green shoots - charles r. weber company, inc.it is clear that global seaborne trade will be hit very...

CHARLES R. WEBER COMPANY TANKER

REPORT

MAY 2009

green shootsbut how are the roots...

“To deal with men is as fine an artas it is to deal with ships.”

Joseph Conrad

1. Executive Summary1. Executive Summary

2. The 2. The YYear so Far 2009ear so Far 2009

The Shipping MarketThe Shipping Market

Global Recession – The Fight BackGlobal Recession – The Fight Back

WWorld Economic orld Economic Action Action

3. The Outlook for the rest of 20093. The Outlook for the rest of 2009

Broad Brush Background – The big themes Broad Brush Background – The big themes

Economic Cycles Economic Cycles

Underinvestment-the End of the Oil Underinvestment-the End of the Oil AgeAge

Potential Drivers for TPotential Drivers for Tanker Market in 2H09anker Market in 2H09

China Continuing to Build itChina Continuing to Build its Oil Banks Oil Bank

Pipelines to Change the Balance of TPipelines to Change the Balance of Traderade

WWeber Blue Pageseber Blue Pages

TTanker Market Outlook for 2H09anker Market Outlook for 2H09

TTanker Supply Prospectanker Supply Prospectss

Freight Market ScenariosFreight Market Scenarios

Calendar of EventCalendar of Events 2009/2010s 2009/2010

4. Future V4. Future Visionision

ShippingShipping

Oil IndustryOil Industry

5. T5. Tanker Companker Companiesanies

Financial MarketFinancial Markets-The Long Road to Recovery?s-The Long Road to Recovery?

The Danger of Being LefThe Danger of Being Left Behindt Behind

The Rising Issue of DebtThe Rising Issue of Debt

AppendicesAppendices

Chronology of Oil Market EventChronology of Oil Market Events s

The Role of SThe Role of Speculators in the Futures Marketpeculators in the Futures Marketss

New Crude Oil Production CapNew Crude Oil Production Capacity acity

Exploration and DevelopmentExploration and Development

Refinery ProjectRefinery Projects s

US Energy PolicyUS Energy Policy

Oil Industry Rationalisation Oil Industry Rationalisation

Ex Masters of the Universe Ex Masters of the Universe

Shipping NewsShipping News

WWeebbeerr TTAANNKKEERR RReeppoorrttCharles R. Weber Company Inc. Tanker Report is

published four times a year. It reviews important top-

ics within the tanker shipping industry and tanker sec-

tors that are of particular interest. It focuses on

changes in tanker trading patterns and changes in

fleet supply and demand.

SSOOUURRCCEESS::Charles R. Weber Research, International Energy

Agency, Energy Information Agency, Lloyds Maritime

Information Unit, Baltic Exchange, Global Trade

Information Services, OPEC.

EEDDIITTOORRIIAALL BBOOAARRDDJohnny M. Kulukundus - Director of Research

George P. Los - Reseacrh Associate

CCOONNTTAACCTT DDEETTAAIILLSSJohnny M. Kulukundis / George P. Los

Charles R. Weber Company Inc.

Greenwich Office Park One

Greenwich, Conneccticut, 06831, USA

voice:+1 203 629 2300

e-mail:[email protected]

e-mail:[email protected]

web: www.crweber.com

DISCLAIMERWhilst every care has been taken in the production of

this study, no liability can be accepted for any loss

incurred in any way whatsoever by any person who

may seek to rely on the information contained herin.

The information in this report may not be reproduced

without he express written permission of the Charles

R. Weber Comapny, Inc.

COPYRIGHT© 2009 Charles R. Weber Company, Inc.

ESSENTIAL READING FOR THE INTERNATIONAL ENERGY INDUSTRY

Issue 12

www.crweber.com

2nd Quarter 2009IN THIS REPORT

Methodology and Scope of the

Charles R. WeberTanker REPORTThe aim of the Weber Tanker Report is to pro-

vide participants in the tanker shipping indus-

try with an overview into the latest develop-

ments in the tanker market and the oil indus-

try that it serves, and also to shine a spotlight

on the future prospects for these two markets.

Crude Oil Market

Subjects that are regularly covered are as fol-

lows:

-Crude oil supply/demand balances historical and forecast

-Crude oil prices

-OPEC announcements and quota changes -US and global

crude oil import/export trade statistics -Crude oil and prod-

uct stocks

-Upstream activity and how developments in the E & P sec-

tor will affect tanker shipping -Refinery developments and

scheduled developments

-Monitor “Peak Oil” Debate

-Monitor Delivery Schedule and Investment plans for new

crude oil capacity

Tanker Shipping Market

Subjects that are regularly covered are as fol-

lows:

-Tanker earnings trends historical and forecast

-Tanker spot fixtures

-Tanker investor activity in terms of new orders, secondhand

sales and scrapping

-Tanker fleet supply changes historical and forecast

-Tanker fleet demand forecasts – taking into account the

impact of tonmiles

-Listed tanker shipping company results and share perform-

ance

This publication also tries to illuminate the dif-

ferences between developments in the vari-

ous tanker sectors during the most recent

period. It also attempts to deliver a snapshot

of tanker business for participants to better

understand the forces at work within the

tanker shipping industry. We welcome our

reader’s thoughts and opinions and would be

very happy to discuss points raised in this

report with you.

Given the speed of developments within the

tanker market and those markets that support

it we take a longer view when compiling this

report. In order to offer daily market updates

we offer a daily market update of all sectors of

the tanker market on our website:

www.crweber.com under the markets section.

For further information please contact the

Charles R. Weber Research Department.

John M. Kulukundis

[email protected]

George P. Los

[email protected]

© 2009 Charles R. Weber Company, Inc. 1

Weber Tanker REPORT Edition 2, May 2009

Green Shoots, but how are the roots…

Executive Summary At the time of the last publication of the Weber Tanker Report, tanker rates had started the year poorly but owners were able to console themselves with the fact that 2008 had been a record year for rates. In the space of time between then and now, tanker rates have significantly deteriorated. Indeed, 2008 is an increasingly distant memory and instead earnings are now flirting with breakeven levels.

It very well may be that the depressed atmosphere of the tanker market is somewhat out of step with the vibes of the world economy. In February, depression was considered a distinct possibility and spotters of green shoots were chastised. Today, most commentators have settled on the term “severe depression” to describe the current cycle, and it seems that everyone is trying to spot green shoots. Many serious commentators warn that although news reports declaring that we are unlikely in a ‘depression’ undoubtedly create a feel-good environment, given that we are in a ‘severe depression’ does not exactly constitute good news. There remain significant risks in the markets which threaten to derail the inroads to economic recovery, which regardless will be a protracted affair. In its April 2009 World Economic Outlook, the IMF commented:

The global economy is in a severe recession inflicted by a massive financial crisis and acute loss of confidence. While the rate of contraction should moderate from the second quarter onward, world output is projected to decline by 1.3% in 2009 as a whole (the worst post WWII recession) and to recover only gradually in 2010, growing by 1.9%. Achieving this turnaround will depend on stepping up efforts to heal the financial sector, while continuing to support demand with monetary and fiscal easing.(1)

The IMF identifies two primary risks: (i) the credit crunch phenomenon is still prevalent with banks failing to deliver the huge funds pumped into them by world governments to some parts of the economy and to certain types of businesses(2). (ii) Banks are still not transparent enough about the extent of their losses and so more confidence-sapping bad news has yet to seep out. Thus, we are nowhere near out of the woods yet. However, one of the key positives to surface over the last few months has been the emergence of the G20 as the international body tasked with responding to the international crisis, following the success of the G20 London summit in early April. An optimistic reading is that this development suggests a new power dynamic between nations and the beginning of a new era of consensus management and inclusivity. Following the summit, Lawrence Summers, director of


the White House National Economic Council, commented that there is no longer a feeling that the ball will drop off the table. The unity and effectiveness of the G20 will be stress tested again at its next meeting in New York in September.

Whether or not the emerging green shoots are an indication that global economic recovery is underway, it is clear that global seaborne trade will be hit very hard in 2009. Under the IMF’s forecast, the prognosis for commerce is particularly severe with global trade expected to contract by more than 10% in 2009, though some other forecasting bodies(3) are predicting slightly smaller declines in global trade. Turning to the tanker sector, world oil demand is certain to contract for the second consecutive year in 2009. The IEA’s estimate for world crude oil demand in 2009 has been revised down by more than 2.1 Mbpd since the start of the year. Even its latest forecast for May is for 0.2 Mbpd fewer than that estimated for April(4). There remains concern that demand could continue to contract into 2010, although the latest US’ EIA estimate indicates a modest 0.7 Mbpd increase in demand next year. Tanker supply is growing faster than expected during 1H09 with no sign of the anticipated surge in scrapping. Presently, fleet growth is heading towards the upper-end of the 6-12% range forecast for this year – though the increase in storage levels has had the temporary-but important-effect of moderating the rise of supply. Nevertheless, fleet growth is too strong and demand destruction too great to not translate into further downward pressure on rates. In the short term, this should lead to a significant increase in the rate of scrapping which, in-turn, should help relieve some of the pressure on rates later in 2009 and through 2010. China may yet come to the rescue if it can either achieve or exceed its own target of 8% GDP growth in 2009 (which would best the IMF’s estimate of 6%)(5). There is also the danger that if the recession continues to deepen, the unity of the G20 could be undermined and cracks could start to appear, e.g. between China and the West, or between those who spend their way out of recession and those who see financial regulation as the key to building confidence in the economy. Changes arising from the immediate fallout of the global economic crisis combined with weak demand fundamentals have the potential to alter the ownership profile of tanker shipping with the possibility of consolidations and bankruptcies. In this new harsh environment, all shipowners will come under pressure from falling revenues as supply and demand fundamentals continue to weaken and period employment opportunities dry up. Some owners face the additional burdens of rising finance obligations from vessels on order. Almost all owners will need to review their sources of credit and redefine relationships with their bankers who are in turn facing tighter regulation and the imposition of a new culture of risk aversion. In many cases, owners who breach their loan covenants will be able to renegotiate the terms to keep their loans in satisfactory standing. The new harsh environment will favour well-run companies with good period coverage and the ability to maintain strong balance sheets.


In the longer term, there is no doubt that the world economy and the tanker market face the possibility of significant change; (1) financial regulation should prevent a return to a risk acceptance culture, (2) the current spending reduction in crude oil exploration and development may create problems with crude oil supply with the potential for a gap in the new fields coming on stream in few years time, (3) tanker ordering has almost dried up over the last six months, which will help improve tanker fundamentals considerably after 2010, (4) the acceleration in the green agenda has been a noticeable feature of the last few months and this has the possibility to hasten the end of the age of oil. (1) Nouriel Roubini (May 12) “While there do seem to be some signs of improvement, ie that the pace of contraction has slowed, the most recent data may still suggest that the global economic contraction is still in full swing with a very severe, a deep and protracted U-shaped recession”. Other commentators warn of the dangers of seeing recovery too early e.g. the phenomenon of a “relief rally”, and of reading too much into a temporary improvement in industrial production created by the need to replenish stocks. (2) Mervyn King the Governor of the Bank of England commented in early May that banks have lost nerve and are not lending quickly enough

(3) (4) IEA’s May Crude Oil Demand Growth Estimate for 2009 -3% (-2.6Mbpd) is more than severe than both the May forecasts from the US EIA -1.8Mbpd and OPEC -1.6Mbpd. All three organisations revised down their estimates for world demand growth in 2009 (5) China continues to report very mixed signals. In April, Goldman Sachs dramatically raised its forecasts for the Chinese economy and is now predicting 8.3% growth for this year, above the Communist Party's own target. However, the latest set of figures from early May were not as good as expected and raised doubts about the strength of Chinese recovery - with industrial production growth from a year earlier slowed to 7.3% in April from 8.3% growth in March, and crude steel output down 4% in April from a month earlier. Wei Gu (Mar 25) argued that to keep a handle on Chinese recovery it is necessary to focus on just 3 key numbers for 2009. “China investors should care about three major numbers this year: 8% economic growth, its 4 trillion yuan ($586 billion) stimulus package, and the 10 industries revitalisation plan. Wei Gu also pointed out three misunderstandings (hidden facts) about the revitalization plan (1) about reducing supply not building up (2) involves state owned companies buying other state owned companies but government won’t allow job losses so impossible to reduce capacity (3) 10 industries under the plan will be treated differently. It might be tempting for investors to dismiss Beijing's interventionist approach. But they should still study the plan. The government has never before come up with such a sweeping package that includes detailed long-term goals for so many key industries. It could serve as a curtain raiser of future industrial policies. (6)Qatar's sovereign wealth fund has put buying on hold for the

next 6 months and will overhaul its strategy to focus more on energy and commodities. In the next 6 months the fund, which is estimated to have assets of $60 billion, will do nothing, and in the second half of the year they intend to switch their focus to commodities, in particular, food, energy, and water. In the short term the fund will continue to hold US dollars but is unsure of their long term intentions.

© 2009 Charles R. Weber Company, Inc.

Tanker Rates/Prices

The global recession has really started to bite into tanker rates with average earnings falling steadily at the start of the year. In April, sharply contracting crude oil demand combined with accelerating fleet growth meant earnings fell below the low tide mark for the last decade set in 02.

Dirty and clean rates have been equally badly impacted, and there is little promise of a change in fortunes in the near/medium term (see chp 3).

Tanker newbuilding and secondhand prices have also plunged, but have not collapsed to the same extent as spot rates.

Demolition prices – another bubble that burst spectacularly in 2008. From record levels at mid 2008, scrap prices lost two thirds of their value in just 3 months during 3Q08 as a result of the disintegration of steel prices. At the start of 2009, demolition prices have fluctuated in a band between $250-300Ldt, while steel prices have continued to slide.

Tanker Fleet

Overall tanker supply expansion accelerated during 1Q09 with 3% (14MnDwt) added to the fleet compared with an increase of just 0.6% (2MnDwt) during 1Q08 and 1.9% (7MnDwt) during 4Q08. The increased rate of fleet expansion reflects the high level of orders scheduled for 2009 delivery (63MnDwt, compared with 37MnDWt in 2008), and couldn’t come at a worse time for the sector. Accelerating supply growth on top of months of demand contraction has conspired to pile the pressure onto tanker rates.

Delivery slippage played a part in moderating fleet growth in 2008 with 5MnDwt fewer deliveries than expected at the start of that year. Owners will hope that slippage continues to be a factor this year. Owners will also be looking for further orderbook cancellations to keep supply growth in check in 2010.

While slippage and cancellations are important, increased scrapping is the crucial factor that can help offset the weight of deliveries entering the market over the next couple of years with around 49MnDWt of single hull tonnage destined for removal by end 2010. The rate of removal of this vulnerable block of tonnage in advance of the deadline is of keen interest to owners. However, at the start of 2009, the rate of scrapping is no higher than it was in 2008 in part due to the sharp drop in scrap prices. Just a tanker rates will not improve until demand picks up, increased scrapping is the second precondition for rate improvement.

Investor Activity The credit crisis and global recession together continue to paralyse the newbuilding market with almost no orders reported in the last six months.

The startling halt to tanker ordering has meant a significant contraction in the size of the orderbook to 162MnDwt (4/08) from a peak of 186MnDwt (9/08). Despite this fall, the tanker orderbook is still equivalent to almost 40% of the trading fleet. Although this percentage is reduced to a more manageable 27% when single hull tankers are discounted. This figure looks better still when compared with the corresponding obook/trading fleet figure of 70% for dry bulk.

Like newbuilding, the tanker secondhand sales market almost ground to a halt in 4Q08 with 0.4MnDwt of sales per month compared with 1.6MnDwt in Q1-308. Unlike newbuilding, there are now signs of life with 1MnDwt of secondhand sales per month in 1Q09. Aframaxes and small Product tankers have been the most popular vessels so far this year accounting for 24 of the 31 sales. The age profile of these two groups is very different with Aframaxes sales involving a mix of vsl ages

2.1 The Year So Far - Chart Wall

4


(av. 10 years), while the age of small Product sales have focused on mid-old vessels (av. 18 years).

Crude Oil Demand The track record of forecasters does not often stand up to scrutiny. In the case, of the IEA’s attempts to forecast crude oil demand, there have been 2 glaring crystal ball misadventures in the last ten years (see chart below).

The first was in 2003-4 when the IEA (along with other forecasters) failed to anticipate the surge in global crude oil demand triggered by Chinese industrial lift off. The 2nd was in 2007-8 and was a case of over optimism (in contrast to 03/04). This time the IEA didn’t see the freight train marked global recession. Its initial estimate for 2008 demand (made 7/07) was 88.2Mnbd compared with an actual figure of 85.8Mnbd (off by 2.4Mnbd). Its initial estimate for 2009 demand (made 7/08) was 87.7Mnbd. Its latest 09 estimate is 83.2Mnbd (off by 4.5Mnbd). The scary part is that estimates are still being revised down. The hope is that the contraction in global industrial production will bottom sometime in 1H09. The IEA won’t make its prediction for 2010 demand until July 2009 – although

it does expect a demand recovery in 2010. The US EIA is already prepared to forecast 2010 demand (14/4/09) at 85.22Mnbd which is up 1.13Mnbd on its own estimate for 2009. This is positive news after two years of demand contraction, but would mean that 2010 demand struggling below levels in the peak year of 2007 and 2008. Hopefully, forecasters have at least got the direction right in 2010.

Crude Oil Production

In response to tumbling crude oil demand from mid 2008, OPEC embarked on a concerted programme of production cuts in its efforts to prop up crude prices. OPEC meetings/production cuts (applied to OPEC 11 ex Iraq): Sep 9 – target compliance with 2007 quota (28.8Mnbd) effective 0.5Mnbd (28.5Mnbd) as based on actual 9/07 output (29Mnbd) Oct 24 – 1.5Mnbd (27Mnbd) Nov 29 – no further cuts Dec 17 – 2.2Mnbd (24.8Mnbd)

In April, it is calculated that adjusted OPEC production hit its lowest level since after the war in Iraq in 2003. Nevertheless, quota compliance is only 80% with Iran (44%) and Angola (45%) the

worst offenders. Saudi Arabia is producing at below its target level. The next chance for OPEC to review its quota levels will be at the end of May. Non-OPEC production for 2009 is around 320Kbd down on 2008. European output has dropped the most, while Brazilian output – by contrast – is flying fueled by new fields coming on line.

Crude Oil Exploration

Falling oil prices and falling demand has seen the oil exploration industry crunch through the gears from full speed ahead to dead slow. Even allowing for seasonal adjustment, the global rig count is way down on the average activity for the last 3 years. There has been an equally dramatic decline in the amount of US rig activity. As for world activity, there is no sign yet that the mothballing of rigs is slowing down. The significant reduction in exploration programmes could have significant implications for new crude oil capacity coming on line in the next few years.

Crude Oil Stocks

OECD forward cover is at 62 days for Feb the highest since 1993. More up to date weekly stock info for the US (now at a 19 year high) indicates the stock build goes on

There are even concerns that storage space will run out. Goldman Sachs (30/4) estimates that global storage will be full by June. Of course, this is good news for shipping with around 100MnBbls of tonnage already being used for floating storage. The stock build has been initiated in part due to the dramatic slide in crude oil prices (see below) which has allowed oil companies to

5


embark on necessary restocking from the low inventory levels seen last year. Oil price contango has also boosted stocking – but the spread between benchmark and futures prices has narrowed so the incentive to build stocks in somewhat diminished

The pattern of product stocking is uneven, although overall levels are at the top end of the range for 2006-2008. In general, gasoline stocks are quite low, while middle distillate stocks are quite high.

Crude Oil Prices

Having spent 1Q09 in the mid-low USD40s bbl range, oil prices have now moved above USD50Bbl. The improvement coincided with the

G20 summit in London, which seemed to pump some much needed confidence into the business world at least to the extent that the consensus view is now that “the ball will not fall off the table” i.e. no Great Depression likely. This collective realisation has led to a moderate recovery in stock markets, which have dragged up commodity prices.

There are differing interpretations about the strength of the recovery. Optimists argue that the market has made an adjustment having previously being pricing for a depression. Pessimists argue that the current bull run on the equity markets is a classic fools’ rally, and that the fundamentals (including continuing downward revisions to crude oil demand forecasts) will not support the recovery.

China Crude Oil Imports Chinese crude oil imports surged in March having fallen below corresponding 2007 and 2008 imports in Jan-Feb.

China’s product imports have shown a more stable pattern than crude oil imports during 1Q09.

China remains pivotal to the recovery of the world economy. When Wen Jiabo announced (Mar 13) that China was prepared to beef up its stimulus programme announced in Nov 08 and that it would meet its own revised 8% GDP growth target for 2009, this was received as a hugely positive signal around the world.

Overall Chinese imports and exports have been curtailed as a result of the global recession. However, Chinese commodity imports surged in recent months – in part to take advantage of low commodity prices (and freight

rates), and in part an over optimistic reading of the recovery of world demand

6


The Tanker Shipping Market Global Recession – The Fight Back The chart shows the skeleton of “bad news” events within the financial system that precipitated the current recession and the key events so far on the lengthy road back to global economic health. It also shows the sometimes contrary path of tanker freight rates, which soared in the summer of 2008 apparently oblivious to the fermenting crisis (of course China crude and product imports were still strong), and today continue to decline despite a modest recovery in business and consumer confidence (evinced by stock market gains) – instead, this time reflecting weak shipping industry supply/demand fundamentals with crude oil demand estimates for 2009 still being revised down, and the pace of fleet growth accelerating.

At the time of the last Weber Tanker Report in March, the fight back had begun but despite various bank bailouts, stimulus packages and a new US President, the remedial action was still working through the system. There were no signs of recovery, and depression was a real fear. During this period, shipping rates were continuing to fall—dramatically matching the major losses in equity markets and falls in most commodity prices. Now, well into the second quarter, it is evident that the tanker market has deteriorated significantly since the start of the year. However, the mood in the tanker market does not reflect a slightly more upbeat tone within the rest of the world economy, particularly evident in the build up to the G20 London summit in April and afterwards. Talk of depression has mostly disappeared, and – despite a consensus view that the recession will be long and deep – there is growing confidence that the bottom of the market may have been reached and the time is right to look for green shoots. The slight improvement in global economic confidence is reflected in moderate gains in stock markets around the world, as well as for commodity prices. The chart above shows how share prices and tanker

Sep 15 2008: Lehman Brothers becomes the first major bank to collapse since the start of the credit crisis

Apr 8 2008: IMF says the effects are spreading from sub‐prime mortgage assets to other sectors, such as commercial property, consumer credit, and company debt.

Oct 3 2008: The fightback begins ‐ The US House of Representatives passes a $700bn (£394bn) government plan to rescue the US financial sector.

Nov 9 2008: China reacts – China reveals $586Bn stimulus package. Turns out that more needs to be done with a second announcement (Mar 4, 2009) about beefing up stimulus package

Jan 9 2009: Obama inaugurated –feel good factor ripples around the world. Something to do with “change”. In first 30 days, (1) $787Bn stimulus signed into law (17/2). Also (2) action to slow down house defaults, and (3) plans to “stress test” banks

Apr 2 2009: G20 London Summit – Depression off the Table – Still disagreements about the balance between increased stimulus and new banking regulation – but present unified front that injects some much needed confidence not to mention $1.1Tr of spending pledges. Japan adds to feel good with its second stimulus package

Share prices and tanker freight rates heading in different directions


freight rates have been moving in different directions in recent weeks. The question is whether tanker rates are a truer barometer of the state of the global economic recovery than share prices(d). The strength of recovery in the world economy will be discussed in more detail in chapter 3. However, its worth noting here that a number of commentators have argued that equities are trading on the basis of positive sentiment despite weak fundamentals, while tanker rates are trading on the reality of supply and demand. It is also worth noting that it would be a gross oversimplification to rely on any one indicator to gauge the state of the world economy. (a) Strategic assessment of where it went wrong – The Fear of Uncertainty - Unlike in 1973 & 1979, the high oil price (a bubble amongst many bubbles) was more of a symptom than a major causal factor in triggering the economic downturn. Fear of uncertainty (the uncertainty of individual bank exposure to toxic securities) caused lending – most notably between banks - to be virtually suspended by September 2008. The ability to dispel fear meant that the money gridlock persisted long enough for the “real” economy to become infected by the fear of uncertainty. Businesses started to curtail spending - either unable or too frightened to make investment decisions, and even the lowly western consumer (already traumatised by falling house prices) realised that job security was now the issue and started to spend more cautiously. (b) Longer term assessment of origins of current crisis - George Soros “The New Paradigm for Financial Markets” (April 2008) suggested that the current crisis was not just an ordinary cyclical event, but had been building for 25 years – the product of credit expansion (from 1930s), globalisation of financial markets, the removal of financial regulation, and the increasing pace of financial innovation (all originating in the 1980s). Even though the crisis has (by any standards) broken the financial system, it has not been allowed to fail (if it had, then a repeat of the Great Depression would have been on the cards). (c) A rare case of governments working together – how another Great Depression was averted – The Great Depression of 1929 was caused by the collapse of the banking system. Coordinated global interest rate cuts and banks bailouts have ensured that this time around the banking system will at least survive. The G20 summit in London in early April was the latest example of how governments around the world are still trying to work together to stave off recession. It now seems that this unified and integrated (if not always harmonious approach) may be starting to pay dividends in terms of rebuilding confidence in the financial system and preventing stagnation with business and consumer confidence no longer on the floor. However, it is early days and market fundamentals are still very weak. (d) Shipping indices as lead indicators of global activity – Crude oil is the world’s energy feedstock and so in theory should be an ideal lead indicator of economic activity. However, the case for using tanker rates for this purpose is actually quite weak because of the attempts by OPEC to manipulate oil prices by micro managing the amount of crude oil it produces. The Baltic Dry Index is often considered a better lead indicator of economic activity because the absence of pervasive cartel activities and because unlike stock and commodity markets it is devoid of speculators. It is also considered a good lead indicator of where end prices are heading. Of course, the BDI (and any other shipping indicator) works best as a lead indicator of economic activity when vessel supply is consistent – which it rarely, if ever, is. It is also worth noting that shipping rates are of no use whatsoever in spotting financial tsunamis. The chart (right) compares the BDI and BDTI and Dow Jones indices. It is interesting to note that dry bulk rates fell like a stone from mid-year – much faster than the BDTI and Dow Jones. This reflected in part the dry bulk market’s sensitivity to the rise in counter party risk caused by the profound loss of confidence in the global financial system sometime after the Beijing Olympics in August and the demise of Lehman Bros in September. The major cargo owners in the tanker sector are leading international oil companies with very low perceived risk of default. During 2H09, therefore, the tanker sector may be seen in some respects as a more accurate indicator of global economic activity – although the brief rally in tanker rates at the end of the year may be seen to reflect the intrusion of market sentiment over market fundamentals. From the start of 2009, the three indices have performed very differently. The BDI has trended up reasonably consistently - the Dow Jones fell sharply during 1Q09 before recovering quite strongly at the start of 2Q09 – the BDTI has consistently trended down. None of these indicators are in fact working well as lead indicators of economic activity. In the case of the BDTI, the direction is being controlled by industry specific fundamentals – namely accelerating fleet growth + massive crude oil over supply reflected in swollen stock levels. In the case of the Dow Jones, market sentiment boosted by the G20 summit seems to be holding sway. The BDI has the best claim to be a lead indicator, but it is difficult to determine to what extent the modest upward trend is due to global market supply/demand fundamentals or to a recovery from the disastrous episode with counter party risk when rates may have fallen to an artificially low level. Nevertheless, it is possible to indentify a strengthening in the BDI after the G20 summit. It is tempting to think that the recovery in both the BDI and Dow Jones in early April is due to more than market sentiment or bounce back factors.


World Economic Action – The G20 Summit, London April ‘09 For the moment at least, it looks as though the G20 summit will prove to have been the point when the global economy stopped heading down and started looking up. Of course, there are dozens of indicators of economic well being and these are still pointing in different directions. For example, while governments may be relieved that industrial production may be found to have bottomed out during 1H09, individuals are still being crushed as the pace of job losses around the world continues to increase. Here is a summary of the key commitments from the G20 Summit:

Financial Regulation

A new Financial Stability Board, with a strengthened mandate, will replace the Financial Stability Forum

Financial regulation and oversight will be extended to all financial institutions, instruments and markets

This includes bringing hedge funds within the global regulatory net for the first time Members are committed to implementing tough new rules on pay and bonuses at a global level International accounting standards will be set Credit rating agencies will be regulated in order to remove their conflicts of interest A common approach to cleaning up banks' toxic assets has been agreed

Tax Havens

There will be sanctions against tax havens that do not transfer information on request The Organization for Economic Co-operation and Development has published a list of countries

assessed by the Global Forum against the international standard for exchange of tax information

IMF

Resources available to the International Monetary Fund will be trebled to $750Bn This includes a new overdraft facility, or special drawing rights allocation, of $250Bn Additional resources of $6Bn from IMF gold sales will be made available for lending to the

poorest countries Support for increased lending to the world's poorest countries of at least $100Bn by the

multilateral development banks

Global Trade

There will be a commitment of $250Bn of support for trade finance made over the next two years

This will be made available through export credit and investment agencies, as well as through multilateral development banks

National regulators will be asked to make use of available flexibility in capital requirements for trade finance

Protectionism

Pledge to resist protectionism Commitment to naming and shaming countries that breach free trade rules


Commitment to notify the World Trade Organization (WTO) of any measures that constrain worldwide capital flows

WTO to monitor and report publicly on these undertakings on a quarterly basis

Fiscal Stimulus

Although there is no new fiscal stimulus, Gordon Brown said G20 countries are already implementing "the biggest macroeconomic stimulus the world has ever seen" - an injection of $5Tr by the end of next year

It would be impossible for all governments to be in agreement with the exact strategy to achieve global economic recovery. Indeed, there were a number of different theories expressed at the summit, such as the focus on financial regulation, in part, to restore confidence in the financial sector vs. focus on increased stimulus spending in order to avoid repeating the mistakes of underinvestment during previous deep depressions. In any case, the G20 proved to be a success because world leaders found enough common ground to rally around and were thus able to present a united front to the world. Two key issues of coalescence were anti-protectionism – although that remains a major threat to recovery – and crucially, the idea of unity itself(c). Tensions beneath the surface may yet bubble up if the road to recovery proves to be even more difficult than expected. John Authers of the Financial Times comments:

“Politicians naturally lauded the G20 2009 London summit as a second Bretton Woods. A more sober assessment is that the summit teetered on the brink of Galbraithian scorn from future generations but ended up slightly nearer the Bretton Woods end of the scale. It was a success firstly because it avoided the total collapse into acrimony that at one point seemed possible. That could have had a catastrophic effect on the world markets’ recently resurgent confidence. It does not reach Bretton Woods on the dial because it failed to agree on the most important issue, which was the role of government spending in combating the downturn. The US and Japan argued for more deficit financing, and dealing with the risks of inflation later; Germany and France disagreed.”

Notwithstanding his reservations, Authers highlights four key achievements of the summit: (1) Recognised need for reduced dependence on the US dollar in the foreign exchange markets (though not a major breakthrough), (2) Place emphasis on avoiding “competitive currency devaluations,” (3) Boosted IMF’s ability to deal with emerging market defaults (such as Eastern Europe), (4) G20 established as the new forum for sorting out the world’s economic problems, reflecting the importance given to emerging economies. Just as China had been a major driver of the global economy in the run up to the peak, in the recessionary period it is now being viewed as potentially poised to help reignite economic growth; accordingly, it was a leading player at the summit. Its guarded welcome to the G20 results and the listing of its own achievements reveals its ownership of the process despite acknowledging that some of its main priorities were not addressed. China was pleased to see the end of Europe/US dominance of the IMF and World Bank, and pledges for extra funding for IMF. Also pleased about increased banking regulation. However, felt commitments to avoid protectionism were too vague (with America exhorting its public to buy American, and the EU introducing export subsidies for dairy products in the run up to the meeting) and – having launched its own 2 year fiscal stimulus package – it had hoped for more action from other countries. China was also prepared to throw its weight around to defend its Hong Kong and Macao tax havens. This area of conflict highlights a wider concern that China is reluctant to have international regulation of its own financial system - including how it should conduct its exchange rate policy. Not everyone is prepared to acknowledge the G20 summit’s success – seeing pronouncements from the meeting as spouts of hot air rather than providing the impetus for change. One commentator argued - how can the G20 summit deliver on its pledges when most rich donor countries are continuing to renege on the promises to increase development aid they made the last time the UK hosted a big heads of government jamboree – the Group of Eight summit in Gleneagles, Scotland, in 2005. The G20 will have a chance to assess and fine tune its own performance at the next G20 meeting in New York in September.

(a) The first G20 finance ministers’ and central bankers’summit was in 1999 (b) First Bretton Woods - In the summer of 1944, delegates from 44 countries met in the midst of World War II to reshape the world's international financial system. The location of the meeting - in the plush Mount Washington Hotel in rural Bretton Woods, New Hampshire - was designed to ensure that the delegates would have no distractions, and no pressure from lobbyists or Congressmen, as


they worked on their plans for post-war reconstruction. The meeting was born out of the determination by US President Franklin D Roosevelt and UK Prime Minister Winston Churchill to ensure post-war prosperity through economic co-operation, avoiding the economic conflicts between countries in the 1930s that they believed contributed to the drift to war. The delegates focused on two key issues: how to establish a stable system of exchange rates, and how to pay for rebuilding the war-damaged economies of Europe. The IMF and the World Bank were created to facilitate these objectives. Steve Schifferes Economics reporter, BBC News (c) Mar 16 – At the pre summit meeting at Horsham, West Sussex the G20 finance ministers agreed (1) twin track strategy seeks to avoid splits (coordinated stimulus + banking reform), (2) cash injection into IMF – possibly boosting reserves from $250Bn to $750Bn, (3) to end the 50-year-old unwritten rule whereby the heads of the IMF and World Bank are decided by European and US governments respectively. Under the proposals announced yesterday, China and other emerging market economies will gain greater influence over the IMF's activities, (4) In the next few months the IMF will rate each country around the world on the scale and performance of their fiscal stimulus packages. However, the finance ministers' commitments were overshadowed by the fact that the Horsham summit failed to commit on a specific target for the amount countries should now pump into their economies, or to agree on specific reforms to the system of financial regulation.

(c) Apr 9 – Evidence on the ground that some countries are continuing to spend – Venezuela/Japan $33Bn on oil development projects in Venezuela for the Japanese market, Venezuela/China to accelerate existing plans to expand oil exports and refinery build - Apr 6 – Japan firms up the details of its second stimulus package. The new package worth $100Bn will target solar energy, medical services, non-regular workers and failing domestic firms. It brings Japan’s total stimulus spending to $220Bn – the biggest in relative terms of any individual country. However, Japan’s national debt is so high that at 4% of GDP the total stimulus package actually increases the massive national debt only by a modest amount from 175% to 180% of GDP.


The Outlook for the rest of 2009 Broad Brush Background Economic Cycles – Recovery from Financial Recession Tends to be Longer The chart below (see red line segments) shows how oil demand went backwards (x-axis) as a result of the first oil shock in 1973 and also as a result of the second oil shock in 1979 (oil price spikes shown on y-axis). Although in 2008 the oil price was more of a symptom of the malaise rather than a catalyst for recession, oil demand has also gone into reverse with the IEA predicting that 2008/9 will be the first consecutive years of contraction since 1982/3.

Following the first oil shock, demand contracted for two years before recovering strongly from 1976. The impact of the second oil shock was more severe with demand contracting for four years before slowly starting to recover from 1984. The key question for the tanker industry is whether the current era of oil demand slowdown will extend into 2010 or even beyond. Taking account of previous recession/recovery cycles(a) gives us ideas of what we may be in for. There have apparently been 11 US recessions between 1945 and 2007 with an average duration of 10 months. The "Great Depression" lasted for around 16Qs from 1929 to 1933 (although the recovery phase lasted until 1939 and the outbreak of WWII). The most serious recent recession was in the 1980s which lasted for around 8Qs and qualified as a "deep" recession. Depression averted, but we are not out of the woods yet – The IMF in its latest World Economic Outlook (pub: April 2009) commented “The global economy is in a severe recession inflicted by a massive financial crisis and acute loss of confidence. While the rate of contraction should moderate from the second quarter onward, world output is projected to decline by 1.3% in 2009 (the worst post-WWII recession) as a whole and to recover only gradually in 2010, growing by 1.9%. Achieving this turnaround will depend on stepping up efforts to heal the financial sector, while continuing to support demand with monetary and fiscal easing”. The IMF’s forecast projections include the following assumptions (1) the world’s financial system will continue along the path to health (although the process of restoring confidence will take longer than


previously envisaged given the scale of bad bank debts), (2) fiscal stimulus plans in G20 countries amount to 2% of GDP in 2009 and 1.5% of GDP in 2010, (3) commodity prices remain around current levels in 2009 and will rise only modestly in 2010. Under the IMF’s forecast, the prognosis for trade is particularly severe with global trade expected to contract by 11.5% in 2009. Other forecasting bodies are forecasting a smaller contraction in global trade. While acknowledging the positive policy decisions taken by world governments and “the encouraging signs of improving sentiment since the G20 meeting in early April” (and taking into account that recovery takes longer from financial recessions), the IMF remains concerned about two particular risks to recovery. Firstly, it opines the credit crunch phenomenon is still prevalent with banks failing to deliver the large funds pumped into them by world governments to some parts of the economy and to certain types of businesses. The IMF comments “overall credit growth to the private sector has dropped sharply”. However, it also acknowledges this reflects not just tighter bank lending standards and securities market disruptions, but also lower credit demand from businesses themselves focused on preserving cash and stabilizing their balance sheets. Secondly, (the IMF believes that banks are still not fully transparent as to the extent of their losses). According to the IMF, “So far, banks have recognized less than one third of estimated losses”. It argues that economic uncertainty is compounded by the unconvinced notions about bank losses and that this generates “a damaging feedback loop with the real economy” which may increasingly hamper business investments into new projects. The IMF acknowledges that there is limited upside potential to its forecasts (described as a “relief rally”), but warns that risks are predominantly on the downside. It describes how a frightening global downside scenario taking into account the risks described above would play out.

“Turning to the downside, a dominant concern is that policies will continue to be insufficient to arrest the negative feedback between deteriorating financial conditions and weakening economies in the face of limited public support for policy action. The core of the problem is that as activity contracts across the globe, the threat of rising corporate and household defaults will imply still-higher risk spreads, further falls in asset prices, and greater losses across financial balance sheets. The risks of systemic events will rise, the tasks of restoring credibility and trust will be complicated, and the fiscal costs of bank rescues will escalate further. Moreover, a wide range of financial institutions—including life insurance companies and pension funds—will run into serious difficulties. In turn, additional stress in the financial sector will drive greater deleveraging and asset sales, tightening of access to credit, greater uncertainty, higher saving rates, and even more severe and prolonged recessions. In a highly uncertain context, fiscal and monetary policies may fail to gain traction, since high rates of precautionary saving could lower fiscal multipliers and steps to ease funding could fail to slow the momentum of deleveraging. “These negative interactions would operate through a complex series of interrelated channels that would play across both advanced and emerging economies. Key transmission routes include deep corrections in national housing markets, especially but not exclusively in advanced economies; corporate stress, especially but not exclusively in emerging economies; deflation risks, mainly in advanced economies; and increasing vulnerabilities in public sector balance sheets, especially but not only in emerging economies. Each of these risks is discussed in turn below, before the section concludes with a negative downside scenario to illustrate the possible combined impact on the global economy”.

Apart from two main risks highlighted by the IMF, another risk worth affording attention to is the potential for cracks to appear in the global approach to handling the crisis. The success of the G20 London summit was in part due to the fact that world leaders were able to present a united front, but undoubtedly, tensions were high. These cracks around strategy will undoubtedly bubble away below the surface, but could eventually come to fore and may have a profound effect on the length and depth of the recession. The most recent signs of discord revolve around The People’s Central Bank of China’s attack (in its latest quarterly report) on the policy of quantitative easing adopted by a number of western countries which it describes as, "A policy mistake made by some major central banks that may bring inflation risks to the whole world." (a) Recession history goes back a long way - to 1854 in fact - with 32 cycles in the US (averaging 17 months of contraction and 36 months of expansion). History and duration of recent recessions - 1929 to late 1930s, Great Depression, stock market crash, banking collapse in the United States sparks a global downturn. Durations: 43 months, 1937, second downturn of the Great Depression. Durations: 13 months, 1945, Duration: 8 months, 1948-1949, Duration: 11 months, 1953-1954, Post-Korean War Recession - The Recession of 1953 was a demand-driven recession due to poor government policies and high interest rates. Duration: 10 months, 1957-1958, Duration: 8 months, 1960-1961, Duration: 10 months, 1969-1970, Duration: 11 months, 1973-1975, Oil crisis, a quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War leads to stagflation in the United States. Duration: 16 months, 1979-1980, 1979 energy crisis, the Iranian Revolution sharply increases the price of oil, 1981-1982, Duration: 16 months, 1982 and 1983, Early 1980s recession, caused by tight monetary policy in the U.S. to control inflation and sharp correction to overproduction of the previous decade which had been masked by inflation, 1980 to 2000, Great Commodities Depression - general recession in commodity prices, 1990 to 1992, Early 1990s recession - collapse of junk bonds and a credit crunch in the United States leads to one quarter of US GDP decline, and therefore not an official recession, 1990 to 2003, Japanese recession -collapse of a real estate bubble and more fundamental problems halts Japan’s once astronomical growth, 1997, Asian financial crisis - a collapse of the Thai currency inflicts damage on many of the economies of Asia, 2001 to 2003, Early 2000s recession - the collapse


of the Dot Com Bubble, September 11th attacks and accounting scandals contribute to a relatively mild contraction in the North American economy. Since the US GDP never actually declined in this period it is not considered an official recession. (b) This report focuses on the IMF’s analysis of the road back to global economic health as the background to an assessment of the likely short-medium term prospects for the shipping market – but it is important to note that (i) there are a lot of other organizations and individuals providing commentary on the economic situation, (ii) we are in unknown territory and no one can be certain of how the world economy will evolve over the next few months and years, and (iii) Lots of question marks about accuracy, purpose, methodology of IMF e.g. in the case of the UK, the IMF incorrectly calculated the amount of losses Britain’s banks had already written off and used these erroneous calculations to pontificate about the state of the UK economy, while analysts questioned the IMF prediction that bank profits would fall between a third and a half in the next two years. Having made these qualifications, it is worth noting that the IMF’s interpretation appears to represent a broad consensus of opinions or how the economy got into the situation it is in and the different policies that are required to restore it to health – although there is much discussion on the importance that should be given to the different policies e.g. bank regulation to clean up banks and restore confidence in the financial system v financial stimulus. It is also worth noting that in the lead up to the world economic crisis that first broke in 2007, there was anything but consensus on what was driving the world economy, the danger or otherwise of the multiple bubbles that were appearing, and the course of action required to allow the global economy to keep growing. The herd followed the analysis that the economy would continue to grow and that the increase in risk taking, bubbles, distortions in wealth distribution etc. were not a major concern. However, there were a group of economists that consistently warned of the dangers. One of these was Nouriel Roubini (NYU Stern School of Business) who was named in Time Magazine’s list of the 100 Most Influential People in the World. He argues that there were a small but significant number of economists, thinkers and analysts who – early on – predicted many of the risks and vulnerabilities that eventually led to this crisis. Roubini considers himself to be the man that joined up the dots between the strands of thinking within this group. He comments that: “Among a few others Robert Shiller was one of the earliest ones to study in detail and warn about a housing bubble; Kenneth Rogoff and a few other economists warned early on about the unsustainability of the US current account deficits and of the global imbalances; Raghu Rajan presented one of the earliest and sharpest analyses of the agency problems and incentive distortions deriving from compensation schemes in financial institutions; Nassim Taleb and a few other finance scholars stressed the risk of fat tail extreme events in financial markets; Paul Krugman – who received his Nobel for his trade contributions – was the father of currency and financial crisis theories in international macro as at least three generations of currency crisis models were developed from his seminal work; Stephen Roach, David Rosenberg and a few other financial sector analysts warned about the shopped-out, saving-less, bubble-addict and debt-burdened US consumer ; Niall Ferguson provided vivid comparisons between historical episodes of financial crises and current vulnerabilities; Hyun Shin and other scholars in academia provided early modeling of illiquidity and of the perverse effects of leverage during asset bubbles; William White and his colleagues at the BIS were among the first – following the scholarship of Hyman Minsky – to analyze how the “Great Moderation” may paradoxically lead to “Financial Instability”, asset and credit bubbles and financial crises; Gillian Tett and a few other journalists at the Financial Times provided early clear explanations of the arcane complexity of credit derivatives and structured finance and of the systemic risks deriving from these new exotic financial instruments; dozen of serious and deep thinking scholars in academia modeled analytically – and tested empirically - the various aspects of systemic financial crises and the interactions between currency crises, systemic banking crises, systemic corporate and household debt crises and sovereign debt crises. “Given the important work done by these and other scholars and thinkers it was certainly easier for me to connect the analytically and empirical dots and warn early on in the middle of 2006 about the incoming economic and financial tsunami. It is important to recognize that a small but significant number of thinkers were willing to think outside the box and were aware of many risks and vulnerabilities. These thinkers - like myself - were not Dr. Dooms; they were rather Dr. Realists, analytically rigorous and intellectually honest and willing to engage in critical thinking rather than follow the herd of the easy consensus. And even among the policy makers there was a difference in views. Alan Greenspan, Don Kohn and Bernanke repeated the mantra that it is impossible to prick asset bubbles and that monetary policy should do nothing when a bubble was rising and then, asymmetrically, aggressively ease when the bubble was bursting to avoid the collateral damage to the real economy. Instead thinkers at the BIS and policy makers such as Tim Geithner, Jean Claude Trichet and Mervyn King had a more nuanced approach on how monetary and credit policy could be used to contain such bubbles. Tim Geithner devoted his first five speeches as President of the New York Fed to the issue of systemic risk in financial markets; he also warned about the unsustainability of the US twin deficits at the time when Bernanke was blaming it all on the global savings glut caused by China and other surplus countries.” Perhaps in the future dissenting voices will be listened to more closely – and there will be less reliance on following the herd.


Peak Oil – Underinvestment to Hasten the End of the Oil Age Everyone knows that the age of oil won’t last forever. However, the debate about peak oil attracts a great deal of attention because the world is close to the turning point when new oil discoveries fail to replace existing reserves and crude oil demand starts to tail off – some argue that the turning point may have already been reached. There is evidence that some of the large international oil companies are doing enough to top off their reserves. For example BP PLC achieved a reserves replacement ratio of 121% in 2008, excluding acquisitions and divestments, with year end reserves of 18.2BnBbls and a resource base of 43.4BnBbls. This was driven by an increase of 1.7BnBbls of new oil and gas to its reserves base. However, the latest focus of attention is the curtailing of exploration budgets by some oil companies, which may hasten the end of the age of oil if the production line of new fields coming on stream is interrupted in a few years time (the result of a lack of investment today), and if oil supplies fail to keep up with demand. Saudi Arabia is one country not dissuaded from continuing to invest in exploration – although it has expressed concern that other oil producing countries aren’t all following their lead, and stresses that the world can’t always rely on Saudi Arabia. Khalid A. al-Falih, Saudi Aramco’s CEO commented: "When there is underinvestment in other producing countries, the world looks to us. There are plenty of resources outside of the Kingdom and we believe they should be produced. We're technically capable of producing much more, but the government will need to decide if we need to decide if we need to go much above 12Mbpd. We think the optimum would be to stretch our resources out for as long as we can." More positively Saudi Aramco's CEO noted that the company’s goal is to raise proven reserves within Saudi Arabia from 700BnBbls to 900BnBbls and its average recovery rate from 50% to 70%. The additional production will be both light and heavy crudes, including one onshore-offshore field which it expects to produce 900,000 b/d when it comes on-stream. Saudi Aramco's investments include developing an "intelligent" field to maximize recovery; futuristic devices such as "res-bots," tiny robots inserted into reservoirs to continuously report conditions; carbon capture and storage, and pre-refining crude desulfurization. According to Khalid A. al-Falih, "All of these efforts will reduce environmental impacts while building on our experience with proven technologies and practices in a worldwide market." Despite concerns about under investment new discoveries are still being made. On May 6, Heritage Oil Corp. reported the discovery of a giant oil field in Iraqi Kurdistan with 2.3-4.2BnBbls of oil in place, of which 50-70% appears recoverable. To put this in context the much trailed Chukchi Sea development off Alaska (America’s next producing region) is estimated to have recoverable reserves between 1-15BnBbls, while the Tupi oilfield off Brazil (the largest oil discovery in the last 20 years) has just started an extended production test and is estimated to contain recoverable reserves of 5-8BnBbls See previous articles about peak oil in the Weber Tanker Report: “The End of Tyranny of Oil in Our Time” – February 2009 “Temporarily Off the Front Pages” – October 2008 “Just OPEC left to Convince” – June 2008 “Oil Company Executives Going Green” – March 2008 “Spare Supply Capacity Continues to Recover” – June 2007 “Plateau or Peak – the CERA proposition” – March 2007


Potential Drivers for the Tanker Market in 2H09 Positive

Wild Cards Negative

Shipping Rising Pressure to Scrap – Despite weak 1H09 freight rates, there has been no significant rise in the rate of tanker demolition with 1.2MnDwt scrapped in 1Q09 compared with an annual total of just under 4MnDwt in each of the last 5 years. This is in contrast to dry bulk where 1Q09 removals (5.6MnDwt) have already exceeded total ‘08 scrapping (4.8MnDwt). Cash reserves built up during the good years perhaps mean that owners, still harbouring lingering optimism that tanker supply isn’t as bad as dry & unimpressed by falling scrap prices, are hoping to trade right up until the looming 2010 drop dead date for over 45MnDwt single hulls. Cancellations – The credit crunch has put owners, yards and banks on the back foot. Already, a significant number of unstarted newbuildings for 2010 delivery onwards have been cancelled. Floating Storage – As many as 50 VLCCs are out of the supply equation through storage employment – although this may reduce as oil price spreads have narrowed Interest Rates Very Low – so no repeat of 1980s – Freight rates have fallen, but pressure partly alleviated by lower cost of debt – for those owners (usually of good quality) with access to debt Oil Industry Modest Recovery, but Oil Prices Still Low (1) – As a result of weak fundamentals, and notwithstanding OPEC’s multiple quota cuts (totalling 4.2Mbpd, Sep5 to Dec17 – with 80% compliance at end March), benchmark oil prices have struggled to get back above $50Bbl. However, the direction of oil prices (towards its $70-90Bbl range) should prevent further OPEC cuts at its next meeting (May 28). If oil prices remain low this will eventually help to stimulate demand growth. New Crude Oil Production Capacity coming on Stream (2,A3) - CERA forecast spare cap could rise to 7-8Mbpd in 2010-12 from 1Mbpd in 2005 (Dec 21) as a result of investments already underway – but that spare cap will contract from 2013 due to cuts in new investments being made today with Barclays IC forecasting a 12% cut in E&P spending in 2009.(A4) World Economy China’s Stimulus – The global recovery depends on the success of China’s stimulus packages (announced Nov and Mar) to maintain its growth momentum G20 Unity, if not Consensus – The balance between regulation and stimulus spending divides world leaders, but these differences were glossed over at the Apr 2 London summit in the interests of unity at all costs. The preference is to focus on key areas of agreement e.g. increasing the role of the IMF, and the G20 itself.

Nature Hurricanes – Apr 7 report from Colorado State Univ has downgraded hurricane season from above average to average. 2008 was the worst US hurricane season since 2005 with Gustav (Aug 26) and then Ike (Sep 5) striking. -See http://www.nhc.noaa.gov/, and http://hurricane.atmos.colostate.edu/. Hurricane season June-November. Global Warming – The UK winter was the coldest since 1996/7. Summer 2009 is expected to be hot in the UK after 2 wet summers. Geopolitical Hotspots The ameliorating effect of a new US President feted by much of the world may help to keep the temperature down – even beyond the first 100 days Israel/Palestine – It had been expected that Israel would seek to redress the power balance with one of its neighbours during the transition phase between US Presidents. Palestine rather than Iran was the eventual target. Despite terrible human cost, out of the news for now Iran and the Re-emergence of the Oil Weapon – Obama reaching out to Iran Mar 19, but Iranian leadership cool. The nuclear issue is still top of the agenda, although Iran’s programme of building a line of naval bases near the entrance to the AG – a key potential oil transit choke point – is another key issue. Russia – further evidence that it is prepared to use oil as a foreign policy tool with (a) gas supplies to Europe once again disrupted this winter as a consequence of Russia’s ongoing dispute with Ukraine, and (b) a possible OPEC/Russia alliance getting closer with Medvedev pursuing policy of “greater cooperation.” Delays in Ukraine and Georgia entering NATO may help to pacify Russia. Venezuela – Apr 8 overseas visits to Japan and China sees Chavez intensifying his efforts to find non-US markets for his oil with a target to export 1Mbpd to each country. Mar 17. Venezuelan President Hugo Chavez, using the need for drug interdiction as his reason, has ordered his country's navy to seize seaports in Venezuelan states having major petroleum-exporting installations. Nigeria – By far the worst performing OPEC country in 2008. OPEC’s decision to cut quotas has helped gloss over Nigeria’s production problems caused by rebel attacks. However, problems persist. Oil industry reform bill currently being debated.

Shipping Credit Crunch – Small and weaker owners are currently struggling to access debt as a result of bank preference for caution & imperative to recapitalise. In the longer term, a shakeup may benefit the industry Hitting the Wall of Ships – 2009 (63MnDwt) is set to be a bumper delivery year – following the addition of 37MnDwt in 2008, and 31MnDwt in 2007. Newbuild cancellations are expected but this will only impact deliveries from 2010 onwards. However, slippage is an increasing factor with 7MnDwt scheduled for delivery in 2008 not materialising – so the final delivery number for 2009 may be significantly lower than 63MnDwt – perhaps as low as 50MnDwt Oil Industry Demand is forecast to contract for a second consecutive year in 2009 (4) – which is the first double year dip since 1982/3. IEA’s May Crude Oil Demand Growth Estimate for 2009 -3% (-2.6Mbpd) – compares with its original forecast of +1% (+0.9Mbpd) in July 2008. This represents an acceleration in the rate of demand contraction from -0.3% (-0.3Mbpd) in 2008. Note: the IEA’s original estimate for 2008 demand was +2.5% (+2.2Mbpd) made in July 2007. The IEA fcast for 2010 is not due until July 2009. However, in May, the EIA predicted that world demand would rebound by 0.7Mbpd in 2010 driven by an expected rebound in GDP growth. Obama Seeks to End “Tyranny of Oil” (A6) – it is very early days yet but Obama seems intent on bringing an early end to the age of oil. This will be a crucial year for US energy policy. Stock Levels Sky High – low oil prices have triggered a significant stock build at the start of 2009. With stocks in May considerably above average levels (OECD oil inventories equivalent to 62 days of demand compared with av. 52-55 days), the benefit to seaborne trade of increased demand could be reduced if oil companies dip into their reserves. However, although Goldman Sachs estimates that global storage could be used up by June, it may be the case that higher stock levels can be expected from now on. World Economy No Depression, but not yet certain if worst is behind - In April, the IMF (5) downgraded its world economic growth forecasts for 2009 and 2010 to -1.3% and 1.9% respectively, (2008 3.2%, 2007 5.2%) from an estimate of 0.5% and 3% in January.


Notes supporting table above outlining potential drivers for the market in 2009. See appendices (A) at the end of the report for additional information outlining potential drivers for the market in 2009.

(1) Oil Price forecasts – Since the start of April and the successful G20 summit in London, oil has been trading on the basis that “depression” has been averted, that the global economy probably reached bottom during 1Q09 and that it will now slowly start to recover. However, some commentators point out that even the modest recovery in oil prices (pushing back above $50Bbl) is not justified in the face of very weak S/D fundamentals. At the start of 2008 (when fears about peak oil started to mount) oil price forecasts were in the range $65-95Bbl. By May, Arjun Murti believed that we could see $150-200Bbl oil over the next six to 24 months. OPEC President Chakib Khelil didn't rule out $200. While on May 30, Matthew Simmons - author of the book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” - appeared on CNBC to claim that oil could be trading between $200/bbl and $500/bbl within 2 months to 5 years. By October it was all change. UBS’ oil price forecast Oct 31 is for prices to average $60Bbl in 2009, and $75Bbl in 2010. Obviously, there has been a bit a turnaround in forecasts, but picking a range for the oil price over the next year is still a wide open target.

(2) Crude oil start-ups – what is the new required oil price – Oil companies are being forced to develop oil fields in increasing hostile regions (e.g. deep water projects in the Atlantic and USGulf), and this has driven up the required oil price for project sustainability. The required oil price level for new projects varies enormously depending on exactly how difficult the oil is to extract. However, as a general consensus, it seems that oil prices in the $50-55bbl are required. At the start of 2008, it was thought that oil companies were basing their budgets on an oil price of around $60-80bbl. WoodMac Exploration Service Manager Alan Murray told delegates at International Petroleum Week in London that operators now need to assume an oil price of $70bbl to earn close to 15% on exploration. John B. Hess provides an illustration of rising exploration costs - a deepwater rig that cost $100,000-200,000pd in 2002 today costs $500,000-600,000pd—if you can find one available. Oliver Onyewuenyi, program manager of Global Deepwater R&D, Shell E&P talking about the challenges facing those tapping into West Africa’s deepwater resources proposes a well cost of up to $100Mn/well.

(3) Will West Africa remain the main source of new oil discoveries - According to Adebola Adejumo from IHS Energy, in the last two years, 6 Bboe have been discovered in Africa, mostly offshore West Africa (78%). These finds account for 22% of global resource discoveries, he said. Over the next seven years, IHS projects Africa’s oil production to grow from 11.5Mbpd to 16 Mbpd. This will account for 15% of global production capacity, he said. Abubakar Yar’Adua, group MD, NNPC claims West Africa, the Gulf of Mexico, and Brazil, are estimated to hold 75% of the world’s undiscovered deepwater reserves.

(4) 2009 Demand Forecast – IEA’s May Crude Oil Demand Growth Estimate for 2009 -3% (-2.6Mbpd) is more than severe than both the May forecasts from the US EIA -1.8Mbpd and OPEC -1.6Mbpd. All three organisations revised down their estimates for world demand growth in 2009

(5) IMF GDP forecasts (Oct 08 / Apr 09)

Date Area 2006 2007 2008 e2009 e2010 Oct ‘08 World 5.1 5.0 3.9 3.0 Apr ‘09 World 5.2 3.2 -1.3 1.9 Oct ‘08 China 11.6 11.9 9.7 9.3 Apr ‘09 China 13 9.0 6.5 7.5 Oct ‘08 India 9.8 9.3 7.9 6.9 Apr ‘09 India 9.3 7.3 4.5 5.6 Oct ‘08 USA 2.8 2.6 1.6 0.1 Apr ‘09 USA 2.0 1.1 -2.8 0.0 Oct ‘08 Euro Area 2.8 2.6 1.3 0.2 Apr ‘09 Euro Area 2.7 0.9 -4.2 -0.4 Oct ‘08 Japan 2.4 2.1 0.7 0.5 Apr ‘09 Japan 2.4 -0.6 -6.2 0.5 Oct ‘08 Middle East 5.7 5.9 6.4 5.9 Apr ‘09 Middle East 6.3 5.9 2.5 3.5


China Continues to Build its Oil Bank

China ready for phase 2 - National Strategic Oil Reserve In the early 2000s, the Chinese government started a programme to develop a national strategic crude oil reserve of 10-14MnTons (equivalent to about 2 weeks supply today). This required the building of 4 new coastal storage facilities located at Dalian, Qingdao, Zhenhai and Zhoushan to be completed during the period 2007-2010. When the oil price dipped below $100Bbl in 3Q08, the Chinese government initiated a stock building programme. The onset of the recession meant that although Chinese crude oil imports were increasing significantly, domestic demand was disappointing and consequently the strategic reserve (which was completed ahead of schedule) along with other reserves maintained by national oil companies were filled up quickly and are now close to capacity. With storage close to capacity, the Chinese government is concerned that it is not able to take full advantage of low crude oil prices to buy up more crude oil supplies. It has initiated a second phase of building to expand the national oil reserve from around 100Mbbls to 270Mbbls (equivalent to 75 days of imports) but this has yet to commence. The plan envisages an additional 8 storage facilities. China continues to buy up crude oil production capacity As part of a wider directive to secure commodity reserves(2), China has continued its policy of buying up crude oil resources into 2009 as illustrated by the following news reports. Mar 26 – "Appropriately obtaining global resources is our inevitable choice and legal right...Winning foreign resources is even more important than stepping up domestic production," Liu Qi, deputy head of National Energy Administration, told an industry forum. Liu also said China will offer more tax and other policy incentives to oil and gas firms to explore abroad. He did not elaborate, but state media have said low-interest loans and capital injections could go to oil giants China National Petroleum Corp, Sinopec and CNOOC Ltd that aim to expand overseas as the global recession lowers the share prices of possible targets. Last month, CNPC launched a friendly C$443 million offer for Canada's Verenex Energy Inc, which owns a stake in a promising Libyan oil concession, though the offer was blocked by Libya. China is working with Myanmar to build an over 2,000 kilometre-long gas and oil pipeline running through Ruili and Kunming in Yunnan province, Guizhou province to Chongqing municipality in southwestern China, Liu said, without providing more details. Mar 17 – OGJ – China sees recession as opportunity and is taking advantage to stock up on foreign oil last month offering $4.2Bn in loans to foreign oil companies in Brazil, Venezuela and Russia to secure future oil supplies. The Chinese government is taking the lead rather than Chinese oil companies Mar 5 -- Chinese companies are seizing their chances to build up strategic oil and gas holdings in the Middle East and North Africa (MENA), but all of these projects have elements of uncertainty, according to a report by Business Middle East (BME). Feb 20 -- Venezuelan President Hugo Chavez and Chinese Vice-President Xi Jinping have signed an agreement to increase to $12Bn an existing bilateral strategic fund for oil development. According to Chavez, Beijing will contribute $8Bn and Caracas the remaining $4Bn to the fund, which aims largely to increase Venezuelan oil exports to China to 1Mbpd in 2015 from the current 350,000 b/d. However, there are structural problems within the burgeoning relationship as Chinese refiners can’t cope with Venezuela’s heavy oil, and it is argued that Venezuela can’t do without US at least for now. Nevertheless, plans are progressing to establish a shipping joint venture between China and Venezuela. The talks are expected to be completed in April with the creation of CV Shipping – a 50/50 joint venture focusing on shipping crude from Venezuela to China. Research has also been started by CNPC that aims to lighten heavy crude oil, enabling it to build several refineries able to process such oil from Venezuela. Feb 19 -- Brazil, as part of plans to secure a $10Bn loan for the development of the country's offshore presalt layer oil deposits, has agreed to supply China with 100,000-160,000 b/d of oil for a year at market prices. Petrobras and the China Development Bank have been negotiating the loan since November 2008.


(2) From an article by Ambrose Evans-Pritchard Daily Telegraph, April 16. In addition to crude oil the Chinese State Reserves Bureau has also been accumulating aluminum, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass). According to Nobu Su, head of Taiwan's TMT group, which ships commodities to China, part of Beijing’s motivation is to try to extricate itself from dollar dependency as fast as it can. "China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years." "The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said. While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank. John Reade, metals chief at UBS, said Beijing may have made a strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."

Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modeled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944. The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees. If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to

$4,925/ton, despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts. Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tons in February, and a further 375,000 tons in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March. While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50%. One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said. This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits. The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis. Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of flat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".


Pipelines to Change the Balance of Trade

By the end of 2009, China expects to significantly expand its pipeline capacity with the completion of 2 new pipelines. The first is an extension of the existing Sino-Kazakh pipeline(1). The second, an entirely new project, is a 992km spur extending from Russia’s East-Siberia Pacific Ocean pipeline whose first phase will be completed by this year end(2).

The burning question for ship-owners is, therefore, “what will the impact of the new pipelines be on seaborne crude oil imports?”

Together the new overland crude oil import feeds will provide an additional 25MnTons/year of capacity – building on the existing overland pipeline capability of 10MnTons/year. In 2008, China imported a total of 179MnTons of which 163MnTons came in by sea(3). The additional pipeline volume scheduled to be added this year is equivalent to 14% of the total 2008 crude oil import trade. If the new pipeline facility is fully utilised, it is estimated that 10 fewer fully employed VLCCs importing crude from the Middle East will be required.

Future pipeline projects(4) could further dent the VLCCs domination of China’s crude oil import trade. However, pipeline projects are highly political and take a long time to reach fruition. The key to forecasting China’s future need for energy imports by sea lies in the balance of the factors of source availability, delivery location, security and cost, as well as need.

The ship-owner still has a geographical advantage in the first three of those factors. Oil and gas imports by sea can be obtained from locations as diverse as South East Asia, the Middle East, Africa and South and even North America if circumstances permitted.

In addition, the majority of China’s energy-hungry industry is located along coastal regions and their increased pipeline based oil imports will arrive in roughly equal quantities at China’s north western and north eastern borders respectively, which are both hundreds of kilometres inland.


Although China has an intricate and expanding network of internal gas pipeline infrastructure, a great deal of its oil distribution is still by rail tanker truck therefore conclusions can easily be drawn about the efficiency of that against a supply on the doorstep.

In addition, China is building an import bypass around the congested Malacca Straits by contributing to the extension of oil & gas pipelines through Myanmar, which reinforces their intentions to maintain seaborne oil imports, as that pipeline will be fed by shipping through the Bay of Bengal.

As for security, the more diverse the source the more secure the overall supply. The way it is then transported is, of course, also important but because of that diversification, the maritime trade routes can come from three points of the compass.

The overland routes basically form the fourth cardinal point to the north are also important to security, as one of the pipelines we are considering there will be entirely within Russia but the other without; China will therefore be well placed to recover from the world’s present economic woes without worrying about where their energy is coming from.

Regarding costs, it remains to be seen how long current reduced shipping rates will continue but for the moment there is no doubt they are competitive. If, however, we see a repeat of last-year’s oil prices, then you can be assured direct pipelines will enjoy a marked increase in importance.

(1) The Sino-Kazakh Connection - Oil already flows into China’s northwest via the Sino-Kazakh pipeline however that is mainly fed from Kazakhstan’s eastern oilfields. Later this-year 2009 will see the completion of the west/east extension of that pipeline to allow its underused capacity to be fed directly from the Caspian basin. The existing 10MnTons/year carried by that pipeline could then be doubled without the necessity for transit through or taking a supply from any other country.

(2) East-Siberia Pacific Ocean Spur – Initially the first part of Russia’s ESPO pipeline spur will start pumping through to Skovorodino, 60km north of the Amur River, which forms the north eastern Chinese border. Whilst the future route of ESPO then extends southeast inside Russia, construction of a pipeline spur to the Chinese border has already begun; CNPC is then expected to take-up the building of a 900km extension of that spur all the way to Daqing. Whilst the West celebrates Christmas and the birth of another decade, oil should also start to flow through the new pipeline, which is expected to have a capacity of 15MnTons/year. As with the Sino-Kazakh pipeline, China has the security of the oil being sourced from and pumped through one country without the necessity of being tariff hit (or worse) by another.

(3) The total of 179MnTons of China’s crude oil imports in 2008 is broken down as follows: 163MnTons by sea, and 16MnTons by pipeline and truck

(4) The Malacca Straits by-pass - Yet another “one country” pipeline is planned to start construction in 2009, that being through Myanmar from the Bay of Bengal to China’s western border. Not only will this provide another route for oil but a gas line will parallel that too, certainly with an eye on Myanmar’s own recent offshore gas find as another alternative source of supply.

Future advances - China’s internal liquid energy distribution infrastructure is set for refurbishment and expansion, with pipelines interconnecting ESPO to China’s eastern “oil-town” of Daqing and onward south to the coast, together with increased refining capacity, already in the advanced planning stages. That combined with additional gas pipeline “west-east” trunks and spurs will definitely have an impact on its import routes within the next five-years.

There is much talk of “green shoots” in the west’s economy, those are very important to China but it also has a huge internal market. Growth in China is therefore expected, if not exactly guaranteed, and with that a continued need for imported energy at current if not vastly increased capacity. The shipping industry as-is therefore has little to fear from China’s pipelines, they just won’t be getting the rapid development they might have forecast in the recent past.

TD1 JAN 09-MAY09

MAY

APR

MAR

FEB

JAN

-1

0

1

2

3

4

5

6

7

8

9

10

$0 $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 $22 $24 $26 $28 $30 $32 $34 $36 $38 $40

TCE $/DAY

No.

Car

go

TDI JAN 09-MAY 09

LOAD: AG

DISCH: USG

CARGO: 280

TD5 JAN09-MAY09

MAY

APR

MAR

FEB

JAN

10

12

14

16

18

20

22

24

26

28

30

32

34

$14 $16 $18 $20 $22 $24 $26 $28 $30 $32 $34 $36 $38 $40 $42 $44 $46 $48 $50 $52 $54 $56

TCE $/DAY

No.

Car

go

TD5 JAN 09-MAY 09

LOAD: WAFR DISCH: USAC CARGO: 130

TD9 JAN09-MAY09

MAY

APRMAR

FEB

JAN

40

42

44

46

48

50

52

54

56

58

60

62

$4 $6 $8 $10 $12 $14 $16 $18 $20 $22 $24 $26 $28 $30 $32 $34 $36

TCE $/DAY

No.

Car

go

TD9 JAN 09-MAY 09

LOAD: CBS DISCH: US CARGO: 70

TD10 JAN09-MAY09

MAY

APR

MAR

FEB

JAN

18

19

20

21

22

23

24

25

26

27

28

29

30

31

$4 $6 $8 $10 $12 $14 $16 $18 $20 $22 $24 $26

TCE $/DAY

No.

Car

go

TD10 JAN 09-MAY 09


TC3 JAN 09-MAY 09

MAY

APR

MAR

FEB

JAN

22

24

26

28

30

32

34

$2 $4 $6 $8 $10 $12 $14 $16 $18

TCE $/DAY

No.

Car

go

TC3 JAN 09-MAY 09


EURO/$ - WTI $/BBL WEEKLY MAR09-MAY09

$45.68

$53.42

$56.00

$57.98

$60.65

$64.18

$50.94$49.54

$48.82

$49.80$50.20

$50.44

$43.26

1.24

1.26

1.28

1.3

1.32

1.34

1.36

1.38

1.4

$42 $44 $46 $48 $50 $52 $54 $56 $58 $60 $62 $64 $66

WTI $/BBL

USD

/EU

RO

EURO/$ - WTI $/BBL

PERIOD: MAR-MAY

VLCC SNAPSHOT

AVERAGE PROMPT RESALE VALUES

$110.0

$110.0

$195.0

$200.0

$167.0

$156.0

$50 $70 $90 $110 $130 $150 $170 $190

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

Millions

AVERAGE 5-YEAR RESALE VALUES

$78.0

$78.0

$162.0

$157.0

$140.0

$133.0

$50 $70 $90 $110 $130 $150 $170

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

Millions

ESTIMATED DELIVERIES

14

90

70

39

0 20 40 60 80

2012

2011

2010

2009

100

TD1 – QUARTERLY TCE AVERAGES

Q1 2008 $63,000 - Q2 2008 $84,000 33.3% Q3 2008 $60,000 -28.6% Q4 2008 $47,000 -21.7% Q1 2009 $34,000 -27.7%

TD1 – MONTHLY TCE AVERAGES

January $39,000 - February $34,000 -12.8% March $28,500 -11.8% April $6,000 -79.0% May $0 -100.0%

TOTAL VLCC FIXTURES

395

428

385

358

347

Q12008

Q22008

Q32008

Q42008

Q12009

AVERAGE 2009 WS SPOT RATES

38.4

35.3

26.0

21.1

20.5

J F M A M

AVERAGE TIME CHARTER RATES

1-YEAR

$67.

9

$75.

5

$85.

4

$68.

7

$51.

6

$37.

0

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

3-YEAR

$50.

8

$55.

7

$66.

2

$57.

7

$46.

2

$37.

4

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

5-YEAR

$48.

1

$51.

0

$60.

0

$53.

4

$43.

7

$38.

1

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

SUEZMAX SNAPSHOT


$78.0

$78.0

$120.0

$120.0

$107.0

$105.0

$40 $50 $60 $70 $80 $90 $100 $110 $120

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

Millions


$61.0

$61.0

$108.0

$105.0

$96.0

$95.0

$30 $40 $50 $60 $70 $80 $90 $100 $110

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

Millions


8

53

44

48

0 10 20 30 40 50 6

2012

2011

2010

2009

0


Q1 2008 $50,000 - Q2 2008 $83,000 66.0% Q3 2008 $66,000 -20.5% Q4 2008 $68,000 3.0% Q1 2009 $42,000 -38.2%


January $45,000 - February $38,000 -15.6% March $44,000 15.8% April $21,000 -52.3% May $16,000 -23.8%

TOTAL SUEZMAX FIXTURES

423

444

420

410

346

Q12008

Q22008

Q32008

Q42008

Q12009

AVERAGE 2009 WS SPOT RATES

79.8

71.9

76.6

52.7

50.0

J F M A M


1-YEAR

$46.

5

$45.

5

$51.

7

$47.

3

$37.

1

$30.

2

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

3-YEAR

$36.

2

$36.

6

$39.

6

$38.

4

$33.

9

$30.

2

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

5-YEAR

$48.

1

$51.

0

$60.

0

$53.

4

$43.

7

$38.

1

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

AFRAMAX SNAPSHOT


$61.0

$63.0

$86.0

$88.0

$83.0

$79.0

$30 $40 $50 $60 $70 $80 $90

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

Millions


$46.0

$48.0

$78.0

$77.0

$71.0

$70.0

$20 $30 $40 $50 $60 $70 $80

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

Millions


56

88

50

4

3

2

0 20 40 60 80

2014

2013

2012

2011

2010

2009

100


Q1 2008 $32,000 - Q2 2008 $48,000 50.0% Q3 2008 $32,000 -33.3% Q4 2008 $29,000 -9.4% Q1 2009 $23,000 -20.7%


January $24,000 - February $14,500 -39.6% March $29,000 100.0% April $6,000 -79.3% May $9,000 50.0%

TOTAL AFRAMAX FIXTURES

1057

1046

886 94

8

946

Q12008

Q22008

Q32008

Q42008

Q12009

AVERAGE 2009 TD9 WS SPOT RATES

102.

9

78.6 11

5.9

60.2 73.4

J F M A M


1-YEAR

$31.

9

$33.

2

$39.

1

$34.

6

$26.

7

$19.

6

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

3-YEAR

$28.

8

$28.

8

$32.

2

$30.

5

$25.

0

$19.

9

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

5-YEAR

$26.

1

$26.

7

$29.

5

$28.

5

$24.

0

$21.

1

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

PANAMAX SNAPSHOT


$55.0

$72.0

$73.0

$67.0

$68.0

$54.0

$20 $40 $60 $80

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

Millions


$38.0

$38.0

$60.0

$60.0

$61.0

$63.0

$10 $30 $50 $70

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

Millions


2

2

36

26

33

0 10 20 30 4

2013

2012

2011

2010

2009

0


Q1 2008 $22,000 - Q2 2008 $38,000 72.7% Q3 2008 $35,000 -7.9% Q4 2008 $27,000 -22.9% Q1 2009 $17,000 -37.0%


January $24,000 - February $8,000 -66.7% March $19,000 137.5% April $5,000 -73.7% May $7,500 100.0%

TOTAL PANAMAX FIXTURES

310

312

245

239 273

Q12008

Q22008

Q32008

Q42008

Q12009

AVERAGE 2009 TD10 WS SPOT RATES

107.

0

76.5 11

2.3

69.4 84

.2

J F M A M


1-YEAR

$28.

9

$28.

3

$30.

2

$29.

7

$24.

9

$18.

6

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

3-YEAR

$26.

3

$26.

0

$27.

0

$27.

1

$24.

0

$19.

3

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

5-YEAR

$24.

5

$24.

6

$25.

0

$24.

9

$23.

1

$20.

6

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

MR SNAPSHOT


$42.0

$62.0

$62.0

$60.0

$59.0

$41.0

$10 $30 $50 $70

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

Millions


$31.0

$32.5

$53.5

$53.5

$51.0

$52.0

$- $20 $40 $60

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

Millions


168

186

104

17

2

0 30 60 90 120 150 180

2013

2012

2011

2010

2009

TC3 – QUARTERLY TCE AVERAGES

Q1 2008 $15,000 - Q2 2008 $25,000 66.7% Q3 2008 $26,000 4.0% Q4 2008 $17,000 -34.6% Q1 2009 $13,000 -23.5%

TC3 – MONTHLY TCE AVERAGES

January $16,000 - February $14,500 -9.4% March $9,500 -34.5% April $4,000 -57.9% May $11,500 187.5%

TOTAL MR FIXTURES

773

768

526

500 64

7

Q12008

Q22008

Q32008

Q42008

Q12009

AVERAGE 2009 TC3 WS SPOT RATES

123.

3

116.

5

93.3

73.2

115.

0

J F M A M


1-YEAR

$23.

5

$22.

5

$24.

4

$23.

3

$19.

1

$15.

8

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

3-YEAR

$21.

8

$22.

0

$22.

4

$21.

8

$18.

9

$16.

3

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

5-YEAR

$20.

8

$21.

0

$21.

4

$20.

6

$18.

7

$16.

8

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

REPORTED TANKER SALES JAN – MAY 09

VESSEL DWT BLT MNTH PRICE BUYERS COMMENTS IMABARI RESALE 309,200 2009 JAN $110.0 JAPANESE (K-LINE) SEASPRITE 147,188 1999 JAN $56.7 U.S (NATS) PACIFIC FANTASY 115,000 2008 JAN $63.0 LIBYAN (GNMTC) PACIFIC DELIGHT 115,000 2007 JAN $63.0 LIBYAN (GNMTC) WIND 114,800 2008 JAN -- LIBYAN (GNMTC) EN BLOC PEAK 114,800 2008 JAN -- LIBYAN (GNMTC) EN BLOC ACTION 114,760 2007 JAN -- LIBYAN (GNMTC) EN BLOC SHOW 113,500 2007 JAN -- LIBYAN (GNMTC) EN BLOC SPIKE 113,420 2006 JAN $315.0 LIBYAN (GNMTC) EN BLOC 4 x HYUNDAI MIPO RESALES 46,000 2011 JAN $202.0 U.K (GLENDA) GRAND PACIFIC 263,043 1994 JAN $28.0 MALAYSIAN NCC BAHA 24,728 1985 JAN -- NORWEGIAN EN BLOC NCC ARAR 23,016 1982 JAN -- NORWEGIAN EN BLOC NCC ASIR 23,016 1982 JAN $26.5 NORWEGIAN EN BLOC VILYUSK 17,125 1977 JAN $3.0 UNKNOWN SALLIE KNUTSEN 153,617 1999 JAN -- NORWEGIAN EN BLOC KAREN KNUTSEN 153,616 1999 JAN -- NORWEGIAN EN BLOC GERD KNUTSEN 146,273 1996 JAN $220.0 NORWEGIAN EN BLOC TVK 04 17,267 2008 JAN -- GERMAN (BUTTNER) EN BLOC TVK 05 17,267 2009 JAN $46.0 GERMAN (BUTTNER) EN BLOC SEMAKAU 97,172 1988 JAN $6.5 GREEK FRANCESCO A. 8,838 1988 JAN $5.6 GREEK PRO GIANT 46,732 2004 FEB $35.0 UNKNOWN WILDEBEEST 40,000 2009 FEB $37.5 UNKNOWN CORAL ISIS 6,082 1982 FEB $1.2 PHILIPPINE GAYA TAPIS 6,012 1994 FEB $3.1 UNKNOWN NEW BREEZE 3,700 1996 FEB $5.1 THAI SUNRISE IRIS 8,256 1994 FEB $7.0 GREEK GRAND PACIFIC 263,079 1994 FEB $14.0 GREEK GAN-GESTURE 16,979 2005 FEB $32.0 UNKNOWN 2 X QINGDAO RESALES 5,500 2009 FEB $20.0 EUROPEAN MARLIN 83,870 1987 FEB $18.0 MIDDLE EASTERN HEDDA 13,749 1987 FEB $2.1 UNKNOWN RAINIER SPIRIT 114,880 2005 MAR -- GREEK (FAIRSKY) EN BLOC MATTERHORN SPIRIT 114,834 2005 MAR $114.0 GREEK (FAIRSKY) EN BLOC PROCESS 28,892 1984 MAR $5.7 MIDDLE EASTERN CHEMSTAR PRINCESS 19,430 1999 MAR $16.5 SINGAPOREAN BETERLGEUSE 3,229 1989 MAR -- GREEK EN BLOC POLLUX 3,224 1989 MAR -- GREEK EN BLOC CASTOR 3,223 1989 MAR $5.3 GREEK EN BLOC MARCHEKAN 45,999 1998 MAR $26.5 CHILEAN (SONACOL) SUBJECTS MONNERON 45,999 1998 MAR $26.5 CHILEAN (SONACOL) SUBJECTS TANYO 281,050 2000 APR $68.0 UNKNOWN INTERNALLY CERIGO 95,987 1989 APR -- CHINESE EN BLOC CONVERSION MERBABU 95,538 1987 APR $20.0 CHINESE EN BLOC CONVERSION SUNSHINE SKY 15,015 1996 APR $10.5 EUROPEAN SARI MARINA 6,500 1991 APR $3.6 INDONESIAN (PERSECO) BOW WEST 12,503 2002 APR $21.0 TURKISH YM VENUS 5,847 2005 APR $12.0 UNKNOWN GOLDEN ELIZABETH 16,321 1997 APR $11.0 UNKNOWN VIJAY DOOT 7,313 1984 APR $2.5 INDONESIAN LINNEA 11,520 1980 APR NR GREEK (AEGEAN) EASTERN TERA 7,758 1990 APR $3.0 RUSSIAN FREJA REGULUS 40,037 2009 MAY $34.0 ITALIAN (MORFINI) NORA 16,255 2001 MAY $22.0 UNKNOWN GOLDEN CHEMICAL 6,062 1991 MAY $3.4 UNKNOWN PRO GIANT 46,732 2004 MAY $34.0 VIETNAMESE BB TO SELLERS END '09 ASTRO LIBRA 285,771 1992 MAY $16.5 CHINESE

KVARVEN 29,980 1991 MAY -- SINGAPORE (WILMAR) EN BLOC SKARVEN 29,980 1990 MAY -- SINGAPORE (WILMAR) EN BLOC STOLZEN 29,950 1989 MAY -- SINGAPORE (WILMAR) EN BLOC VARDEN 29,950 1989 MAY $16.0 SINGAPORE (WILMAR) EN BLOC JO CALLUNA 12,186 1986 MAY $2.5 NORWEGIAN (VESTLAND) JO MAPLE 8,826 1991 MAY -- TURKISH EN BLOC JO PALM 8,826 1991 MAY $4.0 TURKISH EN BLOC AGIOS NIKOLAOS III 281,751 1991 MAY $14.5 CHINESE BETY THERESA 8,491 1995 MAY $8.0 UNKNOWN CAMDEN 298,306 1992 MAY $51.0 SOUTH AMERICAN MOLDA 96,347 1994 MAY $16.5 GREEK NEW HIDAKA 4,783 1995 MAY $4.3 KOREAN SPIRIT EXPRESS 45,861 2002 MAY $25.5 GREEK SUZANNE 11,533 1995 MAY $9.1 UNKNOWN

REPORTED TANKER SCRAPPING JAN - MAY 09 VESSEL DWT BLT MNTH LDT $/LDT COUNTRY STOLT LOYALTY 32,011 1978 JAN 9,885 275 India UNITANK 21,900 1977 JAN 6,212 295 India UNITED MOONLIGHT 55,272 1982 JAN 11,238 310 Bangladesh STOLT CONDOR 37,200 1979 JAN 11,573 Private Terms India SAMBURGA 17,125 1976 JAN 7,444 295 Bangladesh RUNDALE 17,025 1977 JAN 7,444 295 Bangladesh SAMOS 54,500 1982 JAN 12,450 282 India LALAZAR 113,881 1984 FEB 20,319 340 Bangladesh RASTAZA 31,543 1981 FEB 8,347 325 Bangladesh RETALINK II (Asphalt carrier) 4,999 1979 FEB 2,660 258 Bangladesh AVILA 21,705 1978 MAR 8,756 310 Bangladesh ALEKSANDR POKRYSHKIN 67,980 1987 MAR 16,500 325 (as is Singapore) Bangladesh SITEAM MARS 42,010 1982 MAR 10,034 Private Terms Bangladesh OCEAN VELA 60,392 1981 MAR 12,314 315 (as is Singapore) Bangladesh SANTA ELENA 50,600 1986 MAR 12,347 352 Bangladesh ASMAA 16,266 1983 MAR 4,190 Private Terms Pakistan ELEUTHERA 255,987 84 APR 34,216 355 Bangladesh LOMBO ESTE 177,455 80 APR 28,800 375 Bangladesh LI YUN 41,266 82 APR 9,735 Private Terms Bangladesh GULF LION 29,820 81 APR 7,271 310 Bangladesh MELON 87,768 86 APR 13,283 Private Terms Bangladesh KOURION 87,218 85 APR 14,389 290 Bangladesh STOLT EXCELLENCE 32,093 79 APR 11,620 Private Terms India STAR HUANGPU (OBO) 76,290/ - 85 MAY 16,911 240 China KEMERI 17,610 85 MAY 5,522 285 en bloc Bangladesh ZANIS GRIVA 17,585 85 MAY 5,546 285 en bloc Bangladesh MAJOR SOMNATH SHARMA 67,268 84 MAY 13,271 215 (as is Bedi Bandar) India HEADWAY 149,999 89 MAY 20,800 280 Pakistan


Tanker Market Outlook for 2H09

Despite a sustained and ongoing period of demand contraction triggered by the onset of global recession, tanker rates held up reasonably well during the latter part of 2008. This sector was able to avoid the catastrophic collapse that overtook the dry bulk market, in part because fleet growth slowed to around 3% in 2008 from 5-7% per annum over the last 5 years. Tanker rates, however, have fallen away significantly during the first few months of 2009 as a result of a lethal combination of further sustained demand contraction (the IEA’s estimate for global demand in 2009 has been revised down by almost 2Mbpd since the start of the year), and an acceleration in fleet supply growth (+3% in 1Q09). This section looks at whether tanker shipping is strong enough to keep its head above water during 2009, and in what shape it will be to withstand the expected prolonged economic downturn.

Tanker Supply Prospects – Projecting fleet supply for the tanker sector has become more complicated than in the bull market of recent years. It is no longer sufficient just to factor in scrapping based on the IMO drop dead schedule for single-hull tankers, and deliveries from the current orderbook. It is now necessary to take account of a likely acceleration in scrapping triggered by falling freight rates (although unlike the dry bulk sector, tanker scrapping has yet to take off), and the prospect of orderbook cancellations. The storage market is also playing an important (if temporary) part in influencing overall tanker supply, although the conversion market is no longer a key driver. Delivery slippage is the latest factor to have to be considered when forecasting supply. The subject of cancellations is something of a conundrum. The value of the shipping orderbook is huge - tanker $106Bn – dry bulk $166Bn - container $84Bn (as at Jan 2009). The rest of the world is worrying about the credit crunch, but in shipping (particularly in dry bulk) the prayer is that (i) banks will stop lending so that the slug of the orderbook still looking for finance will disappear, and/or that (ii) orders at greenfield sites will fail to materialize because the yards themselves can’t get funding to be built. In the dry sector, the range of possible values for percentage drop out is variously guessed at between not much and 50%. Cancellations are crucial to the dry bulk market where supply has reached crisis point, but how important are they for the wet sector which has the safety valve of the 2010 drop dead date for single hull tankers.

Scenario 1 Demand Destruction Continues and Scrapping Accelerates This scenario assumes that recession is severe and extends to the end of 2010. On the demand side, it is assumed that crude oil demand will remain stagnant in 2010, following two consecutive years of negative growth 2008-2009. On the tanker supply-side, it assumes accelerated scrapping with 50% (equivalent to 20MnDwt) of the tonnage scheduled to scrap in 2010 (the IMO’s scheduled big bang year for saying goodbye to single hulls) brought forward to 2009. This will have a significant impact on the rate of growth of all tanker sectors. It also assumes that there is an extra scrapping component in addition to IMOs single hull phase out schedule with double hull tankers scrapping at 20 years. This will not have a significant impact on the rate of scrapping in the larger sizes, but will lead to significant extra Product tanker scrapping. This scenario assumes that all vessels scheduled for delivery in 2009 will be delivered as these vessels are already under construction and can’t be cancelled. It also assumes that all vessels on order for delivery in 2010 and beyond are delivered, although there have already been some cancellations for vessels in this group and there is considerable discussion that, if recession turns into depression, there will be mounting pressure on owners to cancel an even bigger piece of the orderbook, and also for yards to renege on contracts. The process of cancelling orders involves painful renegotiation, and it is unlikely to be a significant factor in the tanker sector for 2010 deliveries because the single hull phase-out deadline should ensure that 2010 is a relatively lean year for tanker supply growth. Based on these assumptions, fleet growth could increase by 7.6% in 2009, which compares with an average of just over 5% per annum for the last four years (2005 +5.4%, 2006 +7.2%, 2007 +5.8%, e2008 +3%). However, delivery slippage is another market element that may slow the rate of fleet growth. Slippage was not a factor in 2007 when just 1% of deliveries scheduled for delivery in 2007 were delayed to the following year. However, the corresponding figure for 2008 deliveries is around 14%. It is difficult to predict how this phenomenon will work through in 2009. However, if 10% (6.3MnDwt) of scheduled 2009 deliveries are postponed until 2010, this could potentially reduce the rate of fleet growth to 6% in 2009.


Storage is another temporary factor that may ease the pain of fleet growth with up 100Mbbls of crude oil currently being stored at sea. However, with tanker deliveries expected to be the highest in history (breaking through the 50MnDwt barrier even taking into account slippage and cancellations) at a time when crude oil demand is set to contract for the second consecutive year, 2009 will undoubtedly be a very tough year for tanker supply. It should also be noted that in order for tanker fleet growth to be kept to 6%, it is estimated that scrapping would have to hit 25MnDwt for the remainder of the year. It is questionable whether scrapping can get to this high level for two reasons (1) the pace of scrapping has not accelerated at the start of 2009 with just 1MnDwt removed during 1Q09, and (2) the scrapping industry is unlikely to be able to cope with a surge in demolition tonnage especially as fleet supply will also be coming under pressure in other sectors (although it would have been gearing up for 2010). It should also be noted that a total scrapping figure of 26MnDwt for 2009 would be higher than the record level of 25.75MnDwt set in 1985. It should also be considered that some owners have cash reserves and would probably elect to put modern tonnage into layup to see if they can ride out the storm – so, if the looming recession does bite very deep into crude oil demand, expect a significant amount of modern tonnage to enter layup. The conversion market (which was a key factor in moderating the rate of fleet growth in 2007-8) is unlikely to have a significant impact on moderating supply during 2009 (as the dry market is in turmoil, and offshore E&P budgets are being tailored in line with lower oil prices). Scenario 1: Tanker Fleet Development 2009-2011 Table shows projected no of vessels being scrapped from 2Q09-2015. Charts show cumulative net fleet change 2Q09-2011 – All figures are in number of vessels.


Scenario 2 High Case - Scrapping Follows Phase-Out Schedules This scenario assumes that recession lasts until the end of 2009 and that crude oil demand starts to recover in 2010, following two consecutive years of negative growth 2008-2009. It also assumes that scrapping follows the phase-out schedule predetermined by IMO and that all vessels on the orderbook are delivered. Under this set of conditions (which gives almost the maximum possible rate of fleet growth during 2009-10), the fleet will expand by a massive 13% in 2009, before leveling off in 2010 when the rump of the single hull fleet is scheduled to scrap. It is highly unlikely that the tanker industry will be able to sustain fleet growth of 13% in 2009 even if there is only a mild recession. Nevertheless, the tanker supply profile is better than in 1973 and 1979. In 1973, the tanker market was handicapped by massive over ordering in the years leading up to the crisis, which caused tanker supply to expand rapidly at a time when tanker demand was falling. In 1979, the downturn in freight rates was once again compounded by the continuing impact of the over ordering in the early 1970s. At the start of 2009, tanker supply is once again entering a potentially badly timed growth spurt, but on this occasion, the fleet surge (although strong) will not run away - as the large numbers of newbuildings entering the market over the next couple of years will be offset by the guaranteed removal of the rump of the single hull fleet which must be phased out by 2010. The problem may be that if crude oil demand contracts more than expected, 2010 will be too long to wait to scrap. A glimmer of hope could be that some deliveries from the orderbook are delayed or cancelled, but the only real salvation would come in the form a bounce back in demand levels. Despite the sluggish start to scrapping at the start of 2009, it looks increasingly likely that 2009 not 2010 could mark the beginning of the end for the single hull fleet.

Scenario 3 The Very Best Case for Fleet Growth 2009-2010 There are a number of uncertainties hanging over the tanker fleet, which mean that there is considerable doubt about the rate if not the direction of fleet development over the next couple of years. Unusually, there is considerable vagueness about the number of deliveries that will enter the market over the next couple of years due to slippage and cancellations. There is much less uncertainty about fleet removals because of the IMO drop dead date for the scrapping of single hull tankers – although the pattern of scrapping over the next two years is very debatable. Scenario 2 paints the worst case outcome, while scenario 1 plays out a “reasonable” outcome. Due to the level of doubt surrounding supply, it is worth considering (however briefly) a very best case outcome. Under this scenario, it is assumed that 8MnDwt of 20+ year old double hull tonnage exits the market in 2009-2010 along with the 40Mndwt of single hull tonnage already expected to depart. The real leap of faith comes with assumptions for delivery. It is assumed here that slippage pushes 10MnDwt of 2010 deliveries into 2011, and that 50% of the 2010 orderbook is cancelled accounting for a further 21MnDwt. The combined effect of these conditions is that fleet growth over the next 2 years could be reduced to 7MnDwt, or less than 2%. Although the elements of the forecast are worth closer investigation, this is not actually a very likely outcome. One U.S. tanker pundit in a recent report took particular issue with what it described as the “myth about cancellations”. Having studied the orderbook, they concluded that potential cancellations represent a negligible part of new supply scheduled to enter the market. Notes: Additional assumptions used for scenarios: (1) Common trading fleet selection criteria

i. The information in these charts is based on the trading fleet (year of build >1979) ii. Phase-out includes single hull tankers and tankers with double sides or double bottoms, although tankers with double sides or double bottoms are assumed to benefit from life extension from embarking on CAS (condition assessment scheme) iii. Excludes U.S. Flag vessels iv. Excludes Combined Carriers v. Phase-out takes into account vessels sold for conversion to dry bulk carriers or FPSOs and other types

(2) Common orderbook (as at April 2009) and delivery schedules. No assumption is made for additional orders


Freight Market Scenarios Following the April G20 summit in London, there is much less speculation that the world is slipping into a 1930s style depression – although the consensus of opinion is that the recovery will be long and there are major risks along the way. Despite, the improvement in the wider economic mood since the last Weber report, short-term freight rate forecasting is still a fairly gloomy task as recovery in the tanker market is also likely to be a protracted affair – although the two scenarios described below both have positive elements. In the first case, it is assumed that industrial production continues to track downwards and demand continues to deteriorate. Inevitably pressure on rates would intensify, while single-hull scrapping would also be expected to increase ahead of the 2010 phase-out deadline thus pushing fleet growth towards the lower end of the 6-12% forecast range (defined by scenario 1 and 2). This outcome is in fact the most positive for tankers in the long term because it offers relatively short term pain for long term gain. Low demand would keep oil prices low (below $50Bbl), and in the longer term this would stimulate steady demand growth (many underestimated the impact of high oil prices on demand – we shouldn’t now underestimate the positive impact of low oil prices), while low freight rates would secure the ordering drought which would improve the prospects for tanker supply in the longer term.

In the second case, it is assumed that industrial production picks up quicker than expected. If crude oil demand also picks up quickly, then rates could strengthen. However, despite this positive outcome, the benefits could be relatively short-lived as single-hull phase out could be delayed thus pushing fleet supply growth towards the upper end of the 6-12% growth range. The longer term outlook for tankers would also be compromised because an unexpected surge in demand could trigger an oil spike which could potentially jeopardize recovery from recession. The long term prospects for tanker supply might be derailed too if a rate recovery in the short term triggers an early resumption in ordering. Both of the freight rate scenarios described here are relatively optimistic. If the recession gets even worse and demand contraction continues for a third or fourth year, then the outcome for freight could be very dire. Of course, the tanker market is always susceptible to wild card events which could impact on both of the scenarios above. One such event would be a weather related event such as a hurricane. However, the chances of another type of wild card event - temporary crude oil supply dislocation (which is often positive for rates) – are diminished in the short term because falling demand growth and crude oil supply additions means that spare capacity is now up from a very tight 1.5Mbpd to 4Mbpd or higher. More conventionally, rates would benefit if the frantic electric shock treatment

being administered to the world economy in the form of increased government spending and the initiation of non-conventional financial measures such as quantitative easing worked better than expected to produce a shallower recession than expected.


Calendar of Events 2009/2010

Spring

June The Atlantic hurricane season starts (June 1) OECD semi annual world economic review 50 years since invention of hovercraft

Summer

July Sweden takes over the

EU presidency – will focus on green energy and immigration IMO MEPC 59 (13-17) The 35th G8 summit to

be held in La Maddalena, Sardinia (8-10). IEA releases 2010

demand forecast. OPEC releases long range forecast 40 Yrs since Armstrong

walked on the moon (21)

August Three years to go

until London Olympics Mandate of United

Nations Assistance Mission for Iraq (UNAMI) to expire (Aug 7)

September G20 New York

Summit (Gordon Brown to report on how IMF can be turned into an economic rapid reaction force) OPEC 154th Ordinary

Meeting (Sept 9, Vienna) German

parliamentary elections (Sept 27)

Autumn

October 60th Anniversary The

People’s Rep of China UN Security Council

meeting IMF’s semi annual world

economic outlook

November The Atlantic

hurricane season ends (Nov 30) NATO’s annual

meeting, London (Nov 29)

December OECD semi annual

world economic review COP15 UN Climate

Change Conference Dec 7-18 at Copenhagen The first stage of

Russia's East Siberia-Pacific Ocean pipeline (ESPO-1) is forecast to come on stream 25/12

Winter

January 2010 Spain takes over the

presidency of the EU from Sweden Canada takes over G8

presidency from Italy World Economic Forum,

Davos, Switzerland

February Chinese celebrate

the Year of the Tiger 12 Years since

Osama bin Laden issued a fatwa against all Jews and Crusaders

March OPEC 155th Ordinary

Meeting, Vienna World Bank updates

global economic forecast The 32nd League of

Arab States summit CMA- Shipping 2010 EU-Russia summit 7th Green Ship Tech

Conference


Shipping 1.1BnTons

Airline 650MnTons

Future Vision In this section, possible events that will impact the tanker shipping and crude oil markets in the medium to long term are reviewed. Shipping Carbon Footprint – Shipping has been attracting increasing criticism for its environmental record. The issue of GHG emissions from shipping has been the subject of ongoing discussions within IMO, and it was again tabled at the latest IMO convention - MEPC 58 (London Oct 6-10, 2008). The developing countries within IMO want to establish global uniform standards, but this is at odds with the stance of developing countries who want common but differentiated responsibilities that reflect the respective capabilities of different nations (as per UNFCCC).

No resolution was achieved at the conference, but it was agreed discussions should continue at MEPC 59 in July 2009 which will benefit from the findings of the 2nd and final part of the update of the 2000 IMO study. The outcome of MEPC 59 will, in accordance with the established action plan, be presented to the UN conference on climate change to be held in Copenhagen in December 2009 when environmental rather than economic issues may once again be in the spotlight. As discussed in last quarter’s report - in relative terms, shipping’s carbon footprint gets a gold star. The shipping industry’s carbon footprint is lower than all the other transport

modes in terms of carbon dioxide per unit of work. According to Mark Brownrigg, director-general of the Chamber of Shipping “Air freight produces 100 times as much CO2 per tonne kilometre” – while shipping carries 80% of world trade.

But, its absolutes that count and Shipping’s carbon footprint is massive - There is some debate about exactly how much carbon dioxide shipping generates – see studies by BP, and IMO – but it seems that maritime carbon dioxide emissions are not only higher than previously thought, but could rise by as much as 75% in the next 15 to 20 years”. US asks UN to help cut ship emissions near coasts – Mar 30 - The US has asked the International Maritime Organization to create a buffer zone around America's coastline to cut pollution from ocean-going ships that harms human health according to the Environmental Protection Agency. "This is an important and long overdue step in our efforts to protect the air and the water along our shores and the health of the people in our coastal communities," said EPA Administrator Lisa Jackson. Under the proposal, which was also submitted to the IMO by Canada, big vessels like oil tankers and cargo ships that operate in a 230-mile (370-kilometer) "emissions control area" extending from two countries' coastlines, would face stricter smog and particulate pollution standards to reduce the threats the emissions pose to humans and the environment. The United States asked the IMO to create the boundaries because some 90% of the ship calls on U.S. ports are made by foreign-flagged vessels. The plan would cost some $3.2Bn annually by 2020 in ship retooling, cleaner fuels and other expenses, but save up to $28Bn per year in health care costs, according to the EPA. More on Ship Emissions – This subject continues to dominate the outlook for shipbuilding in the future, although the green lobby is not having it all its own way. In May 2008, after a defeat in the federal courts, the California Air Resources Board (ARB) circulated a notice to owners and operators saying it will not press ahead with planned measures forcing ships to use low-sulphur fuel in auxiliary engines within 44km of the coast.


Oil Industry (and alternative energy replacements) Obama Talks of New Era In mid 2008, there was anger at escalating of oil prices. Today, oil prices have moderated, crude oil demand is falling and concern is directed at the prospect of a shrinking global economy. This turn of events would normally mean that issues surrounding energy and the environment would go onto the back burner, but a new US President is determined to make energy a part of his economic recovery plan. On Feb 5, President Obama commented to US Secretary Steven Chu at a public meeting, "Your mission is so important and will only grow as we seek to transform the ways we produce and use energy for the sake of our environment, our security and our economy." Apr 2 – US House Energy and Commerce Committee Chairman Henry A. Waxman (D-Calif.) released a 648-page draft of clean energy legislation aimed at reducing US dependence on foreign oil and combating global warming. According to Waxman, "This legislation will create millions of clean energy jobs, put America on the path to energy independence, and cut global warming pollution. Our goal is to strengthen our economy by making America the world leader in new clean energy and energy efficiency technologies”. Raymond James analysts commented, "There is a lot here to talk about, including cap-and-trade, a carbon tax, a national renewable power mandate, new coal plant standards, and more. The package is truly far-reaching, more so than we would have expected at such an early stage in the new administration." They also noted, "The Energy and Commerce Committee aims to wrap up debate by the summer, but we are doubtful that such far-reaching legislation - (especially with all the implications of cap-and-trade) - can realistically get passed so quickly."

Long Term World Oil Demand Forecast

EU Primary Energy Demand to Fall by 6-8% by 2020 – Feb 17 – The first annual report of the Market Observatory for Energy presented by European Energy Commissioner Andris Pielbags contains two demand scenarios. Under the baseline scenario, the EU's energy consumption would rise 5-9% by 2020, depending on oil prices and driven mainly by transport fuels. Under the New Energy Policy Scenario (which assumes that policies will be introduced to allow the EU to meet its targets of 20% fewer greenhouse gas emissions compared with 1990; a 20% share of renewables in the final energy demand, and substantial energy efficiency improvement), energy demand is expected to fall by 6-8% by 2020. The share of carbon-free and indigenous energy sources—renewables and nuclear—in the EU's fuel mix would grow to 28-30% under the New Energy Policy compared with only 21-25% under the baseline. The share of renewables would increase under both scenarios and price circumstances. Under the baseline scenario, import dependency for oil could reach as high as 93% in 2020.

Long Term World Oil Supply Prospects

May 6 – Though Saudi Arabia's national oil company is feeling the impact of lower prices CEO Khalid A. al-Falih does not anticipate that spending plans or production levels will change - "We were expecting to produce around 10Mbbls per day at this time and now are producing about 8Mbbls. We're not seeing any imminent increase in production because we're not seeing any imminent increase in demand. But we continue to invest along the petroleum value chain because we expect high demand to return." – al-falih also noted that the company will boost its capacity to 12Mbpd in a few more weeks when it completes its Khurais oilfield program. Its goal is to raise proven reserves within Saudi Arabia from 700Bnbbls to 900BnBbls and its average recovery rate from 50% to 70%. The additional production will be both light and heavy crudes, including one onshore-offshore field which it expects to produce 900,000 b/d when it comes on-stream.

Energy Crisis The IEA has warned that the global financial crisis has sown the seeds of a power supply crisis in the Middle East – Feb 17, and appealed to governments to maintain investment plans. According to the IEA, the Middle East region needs to spend a total of $500bn per year in its power infrastructure 62% in transmission & distribution and 38% in power generation – in order to meet annual electricity demand growth of 4%. However, several power projects in the region have been delayed due to financial issues arising from the global credit squeeze.


Managing Greenhouse Gases Study reveals CO2 storage potential offshore Scotland – May 5 - A major one-year collaborative study involving the Scottish Centre for Carbon Storage (SCCS), the Scottish Government, and a number of industry partners has revealed that 5,070 to 50,706MnTons of industrial carbon dioxide (CO2) emissions, including power generation, can be stored deep beneath the Scottish area of the northern and central North Sea. Storage capacity of 5,070MnTons is more than enough for 100 years worth of the UK's total industrial CO2 Norwegians Capture CO2 - Mar 9 - StatoilHydro's injection of carbon dioxide into the Utsira sandstone formation in the Norwegian North Sea has been spreading as expected throughout the structure (1000m below the seabed) over the past 13 years, according to new 4D seismic data. To date it has stored more than

10MnTons of CO2. ExxonMobil and Total are partners in the project. Storing CO2 in Coal Seems - Feb 17 -- A team of regional partners has begun to inject carbon dioxide into Virginia coal seams to determine whether it can be stored there and potentially produce coalbed methane, the US Department of Energy said on Feb. 11. The study's results will help assess carbon storage in coal seams' potential as a safe and permanent greenhouse gas emission mitigation method while enhancing natural gas production, DOE's Fossil Energy Office said. It said that DOE's Southeast Regional Carbon Sequestration Partnership (SECARB) began injecting CO2 at the Russell County, Va., test site in mid-January.

Alternative Energy Projects and Ambitions

Obama stress the importance of clean energy – Feb 24 - in his first primetime address to Congress, he said, "We know the country that harnesses the power of clean, renewable energy will lead the 21st century, yet it is China that has launched the largest effort in history to make its economy energy efficient”. He pledged to invest $15Bn/year to develop technologies like wind power, solar power, advanced biofuels, clean coal and more fuel-efficient cars and trucks.


Tanker Companies Green shoots or fools’ gold - Is this the real start of the recovery? Tanker sector share prices -along with those in many other sectors - hit a new low at the end of February. However, in the build up to the G20 London summit in early April, and for sometime thereafter some commentators detected tentative signs of an improvement in business and consumer confidence as the idea has taken root that the world’s governments may have done enough to prevent recession turning into depression. Market fundamentals remain very weak, but the improvement in sentiment has led to a modest revival in stock market fortunes around the world in recent weeks – a revival that has been shared by tanker shares despite falling tanker rates, rising fleet growth and record high crude oil stock levels. It should be noted that this is not the first mini stock - market rally since the onset of the global downturn, and so talk of entering a recovery phase may be premature. After peaking in June 2007, there have now been 5 share price rallies of 10% or more (by May 2009).

(1) 8-10/07 (+15%) = “phony war” when we kidded ourselves that the problem was contained within the financial and property sectors (2) 3-5/08 (+18%) = “Bear Sterns relief rally” all the news out of the way (3) 8/08 (+10%) = “Summer Lull/Olympic Optimism” before collapse of Lehman Bros in September – tanker shares disconnected from the market at this point (4) 12/08 (+15%) = “Real Economy will escape” (fingers crossed) (5) 3-5/09 (+27% so far) = “G20 London Summit confidence injection”

Here are a few good reasons to be positive that stock markets are close to the bottom of the cycle, and that good news stories may be seen as nascent green shoots of global economic recovery: (1) The emergence of the G20 as the body tasked with responding to the international crisis suggests a new power dynamic between nations and the beginning of a new era of consensus management and inclusivity. The unity and effectiveness of the G20 will be stress-tested again at its next meeting in New York in September. (2) Valuation argument – shares have been lower, but on increasingly few occasions. (3) length and depth of market – only 30s and 70s come close in terms of depth and duration. (4) market holding up in face of bad news – all bad news factored in. (5) tentative signs that economy recovering or deteriorating less quickly. (6) breadth of rally (so unlikely to be dead cat bounce). Lead indicators to watch out for: (1) Copper price - up by one third so far this year, although stuttering progress. China has been buying copper, but this does not necessarily mean that China is having an economic recovery. (2) BDI – well up on 2008 lows, although like copper stuttering progress. (3) Low level of company inventories, which means that any uptick will lead to increase in industrial production).


The Danger of Being Left Behind While the global economic landscape may be sprouting a few green shoots, it is entirely possible that certain industries could be left behind as recovery takes off. This happened to the tanker industry in the 1970s after the first oil shock, when the self-inflicted wound of over-ordering meant tanker earnings and share prices remained depressed much longer than in most other sectors. The series of charts here compare the performance of OSG’s share price with ExxonMobil’s share price and the price of crude oil in 2007, 2008 and 1H09 and reveals an ever-changing set of connecting and disconnecting relationships. In 1H07, all three time series moved upward in unison, but during 2H07, OSG’s share price disconnected from the other two and fell back sharply. The time series were moving upward together again at the start of 2008, and then contracted together as the economic crisis loomed. However, when the crisis broke in September, both OSG’s share price and the oil price plummeted, while ExxonMobil’s share price held its ground. During 1H09, the relationships changed again with ExxonMobil’s share price remaining stable, while the price of oil mounted a mini-revival during 2Q09, and OSG’s share price fell to new lows before recovering slightly at the start of May. The reason tanker share prices have a shifting relationship with the other two variables is the complicated interrelationship of shipping industry market fundamentals, oil industry market fundamentals, economic sentiment, the micro management of oil supply by OPEC, the activities of speculators, and the value of the US dollar vs. world currencies – which oftentimes move in and out of focus as key drivers for the three time series at different times. At certain times, tanker shipping has been seen as a proxy for the fortunes of the oil industry (e.g. 2H07); at other times its fortunes have been dragged along by sometimes illogical sentiment (e.g. in 2008 when the bubble was building and when it burst). Today, tanker share prices are responding to the improved sentiment apparent since the G20 summit in early April that is also driving the general stock market rally. However, tanker share price performance has not matched the gains of both oil prices and ExxonMobil’s share price during 1H09 as a whole - in part because the market is being judged on the perceived weaknesses of tanker market fundamentals (e.g. accelerating fleet growth, low demand, high stock levels and falling freight rates). It is conceivable that unless both tanker supply and demand fundamentals improve, the strands of connectivity which bind the tanker industry to the fortunes of oil companies and oil prices will be broken in the minds of investors - and tanker shipping could be left behind just as it was in the 1970s. The consensus of opinion indicates a general belief that the corner may have been turned for the global economy. Whether the recovery has started now or not (and even assuming the G20 remains united), it is clear that the road to better health will be long…and there will be setbacks. The more important question, then, is how the global financial and economic tsunami is being dealt with by tanker companies. In its World Economic Outlook (published April 2009 see extract of report at end of this chapter), the IMF talked in general terms about the vulnerability of the non-financial corporate sector as a result of the recession. The IMF notes that all the good work done since the 1990s in building the resilience of the corporate sector - through a steady decline in leverage, subdued investment and easier access to credit which has helped build corporate liquidity- may be undone by the gradual weakening of balance sheets of non-financial firms around the world. These companies are often weathering the storm by eating in to their cash reserves in the face of a financing squeeze manifested in “…tighter external financing conditions, difficulties in obtaining trade finance, and domestic banks’ increased aversion to risk.” As a result of weakening balance sheets, non-financial firms have cut investment plans, thus creating a


negative feedback loop. The IMF highlights the US – among the G3 – as experiencing the largest increase in default possibilities. These general comments relating to concerns about the non-financial corporate sector can be applied to the tanker shipping industry – but there are other industry-specific strengths and weaknesses that come into play. Approaching recession - Tanker companies arrived at the crisis in good shape after five years of consistently strong freight rates. However, two structural weaknesses particular to the tanker sector started to appear: (1) From 2006, tanker ordering started to take off leaving the market today with a large, partly unfinanced orderbook. (2) From 2007, period employment opportunities started to decline, weakening the potential of companies to secure future employment cover. The VLCC sector provides an illustration of the decline in period employment which fell from 15 fixtures of 3 or more years duration in 2006, to 9 in 2007, and 6 in 2008; there has been just one such fixture in the first five months of 2009. Impact of recession on tanker shipping and tanker ownership in the short term – Changes arising from the immediate fallout of the crisis, combined with weak demand fundamentals, has the potential to alter the ownership profile of tanker shipping during the recession recovery phase of 2009-2010 – which coincides with its own transition phase when the rump of the single hull fleet is phased out. In the new harsh environment, all shipowners are exposed to falling freight rates as supply and demand fundamentals continue to weaken and period employment opportunities dry up. Some owners face the additional burdens of rising finance obligations from vessels on order. All owners will need to review their sources of credit and redefine their relationships with their bankers, who are in turn are facing tighter regulation and the implementation of a new risk-aversion culture. The new harsh environment will favour well-run companies with good period coverage and the ability to maintain strong balance sheets (e.g. includes companies with vessels on order that are facing rising financing costs, but have the flexibility to sell assets). It could be that consolidation and bankruptcies are on the cards. A report from one shipping analyst points out that although banks may demand more from shipowners e.g. in the form of increased equity to fund newbuildings – most will recognise the fact that tanker freight rates don’t justify greater input from owners, so won’t push too hard at this stage. In the wider nexus between banks, owners and shipyards, the recognition of common problems will foster an environment of mutual respect – at least for now. Impact of recession on tanker shipping and tanker ownership in the longer term – will things return to normal? What was normal? (1) Like the rest of world, the tanker sector had become used to the explosive growth in Chinese demand papering over its own structural cracks and excesses, (2) Globalisation – the recognition of the interconnected fortunes of nations, (3) Peak oil was a hot topic, but the end of the age of oil was perceived as being over the horizon and did not enter planning forecasts, which continued to see trade as an arrow pointing up. Global level – (1) Belief in capitalism likely to be sustained in the absence of an alternative system. (2) Globalization even stronger – the opening up of the top table shows how the nations of the world still believe their fortunes are inextricably bound up with each other. (3) World trade growth will resume, as the powerful expansionary forces in the BRIC nations still very active. (4) The rise of the green agenda is likely to be cemented into mainstream politics by the new White House administration. Renewable energy is increasingly the focus of the future, threatening an uninterrupted era of crude oil’s permanent demand destruction. (5) Underinvestment in crude oil exploration caused by the impact of the credit crunch on oil company exploration budgets threatens to shorten the age of oil, even in the absence of the green agenda. Industry Level – While the new dawn looks very uncertain at the global level for tanker shipping, particularly with regard to how far the green agenda will have advanced and its impact on crude oil demand, there are perhaps more positives to look forward to at an industry level: (1) Even after the financial system is returned to health, the emphasis on tighter regulation and risk-aversion will mean that banks will continue to favour low risk, larger clients which may lead to an acceleration in the process of ownership consolidation, especially if rates are depressed due to the continuing phenomenon of permanent demand destruction. (2) Fleet supply should look leaner with the exit of the single hulls, and a lower orderbook due to the ongoing lull in ordering since mid-2008.


The Rising Issue of Debt

Winners and losers in the league table of debt

This section does not attempt to make a detailed assessment of the prospects for individual tanker companies to ride out the recession; the well being of a company is made up of dozens of different life signs: amount of period cover, customer relationships, strength of balance sheet, relationship with its bank, cash flow, loyalty of shareholder base, management experience, operational quality, age of fleet, forward strategy, wisdom of hedging policy, strategic alliances with other owners among others. However, the ability to maintain a strong balance sheet will be one of the key indicators of a company’s ability to make it through the recessions. Falling revenues, increasing newbuilding obligations and the restriction on credit availability (as the banking crisis continues to unwind) mean that the management of debt in particular will be something to watch for. Marine Money’s annual Shipping Banker Survey was published in May (1) and looks in detail at capital availability in the shipping industry. Amongst a wide range of statistics, the survey reveals that 87% of bankers believe that shipping will be impacted by credit restraints and almost 50% believe banks’ tolerance for the riskier nature of sipping finance will decrease over the next year. MM points out that some of the negativity detected in the survey is due to “…uncertainty as banks acclimate themselves to a new environment.” The MM survey focuses on the differences between public and private companies, in terms of their ability to secure funds in the new, leaner era. It points out that increased regulation will be the lasting legacy of the crisis, which means “…simplicity and transparency may be critical factors in the new ‘regulated’ finance environment.” Clearly, listed companies have an advantage over their private counterparts in this regard and MM concludes, “[Public] companies may ultimately fare better, developing a position of privilege.” The conclusion ties in with a recent McKinsey report of the future of private equity(2). It points out that due to the lack of transparency, leveraged buyouts (a staple of the private equity market) are less likely to attract bank funding than before the credit crisis, therefore the private equity sector is looking for new channels for investment (of its estimated $470Bn in committed - but not yet invested - capital) and it may look to take advantage of bank-orientated public companies through private investment in public equity (PIPE). McKinsey sees strong synergy in this relationship; private equity management offers stronger strategic leadership, while public company management offers skills in communicating with a dispersed body of stakeholders and compliance with public-market regulation. Focus on listed shipping company debt - the set of charts below compares the development of debt with the development of market capitalization for individual listed shipowners over the last 2-5 years(3) . Clearly, share prices have fallen significantly over the last year and so it is no surprise to see the orange market capitalization line dip significantly for almost all of the companies featured. In fact, Nordic American Tanker Shipping (NAT) is the only shipowner not to have seen a contraction in market capitalization – this is in part due to the fantastic public relations job done by Chairman & CEO Herbjørn Hansson. NAT is to capitalize on its popularity with shareholders with a public offering announced in May. In contrast to the orange market capitalization line, most blue debt lines have been rising sharply in recent months. This includes companies with vessels on order that are facing rising financial costs. Rising debt coupled with diminished credit availability may make investment from private equity sources an attractive proposition. Frontline and OSG are two leading tanker companies that have been able to ease their debt burden in recent quarters. Shipowners that have sold vessels in the last year will have lightened their debt burden. Such companies include OSG, Brostrom, D’Amico International Shipping, and Teekay. Few listed tanker companies have been prepared to buy secondhand vessels (and of course there have been no new orders) despite the severe drop in vessel values. Most buyers of secondhand tanker tonnage are from China, the Middle East, North/West Africa and Latin America. (1) Marine Money Magazine published May 2009 | (2) The Future of Private Equity –No. 31 Spring 2009 in series Perspectives on Corporate Finance Strategy (3) The period selected depends on reporting history of individual companies) – and this gives a very broad brush guide to how individual companies are managing their balance sheets


Listed Tanker Companies Changes to Debt and Market Capitalisation


Extract from IMF’s World Economic Outlook Published April 2009


Appendices

39-46 Chronology of Oil Market Events Feb-May

47 The Role of Speculators in the Futures Markets

48 New Crude Oil Production Capacity Coming on Stream

49-51 Exploration and Development

52-53 Refinery Projects

54-55 What a Democratic Presidency Means for US Energy Policy

56

Oil Industry Rationalisation

57

Ex Masters of the Universe

58

Shipping News


Chronology of Oil Market Events Feb-May 2009 and how the oil price was influenced This is a daily record of events in the oil market. Each daily entry starts with the price for WTI. The colour coding is to show the direction of influence on the oil price, where indicates a downward impact on prices – while indicates a price accelerator. identifies events from the financial markets that spilled over into the oil market, indicates a possible green shoot and indicates an impartial event. Summary Prior to the onset of the current global economic crisis, crude oil traded primarily on fears of supply disruptions (oil prices soared). With the onset of the downturn, crude traded primarily on fears of economic collapse (prices plummeted). Entering 2009, there was a period of uncertainty with crude traded primarily on the belief that demand was falling faster than supply (prices stagnated at the low/mid $40s per barrel). Following the G20 summit in London at the start of April, a belief that a depression has been averted emerged. The market believes that the global economy probably reached bottom in 1Q09, and since then confidence has tentatively crept back into stock markets pulling commodity prices up too (oil prices back above $50/bbl) despite very weak S/D fundamentals. Unlike oil prices, tanker freight rates have weakened in response to weak fundamentals.

May 14 $ – May 13 $57.72

China’s industrial production growth from a year earlier slowed to 7.3% in April from 8.3% growth in March, providing more uncertainty over whether a Chinese recovery is under way. China’s crude steel output fell 4% in April from a month earlier. Analysts believe investors remain concerned about the impact of the expected issuance of $1.7Tr of US treasuries May 12 $57.1

Ford plans to raise $2Bn in share issue. Some analysts believe the recovery in oil prices has been too much too soon, and anticipate that backwardation

may become a factor in trends continue. Venezuelan President Hugo Chavez, attempting to bolster his socialist spending programs, has nationalized nearly 40 domestic and international oil services companies operating in his country, with another 20 still under threat.

Uncertainty

Fear of economic collapse

Fear of supply disruption and “stupidity”

After G20 Summit, belief that “depression” averted and the worst is over

G20 Summit London Apr 2


May 11 $56.74 Latest US employment stats show that the hemorrhaging jobs is starting to slow. Meanwhile, Pritchard Capital

analysts said, "Korean industrial production has shown signs of real strength, just 10% below 2008 levels although Japan is still 30% below early 2008 levels." US industrial production was still contracting in April, but the number was up for the fourth consecutive month. Japan, Korea, and Thailand showed industrial production gains in March. The European Central Bank President, Jean-Claude Trichet signalled that the global downturn had bottomed, with some large economies already able to put the recession behind them and look forward to renewed growth. His remarks came as the Organisation for Economic Co-operation and Development said there were signs of a “pause” in the economic slowdown in France, Italy, the UK and China. May 8 $58.82

Oil prices continue to rise as traders shrug off mounting inventory news and concentrate on news of economic turnaround. Big funds are betting that the worst of the recession is over. May 7 $56.62

Bank of England to pump another £50Bn into the UK economy through quantitative easing. It has spent about £54Bn so far and is on track to spend £75Bn by June; it will now extend its spending to £125Bn.

US bank “stress tests” (measuring the fitness of banks to survive in a doomsday scenario) reveal 19 failing banks requiring a combined cash injection of $75Bn. Bank of America is the most at risk, requiring $34Bn. It is hoped that the results of these tests will lift the continued uncertainty about the level of bad debt in the banking system and remove the prospects of nationalisation. The difficult next step for the failing banks is to put plans in place to raise the missing billions by the deadline of June 8. Bank of America said it would raise the $33.9Bn it needs through the sale of assets and other measures, while Citigroup, Morgan Stanley and Wells Fargo are to issue or exchange shares.

Less positive news as a result of the US government’s $14Bn bond issue as they are forced to pay at 3.3% (worst for 6 months – with the market choking on all the extra funding being pumped into the market by the government). Commentators are worried that it may be the government’s finances, rather than those of banks, that will give the most concern for the future. In other news, President Obama released his final fiscal - year 2010 federal budget. It included $31.5Bn of new oil and gas taxes over nine years, which were part of the original request he submitted to Congress in February. May 6 $54.82

US crude oil stocks up a further 0.6Mbbls. Although this jump was not as great as the market had expected, distillate stocks increased above expectations.

China approved a plan to set up 10MnTons of refined fuel state reserves by 2011 as part of its economic stimulus plan. At China's current consumption, it would provide 2 weeks of forward coverage of gasoline, diesel, and kerosine combined. May 5 $53.8

Obama to close tax loopholes for US multinationals May 4 $53.16

UK offers to help protect Iraqi oil exports against insurgents. Raymond James & Associates argue that we may have seen peak oil in July 2008 with non-OPEC peaking in 2007

and OPEC in 2008 – as $100Bbl+ prices meant that producers would be flat out to benefit from the windfall. May 1 $52.24

Chrysler files for Chapter 11. Equity markets continue to rebound. (but does not sit easily with negative economic news). It is not just equities that are rebounding; the credit markets, the US junk bond market, emerging markets and

commodities, such as oil, are all on the rise But these markets are taking their cue from the equity markets. Markets were pricing in-recession. The extreme pessimism of 2 months ago (when depression was being predicted) has helped provide the platform for

the rebound. In addition, fiscal stimulus in US and China is thought to be having an effect and banking has stabilized. However, house prices in US and UK still heading down (putting further pressure on bank balance sheets). Albert

Edwards, a strategist at Société Générale, who has long taken a bear view, says: “The current pop in the market is not dissimilar to the many bear market rallies between 1929-33, where signs of economic stabilisation were met with strong 25 per cent rallies, most especially in late 1929 and mid 1931. This optimism was subsequently crushed.” Apr 30 $49.18

Japanese industrial production up for the first time in six months. but Bank of Japan cuts economic forecasts for Japanese economy further. UK house price rally dashed with a fall

being reported in April. Apr 29 $49.32

President Obama’s 100-day milestone. US Crude oil stocks jumped a further 4.1Mbbls last week (ahead of consensus expectation of 1.8Mbbls). Distillate

stocks also jumped again (1.8Mbbls), but gasoline stocks contracted giving some glimmer of demand strength (-4.7Mbbls, compared with expectations of a small increase). Apr 28 $48.19

Signs that debt is becoming more available to riskier investing classes are found in the amount of new debt borrowed in the US junk bond market, which has risen to more than $7bn in April to-date, its highest level since July


last year, according to Dealogic data. Survey of German businessmen shows that confidence is rising that recession in Europe’s largest economy will ease later this year.

Fear of Mexican swine fever pandemic is hitting stock markets except pharmaceuticals (level 4 alert on scale up to 6) – looks set to undermine demand through reduce air travel. Apr 27 $49.4

The US Export-Import Bank has approved $900Mn of 10-year direct loans to Pemex to support the purchase of US goods. Dominique Strauss Kahn, the head of the International Monetary Fund, said on Saturday that if countries are successful in cleansing their financial systems, the fiscal stimulus already implemented for 2009 “…may be enough”. The IMF also said it was making good progress in securing the $500Bn additional resources that the G20 called for at the London Summit earlier in April.

However, behind the rhetoric, the IMF’s recent forecasts are overwhelmingly negative. FT 22/4/09 The fund expects US output to contract by a whopping 2.8 per cent this year. Unlike most economists

predicting a recovery in the second half, the IMF sees no improvement until mid-2010. Even then it reckons growth will only be an anaemic 1.5 per cent. The Congressional Budget Office, by contrast, forecasts 4 per cent growth in 2010. Quite a gap. Nor is the IMF’s pessimism restricted to the US. What will the European Central Bank – which has pencilled in a 1.7 per cent contraction this year – make of the IMF’s estimate that eurozone output will plunge 4.2 per cent, with Germany down 5.6 per cent? Long-suffering Japan is forecast to slow even more. In all, the IMF reckons aggregate gross domestic product across the advanced world will fall 3.8 per cent in 2009, with no growth next year. Stick that in your stress tests. Meanwhile, emerging nations have got off no lighter. Growth in emerging Asia will halve to just over 3 per cent and forecasts for parts of eastern Europe are better left unwritten. Even so, the developing world actually looks to be the sole source of dynamism for the next couple of years, led by Latin America, the Middle East and parts of Asia and central Europe. Decoupling may be back – although no one had hoped it would look like this. IMF stresses that no escaping the scale of national debt. It reported the UK deficit would rise from 9.8% of GDP this year to 10.9% next, while the deficit in Japan would increase to 9.6% of GDP. It predicted that the US deficit would inch lower, but to a still high 8.8% of GDP. The biggest deterioration would come in Germany, the IMF forecast, with the deficit jumping from 4.7% of GDP to 6.1%. The deficit will also move higher in France, to 6.5% of GDP. Apr 24 $51.16

Japanese car makers report increased production in March. Most analysts believe that S/D factors will eventually pull oil price back down

Apr 23 $48.81

Another bank – Credit Suisse – returns to profit. Also share prices for oil related companies not going down despite some bad news on results – perhaps an indication of a turning point in the market. US driving stats down 0.9% in Feb y-o-y – but significant improvement on demand destruction of recent months – Bottoming of demand destruction Apr 22 $48.83

UK Budget - government to issue £220Bn in government bonds (£50Bn higher than market expected). UK Government accused of over-optimism in its calculation of when the public debt will be brought back down from

80% of GDP to 40% of GDP (probably because it expects to lose next election). One positive note from the UK budget is that operators to be offered incentives to develop small and challenging

fields. Wider market news: Expectation that oil price is being held up by strong dollar and progress in stock market; if these supports disappear weak oil fundamentals will not save oil prices from sliding back. Apr 21 $49.5

The IMF raised its forecast for global losses from the credit crunch to $4,100bn and urged governments to take “bolder steps”

(But questions remain regarding the accuracy, purpose, and methodology for instance in the case of the UK, the IMF incorrectly calculated the amount of losses Britain’s banks had already written off and used these erroneous calculations to pontificate about the state of the UK economy, while analysts questioned the IMF prediction that bank profits would fall between a third and a half over the next two years).

Stock prices in UK and US start the week poorly (after making gains last week). UK announces negative RPI inflation for first time since 1960. In US, fears about the duration of recovery take hold again.

UK home sales increased by 40% in March. Apr 20 $49.24

Crude oil prices (real time and futures) contract sharply. Apr 17 $51.99

US Environment Agency announces that it accepts the theory that global warming is probably caused by CO2 and that it is harmful to man.

First green shoots for UK housing, with a rise in the number of mortgages being taken out for the first time since 2007 (+4% Feb mom overall market, +7% Feb mom first time buyers). Apr 16 $51.88

China reports 1Q09 GDP growth of 6.1% - the lowest figure since records began in 1992 – down from 6.8% in 4Q08 and 9% in 2008 overall – though it could have been worse (with growth underpinned by thestimulus package). US crude oil and distillate stocks still well above average – refinery utilization rates must fall. Relative strength of oil price indicates that market sentiment is being driven by G20 glow (includes improving stock market prices) rather than crude oil S/D – unlike tanker rates which are extremely weak. "My leading petroleum indicator for how the general economy is doing is diesel fuel. Demand for low-sulfur diesel was down about 6% during the first quarter. Until I see that change, it tells me that economic activity is slowing down," API Chief Economist John C. Felmy told OGJ on


Apr. 16. Not exactly good news - the US Department of Labor said the number of new jobless claims decreased by 53,000 to 610,000 in the week ended Apr. 11, the lowest number since January. Apr 15 $51.68

UBS to cut 11% of global workforce. Repsol YPF said it will temporarily shut down its 100,000 b/d refinery in Cartagena, Spain, due to poor demand and margins. API reports that the US’ share of world crude oil consumption has fallen from 25% in 1Q05 to less than 23% in 1Q09 Apr 14 $52.58

Obama hints at recovery Saying work to boost US economy is starting to bear fruit. This was backed up by Ben Bernanke’s guarded

optimism: “We have seen tentative signs that the sharp decline in economic activity may be slowing.” – However, S&P500 fell 2% on news of a 1.1% decline in retail spending in February Following Venezuelan President

Hugo Chavez’ visit to China, the two countries have agreed to bring forward the starting date of the long-planned increase in Venezuelan oil exports to China. Chavez argues the revised timetable for exporting 1bpd to China (from current 380Kb/d) is possible by diverting some of the 1.5Mbpd currently going to the US. The planned target was originally set to be reached in 2013 – the initial revised target in 2011. The countries have already an agreement to build a joint venture refinery in Guangdong province. The completion of this refinery is an important precondition for increased shipments. Apr 13 $50.88 Apr 10 $53.77

The IEA has slashed its global oil demand forecast to 83.4Mbpd (-2.4Mbpd below 2008, down 1Mbpd from last months estimate) after a reassessment of GDP assumptions (forecast down 1.4% in 2009) and much lower-than-expected 1Q09 demand data. The pace of contraction is close to early 1980s levels, with a growing consensus that economic and oil demand recovery will be deferred to 2010 (in March expecting recovery in 2H09). The IEA expect that Non-OECD oil demand will average 38.3 million b/d in 2009, almost 230,000 b/d lower than previously expected. Although small, this will be the first contraction in non-OECD demand since 1994, IEA said. Apr 9 $52.47 Apr 8 $52.57

Crude oil futures’ prices fall, partly on news that US commercial inventories were up 1.7Mbbls. Qatar; Oil Minister, Abdullah bin Hamad al-Attiyah, said that a price of $50/bbl is "reasonable" for today's world economy and that he doesn't expect prices to rebound to $70/bbl this year.

Japan and Venezuela, following meetings in Tokyo between Venezuelan President Hugo Chavez and Japanese Prime Minister Taro Aso, agreed to investments of $33.5Bn to develop oil and gas projects in Venezuela for Japanese markets. Chavez wants to supply Japan with 1Mbpd of crude oil. Apr 7 $51.26 Apr 6 $52.54

US Department of Labor reported US nonfarm payrolls fell 663,000 in March while the unemployment rate jumped to a 26-year high of 8.5% from 8.1%.

Japan firms up details of second stimulus package to be worth $100Bn to target solar energy, medical services and failing domestic firms. Apr 3 $53.64

After falling for six months, US drilling activity was reported to be slightly up. Apr 2 $52.82

G20 $1.1 Trillion show of unity – is this the turning point in the crisis fightback – stock markets respond well with oil prices on the rise

Apr 1 $47.95

The Japanese Prime Minister, Taro Aso dismissed Angela Merkel’s warnings about the risks of excessive public spending in the global downturn, saying Germany has failed to understand why strong fiscal action is vital for recovery (pointing to Japan’s 15-years experience of prudently struggling to get out of recession). His comments reveal once again the wide differences between world leaders ahead of G20.

Oil market is described as “waffling” as traders respond to conflicting signals. Chavez issued a statement saying $80/bbl is a "fair" price for crude.

US stocks increased again this week, remaining above levels for the last few years. Mar 31 $46.81

Aims of G20 downgraded – now just about “cleaning up” banking. Japan (whose Government debt is equivalent to 170% of GDP) outlined a new stimulus package and announced that it would “mobilise all available means” to prevent the world’s second largest economy’s “floor” from “falling out”. The prime minister, whose government is already implementing stimulus spending measures worth about ¥12,000Bn ($120Bn), said it was too early to talk about the likely scale of the new package. However, ruling party politicians have suggested it include fiscal spending of about ¥20,000Bn. Mr. Aso commented that Japan was ready to “…take the lead” in global efforts to address the slump, adding that Tokyo would provide more than $22Bn in additional trade financing assistance and give global coverage to a trade insurance network it announced for the Asia-Pacific region last year. Japan would also offer ¥500Bn over the


next three years in new overseas development aid for Asian countries suffering from the global downturn and stand by its pledge to double such aid for Africa by 2012, Mr Aso said.

Real time oil price and future oil prices head in different directions, indicating, perhaps, the belief in medium strength of demand and a strengthening dollar. Mar 30 $48.45

President Obama calls for G20 unity. Stock markets plunge, in part due to concerns about US car industry with Obama withholding further bailouts to GM and Chrysler, but also because of concerns about deepening recession in Europe which caused the dollar to strengthen against the Euro. Crude oil futures markets also take a major tumble (-$3bbl) along with real time prices (-$2.5bbl) Mar 27 $51.12

Build up to G20 looks troubled – expectations being lowered and leaking by Germans against Brown. Meanwhile, Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "The global economy is

in worse shape than the consensus expects, but…the world can avert a 1930s style downturn. We expect the energy and industrial metals complex eventually will be the major beneficiaries of and improving economic outlook." Mar 26 $51.93

Oliver Jakob points to a US stock build of 8.5Mbbls over the last 4 weeks (13Mbbls including SPR), and argues OPEC cuts are still not translating in stock draw downs.

Stock markets still on up. Mar 25 $50.84

Despite the UK government’s failure to sell all its bonds at auction yesterday, The mood of optimism that the US government may have begun the process of restoring faith in the banking

system with stock markets still on the rise. Also the US government is having better luck selling its debt. For the first time since the 1960s, the US Federal Reserve will begin buying Treasury bonds with plans to buy up to $300Bn of Treasury securities over the next 6 months; today's auction will include $34Bn of 5-year and 10-year notes.

Oliver Jakob continues to comment that the crude oil price rally may lack substance because; (1) trading volumes are light, and (2) crude oil stocks are still high.

Brazil again considering an invitation to join OPEC. Mar 24 $51.74

Equity and oil markets continue to rise, buoyed by positive sentiment from PPPIP announcement. Oliver Jakob is cautious about the strength of the oil price rally, pointing to low trading volumes. Mar 23 $51.72

Public Private Partnership Investment Programme - US Government unveils final solution to clean up bank balance sheets by offering $500Bn of “toxic debt” to the public on highly preferential terms. It is described as a market-based solution but is criticized by some because if all goes well individuals make hay, while if it goes wrong the tax payer pays.

Stocks rally on the announcement of the plan. It looks like the stock market is clear of the bottom. Weakening dollar also a factor in rising oil prices. Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "Consensus oil price forecasts stand near $50/bbl for 2009 and $65/bbl for 2010. We remain more comfortable with prices near $45/bbl in 2009 and $55/bbl in 2010. A sharp recovery in oil prices toward $80/bbl in 2011 remains possible, but is highly dependent on a strong economic revival starting in 2010." Mar 20 $49.47

In contrast to Horsnell, Oliver Jakob does not belief that OPEC has yet done the job of reducing the level of oil inventories, even though oil prices are threatening the $50bbl level. Mar 19 $48.94

The US Federal Reserve is to embark on quantitative easing by buying up longer-term Treasuries for the first time as part of a $1.15Tr spending spree with the aim of boosting the American economy out of recession.

Reaching out to Iran - President Barrack Obama released a special video message for all those celebrating Nowruz, the Iranian New Year's celebration. The holiday, marking the arrival of spring, is celebrated in several countries, including Afghanistan, Azerbaijan, India, Iraq, Pakistan, and Tajikistan. In the message, Obama said, "At this holiday we are reminded of the common humanity that binds us together.” He also addressed Iran's leaders directly, saying the US wants Iran "…to take its rightful place in the community of nations." Obama said, "You have that right—but it comes with real responsibilities, and that place cannot be reached through terror or arms, but rather through peaceful actions that demonstrate the true greatness of the Iranian people and civilization. And the measure of that greatness is not the capacity to destroy, it is your demonstrated ability to build and create." Iran’s response was quite cool.

Paul Horsnell (Barclays Capital) detects shift in sentiment from bearish to bullish as market changes focus from macroeconomic to industry balances. Mar 18 $46.18

World Bank cuts China’s GDP growth forecast for 2009 to 6.5% (4.9% of which is from government spending) from 7.5% in December.

Possibly entering a phase of stock building at sea as refinery margins being squeezed. Venezuelan President Hugo Chavez, using the need for drug interdiction as his reason, has ordered his country's navy to seize seaports in Venezuelan states having major petroleum-exporting installations. The decision by Chavez, who has long been concerned by purported US plots to invade his country, follows a recent announcement by Washington to closely monitor ships entering US ports after recent calls at Venezuela. The US has long claimed that Chavez provides support


for the terrorist Fuerzas Armadas Revolucionarias de Colombia (FARC). Two days before issuing its directive concerning Venezuelan ships, the US government reiterated long-standing claims linking FARC with drug trafficking. Mar 17 $46.1

Green Shoot – Unexpected jump in US house starts (+22% in Feb) Algerian Oil Minister Chakib Khelil said compliance with production quotas among OPEC members will improve to

95% by the time the group meets in May. Pritchard Capital Partners reduced its crude price estimates to an average $52.50/bbl for 2009 from its previous

projection of $60/bbl. The reduction was to $65/bbl from $75/bbl for 2010. Mar 16 $45.1

G20 Apr. 4 meeting; (1) twin track strategy seeks to avoid splits (coordinated stimulus + banking reform), (2) cash injection into IMF – possibly boosting reserves from $250Bn to $750Bn.

OPEC: no new output cuts at Mar. 15 meeting but, as expected, called for stricter compliance by members (79% Feb). Obama reportedly called King Abdullah of Saudi Arabia prior to that meeting. Earlier last week US Secretary of Energy, Steven Chu, said another cut could severely interfere with the recovery of the troubled global economy. Also thought that didn’t want to rock boat ahead of G20; argued that OPEC has finally accepted that the world recession is too great a force to resist – and that can’t force oil prices up at the moment without risking exacerbating recession.

Russia has proposed sending a permanent envoy to OPEC meetings in an effort to coordinate policies, again declining membership in the group. "We can live without [OPEC] membership but we want to have closer dialogue with OPEC to exchange data, information, and ideas and that's why we raised the idea of having a permanent representative here at the secretariat," said Russian Deputy Prime Minister Igor Sechin.

Green Shoot - Federal Reserve Chairman Ben S. Bernanke said over the weekend the US recession likely will end this year if the government can revitalize the banking system – offsetting negativity from OPEC meeting Mar 15. Mar 13 $43.86

Talk once again of an OPEC price cut. It seems OPEC is testing the market with different inferences to different policy options to see how the market will react. Oliver Jakob commented, "OPEC has been sending during the week multiple and contradictory sound bites (including the now-usual Russian pre-meeting quote of "we might look to join") to test the market reaction, and the answer seems to be quite clear: a cut and we will try to take over the $50/bbl resistance, no cut and we just cruise on the $40-50/bbl highway." - Better than expected US retail sales (up 0.5% in Feb from January, down 0.6% from last Feb). Wen Jiabo announced that China will increase public spending further this year to boost its economy if needed and already has contingency plans in place to do so.

He also commented that it would not change its exchange rate policy. On America, he commented, “We have lent a huge amount of money to the United States, and of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the US to maintain its good credit, to honour its promises and to guarantee the safety of China’s assets.” Wen was lukewarm on idea that China should provide additional funds to IMF. OPEC revised down its estimate for world GDP growth in 2009 from +0.4% to -0.2%. It cut its estimate for 2008 oil demand to -300Kb/d (down 100Kb/d). OPEC also cut its forecast for 2009 oil demand to -1Mbpd (down 400Kb/d). The IEA left its estimate for 2008 oil demand unchanged at 85,7Mbpd, which is down 400Kb/d compared with 2007) The IEA also cut its forecast for 2009 oil demand to -1.2Mbpd (84.4Mbpd) Mar 12 $43.96

Oliver Jakob argues that US demand reduction may be reaching nadia. Most commentators now expect the OPEC Mar 15 meeting to focus on compliance not cuts even though prices are stubbornly below target levels. Iran, Venezuela and Ecuador are the bad apples at less than 40% compliance – although Nigeria and Libya 60-70% and Angola 50-60% have some way to go. OPEC appears to recognize that a price rise caused by tightening supply could be short-lived triggering a further weakening in demand. Mar 11 $42.51

QE (Quantitative Easing) day in UK – EIA again reduce world oil demand forecast for 2009 – 84.27Mbpd (down 430Kb/d from last month, and

1.38Mbpd lower than 2008). It also reduced its supply projection by 910Kb/d. Preliminary figures shows Chinese crude oil imports in February are the same as January but 540Kb/d than the corresponding period in 2008. OPEC’s production in Feb still 1Mbpd above target (4.2Mbpd) – but latest view is that OPEC will not make additional cuts on Mar 15 even though oil price languishing in mid $40’s. Biggest quota busters are Iran +400Kb/d, and Venezuela +225Kb/d. Russia is exporting an increasing percentage of its production and it may be a significant factor in keeping a lid on prices. The EIA also reduced its estimate for US GDP growth in 2009 to -2.8%. It expects GDP to recover by 1.9% in 2010. The EIA expects WTI to average $42/bbl in 2009 and $53/bbl in 2010 Mar 10 $44.87

Chinese exports fell 25.7% in Feb; much higher than expected (imports down 24.1%)

But also reported strong increase in fixed asset spending, indicating that the financial stimulus package was being activated (spending on transportation particularly strong).

It was also reported that Chinese inflation turned negative in Feb. for the first time in 6 years. IMF expects that it will be predicting (in April) global economic growth falling below zero in 2009 for the first time in 60 years. Talk of another Great Depression increases. Discord about agenda for G20 meeting in April – tighter financial regulation at the top of the agenda (fear of a repeat banking disaster in the future) v establishing global accord on bailout strategy (fear of protectionism now and destabilization if countries move in different directions).


Mar 9 $44.12 Oil prices on the rise as traders shake off stream of bad economic news and focus on impending OPEC production

cuts expected at Mar 15 meeting. Some believe OPEC want to show compliance at 90% so that a 1Mbpd cut will move oil prices significantly above $50bbl (Saudi likely to lead with 0.3Mbpd cut).

The Labor Department reported Mar 6 the US unemployment rate increased to 8.1% in February, the highest since late 1983. At Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., analysts warned, "The down cycle will be deeper and longer than most expect, with oil consumption falling for 3 years—the longest period since the early 1980s." They said, "The steep drop in oil prices and limited access to capital will further reduce exploration and production capital spending. Deflation will take years, not quarters, to set in; thus, we expect a U-shaped cycle, not a V-shaped recovery as some expect." Mar 6 $43.46

US Department of Labor reported new unemployment filings topped 600,000 for the fifth consecutive week. In a recent interview with Reuters, International Energy Agency Executive Director Nobuo Tanaka said a $40/bbl oil price through 2009 would have the effect of a $1 trillion stimulus to the world economy. Crude oil exports from OPEC, excluding Angola and Ecuador, are forecast to fall by 430,000 b/d in the 4 weeks before Mar. 21, according to tanker analyst Oil Movements. Mar 5 $44.78

Both crude prices and US demand appear to have bottomed, said analysts at Pritchard Capital Partners LLC, New Orleans. They noted the crude price contango on the New York market "has narrowed dramatically from $15 to $7, removing incentive for storage," at an assumed monthly storage cost of 30¢/bbl. Moreover, they said, "Technical prices may look to test recent $48/bbl highs."

Stock markets continue to struggle e.g. Far East markets down because China did not increase stimulus spending – even though it indicated that 8% GDP growth target was within reach.

Oil price has stabilized, but at a level that is too low for OPEC – therefore, further production cut likely Mar 15. Mar 4 $45.83

QE Day - Bank of England cuts interest rates to 0.5% (down from 1%), and embark on quantitative easing with £175Bn injection (equivalent to 5% of GDP). WTI still decoupled from the international market. Stock markets hit new lows.

China will meet its goal of 8% economic growth this year, Premier Wen Jiabao said on Thursday, although against expectations he did not outline any new spending proposals to revive the economy. However, it is believed that China still has room to increase spending if required.

Raymond James & Associates Inc. said, "Several negative data points released [Mar. 3-4] point to a prolonged global recession: Australia's GDP shrinks for the first time in 8 years, US auto sales fall 40% in February, and OECD warns that the recession will be deeper than the IMF has forecast.

The small glimmer of hope comes from China, where the Purchasing Managers' Index improved in February for the third consecutive month, perhaps suggesting that manufacturing activity is in the early stage of revival."

KBC analysts said: "The global picture remained gloomy with Chinese crude imports falling back by 8% from a year earlier in January, as crude runs slumped. Sales growth in India was an anemic 2.3% reflecting weak demand in a slowing economy, while domestic oil products demand in South Korea fell by 2.4%."

Shell Petroleum Development Co. shut in oil installations in the Niger Delta after explosions punctured in three places its 24-in. trans-Escravos oil pipeline.

Brazil reports record production 2.01Mbpd Mar 3 $42.94

Fears that recession is deepening But stock markets rose in part because China indicated that Premier Wen Jiabo would outline new spending

proposals on Mar 4. Explosions punctured in three places Shell’s 24-in. trans-Escravos oil pipeline that transports crude from the Forcados fields to the export terminal. An estimated 70,000 b/d shut in. Shell declares force majeure Mar 9 Mar 2 $42.46

Department of Commerce reported US GDP fell 6.2% during 4Q08. Largest drop since 1Q82 (-6.4%). Economists had been expecting a drop of 3.8%. With no positive signals in site, it looks like being another long week. Raymond James & Associates Inc. reduced their oil price forecasts to $43/bbl from $60/bbl for 2009 and to $65/bbl from $80/bbl in 2010 "due to the severity of the global economic meltdown and bloated inventory levels at Cushing, [Okla.]," the key delivery point for US crude. Feb 27 $44.19

Biggest driver remains economic uncertainty – stock markets touch new lows. Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "In our view, additional OPEC cuts and more convincing signs of an economic upturn are required to stabilize oil prices. Since we expect the G7 [industrialized nations—Canada, France, Germany, Italy, Japan, UK, and US] will require additional fiscal stimulus packages to support growth, we remain skeptical of near-term crude oil price rallies." Feb 26 $44.64

UK Government announces £600Bn takeup (in principle) from Lloyds (finalised 7/3/09 £260Bn) and RBS (£325Bn) under its Asset Protection Scheme. The scheme means that banks can take toxic debt off their balance sheets.

The unexpectedly large drop in gasoline stocks (which are lower than for corresponding periods 2006-8 – having started the year at average levels) seems to be a major factor in strengthening oil prices. EIA reported US gasoline consumption was up 1.7% over the past 4 weeks from year-ago levels. Lower prices are finally having an impact. Stock peaks may have been reached around the world.


Still plenty of negatives e.g. more negative US unemployment news Feb 25 $43.29

Oil price bounce caused by a strong equity market and assurances from Federal Reserve Chairman Ben Bernanke that the US government did not intend to nationalize big banks. Also reports of signs that the market is tightening e.g. falling gasoline inventories on the east and west coasts. Paul Horsnell at Barclays Capital Inc., London said, "At this stage, we still view WTI as having largely decoupled (due to lagging tightening phase) as an indicator of the global market. We would look to Brent and physical market differentials to be stronger and earlier indicators of the long process of the turning of the cycle towards first balance and then some mounting supply side tightness." Feb 24 $40.41

Market still battered by economic woes (S&P Index hits new low, American Intl Group announces additional $60Bn of losses) + belief that demand falling faster than supply.

OPEC compliance improving - OPEC's crude exports are projected to average 25.3Mbpd February, down from 26.3Mbpd in January and nearing the group's official quota of 24.8Mbpd. Oliver Jakob has spotted some better than expected demand figures, and this could be significant just as OPEC’s compliance is improving. Feb 23 $41.16 –

Further reports that OPEC to cut production at Mar 15 meeting (OPEC still targeting $70-80Bbl). Feb. 21 -- Russia's Vice-Premier Igor Sechin said his country is planning to discuss a proposed memorandum on cooperation (first submitted in October) with OPEC at the meeting (Russia stressing that looking for greater cooperation with OPEC not membership).

Oil still struggling to find a true equilibrium price and demand faller faster than supply. Feb 20 $40.29

First drop in US inventories this year boosts prices. Pritchard Capital analysts said, "The major fiscal stimulus worldwide is likely to be inflationary and good news for commodities once the dust settles in the financial system. We think Chinese demand will remain the overriding issue for commodities in the next several years." Feb 19 $40.36

Oliver Jakob argues that demand destruction may be bottoming out as US driving miles down just 1.6% yoy in December (despite poor weather and job losses) compared to drops of 4-5% in recent months. Feb 18 $39.55

More negative economic news and strong dollar push oil prices down (as fears that Western Europe may not be able to deal with a financial crisis in Eastern Europe caused Euro to fall against dollar). Futures prices also continue to retreat in part because of anticipation of a further stock

Gunmen attacked an ExxonMobil installation in the delta region of Nigeria. The militant Movement for the Emancipation of the Niger Delta has given Agip SPA and Saipem SPA until Feb 20 to leave the region. Feb 17 $40.22

"temporary glut of crude" at the primary delivery point in Cushing, Okla is causing oil prices to remain depressed. Feb 16 $42.83 Presidents Day holiday in US –

ExxonMobil Corp., dismissing the latest statements by Libyan leader Moammar Gadhafi, said it is not concerned about remarks threatening to nationalize the Arab country's oil industry. Feb 13 $44.42

Japan reports 3.3% contraction in GDP in 4Q08 – The spread between WTI and Brent widened to $10Bbl – as oil’s contango continued to steepen. Analysts at

Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., said, "Canadian oil sands development activity has gone from a hurried pace to almost a standstill in a very short time." Feb 12 $44.4

Crude futures continue to fall in part due to reports of another strong jump in US crude oil reserves (although there was also a strong draw on gasoline stocks).

Venezuela's oil minister indicated that OPEC may agree to another reduction of production at the group's scheduled meeting Mar. 15.


The Role of Speculators in the Futures Markets

Summary - US politicians have struggled in recent months to evaluate the role of speculators in determining the movement of commodity prices. Obama’s inaugural address makes it clear that he believes that left unchecked speculators with bring markets down. The following chronology plots recent discussions on the subject. Currently the politicians and Commodity Futures Trading Commission (CFTC) are singing from different hymn sheets Michael Martins – St Croix – Fund Manager (who doesn’t trade food or oil, on principle) – testified against Commodity Index Funds in front of Congress – 0.5% of market but pushing one way (either up or down) – used to be S/D, now S/D+Demand. May 6 – Khalid A. al-Falih, CEO if Saudi Aramco suggested that additional government regulation of financial markets may be necessary after crude oil prices spiked in 2008. "We're in the minority on what happened, at least publicly. We felt the market was well-supplied. At the same time, we were on the phone literally begging our customers to take more barrels to reduce pressure on prices. We continue to believe that speculators drove the increase a perception that supplies were tight. We found this odd since we had so much spare inventories and production capacity," he said. Apr 9 – Speaking at the IEA’s 2009 annual conference, Adam E. Sieminski, Deutsche Bank's chief energy economist warned against assigning blame too quickly (e.g. reluctant to blame speculators). He pointed out that several factors could have set the stage for crude oil prices to soar in early 2008 – (1) Emerging market economies had an average annual growth in gross domestic product of 7% from 2000 to 2005, (2) Crude oil prices did not rise enough during this period to justify heavy exploration, reducing the OPEC’s spare production capacity considerably. (3) Refining capacity also didn't grow, (4) the value of the US dollar declined, and (5) then there's stupidity, "stupidity can drive decisions. That's the best explanation for somebody buying a crude oil contract at $147/bbl and expect the price to go up. Governments can't regulate against this." Apr 9 – CFTC Says Speculators not to Blame – but not sure what was. Nine months after crude oil prices reached record levels, the CFTC and other experts agreed at the US EIA's 2009 annual conference on Apr 7 that speculators shouldn't be blamed. They also could not say definitively what pushed prices upward during 1H08. However, some argue that the CFTC’s survey into the event is not yet complete as still to understand/investigate the OTC markets where data is scarce. Apr 5 – Senate Energy and Natural Resources subcommittee hearing to discuss elements of energy commodity reform (1) S.672 bill aimed at giving The Federal Energy Regulatory Commission (FERC) greater powers to act (i.e. to suspend trading or freeze assets) (note: CFTC already have these powers), (2) establish an office to collect data on all segments of the market in order to being greater transparency. Mar 23 -- CFTC finalizes rules increasing exempt commercial market oversight in order to close the so-called Enron Loophole. The rules implement provisions of the 2008 CFTC Reauthorization Act, which created a new regulatory category, ECMs with significant price discovery contacts, and subjected these electronic trading facilities to additional regulatory and reporting requirements effective Apr. 22, the commission said. Mar 23 -- President Barack Obama has named Jon Wellinghoff, who has been acting chairman of the Federal Energy Regulatory Commission, as its chairman on Mar 19. Obama also announced that he plans to appoint Suedeen G. Kelly to a second 5-year term as a FERC commissioner. Mar 11 -- Bart Chilton, a member of the US Commodity Futures Trading Commission, was appointed chairman of CFTC's Energy Markets Advisory Committee on Mar 10. Chilton will succeed Walter L. Lukken, who chaired CFTC during the administration of President George W. Bush. The appointment, by acting CFTC Chairman Michael V. Dunn, could signal a more aggressive approach by the advisory committee because Chilton frequently issued written dissents to decisions announced by Lukken, who has been EMAC's only chairman since it was established in February 2008. Jan 20 -- The CFTC has elected Commissioner Michael V. Dunn as its acting chairman. He listed 5 priorities (1) pursue broad reforms in the regulation of commodity trading, (2) identify and manage new derivative markets and products, (3) improve collaboration with other regulatory body, (4) review conditions under which it grants exemptions for entities to exceed speculative position limits and other hedge exemption policies, and (5) that the CFTC is well funded.


New Crude Oil Production Capacity Coming on Stream

May 11 – The Kurdistan regional government announced plans to truck oil from its Taq Taq field in northern Iraq to the Khurmala export station about June 1. At Khurmala, oil will enter Iraq's export pipeline transiting Turkey with a terminal at Ceyhan. The field is in the process of increasing output to 70,000b/d with plans to increase production to 180,000b/d May 1 -- The extended production test of the giant presalt Tupi discovery in the Santos basin off Brazil (the largest oil discovery in over 20 years) has begun to the BW Cidade de Sao Vicente floating production, storage, and offloading vessel, according to Galp Energia SGPS SA, Lisbon. The FPSO, with a 30,000 bo/d processing capability, is moored in 2,170 m of water on Block BM-S-11 about 280 km off Rio de Janeiro. Galp Energia says that production will not exceed 14,000 bo/d during the 15-month production test of the Tupi Sul and Tupi-1 wells. The

Tupi field, discovered in October 2006, contains an estimated recoverable 5-8BnBbls of light 28-30° gravity oil and natural gas. Operator Petroleo Brazileiro SA (Petrobras) has a 65% interest in the block. Partners are BG Group 25% and Galp Energia 10%. At full capacity the field is expected to produce at the rate of 1Mbpd. Apr 9 - Production has begun from the first wells in the Zhao Dong block, Bohai Bay, offshore China, according to Roc Oil (Bohai). Total gross production from the Zhao Dong block is currently approximately 21,500 b/d of oil. Mar 19 - The Bozhong (BZ) 28-2S oil field in the Bohai bay is onstream, according to CNOOC. Production began with 4,000 b/d of oil via four wells. The main development facilities include one central platform, 49 wells, and one FPSO. Production is expected to ramp up an average 25,000 b/d of oil by 2011. Feb 18 -- Anglo-Russian oil joint venture TNK-BP Holding reported it has started commercial production at Urna and Ust-Tegus fields in the Uvat area of the Tyumen region in Siberia, feeding crude into the 264-km pipeline that connects the fields with the OAO Transneft pipeline system. Urna and Ust-Tegus, which are located in the eastern part of Uvat, hold an estimated 300MnTons of oil in place, including 100MnTons of reserves. Plans call for the production of some 1.5MnTons of crude from the fields in 2009.

Jan 13 - Production has begun from Platform B, part of Peng Lai (PL) 19-3 blocks' Phase 2 project in China's Bohai Bay. Platforms D and E are expected to come online this year.


Exploration and Development

Summary – The dramatic collapse of the oil price during mid 2008 is starting to have a significant impact on E&D spending in future months. Most telling is Saudi Aramco’s decision to delay new E&D projects, and reports Feb. 9 that OPEC has delayed 35 of 150 planned oil drilling projects by at least 4 years.

see John Kemp, ft.com 24.11.08 Market already making adjustment to take account of changing supply demand balance to bring e&d costs down (e.g. rig hire rates falling – steel prices) with IEA having already cut its estimate for 2030 production by a staggering 10 million bpd (9 percent) since WEO2007 (when it thought 113.7 million would be needed by 2030).

May 13 -- Japan and Russia have agreed to jointly develop an oil field in Eastern Siberia, according to an announcement by state-owned Japan Oil, Gas & Metals National Corp. (JOGMNC). The joint venture, called INK-Zapad, will aim to develop the Bolshetirsky and Zapadno-Yaraktinsky blocks, which lie in the northern reaches of the Irkutsk region. May 6 - Saudi Arabia's national oil company is feeling the impact of lower prices, but CEO, Khalid A. al-Falih does not anticipate that spending plans or production levels will change - "We were expecting to produce around 10Mbbls a day at this time and now are producing about 8Mbbls. We're not seeing any imminent increase in production because we're not seeing any imminent increase in demand. But we continue to invest along the petroleum value chain because we expect high demand to return," – al-Faliha also noted that the company will boost its capacity to 12Mbpd in a few weeks time when it completes its Khurais oilfield program. Its goal is to raise proven reserves within Saudi Arabia from 700Bnbbls to 900BnBbls and its average recovery rate from 50% to 70%. The additional production will be both light and heavy crudes, including one onshore-offshore field which it expects to produce 900,000 b/d when it comes on-stream. May 6 -- Heritage Oil Corp. has reported the discovery of a giant oil field in Iraqi Kurdistan with 2.3-4.2BnBbls of oil in place, of which 50-70% appears recoverable. To put this in context, the much trailed Chukchi Sea development off Alaska (America’s next producing region) is estimated to have recoverable reserves anywhere between 1-15BnBbls, while the Tupi oilfield off Brazil (the largest oil discovery in the last 20 years) has just started an extended production test and is estimated to contain recoverable reserves of 5-8BnBbls. Apr 29 – The UK Government has awarded Senergy a framework agreement with contracts of up to $2.7Mn to examine ways of prolonging the production life of the North Sea oil and gas industry. The three-year study, which is already under way, will support the work of the Department for Energy and Climate Change (DECC) as it seeks to secure maximum recovery from existing oil and gas developments as well as the exploration of opportunities to access new reserves in technically challenging fields. The contract will see Senergy assess the most effective ways of maximizing economic hydrocarbon recovery from the UKCS via proper stewardship of existing fields and the deployment of the latest technology for new field developments. Apr 21 – BMI forecasts that Russian oil production during 2007-18 is set to increase by 13.25%, with output rising steadily to 11.3Mbpd by 2018 from 9.98Mbpd in 2007. Apr 9 – Deloitte's latest North West Europe Review shows that exploration operations within the UK Continental Shelf have decreased significantly in the last 12 months. It reports that while the same number of appraisal wells were spudded in the UK during 1Q09 compared with the year before, the number of exploration wells has fallen 78%.


Apr 8 - Japan and Venezuela, following meetings in Tokyo between Venezuelan President Hugo Chavez and Japanese Prime Minister Taro Aso, agreed to investments of $33.5Bn to develop oil and gas projects in Venezuela for Japanese markets. Apr 3 – TNK-BP reports that (with recoverable volumes of more than 7BnBbls of oil and 3.53 tcf of gas) Western Siberia's supergiant Samotlor field should continue to produce until the year 2099. The Russian amalgam plans to invest $1Bn/year through 2011 to sustain it. Samotlor, discovered in 1965, on marshlands and taiga in the Khanty-Mansi Autonomous area just north of Nizhnevartovsk in the Tyumen region, has produced 19.2BnBbls of oil since development began in 1969. Production peaked in 1980 at nearly 3.2Mbpd, almost half of Russia's output, and had fallen to 400Kb/d by 1999 – before recovering somewhat (currently producing at 580Kb/d) Mar 30 -- Saudi Arabia's state-owned Saudi Aramco—in line with newly announced government policies—will continue to invest in new oil, gas, and petrochemical projects, despite the current global economic downturn, according to government leaders and company officials. Mar 6 – BP reports that in order to maintain its dividend and fund its $20Bn investment programme without recourse to borrowing, it requires an oil price at $60/bbl. Total reported a few months ago that $90/bbl was needed to generate a 12.5% IRR for their Canadian tar sands projects and $75/bbl for their offshore West African projects. Mar 5 -- Exxon Mobil Corp. plans to spend $25-30Bn per year over the next five years to meet energy demand. ExxonMobil has nine projects expected to reach production in 2009 to add 485,000 boe/d to its total. In 2008, the company replaced more than 100% of production through added reserves. Mar 3 -- Sonangol, Sociedade Nacional de Combustíveis de Angola, and BP Exploration (Angola) have made a discovery with the Leda well in ultra deepwater block 31, offshore Angola. This is the seventeenth discovery made by BP in block 31 and is 415 km (258 miles) northwest of Luanda and about 12 km (7.5 miles) to the southwest of the Marte field. Mar 1 -- Mesopotamia Petroleum Co. Ltd. (MPC) signed an agreement with Iraqi state-owned Iraqi Drilling Co. (IDC) to form a new joint venture focusing on increasing oil and gas production in Iraq. "This is the Iraqi ministry of oil's first joint venture agreement of its type signed with a foreign company since the fall of the regime of Saddam Hussein in 2003," said MPC. The company's name will be Iraqi Oil Services Co. LLC (IOSC), which will drill several wells for the nation's oil companies and international operations. On a conservative basis, these are expected to yield 5,000 b/d/well. About 60 wells/year are to be drilled around Basra as soon as possible, according to IDC. In 2008 Iraq produced 2Mbpd, which the ministry wants to boost to 3Mbpd as soon as possible and to 4.4Mbpd within the next 4 years. By 2013, Iraq wants to achieve 6Mbpd of production. Feb 27 -- A new Deutsche Bank analysis finds that in the short term, oil prices likely would have to fall to $20/bbl and below for non-members of the Organization of Petroleum Exporting Countries to shut in a large amount of production. However, with investment now falling, the downside risks to supply forecasts are increasing. This suggests that upside price risks, once demand recovers, are considerable. Findings include: (1) on average, the cash cost of extracting oil in the mature and higher-cost, non-OPEC markets of Russia, UK, Norway, and Alaska is about $15/bbl—greatly below the current oil price. Only in the Canadian oil sands do average cash costs of about $28/bbl approach the prevailing $35-40/bbl price of WTI. (2) Looking at the marginal cash cost curves within these mature regions, a modest 700,000 b/d of production would be cash negative with an oil price of $30/bbl, including 400,000 b/d of oil sands production. However, at a $20/bblWTI oil price this rises towards a more substantial 3.5Mbpd. (3) decline rates could curtail supply quickly. Past oil-price collapses have been associated with a sharp increase in the decline rates observed in mature basins. Using past production curves as a proxy, Deutsche Bank estimates that as much as 1.5Mbpd of supply could be lost to accelerated decline over the next 2 years within the US onshore, Alaska, Canada, UK, Norway, and Russia. (4) new supply projects are being postponed. Within the growth regions, the rise in costs and taxes in recent years suggests that the average oil price necessary to achieve a 15% rate of return is now $68/bbl in Angola, $62/bbl in the US Gulf of Mexico, $60/bbl in deepwater Nigeria, and around $60/bbl in Brazil, although this depends heavily on the scale of the development considered. Feb 25 – Douglas-Westwood World Oil & Gas Offshore Production & Spending Forecast for 2008-2012 is now available. Feb 24 -- South Korea's President Lee Myung-bak and visiting Iraqi President Jalal Talabani have signed a $3.55Bn reconstruction agreement, which also includes rights to develop Iraqi oil reserves.


Feb 20 -- In an effort to attract investment, Iraq has reversed earlier plans and will let international oil companies hold as much as 75% stakes in oil drilling projects. Feb 19 -- Brazil, as part of plans to secure a $10Bn loan for the development of the country's offshore presalt layer oil deposits, has agreed to supply China with 100,000-160,000 b/d of oil for a year at market prices. Petrobras and the China Development Bank have been negotiating the loan since November 2008. Feb 17 – Ernst and Young points out that previous commodity price downturns have lasted for an average of 73 weeks. Assuming the average case, the current downturn could be half way through. E&Y believes the oil industry - now much more efficient than at the time of the last major collapse in the 1980s - is well positioned to take advantage of a recovery in prices. It believes that sustained E&P activity will enable producers to meet long-term

demand and offset pricing shocks in the next up cycle. Producers would be wise to maintain a long-term focus and "drill through the storm," even as margins decline, the company says. This will not only ensure continuity of supply, but serve to help retain top talent which will pay dividends in the long term as the retiring of today's oil and gas workforce gets underway.

Feb 13 -- Total SA indicates that it will maintain its overall investment program at the same $18Bn level as in 2008 despite the unfavorable economic and financial environment, even if oil prices remain below $40/bbl for some time. Feb 9 -- Iranian Offshore Oil Co. (IOOC) has discovered a new oil reserve in the Farsi oil field in the AG, which could yield over a billion barrels in reserves, according to a local news source. The company is currently negotiating a deal with ONGC for the expansion of the field, the source says. Feb 3 – Occidental Petroleum Corp.'s 2008 earnings were the highest on record at $6.9Bn – up from $5.4Bn in 2007. Nevertheless, its capital budget has been cut to $3.5Bn in 2009 from $4.7Bn in 2008. Feb 2 – BP reported a 39% rise in profits in 2008 to $25.6Bn (4Q $2.6Bn). Indicated that needed $50-60Bbl to pay for capital spending. BP suggested there could be a modest reduction in capital spending this year, forecasting organic spending of $20bn-$22bn for the year, compared with $21.7bn last year.


Refinery Projects Summary - The dramatic collapse of the oil price during mid 2008 is starting to have a significant impact on refinery projects in future months. Most telling is Saudi Aramco’s decision to delay new refinery projects. Apr 30 -- Indonesia's Setdco Group and its partner PT Intan Megah have sought permission to build a 300,000 b/d refinery at Tanjung Sauh on Batam Island near Singapore—one of two new facilities apparently set for construction on the island. Apr 16 -- Mexico's Petroleos Mexicanos (Pemex) will spend $12 billion to construct a 300,000 b/d ($9.1Bn) refinery in Tula and upgrade an existing facility at Salamanca. The new refinery is expected to produce 142,000 b/d of gasoline, 82,000 b/d of diesel, and 12,000 b/d of jet fuel (all with "ultralow" sulfur content). Apr 10 – It is reported that Qatar has delayed the Al Shaheen refinery project for about one year, as well as the Barzan development project in supergiant North gas field, and the Mesaieed aromatics plant in order to capture falling construction costs resulting from the global economic downturn. Mar 23 -- Kuwait Prime Minister Sheikh Nasser Mohammad al-Ahmad al-Sabah reported that the country has canceled plans to build a 630,000 b/d fourth refinery at Al Jour on the Persian Gulf coast near the Saudi Arabia border. He said an Audit Bureau study deemed the project unfeasible. The refinery, earlier expected to cost $10Bn but later raised to $15Bn and rebid, had been scheduled to start in 2013. Mar 23 -- Saudi Aramco reported it plans to sign an agreement with Sumitomo Chemical Co. to develop Phase 2 of its refinery and chemicals complex in the port city of Rabigh on the Red Sea. That first phase of the project involved upgrading the 400,000 b/d Rabigh refinery to produce higher-quality products, including petrochemical units to produce 900,000 tonnes/year of polyethylene, 700,000 tpy of polypropylene, 600,000 tpy of monoethylene glycol, and 200,000 tpy of propylene oxide. Construction of phase 2 could start as early as yearend, with the complex targeted to come online sometime in 2013-14. Mar 18 -- Motiva Enterprises LLC has delayed until 1Q2012 the completion target for a project that will make its 285,000 b/d refinery at Port Arthur, Tex., the largest in the US with a capacity of over 600Kb/d. Motiva, a joint venture of Shell Oil Co. and Saudi Refining Inc., originally planned to complete the $7Bn expansion in late 2010. The project will add a single-train crude distillation unit with a capacity of 325,000 b/d. The largest US refinery now is ExxonMobil's 572,500-b/d facility in Baytown, Tex. Mar 13 -- Libya's National Oil Corp. and the Trusta group, a UAE energy consortium, agreed to establish a joint venture to improve the output and product quality of the 220,000 b/d Ras Lanuf refinery in Libya. Mar 9 -- China National Petroleum Corp. (CNPC) and Russia's OAO Rosneft, following their respective governments' recent agreement on the construction of the East-Siberia Pacific Ocean pipeline spur, may soon begin construction of their long-planned 200,000 b/d oil refinery in the Chinese coastal city of Tianjin.

Mar 6 -- Work on a Malaysian refinery complex, part of the planned Sungai Limau hydrocarbon hub project formerly known as the Yan petroleum industry zone, is expected to start in July.


Mar 3 -- Indonesia's state-owned PT Pertamina, renewing interest in an earlier plan, has signed a memorandum of understanding with Dubai-based Star Petro Energy (ETA Group) and Japan's Itochu Corp. to upgrade the country's 260,000 b/d refinery at Balikpapan in East Kalimantan. This is in addition to plans to build three new refineries within 3-5 years. Two of the planned refineries would be new: one in Bojonegara, Banten, and another in Tuban, East Java. The third project, meanwhile, will be an expansion of the existing refinery at Balongan in West Java. The total capacity of the three planned refineries will be 400,000 b/d. Feb 27 -- Vietnam opened its first refinery, a $3Bn project designed to meet a third of Vietnam's fuel demand in 2010. The 148,000 b/d plant will be operated by state-owned Vietnam Oil & Gas Group (Petrovietnam) after Total SA and Russia's OAO Zarubezhneft pulled out amid complaints that the project's economic efficiency was being sacrificed to political pressures in the country. Petrovietnam insisted the plant be built at Dung Quat Bay in the central province of Quang Ngai to create jobs in that economically poor and typhoon-prone area hundreds of miles from the country's main industrial hubs and offshore oil fields. The World Bank said in 1997 the project would not help Vietnam's economy and the International Monetary Fund questioned Dung Quat's value. Construction was by an international consortium led by France's Technip SA. A port was built as part of the project so petroleum products can be shipped by sea. Petrovietnam said the refinery should be at full capacity in August. The company is designing another refinery, in the north, and has tentative plans for a third. Jan 20 – Pemex will delay construction of a refinery until end 2009. It first announced the plan to build a new 300,000 b/d refinery ($9-10Bn) in mid-2008, and planned to begin preparing the refinery site before yearend 2008. The company is eyeing nine possible sites for the proposed facility, including Cadereyta, Campeche, Dos Bocas, La Cangrejera, Lazaro Cardenas, Manzanillo, Salina Cruz, Tula and Tuxpan.

Feb 19 -- Nigeria's Capital Oil & Gas Industries Ltd. plans to build a refinery in Lagos with the state government, OGJ has learned. The partners want to form a joint venture and are carrying out an environmental impact assessment for the 100,000-200,000 b/d refinery. They hope to lay the foundation stone by yearend. Construction is expected to take 4 years.


What a Democratic Presidency Means for US Energy Policy A Shift Away from Fossil Fuels May 7 - President Obama released his final fiscal 2010 federal budget. It included $31.5Bn of new oil and gas taxes over nine years which were part of the original request he submitted to Congress in February. May 6 – A core part of Obama’s US Energy Vision, a new biofuels - proposals would require 36 billion gal of renewable fuels be produced annually, 16 billion gal of which would have to be cellulosic biofuels and 1 billion gal of which would have to be biomass-based diesel. At the most, 15 billion gal of the renewable fuel mandate could be met by corn-based ethanol and other conventional biofuels. For the first time, some renewable fuels would have to achieve greenhouse gas reductions comparable to the gasoline and diesel fuel they displace. The proposed regulations also would address the greenhouse gas lifecycle issue for the first time. If adopted, Environment Protection Agency would solicit peer review analysis of methods to measure various fuels and feedstock combinations' GHG impacts , including indirect emissions from land use changes, before implementation. May 4 -- Despite the emphasis on alternative energy sources in current and proposed government energy policies, the US cannot attain energy independence by 2030, said a large majority of oil and gas executives recently surveyed by KPMG LLP's Global Energy Institute. Of the 382 oil and gas financial executives polled by KPMG in April, 63% said energy independence is not possible until after 2030. Only 16% said it might happen by 2030, while an optimistic 9% said independence is possible before 2020. When asked if they would support a cap-and-trade or carbon tax to reduce CO2 emissions, KPMG found 59% do not support either, 23% would support carbon tax, and 18% would support a cap-and-trade system. April 27 - President Obama spoke before the Annual Meeting of the National Academy of Sciences to discuss his plans to reinvigorate the American scientific enterprise through a commitment to basic and applied research, innovation and education. Citing the challenges the country faces in global economic competitiveness, energy and health, the President called for the U.S. to surpass its record investment in research and development, set in 1964 at the height of the space race, exceeding 3% of GDP. This goal would be met with both public and private investment, according to the President. During the speech, the President announced the launch of the $400Mn Advanced Research Projects Agency-Energy (ARPA-E). ARPA-E is a new Department of Energy organization modeled after the Defense Advanced Research Projects Agency. ARPA-E will award grants to recipients that enhance the economic and energy security of the United States through the development of breakthrough energy technologies; reduce the need for consumption of foreign oil; reduce energy-related emissions, including greenhouse gases; improve the energy efficiency of all economic sectors; and ensure that the United States maintains a technological lead in developing and deploying advanced energy technologies. Also, the President proposed a joint initiative by the Department of Energy and the National Science Foundation that will inspire tens of thousands of American students to pursue careers in science, engineering, and entrepreneurship related to clean energy--with programs and scholarships from grade school to graduate school. In addition, the Department of Energy will announce grants to establish 46 Energy Frontier Research Centers with a total planned commitment of $777 million. These centers will address current fundamental scientific roadblocks to clean energy and energy security. Apr 22 – ConocoPhillips testified to the US House Energy and Commerce Committee that oil refiners will be hit harder than other US manufacturers under proposed cap-and-trade legislation. The EIA estimate that refiners would pay an estimated $68Bn annually under a $25/ton carbon tax which includes collections of end-users' carbon taxes in addition to levies on refiners' greenhouse gases under the measure. ConocoPhillips argued that unlike other manufacturers, refiners would not be able to pass this on. Apr 2 – US House Energy and Commerce Committee Chairman Henry A. Waxman (D-Calif.) released a 648-page draft of clean energy legislation aimed at reducing US dependence on foreign oil and combating global warming (OGJ Online, Mar. 31, 2009). "There is a lot here to talk about, including cap-and-trade, a carbon tax, a national renewable power mandate, new coal plant standards, and more. The package is truly far-reaching, more so than we would have expected at such an early stage in the new administration," said Raymond James analysts. "The Energy and Commerce Committee aims to wrap up debate by the summer, but we are doubtful that such far-reaching legislation (especially with all the implications of cap-and-trade) can realistically get passed so quickly." Mar 27 -- Two weeks after it failed by two votes to pass public lands legislation, the US House approved Mar 25 a bill that will add 2 million acres to the federal wilderness system. The measure now heads to the White House, where President Barack Obama is expected to sign it. At a press conference with House members following the bill's passage, US Interior Secretary Ken Salazar confirmed that the 2 million new acres of wilderness would definitely be closed to oil and gas activity. Another 26 million acres which would be added to the National Conservation Landscape System would be limited to "appropriate activity," he said.


Feb 26 – In its proposed fiscal 2010 federal budget, the Obama administration has proposed eliminating what it termed "oil and gas company preferences." The move would raise nearly $31.48Bn of revenue by fiscal year 2019, it said. In the budget's mandatory and receipts proposal table, it called for the repeal of the manufacturing tax deduction for oil and gas companies, which it said would raise an estimated $13.29Bn over 10 years, and the percentage depletion allowance, which it said would raise some $8.25Bn during that period. It also recommended repealing the enhanced oil recovery credit, the marginal well tax credit, the expensing of tangible drilling costs, the deduction for tertiary injectants, and the passive loss exception for working interests in oil and gas properties. The proposals also included placing an excise tax on Gulf of Mexico production, which the budget said would raise $5.28Bn, and increasing the geological and geophysical amortization period for independent producers to seven years from five to raise nearly $1.19Bn, essentially reversing a provision in the 2005 Energy Policy Act.

Feb 24 – In his first primetime address to Congress, Obama listed energy as one of the three critical areas of investment (along with health and education) to secure the country’s economic future. "We know the country that harnesses the power of clean, renewable energy will lead the 21st century," Obama said, adding, "Yet it is China that has launched the largest effort in history to make its economy energy efficient. We invented solar technology, but we've fallen behind countries like German and Japan in producing it. New plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea." Obama told the joint session of the 111th Congress: "Well, I do not accept a future where the jobs and industries of tomorrow take root beyond our borders, and I know you don't either. It is time for America to lead again." The nation would

double its supply of renewable energy within the next 3 years thanks to the recently enacted economic recovery plan, Obama said. "We have also made the largest investment in basic research funding in American history, an investment that will spur not only new discoveries in energy, but breakthroughs in medicine, science, and technology," he said. Thousands of miles of new power lines with be built to carry electricity from alternative and renewable sources to consumers, and thousands of people will go to work to make US homes and businesses more energy-efficient, Obama said. The president said, "But to truly transform our economy, protect our security, and save our plant from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy. So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America. To support this innovation, we will invest $15Bn/year to develop technologies like wind power and solar power, advanced biofuels, clean coal and more fuel-efficient cars and trucks built right here in America." Jan 26 - Obama signed memorandums granting California and other states the right to raise air quality standards above the national level and ordering the Department of Transportation to establish higher fuel efficiency requirements for automakers in the 2011 model year.


Oil Industry Rationalisation Apr 3 -- Abu Dhabi's state-owned investment firm International Petroleum Investment Co. (IPIC) will pay €3.3Bn ($4.4Bn) to increase its share in Cia. Espanola de Petroleos SA (Cepsa). IPIC will buy a 32.5% stake in CEPSA from Spanish bank Santander and purchase an additional 5% stake from Spanish power firm Union Fenosa. The purchases take IPIC's total ownership in CEPSA to 47%, making it the second-largest shareholder after Total SA which owns 48.8%. The remaining shares are held by the public.

Mar 24 -- Suncor Energy Inc. and Petro-Canada, both of Calgary, have agreed to merge the two companies in a CAN$19.3Bn transaction. The resulting company, Suncor, will have 7.5 billion boe of proved and probable reserves with existing production of 680,000 boe/d. Suncor will become the largest holder of oil sands properties for both mined and in-situ resource recovery. It also will hold assets in every major oil development project on Canada's East Coast. International holdings involve oil and natural gas production from the North Sea, North Africa, and Latin America. The combined company will have refining capacity of 433,000 b/d, Suncor said. Completion of the proposed merger depends upon approval by Suncor and Petro-Canada shareholders, as well as regulatory approvals from the Canada government. Suncor and Petro-Canada anticipate closing the transaction during the third quarter. Mar 17 – According to John S. Herold Inc. and Harrison Lovegrove &

Co. Ltd. the total transaction value for worldwide upstream corporate and asset deals fell to $104Bn in 2008 compared with an annual average of nearly $160Bn during 2005-07. Mar 11 -- Mergers and acquisitions among UK-listed oil and gas companies soared by more than 70% in the last year, according to law firm Freshfields Bruckhaus Deringer LLP. The rise could indicate larger players' desire to acquire smaller operators, now struggling to access capital. Mar 4 – According to Price Waterhouse Cooper total oil industry global deal value in 2008 fell 38% to $180.4Bn, down from the 2007 high of $292.2Bn. Only two transactions topped the $5Bn mark in 2008, compared with 10 such deals in 2007. Natural gas accounted for 6 of the top ten deals. Mar 3 – Nigeria plans to sell its four refineries to raise money, as falling oil prices have left the country's budget deficit worsened. Mar 1 -- CNOOC Ltd. has taken over 100% operating rights in Lufeng 13-1 oil field in the South China Sea, assuming a 75% stake from its long-time Japanese partners after expiration of their production-sharing contract. The field, which commenced operation in 1994, is currently producing at 12,000b/d. Feb 27 -- China National Petroleum Corp., eyeing the acquisition of promising new assets in Libya, has agreed to purchase Calgary-based Verenex Energy Inc. in a deal valued at CAN$499Mn with the assumption of debt. Verenex's main Libyan asset lies in Areas 47 of the Ghadames basin, where the firm is the operator and holds a 50% working interest in the initial 5-year exploration period. Feb 6 – Raymond James analysts noted, "While the mergers and acquisitions market has been hamstrung by the credit crisis, many of the larger E&P companies with healthy balance sheets and free cash flow potential will have opportunities to rake in attractive assets at 'fire sale' prices."


Ex Masters of the Universe Bear Stearns - sold to JP Morgan Chase Mar 16, 2008 ($240Mn) Merrill Lynch - sold to Bank of America Sep 14, 2008 Lehman Brothers - filed for Chapter 11 - Sep 15, 2008 – Barclays and Nomura pick up pieces Morgan Stanley – changed status from investment bank to bank holding company Sep 21, 2008 - On Sep. 29 2008, it was announced that Mitsubishi UFJ Financial Group, Japan's largest bank, would take a stake of $9 billion in Morgan Stanley equity (deal finalized Oct 14. 2008). Failed “stress test” May 7, 2009 along with 18 other US banks – it is told to raise an additional $1.8Bn.

Goldman Sachs - changed status from investment bank to bank holding company Sep 21, 2008 – Reported 1Q09 profits of $1.8Bn, and its chairman & CEO, Lloyd Blankfein is eager for his institution to become the first big bank to shake off the stifling embrace of the US government which has gripped it since it accepted $10Bn of taxpayer loans in the autumn. Blankfein’s maneuverings include publicly contrite statements that the bank has learnt its lessons (including pay reform), and high profile indications of its returning strength when it raised $5Bn from private investors. Its 1Q09 results also show strength. Despite having a sharply reduced leverage ratio – its assets are now only 14 times capital, compared with 26 times at the

end of 2007- its fixed income and currencies trading desks have exploited the wide spreads caused by market disarray to make more money than ever. Goldman has plenty of capital and a cash pile of $164Bn, which it keeps stuck in short-term Treasury bonds in case of future turmoil. Not only does it show no sign of being in danger any more, but it has abundant resources to exploit the weakness of others by buying distressed debt and discounted private equity stakes. However, the world has changed and many concerned with banking reform, do not want Goldman Sachs (which the US government has acknowledged is too big to fail) to rush back out to conduct business as before.


Shipping News May 12 - In order to fund further acquisitions under planning and for general corporate purposes, Nordic American Tanker Shipping Ltd. announced an underwritten public offering of 3,500,000 common shares. The common shares are being offered pursuant to the Company's effective shelf registration statement. May 4 - Navios Maritime Partners L.P. (Dry Bulk sector) announced plans to offer 3,500,000 common units representing limited partnership interests in a public offering. Navios Partners expects to grant the underwriters a 30-day option to purchase an additional 525,000 common units to cover over-allotments, if any. Navios Partners expects to use the net proceeds from the public offering to fund its fleet expansion and/or for general partnership purposes. Apr 29 - U.S. Shipping Partners Files for Chapter 11 Protection - U.S. Shipping Partners filed voluntarily for relief to reduce and restructure its debts under chapter 11 of the US Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York on April 29, 2009. Apr 24 -- Indonesian shipping firms, eyeing favorable new legislation, need $6.5Bn to purchase 127 ships to replace foreign-flagged tankers currently carrying oil and gas in that country's waters. It is likely that there will be problems securing domestic financing since the Indonesian banking industry demands a long-term transportation contract and a 30% equity financing from a shipyard company. Johnson W. Sutjipto, chairperson of the Indonesian National Ship-owners' Association (INSA). Commented that while foreign banks are ready to finance the ship procurement, they are hesitant because Indonesia has not yet ratified international legislation that would enable them to recover their investment through the arrest of ships. Mar 25 -- Abu Dhabi National Oil Co. shipping subsidiary Abu Dhabi National Tanker Co. has signed contracts for the construction of 13 new ships for its fleet. All are scheduled for delivery by yearend 2011. The orders are the culmination of plans announced in 2006, when ADNTC revealed its strategy to invest up to $500Mn to double its fleet of crude and products tankers to 22 by 2010. The 13 vessel order includes: 2 Aframax, 4 Panamax Product. The company is also expanding its fleet to include dry bulk carriers to meet its future demand to transport liquid and granular sulfur, which are exported from ADNOC facilities at Ruwais. Mar 23 - D’Amico International Shipping – D’Amico was forced to renegotiate the sale of M/T High Harmony and M/T High Consensus to United Arab Chemical Carriers during 1Q09 from $56.5Mn per vessel to $53Mn per vessel Mar 10 – Oman Shipping is stepping up its ability to carry oil and products. In March 2009, it commissioned its second 110,000Dwt LR2 Haima product tanker - the 18th ship in the OSC fleet. In mid-December 2008, OSC and Emirates for Trade Agencies (ETA) signed in Dubai an agreement to establish a 50-50 joint venture to own three 300,000Dwt crude oil tankers. The Omani-Emirates agreement followed an announcement by OSC in September that it planned to raise $4Bn by the end of 2008, aiming to add 15-20 product tankers to its fleet, in addition to the order for 10 VLCCs it announced in February (for delivery between Nov 2011 and Apr 2012). Feb 25 -- Abu Dhabi's state-owned International Petroleum Investment Co. has signed an agreement with Greek shipowner Victor Restis for investments in shipping, energy, and transport. Under the agreement, the two sides envisage an initial commitment of $1.5 billion for investment in the shipping and energy fields, potentially including storage, ship-building, pipelines, and ports. According to one industry analyst, priority is likely to be cooperation in creation of a new tanker fleet for transporting Abu Dhabi's oil as well as third party cargos. In announcing the joint venture, IPIC managing director Khadem A. Al Qubaisi said: "Through acquisitions and strategic holdings, the new consortium aims at creating the first vertically-integrated group that will be active not only in oil extraction and refining but in its transportation." The joint venture, to be headquartered in Abu Dhabi, will be managed from Athens by the Restis Group, which already controls 60 ships and has several joint ventures in dry and wet shipping, especially through its subsidiaries Golden Energy Management and Golden Energy Tanker Holdings Corp. Feb 20 -- Venezuelan President Hugo Chavez and Chinese Vice-President Xi Jinping have signed an agreement to increase to $12Bn an existing bilateral strategic fund for oil development. According to Chavez, Beijing will contribute $8Bn and Caracas the remaining $4Bn to the fund, which aims largely to increase Venezuelan oil exports to China to 1Mbpd in 2015 from the current 350,000 b/d. However, there are structural problems within the burgeoning relationship as Chinese refiners can’t cope with Venezuela’s heavy oil, and it is argued that Venezuela can’t do without US at least for now. Nevertheless, plans are progressing to establish a shipping joint venture between China and Venezuela. The talks are expected to be completed in April with the creation of CV Shipping – a 50/50 joint venture focusing on shipping crude from Venezuela to China. Research has also been started by CNPC that aims to lighten heavy crude oil, enabling it to build several refineries able to process such oil from Venezuela.

green shoots - charles r. weber company, inc.it is clear that global seaborne trade will be hit very...

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