetrics, beyond that “we archive all the data – it’s a searchable Google of trade”.

Geo-tagging the world

Monetising trade analysis

CargoMetrics’ data scientists are sucking up data on commodities using customs data, vessel AIS movements (satellite and terrestrial), images and other raw data from hundreds of sources on a daily basis. The company has a dynamic register of ships (it is no secret that CargoMetrics is working with Clarkson Research Services) and has geo-tagged the global ports. This means that CargoMetrics can track a ship to the berth and then cross-reference the cargo against customs data, images from ports and other data. Dr Borgerson aims to have a complete and verified picture of world trade in real time. The company even claims to have built a real-time model of China’s gross domestic product: “We aim to be the NSA of global trade”, Dr Borgerson told a hushed CMA audience.

CargoMetrics’ investors have very deep pockets It is incredibly costly to buy every possible source of trade data, and have a supercomputer to run algorithms in real time to crossreference sources against vessel movements. CargoMetrics must

Tanker Shipping & Trade | April/May 2018

How does CargoMetrics monetise the output? It gambles. CargoMetrics is a hedge fund that uses its unique data source to trade on hundreds of stock exchanges worldwide. According to Dr Borgerson, so far this year, CargoMetrics has been right 54% of the time.

Tanker brokers beware

This is just the start for CargoMetrics. Having built a global trade model, and trading on the arbitrage between supply and demand, CargoMetrics plans to share its results and techniques with selected partners. According to Dr Borgerson, CargoMetrics has been asked to apply its technique to service the requirements of a large Danish tanker company, widely believed to be Maersk Tankers. This combination would take the algorithms to a new level. If CargoMetrics achieves its goals, it will take away the information discovery role of competitive brokers. By CMA Shipping 2028, some of those who attended CMA Shipping 2018, may no longer have jobs. TST

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European Maritime Cyber Risk Management Summit 15 June 2018, London

SHIPOWNERS ATTEND FREE

Maritime Cyber Security: People, Processes and Products The Maritime Cyber Risk Management Summit (in association with Norton Rose Fulbright)

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What: A one day event that addresses cyber security management in the maritime industry from operational, technical, training, insurance, regulatory and legal standpoints. Why attend? There is no single solution to managing cyber risks. But there is one event in the maritime industry that brings together experts from across the entire maritime security chain together to better understand cyber security management in the maritime industry. Topics will include: • The current regulatory and risk assessment outlook • The NIS Directive and what it means for maritime • Debunking blockchain myths • Latest maritime cyber security vulnerabilities and threats • Risk reduction strategies • How machine learning is revolutionising threat detection • Maritime cyber security and loss prevention, reputational risk and business interruption • Protecting your infrastructure from cyber crime • What is the legal standard in relation to due diligence and seaworthiness?