Tanker 08 q 1 Report

8/13/2019 Tanker 08 q 1 Report

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CHARLES R. WEBER COMPANY TANKER

REPORT

MARCH 2008

Light at the end of the tunnel?

Or just a breakin the cloudsThe show will go on!

Will 2008s script be played out in 2009?Where have all the tankers gone?

The floating offshore fleet


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

Joseph Conrad


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Tanker Shipping Will There be Any Surprises?

1. Executive Summary

At the start of last year, commentators, unnerved by the size of the tanker fleet orderbook, were fairlypessimistic about the prospects for tanker freight rates in 2008. However, over the last few months newvoices have started to talk up the tanker market for 2008. The question is can the tanker marketsurprise. Will average freight rates remain firm, or is it premature to lift the gloom before there hasbeen any real freight market pain. Looking further ahead, it is worth asking - if the tanker market isstronger than expected in 2008, will the recovery be sustained, or is it simply the case that problems willbe postponed until 2009.

At the start of 2008, the structural problem for the tanker market remains that there are too many shipsbeing delivered. The downward pressure on rates that this will exert is being compounded by weakeningdemand forecasts, as the IEA continue to lower their aim in response to the continuing threat of worldeconomic recession (down 200Kbd in February to +1.7Mnbd) and OPECs forecast is even lower (+1.3-1.5Mnbd).

However, tanker owners like OSG and Teekay are making a case for an average (Teekay) to good (OSG)year. They point out that in 2007 rates were artificially depressed because of backwardation which led toa long strong draw down in stocks. For 2008, they see new positive factors coming into play:

(1) Conversions - more conversions will significantly mitigate tanker supply growth - OSG expect theVLCC fleet to contract up to August 2008 giving the potential for spikes, while Teekay see 25 new FPSOprojects a year adding fuel to the conversion story.

(2) Hebei Spirit - This unfortunate accident potentially provides more good news for the tanker supplystory in 2008. Until December 2007, there had been a disappointing shortage of wild card events (unlessyou count the dramatic rise of conversions), but then the Hebei Spirit oil spill in South Korea - the

Charles Weber TankerREPORTFirst Quarter 2008


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spiritual home of the single hull tanker - led to South Korea and other Far Eastern nations to be a littlemore circumspect about their tanker chartering strategies. This story is still unfolding - but OSG inparticular sees this as drawing in the ever shortening life expectancy for this class of vessel.

(3) Regions Disconnect - on the demand side there is also some good news to offset the fairly direpredictions for OECD demand growth. In particular, the Middle East and Asian demand forecasts havebeen revised up rather than down. There are some commentators that anticipate a US led recession willnot extend into the Middle East and Asia

(4) Moderating Oil Prices + world recession averted - demand picks up particularly for OECD countries

Can it be that easy to roll away the clouds?

Recession is a possibility demand side risk is on the downside. The IEA points out that the recent era ofgood years could very easily give way to bad years. The demand shock of 2004 was largely responsiblefor shaping the oil market we have today, but equally importantly, it was followed by three more years ofstrong growth. In a similar vein, an economic slowdown has the potential to change the landscape overthe next few years depending on how deep it is and how long it lasts.

Apart from the potential for lower demand, there are other pitfalls awaiting the shipping industry.Clarksons recently calculated that $300Bn of the $488Bn shipping orderbook still requires financing. Thecredit crunch has means that banks are less willing to lend. Failure to secure finance could result inshipowner casualties. However, it is worth noting that the Middle East has almost unlimited funds so itmay just be a case of looking for debt in new directions.

The key factors

Tanker supply - more positive than it was, but perhaps the card has been overplayed with ownersexpecting conversion sales to continue.

Tanker demand (1) shadow of world recession means that crude oil demand risks are on the downside,(2) wild cards bubbling unlikely that the year will be as quiet as it was last year expect hotspots possibly Venezuela to help underpin tanker demand.

2008 above average tanker freight rates but risks on the downside. Take cover in 2009

Overall, Teekay forecast 5% tonmile demand growth and 3-5% fleet growth. This seems a reasonablyeven handed forecast (assuming no economic melt down) and would suggest that - notwithstanding wildcard events - tanker freight rates will be a bit like in 2007, fairly lacklustre - but above average for the

last 10 years or so.

Looking further ahead - even though the ordering fever was passed to the dry bulk sector many monthsago, the structural problem surrounding tanker supply will continue to play an important role indetermining the course of tanker freight rates as accelerating deliveries in 2009 causes supply pressureto mount (2009 55MnDwt of new tonnage compared to 45MnDwt in 2008). You only have to look at thenumber of companies looking to diversify their spheres of interest (either by buying shares in othercompanies or buying different vessel types) to know that tanker shipowners are more than a littleworried.


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Tanker Rates/Prices

Average tanker earnings in 2007

were the lowest since 2003, but2007 was still the fourth best yearin the last decade and the sixthbest based on weighted averageearnings. While the year finishedon a belated high, freight rateswere in an almost counter seasonalmode leading up to this finale.

Why were rates so poor 7-11/07 This was due in part tohigh oil prices coupled with asituation where future prices werebelow spot prices (backwardation),which meant that charterersdeferred crude oil purchases.

With the expectation of lowercrude oil prices around the corner,charterers were prepared to acceptstronger than average stock drawdowns in the Atlantic Basin andAsia. Relatively low product pricescompared to crude prices wasanother factor as the lack ofincentive for refiners meant thatrefinery utilization was relativelylow.

High bunker prices, the influx oftanker newbuildings and theabsence of any significant

catastrophic events (such ashurricanes), and seasonality wereother factors contributing to thelull in tanker earnings during thisperiod. Despite persistently lowfreight rates vessel valuescontinued to climb skyward asshown by the VLCC vessel valuechart.

Why did tanker rates go sohigh at the end of 2007 afterseveral depressed months,earnings finally surged from lateNovember signalled by OPECsannouncement of a 0.5Mnbdincrease in its effective quota. Akey factor proved to be SaudiAramcos (1)decision aroundThanksgiving to lower prices to USbuyers by $5-11bbl which servedto stimulate ME-NAmr VLCC trade.The Hebei Spirit oil spill off SouthKorea (7thDecember) addedfurther momentum to the ratesurge as did the slowdown in fleetgrowth caused by the growingphenomenon of conversion sales

(see tanker fleet section) and thenarrowing of backwardation whichhelped to bring refiners into themarket thus creating additionaldemand.

(1) Saudi Arabia added furthersupport to the US economy bycountering Iran and asserting thatOPEC should not switch to pricingoil in euros to offset the decline inOPEC earnings caused by the weakdollar because of the likely -veimpact on the US economy

Saudi Arabias actions to discountoil sales to the US served as atargeted artificial oil market

stimulus which had adisproportionate impact on ratesacross the tanker sectors. With theVLCC sector the main beneficiaryof the stimulus, a disconnect wascreated between VLCC earningsand those of other sectors.

In announcing their 4Q07 results,Frontline (in particular) and OSGwere able to crow that theirrespective spot trading VLCC fleetswere able to take advantage of therate spike spikes they contend

nearly always benefit the VLCCsector above other tanker sectors.A counter position was articulatedby Teekay in presenting their 4Q07results pointing out that the ratespike was short lived and thedisconnect between tanker sectorsis always temporary.

Typical first quarter for 2008By January 2008, the rate surge

was over. It can be argued thatthis is in line with normal seasonalpatterns and it is indeed impossibleto infer from current rates how themarket will develop through therest of the year. There are amorass of signals swirling aroundthe market not least the brewingtension between the US and OPECover the ExxonMobil/Venezueladispute and OPECs apparentintransigence with regard to raisingits production quotas.

Tanker Fleet

Tanker supply was relatively stableat around 300MnDwt during theearly 2000s, but by 2003 thecurrent phase of dramatic fleetgrowth was underway. It isestimated that fleet growth hit5.8% in 2007, which is slightlyabove average growth rates for theperiod 2003-2006 (5.3%).

Tanker deliveries have beenhistorically high for the last fiveyears averaging 29MnDwt per

year, but a higher magnitude waveof deliveries has started to washthrough the market with 45MnDwtin 2008, 53MnDwt in 2009, and43MnDwt in 2010.

There are still no signs of anincrease in tanker scrapings whichhas been stubbornly low for thelast three years (averaging3.8MnDwt, with just 3.5MnDwt in

2007). However, the fall out fromthe Hebei Spirit accident may beset to change that and bringforward the scrapping of single hutankers ahead of the IMO phaseout schedule for most tankers of2010. OSG is targeting 2009 whenSH vessels are marginalized at 1015% of the market as the tippingpoint when charterers will finallygive up on this sector and forcesingle hulls out.

Despite the prospect of higherscrapping, it is not the story of themoment with regard to fleetremovals. Today older units of all

sizes (but particularly VLCCs) arebeing sold in significant numbersfor conversion to dry bulk carriersor FPSOs.

It is estimated that in 2007,14.5MnDwt were sold forconversion (which includes around2.5MnDwt for owners who retainedownership but decided to convert)It may be that conversions ratherthan scrapping continues to be thestory up to 2010.

2 The Year SoFar - Chart Wall


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Investor Activity

Tanker investors were busy againin 2007. In the newbuildingmarket, the oversized orderbookcoupled with rising vessel valuesand the popularity of dry bulknewbuildings meant that activitydid slow to almost half the rate

seen in 2006. However, 2006 wasan exceptional year, with ownersordering vessels to try and cash inon the next tanker sweet spot,which they anticipated would occurafter the exit of the rump of thesingle hull fleet in 2010.

South Korean shipyards dominatethe current tanker newbuildingleague table, but 9 Chinese yardsare in the top 25 with DalianShipbuilding having the largesttanker orderbook of any of theChinese yards. There are currently30 different yards with 1MnDwt+of VLCC tonnage currently on

order.

In the secondhand market, risingvessel values did not prevent salesreaching their highest level since2004 and the second highest levelsince 2000. The market wasfuelled in part by conversion sales,which have continued unabated atthe start of 2008.

Crude Oil Demand

World crude oil demand increasedby 1.1Mnbd (+1.4%) in 2007according to the IEA. This increasecompares to increases of 0.9Mnbdin 2006, 1.4Mnbd in 2005 and3.2Mnbd in 2004. While the size of

the surge in demand in 2004 tookthe world by surprise, the IEAfound it necessary to revise downboth demand estimates for 2006and 2007 in the face of anunderperforming world economy.

Crude Oil Production

After concerns about the securityof crude oil supply (and availabilityof spare capacity), world crude oil

production increased fairlyconsistently between October 2005(83.5Mnbd) and July 2006(86.1Mnbd) underpinned byincreased OPEC and Non-OPECproduction.

Thereafter, falling crude oil pricesfrom mid 2006 precipitated anunofficial cut in OPEC production.OPEC production was cut back

further in October 2006 with theannouncement of a 1.7Mnbd quotacut (1.2Mnbd effective cut). WhileOPEC production slowed in 2H06,Non-OPEC production remainedstrong across almost all regionsbut led by Russia.

At the start of 2007, both Non-OPEC (Norway was one of thepoorest performers) and OPECproduction started to contract andthe oil price started to come underupward pressure as fears aboutthe availability of productioncapacity surfaced once again.

From November OPEC increased itseffective quota by 0.5Mnbd. HigherOPEC production was led by SaudiArabia, and coincided with higherNon-OPEC output. Ultimately, theincrease in production helped fuelthe tanker rate surge during 4Q07,but it did nothing to reduce themomentum of rising oil prices.

OPECs announcement at its recentmeeting in March that it would notincrease its production further was

described as a mistake by Bush.OPEC has consistently blamedrecord oil prices on marketspeculation, geopolitical risks andweakness in the US dollar, ratherthan a lack of supply in themarket. Bush will be furtherexasperated by the OPECsdecision not to call anextraordinary meeting in April toreassess whether the market is

well supplied with oil although itsays there is the option forinformal meetings.

Crude OilExploration

Over the last three years, therehave been concerted efforts to putas many rigs as possible into thewater in order to find new reserveto bolster official crude oil spareproduction capacity figures.

Following the mid year seasonaldip in activity, world rig activity isonce again close to record levels.The US Gulf component of theworld active rig count is non-seasonal and rig numbers arealready at record high levels.

Crude Oil Stocks

Crude oil stocking and destockingfollows a seasonal pattern.


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However, overlaying this in recentyears has been a concerted effortby governments and industry toincrease the base level of stocks inthe face of mounting fears aboutthe security of crude oil supplies.

From mid 2007, there was a sharpcut in crude and product stocklevels in part due to high crude oilprices coinciding with a

backwardation phase in the futuresmarket.

Faced with these twin factors,charterers were prepared to seestocks fall in the short term withthe opportunity to restock whencrude oil prices had subsided.However, even with crude oil spotprices remaining strong throughout1Q07, there are finally signs ofstock building activity e.g. EIAreported that US crude oilinventories increased for 7consecutive weeks ups to the endof February.

Crude Oil Prices

In 2006, crude oil prices peaked inJuly at around $80/bbl. However,record world crude oil productionand record stocks contributed to abelief that fears about the fragilityof crude oil supply were overstatedand precipitated a steady declinein crude oil prices to below $60bblby end 3Q06.

At this point, OPEC which hadalready started to cut backproduction declared its intention todefend a $60bbl floor andannounced a 1.7Mnbd quota cut(1.2Mnbd effective cut) in October2006.

During 2007 and into early 2008,oil prices have been on the rise

again following an explosivetrajectory towards $100bbl. TheWTI end of day spot price finallywent through the $100bbl barrierat the end of February 2008.

OPEC has provided an inadequatelagged response to rising worldcrude oil demand by delaying itsofficial production quota rise untilNovember 2007.

This lagged response hascontributed to the rising oil price a rise that has been exacerbatedby the weak dollar, persistent fearsabout product stocks, and theactivities of speculators.

OPECs insistence at its March2008 meeting that the world iswell supplied with oil hasantagonised America and thestand-off has the potential to keepoil prices high although manymarket commentators haveexpressed an opinion that priceswill fall back to around $80bbl thisyear.

Crude oil is not the onlycommodity to have seen sustainedprice rises in the last few years.See the UN Commodity price chartto see how industrial bulkcommodities and latterlyagricultural commodities have alsobeen on the rise. Chinese demandis a key factor underpinning therise in commodity prices in recentyears.

China Crude Oil

Imports

China crude oil import growthcontinues to build on the initial2004 surge. For the ytd (Sept2007), imports are up 14%.

The strength of crude oil imports isjust part of the story of Chinasunrelenting growth story with totalimports and exports running wellahead of last years levels.


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US Energy Facts

Pu l s e Se r i e s

UnitedStates SummaryCrudeOilandProductsData Source:EnergyInformationAdministration

2001 2002 2003 2004 2005 2006 2007 2010 2020 2030

CrudeOilProduction 000bd 5,801 5,746 5,681 5,419 5,178 5,102 5,910 6,390 5,630

Alaskan 000bd 963 984 974 908 864 741

Lower48States 000bd 4,839 4,761 4,706 4,510 4,31 4 4 ,36 1

OtherDomestic Production 000bd 3,140 3,700 4,010 4,590

NetImports 000bd 12,450 11,640 12,700 14,810

TotalImports 000bd 1 1, 87 1 1 1, 53 0 1 2, 26 4 1 3, 14 5 1 3, 71 4 1 3, 70 7

CrudeOilImports 000bd 9 ,3 28 9 ,1 40 9 ,6 65 1 0, 08 8 1 0, 12 6 1 0,1 18

FinishedPetroleumProducts 000bd 1,537 1,409 1,582 1,764 2,07 5 1 ,81 1

NaturalGasLiquids 000bd 250 199 271 305 374 360

OtherLiquids 000bd 756 783 746 988 1,138 1,419

Consumption 000bd 20,650 21,180 23,010 24,930

TotalCrudeOilandPetroleumProducts

(Incl.SPR) 000bbls 1,586,349 1,547,910 1,568,303 1,644,805 1,697,604 1,719,506

SPR 000bbls 550,241 599,091 638,388 675,600 684,544 688,605

CrudeStocksexcludingSPR 000bbls 311,980 277,614 268,875 285,741 323,704 312,276

PetroleumProductsS to ck s 0 00 bb ls 7 24 ,1 28 6 71 ,2 05 6 61 ,0 40 6 83 ,4 64 6 89 ,3 56 7 18 ,6 25

RefineryNetInputs 000bd 1 5, 12 8 1 4, 94 7 1 5, 30 4 1 5, 47 5 1 5, 22 0 1 5, 24 2

UnitedStates SummaryEnergyMix Source:EnergyInformationAdministration

2001 2002 2003 2004 2005 2006 2007 2010 2020 2030

Production

CrudeOilandLeaseC on de ns at e Q ua dBtu 11.0 10.8 11.1 12.7 13.8 12.1

NaturalGasPlantLiquids QuadBtu 2.3 2.4 2.3 2.2 2.3 2.2

DryNaturalGas QuadBtu 18.6 19.0 19.2 19.6 20.3 20.4

Coal1/ QuadBtu 23.2 23.8 23.3 23.3 25.6 31.2

NuclearPower QuadBtu 8.2 8.2 8.3 8.3 9.2 9.9

Hydropower QuadBtu 2.7 2.9 2.6 2.9 3.0 3.0

Biomass2/ QuadBtu 2.8 3.0 3.3 4.1 4.9 5.5

OtherRenewableEnergy3/ QuadBtu 0.7 0.9 1.0 1.5 2.0 2.5

Other4/ QuadBtu 0.4 0.4 0.8 0.5 0.6 0.7

Total QuadBtu 69.8 71.3 72.0 75.2 81.6 87.5

Imports

CrudeOil QuadBtu 22.1 22.1 21.6 21.2 22.4 26.2

LiquidFuelsandOtherPetroleum5 / Q ua dBtu 7.2 7.2 7.2 6.1 7.1 8.0

NaturalGas QuadBtu 4.4 4.3 4.5 4.9 5.4 4.9

OtherImports6/ QuadBtu 0.8 1.0 0.9 0.9 1.9 2.7

Total QuadBtu 34.6 34.6 34.3 33.1 36.9 41.7

Exports

Petroleum7/ QuadBtu 2.3 2.6 2.7 2.8 2.9 2.9


Coal QuadBtu 1.3 1.3 1.4 1.2 0.9 0.9

Total QuadBtu 4.3 4.6 4.8 4.8 4.8 5.2

Discrepancy8/ QuadBtu 0.3 1.3 0.2 0.1 0.2 0.2

Consumption

LiquidFuelsandOtherPetroleum9 / Q ua dBtu 40.5 40.4 40.4 40.8 44.4 48.2


Coal QuadBtu 22.8 22.5 22.5 22.9 26.2 31.7

NuclearPower QuadBtu 8.2 8.2 8.3 8.3 9.2 9.9

Hydropower QuadBtu 2.7 2.9 2.6 2.9 3.0 3.0

Biomass10/ QuadBtu 2.5 2.5 2.6 3.1 3.8 4.2

OtherRenewableEnergy3/ QuadBtu 0.7 0.9 1.0 1.5 2.0 2.5

Other11/ QuadBtu 0.2 0.2 0.2 0.2 0.2 0.2

Total QuadBtu 100.4 100.0 101.3 103.6 113.6 123.8

Prices(2006dollarsperunit)

Petroleum(dollarsperbarrel)

LowSulfurLightPrice12/ 58.3 66.0 67.1 66.9 61.1 71.9

ImportedCrudeOilPrice12/ 50.4 59.0 62.1 58.9 52.8 62.1

NaturalGas(dollarspermillionBtu)

PriceatHenryHub 8.9 6.7 6.8 6.6 5.9 7.2

WellheadPrice13/ 7.6 6.2 6.0 5.9 5.3 6.4

NaturalGas(dollarsperthousand cubicfeet)

WellheadPrice13/ 7.8 6.4 6.2 6.1 5.4 6.6

Coal(dollarsperton)

MinemouthPrice14/ 24.1 24.6 25.3 24.5 22.6 23.5

Coal(dollarspermillionBtu)

MinemouthPrice14/ 1.2 1.2 1.2 1.2 1.1 1.2

AverageDeliveredPrice15/ 1.7 1.8 1.8 1.9 1.8 1.8

AverageElectricity(centsperkilowatthour) 8.4 8.9 8.9 9.1 8.6 8.8

Shells 12 Point

Plan for US Energy

Policy

-- Greater access toconventional oil and gas in andoff the US.

-- Development ofunconventional oil and gasresources, particularly oil shalein Colorado, Wyoming, andUtah.

-- Greater emphasis on cleancoal technology, particularly

coal gasification or integratedgas combined cycle technology,can allow the US to use coal togenerate electricity whilecapturing and sequestering

carbon dioxide.

-- Supplementing US naturalgas supply with imported LNG.

-- Moving biofuels beyond thefood parts of grain to biofuelslike cellulosic ethanol madefrom the stalks and othernonfood parts of grain.

-- Creating wind energydistribution systems.

-- Pushing solar research tomake solar energy commercially

viable.

-- Developing a hydrogen fleetand fueling infrastructure.Hydrogen as an automotive fuelis in the pilot stages with only afew demonstration projects inthe US.

-- Improving energy-efficientdesigns of various energyproducts including light bulbsand automobile engines. Thisincludes more energy efficiencyin urban planning.

-- Developing a federal

framework for measuring andcontrolling greenhouse gases.Shell advocates an effective USclimate change policy including

a cap-and-trade program.

-- Educating citizens on energyissues, starting with programsin the schools.

-- Staying open to other viableenergy alternatives, includingas-yet-undiscovered optionsalong with nuclear power,geothermal energy andhydropower.


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3. 2008 Will There Be Any Tanker Surprises?

3.1 Tanker Shipping in 2008 A story already toldIt can be argued that the script for 2008 was written in 2006 when it looked like the ordering boom ofthat year had got out of hand to such an extent that it would ultimately lead to a day of reckoning for

freight rates probably in 2008, as excess tanker deliveries started to swamp the market before peaking in2009.

In 2006, there was good reason for an ordering surge. Tanker owners were building new vessels toreplace the ageing single hull fleet that was to be swept away by 2010 under IMO phase out regulations.However, the magnitude of the surge was too great and the shadow of the orderbook has hung over themarket ever since. Today the orderbook stands at close to 160MnDwt, while the fleet to be phased out is66MnDwt, and this means that potentially the tanker fleet could expand by more than 20% over the nextthree years.

However, the supply-side equation - that had looked so cut and dried - added an extra, unexpectedparameter in 2007 with a new surge this time in tanker conversion sales for the FPSO and dry cargo

markets. The overwhelming number of conversion sales involved single hull vessels with very limited lifeexpectancy under IMO phase-out. Therefore, the emergence of this market has had the effect ofaccelerating the removal of single hull tonnage and alleviating the pressure on tanker supply at least inthe short term. If the conversion market remains buoyant, then this will undoubtedly have a positiveimpact on the tanker market in 2008 but, if it does, can it turn 2008 into a good year for tanker freightrates as some commentators believe it will.

Looking further ahead, unless the conversion market starts to attract more double hull converts then theoverall fleet supply equation for 2008-2010 will remain very similar, and the day a reckoning for tankerfreight rates will simply have shifted to a date in 2009. However, if double hulls start to be converted outin significant numbers then perhaps the great escape is a possibility. Of course converting relatively oldsingle hull tankers does carry technical risk (particularly for dry cargo trading) and not all owners wouldbe comfortable with the process.

Before looking in detail at some of the other potential drivers likely to impact on tanker shipping in 2008,it is worth drawing attention to a broad overview of the global political and economic landscape becausetoday tanker shipping is facing quite an extreme environment and wild cards abound. China is still

powering the world economy, but it has been knocked of the front page by relentless discussion ofrecession, the rise and rise of commodity prices and a number of countries big and small lining up to flextheir muscles e.g. Russia, Iran and Venezuela, and bring their disputes with the west to a head.

A healthy conversion market will be an important factor in taking the steam out of fleetgrowth in 2008. However, if 2008 turns from what - at the end of 2006 - seemed likely to be adifficult year for freight rates to a good year, then it will be wild cards rather than theconversion market that will be the main driver

Of course, it is also important to be aware of developments in other sectors because there can be knockon effects for the tanker market as demonstrated by the dynamic relationship with the dry cargo andFPSO markets last year. In 2008, structural changes in the worlds energy mix may start to take greatershape as the world starts to focus on how it can eventually wean itself off oil.

Some have described 2008 as the year of LNG. Michael Stoppard, CERA senior director of global gas

asserts that the stage appears set for natural gas to become more of a global energy commodity in 2008and 2009 than in the past, largely because of an expanding LNG industry. He forecasts that world LNGliquefaction capacity will grow by almost one-third to 341 billion cu m in 2 years, and that 58 LNG shipswill be added to the existing 251.

ExxonMobil recently announced huge extra investment in the LNG sector. Over the next 3 years, itexpects to startup multiple projects across the full value chain of the LNG business, includingproduction, transportation, and distribution. ExxonMobil will also commission four of the world's largestliquefaction facilities and new LNG ships, which can carry 80% more natural gas than conventionalships. According to chairman and CEO Rex Tillerson "ExxonMobil will almost double its production ofLNG over the next 3 years, providing greater supplies of this clean-burning energy source for powergeneration and for industrial and domestic use."


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3.2 Potential Drivers for Tanker Market in 2008

Positive Wild Cards Negative

Shipping

Continuing vessel conversion sales to

alleviate the pressure on fleet growth -driven by dry bulk and fpso conversions.

Teekay estimate that 25 fpso projects willcome to fruition in each of the next 5 yearsand that a number of these wil l requireconversion tonnage. Dry bulk freight ratesare off their peak, but this sector willcontinue to produce conversion buyers.

Fall out from Hebei Spirit - it seems thatFar Eastern countries are becoming

increasingly reluctant to take single hulltonnage and this factor will further offset

the impact on fleet growth of vesseldeliveries.

Oil Industry

IEA Crude Oil Demand Growth Forecast

+1.9% (+1.7Mnbd) despite trimmingforecasts in response to increasing concernsabout world economic recession, the IEAforecasts demand growth to beat 2007+1.4% (+1.1Mnbd). Growth expectationshave been cut for developed economies andthis has only partly been offset by improvedexpectations for the Middle East and Asia.OPEC are less optimistic about crude oildemand in 2008 forecasting growth of+1.3-1.5%

Need to rebuild stocks OECD industrystocks reached a new high level by mid2007, but a stronger than expectedseasonal drawdown has left stocks in themiddle of the five year average range. Withconcern about the security of crude oilsupplies, the IEA expect a stronger than

average stock build during 2008.

Surge in new crude oil productioncapacity coming on stream (1) IEAforecast an additional 3.1Mnbd OPECcapacity for 2008 up from 1.3Mnbd in 2007.However, OPEC projects may be held back ifit decides to micro manage oil prices. OPECitself expects non-OPEC production toincrease by 1Mnbd in 2008 and for thisgroup to therefore shoulder most of theextra burden of demand increase. It isimportant to note that the market will takecomfort from any new additions only if themarket feels the spare capacity will beavailable when needed. OGJ point to Russiaand Africa (2)as most important producinggrowth regions.

Oil Co exploration budgets Not animmediate hit but adds to supply feelgood (3)National oil companies, who willcontrol a growing share of oil reserves havetended to invest less in exploration andinnovation than international majors. Thatmay now be changing as many companies

are scaling up oil and gas projects tocompensate for declining fields. OGJ alsopoints to improved field recovery boosting

reserves and adding to feel good.

World Economy

China Olympics China is determined tohave a good news year

Nature

Hurricanes 2007 produced a relatively

quiet hurricane season. The prospects forthe 2008 season can be tracked at

http://hurricane.atmos.colostate.edu/

Global Warming The northernhemisphere winter has been warmer thanaverage. In December, January and

February, the average temperature inStockholm was 36 degrees the higheston record since record-keeping began in1756. One of the key ingredients for a

strong 4Q08 will be a reversion to morenormal weather patterns

Geopolitical Hotspots

The following hotspots have all beenactive in recent months and have created

supply uncertainty that has helped to

underpin the rise in crude oil prices. Thefuture temperature of all of thesehotspots is difficult to predict but it isquite likely that one of more of these

zones will continue to bubble.

Iran no clear trajectory for Iran/Worldrelations obvious potential for majorimpact on shipping markets positive ornegative

Russia new president but relationshipswith Europe and the US are poor. Bothenergy and Serbia have the potential tobecome flash points in 2008

VenezuelaThe tension betweenVenezuela and ExxonMobil/USgovernment over the compensation for

ExxonMobil's nationalized projects, andthe consequent freeze of $12 billion ofthe Venezuela's state oil companysassets still has a way to run. Venezuelanimposed an embargo on Exxon afterthreatening to cut off all shipments to theUnited States.At its meeting 5/3 OPECannounced that it would supportVenezuela in its dispute with ExxonMobil

Concerns thatIraq will not be able tosustain its current strong crude oilproduction performance

Nigeria possible new phase of civildisturbances

The Growing power of OPECrevenues were up 10% to $674Bn in2007 from $612Bn in 2006 and itwelcomed new members with recentconverts Angola joining and Ecuador

rejoining the collective. Growing powerhas led to greater tensions with the west.It may be that the debate about whetherOPECs micro management of the oilsupply or the influence of speculators andthe weak dollar is responsible for$100+bbl comes to ahead. OPECssupport of Venezuela in its dispute withExxonMobil will exacerbate tension withUS government. Saudi Arabia has actedas a moderator so far.

Shipping

Hitting the Wall of Ships 44MnDwt

forecast for delivery in 2008 up from30MnDwt in 2007. In 2007, scrapping

and conversion sales removed3.5MnDwt and 14.5MnDwt respectively.Note that not all conversion vesselsexit the market immediately also notethat figure for conversion sales includesvessels earmarked for conversion by

their current owners.

Oil Industry

Continued High Oil Price Erastarting to undermine demand?Althoughweak dollar means that oilprices appear artificially high. Alsoprices expected to moderate to $50-$80 (average estimate = $76bbl) in

2008 (4)

Insufficient refinery cap until

2009/10 refinery bottlenecks canhave both positive and negative effectson tanker freight rates. New refineriesare being planned like rising oil coexpenditure this creates feel goodfactor (5)

Latin American crude oil supplyrevised down for 2008 however,the long term prospects for LatinAmerican output were given a boost inJan 2008 when Petrobras announcedthe discovery of the Jupiter field, ahuge natural gas and condensate (verylight oil) field which could equal theTupi oil field in size (5-8 billion BOE).

Faster than expected shift toethanol in Atlantic Basin

World Economy

Is a recession building?

GDP growth in the OECD regionforecast to slow from 2.7% in 2007to 2% in 2008

China Inflation 7.1% Lower GDPforecast 9-10% in 2008 comparedto 11.4% in 2007. There may be alagged effect as the Olympicinvestment tails off (stadium airport train station). As less steel is requireddomestically, it may be that China steelexports will start to rise. The spot light

on the China/Sudan relationship has ledto the politicization of the Olympics.

Does this presage further troubleahead?

Japan banks hidden sub primeexposure report end March

13/2/2008 the Swiss connection (UBSand Credit Swiss)


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Notes accompanying the table outlining potential drivers for the market in 2008

(1) Cr u d e o i l s t a r t - u p s w h a t i s t h e n e w r e q u i r e d o i l p r i ce Oil companies are being forced to develop oil fields inincreasing 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. Estimates for oil

price levels in 2008 range from $50-100bbl, although oil companies seem to be basing their budgets on an oil price of around

$60bbl. Infact, the IEA have picked a slightly higher range and talks about $60-80bbl as the new benchmark for oil

companies, while 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 $500,000-600,000pdif 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 Africas deepwater resources proposes a well cost of up to $100Mn/well.(2) W i l l W e s t A f r i c a r e m a i n t h e m a i n s o u r c e o f n e w o i l d is c o v e r ie s - 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 Africas oil production to grow from 11.5Mnbd to

16 Mnbd. This will account for 15% of global production capacity, he said. Abubakar YarAdua, group managing director,

NNPC claims West Africa, the Gulf of Mexico, and Brazil, are estimated to hold 75% of the worlds undiscovered deepwater

reserves.

(3) O i l c om p a n y e x p l o r a t i o n b u d g e t s - OGJ exploration budgets survey not due out until April. Expect growth overall, butlittle growth in US in part due to acute skill shortages. The following are a selection of recent capex budget announcements.

E x x o nM o b i l announced plans for capex of $125Bn over the next 5 years. BPwill spend $21-22 Bn in 2008, up from $19 Bn

in 2007 because of sector inflation and growth. Some $15 Bn was earmarked for upstream, $5 Bn for downstream and $1.5

Bn for the other businesses, including Alternative Energy. U l t r a P e t r o l eu m Co r p . budget $755 Mn capex in 2008 (+6%) up

from $714.5 Mn in 2007.T o t a l budget USD19 Bn capex in 2008 (+19%) up from USD16 Bn in 2007 B r i g h am E x p l o r a t io n

budget USD134.4 Mn capex in 2008 with 76% for drilling which is +6% up on 2007 R an g e R e s o u r c e s budget USD1.07 Bncapex in 2008, +17% on 2007. Oil Co exploration budgets - Its all about energy security, H.O. Ajumogobia, Nigeria

minister of state for energy national oil companies, who will control a growing share of oil reserves have tended to invest less

in exploration and innovation than international majors. That may now be changing as many companies are scaling up oil

and gas projects to compensate for declining fields.

(4) O i l P r i c e f o r e c a s t s also see (1) - WTI to average $76/b in 2008 (UniCredit $95; BNP $89; Danske $83.5; StandardChartered Bank $82; Natixis $67.7.The price of oil how high will it go is $80bbl the new target for OPEC ($65bbl forSaudi Arabia). Last stated price band was $22-28 a barrel (was scrapped in 2005) Libya, Algeria suggested price band of

$55-60 in 2006 but was rejected by membership. Tony Considine, TNK-BP downstream executive vice-president talks about

Russias 100 mini refineries that have sprung up, which will be competitive if oil prices are at $60/bbl." (Q!) According to John

Hess "While energy's share of personal spending in the US is 6%, it is still much less than food, which is 14%; housing, 15%;

and medical expenses, 17%. The strength of coal and LNG provides a floor. Will oil be priced in Euros the $ has lost

considerable value compared to the euro since 2000 (40%+). There are calls from within OPEC to switch its allegiance from

the $ to the euro within a decade. Iran already pricing in Euros Venezuela in favour Saudi Arabia against.

(5) R e ce n t a n n o u n c em e n t s o f n e w r e f i n e r y b u i l d s a n d e x p a n s i o n p l a n s : F e b . 2 8 -- Repsol-YPF SA, planning to double thecapacity of its 100,000 b/d Cartagena refinery in Spain, has awarded a $1.3 billion contract to Fluor Corp. for the project

management of much of the project. The $4.8 billion project represents the largest refinery upgrade and expansion project in

Spain in the past 30 years. Completion is set for 2011. F e b . 2 6 -- Abu Dhabi will build a 417,000 b/d refinery, further

boosting the emirate's existing 485,000 b/d refining capacity, reported the Emirates News Agency. F e b . 1 5 -- Trinidad and

Tobago's Minister of Energy and Energy Industries Conrad Enill announced that the twin-island nation will construct a $3-4

billion refinery next to its existing 168,000 b/d refinery at Pointe-a-Pierre. The Minister said, although the final figure is not

yet in, he expects the refinery's capacity to be in the order of 200,000 b/d.F e b . 1 2 -- Total SA will build a 50,000-b/d cokerand desulfurization, vacuum distillation, and related units at its 231,000 b/d refinery in Port Arthur, Tex. The $2.2 billion

increase in the refinery's deep-conversion capacity will boost output of ultralow-sulfur automotive diesel by 3 million

tonnes/year. Commissioning is scheduled in 2011.F e b . 8 -- Hunt Refining Co. plans to install two new units at its

Tuscaloosa, Ala., refinery to increase crude throughput by more than 30% to 69,000 b/d, double its production of gasoline

and diesel for the Southeastern US, and enable it to meet future benzene regulations. Project completion slated for 2010.


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3.3 Tanker Market Outlook for 2008

Tanker Supply Prospects projecting fleet supply for the tanker sector has become morecomplicated than in the past. Not only is it necessary to factor in deliveries from the current orderbookand scrapping based on the IMO drop dead schedule for single hull tankers, it is now necessary to take

account of the growth in conversion sales which are giving ageing tankers a second life option away fromthe tanker market. The following scenarios assume there is no recession and crude oil demand follows

IEA forecasts. If there is a recession then the rate of tanker scrapping could accelerate considerably.

Scenario 1 Conversion Sales Stall Assuming there are no further conversionssales, then the fleet will expand by 41.8MnDwt in 2008 which is equivalent to 10.7% fleetgrowth, which compares to an average of 6% per annum for the last three years (2005 +5.4%, 2006

+7.2%, 2007 5.8%). The table below focuses on scrapping across the VLCC, Suezmax and Aframaxsectors. These are the sectors most effected by conversion sales, although certain owners in the offshoresector like Teekay operate in the sub Aframax sector.

Vessel Total Cumm ulat ive Net Fleet Change

Category 2008 2009 2010 2011 2012 2013 2014 2015 (Takes account of vessels on order)

U/VLCC>=200,000

1 1 100 1 5 108

Suezmax>=120,000,=80,000,=200,000

39 20 43 1 5 108

Suezmax>=120,000,=80,000,


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Note (1) The information in these charts is based on the trading fleet (year of build >1978) and orderbook as at start February 2008Note (2) Phase-out includes single hull tankers and tankers with double sides or double bottoms, although tankers with double sides ordouble bottoms are assumed to benefit from life extension from embarking on CAS (condition assessment scheme)Note (3) Excludes U.S. Flag vesselsNote (4) Excludes Combined CarriersNote (5) Phase-out takes into account vessels sold for conversion to dry bulk carriers or FPSOs and other types

Additional notes:

The two fleet supply scenarios assume the same delivery scenario. Scrapping assumptions are also the same, although because tankerssold for conversions are usually single hull vessels close to their sell by dates under IMO phase-out, it is necessary to make sure single

hull conversion sales are removed from the scrapping forecast

Forecast Deliveries from orderbook 2/08: 2008 = 44.9MnDwt 2009 = 52.9MnDwt 2010 = 42.8MnDwtForecast Scrap under IMO phase out: 2008 = 3.1MnDwt 2009 = 2.8MnDwt 2010 = 59.5MnDwt

In 2007, it is estimated conversion sales (combined with other vessels committed for conversion by their current owners) were brokendown as follows: total conversion = 14.5MnDwt (comprising VLCCs 38 vsls/9.8MnDwt, Suezmax 15 vsls/2.2MnDwt, Aframax 22

vsls/2.1MnDwt, Other 9 vsls/0.4MnDwt).

VLCC conversions for the period 2008-2009 are estimated at 15MnDwt, which is in line with an estimate (January 2008) of 19.4MnDwtfor the longer period 2008-2010 from Clarksons. Of course, there are technical risks particularly associated with converting VLCCs todry bulk trades. A mishap might undermine the conversion market. It also the case that conversions sales would fall off if dry bulk

freight rates failed to continue to deliver.

The number of vessels being removed from the fleet 2008-2010 is the same in both forecasts. However, in forecast 2 the removals aremuch more evenly distributed.

A recent forecast by OSG for the V/ULCC fleet anticipated fleet contraction up to at least August 2008

Freight Market Scenarios

The key known freight market drivers in 2008 will be China (a banker in Olympic year), the worldeconomy (prospect of recession), OPEC (on the wrong side of the US government for its support ofVenezuela and for failure to increase production), and conversion sales (which are in turn dependent onthe strength of the dry bulk and FPSO markets). Wild card geopolitical political events may well have amajor role to play this year with Russia, Iran, and Venezuela all looking to rock the boat. Under all threescenarios set out below, oil prices are expected to recede from their current high (albeit weak dollarinflated) levels.

Scenario 1 Worst case

Recession + OPEC cuts production to support prices -Japanese banks belatedly report terrible

results at the end of March because of their high exposure to the US subprime market. Recession hitsworld economies causing oil demand to stall even though crude oil prices fall into $60-80bbl range. EvenChina is unable to ride to the rescue as it is consumed by its own battle with rampant inflation (risingfrom 7.1% at the start of the year). OPEC, which couldnt cut production before because it didnt want toget the blame for triggering a world recession, now cuts production to support prices and tanker demandis stifled. With new tonnage swamping a stagnant market, pressure to scrap vessels early increasesespecially as the dry market is struggling with its own problems and this means that the 2ndlife/conversion outlet dries up. Oil tanker owners flush with cash do not rush to scrap, but nonethelessfleet growth moderates to 5-7%. Geopolitical hotspots go cold and the hurricane season blows out earlyleaving freight rate in the doldrums with no spikes. Vessel values for SH tankers fall allowing offshorecompanies to pick up cheaper vessels for FPSO projects.

Scenario 2 Best case

Recession is avoided + wild card events kick in The credit crunch is contained and talk of globalrecession becomes just background chatter. OPEC and non-OPEC production starts to come on streamraising spare production capacity to comfortable levels (4Mnbd) supply security fears moderate. Crudeoil prices come under downward pressure falling well below $100bbl and crude oil demand starts tooutpace IEA forecast levels. The world is caught up in the build up to the Beijing Olympics - theSpielburg/Sudan hiatus is a distant memory. Vessel conversion sales continue and tanker fleet growthmoderates to 5-7%. Tanker freight rates start to pick up during the spring and summer as oil companiesseek to take advantage of falling crude oil prices to replenish their stocks which were run down duringthe high crude oil price environment of 2H07 in an above average seasonal build. At this point, the notionof a best case scenario only applies to tanker rates which spike dramatically as the US is beset by the

twin trials of a severe hurricane season and deteriorating relations with Venezuela, which cuts off crudesupplies. At this point the wild card effect kicks in and the sky is potentially the limit for tanker rates.


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Scenario 3 Medium Case

Recession is avoided no major wild card events this is like the best case scenario without thefeel good factor or the catastrophic wild card denouement. With annual tanker supply growth running at

5-7% and annual crude oil demand growth at 5% running as predicted (by the IEA +1.9%) taking intoaccount the tonmile multiplier effect (as forecast by Teekay Corporation in March 2008), tanker freightrates do very little to distinguish themselves from rate levels in 2007 except that rate strength in moreevenly distributed through the year as lower oil prices mean that the seasonal stock drawdown is muchless severe. There is the potential for a VLCC rate spike as this fleet is actually expected to contractslightly during 1H08 but this would probably depend on the added impetus from a wild card event.

Tanker Values

It is probable that tanker values are near the top of the asset cycle with the rise in conversion saleshelping to edge prices still higher towards the end of 2007, but with signs at the start of 2008 that thiseffect may now be weakening despite continued strong interest for conversions. Nevertheless, someowners continue to make a case for still higher prices pointing to tightness in the newbuilding marketand the continuing rise in steel prices.

Other Factors in 2008

Shipbuilding boom to tail off- Zhang Tao fears newbuilding orders will tail off this year as the US

recession puts the brakes on world trade. The Dalian Shipbuilding vice-president says owners havealready begun to cancel orders and he fears the building boom is nearing the end. He said: We'rekeeping a close eye on whether the market has started to turn south after the boom of past years.

We have our running shoes ready. When the bear comes, we will run faster than our rivals, he toldReuters. A sharp drop in ship prices is unlikely this year, but ship turnover should be lower than lastyear. Analysts say increased shipyard capacity in China, South Korea and Vietnam coupled with the USeconomic low has harmed demand for new ships. Percentage points have been sliced from some leadingChinese shipbuilders share prices in the past three months amid concerns over falling orders. Zhang saysDalian will focus on serving state-backed Chinese clients and producing oil tankers and mid-sizedcontainer ships in order to ride out the down-turn. Chinese yards won 40% of world newbuilding orders in2007 and expect to over-take South Korea as the number one shipbuilding nation in 2011.

Tanker Owner stock buyback to continue Since 2006, a number of tanker companies have

engaged in a concerted policy of buying back their own shares e.g. OSG purchased 22% of shares sinceJune 2006. OSG has consistently maintained that its share is undervalued feeling that the correct shareprice should be $108 (6thMarch $58.90). It has indicated that if the credit crisis is over and its shareprice remains undervalued, then it would continue to buy back its own shares although it would alsoconsider paying down debt. Teekay also remains committed to its share buyback programme.


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FPSO VLCC

According to Scottish Enterprise the global subsea oil and gas market will remain strong for theforeseeable future and predicts that investment will total $218 billion over 2008-12. This is despite a

market growth of nearly 90% during the past 5 years. OSG predicts that there will be a further 5-10VLCC FPSO conversions in 2008, while Teekay has high hopes for Brazils deep sea developmentprospects. Abubakar YarAdua, group managing director, NNPC claims West Africa, the Gulf of Mexico,and Brazil are estimated to hold 75% of the worlds undiscovered deepwater reserves.

From the above statements, it is clear that expectations remain very high for the continued development

of the FPSO market. The following maps break down the FPSO and FSO activity by tanker sector. Weberwill continue to monitor developments in these sectors and also in the sub Aframax sector.

B r i e f i n g Se r i e s

BrazilFPSO Brasil

FPSO CapixabaFPSO Cidade de Sao Mateus

FSO Cidade do Rio de Janeiro MV14FPSO Espadarte

FPSO FluminenseFPSO Marlim Sul

FPSO Polvo

Frade (2009)Golfinho IIPetrobras 31Petrobras 32Petrobras 33Petrobras 35Petrobras 37

Petrobras 38 (FSO)Petrobras 43

Petrobras 47 (FSO)Petrobras 48Petrobras 50Petrobras 53Petrobras 54

Petrobras XXXIII

RussiaBelokamenka

ItalyVega Oil

LibyaSloug (FSO)

MauritanniaBerge Helene

Ivory CoastBaobob Ivoirion

YemenSafer (FSO)

QatarCaribbean Blue (FSO)Knock Nevis (FSO)Pacific Jewel (FSO)

ChinaNan Hai EndeavourNan Hai Fa Xian

Peng Li

VietnamHikari Orient (FSO)

IranSoorena (FSO)

IndonesiaBelanak NatunaMaxus Widuri (FSO)

MalaysiaFPSO Kikeh

AngolaFPSO DaliaFPSO Gimboa 1Q08FPSOFPSO GirassolFPSO Greater PlutonioFPSO Mondo 12/07FPSO Saxi 1/08 ex LitopiaKizomba AKizomba B

Kizombas CKuitoPalanca (FSO)Xikomba

GabonConkouatiFernan Vaz (FSO)

Equatorial GuineaFPSO SerpentinaSendje CeibaZafiro Producer

NigeriaAgbami FPSO

BongaErha FPSO

FPSO FalconFSO Unity

Knock AdoonOloibiri (FSO)

Sendje BergeTrinity Spirit

Yohi

MexicoTakuntah (FSO)Yuum Kaknaab

VenezuelaNabarima

CameroonKome Kibi 1

CongoYombo


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FPSO Suezmax

UKAnasuria

SchiehallionCanadaSea Rose

Terra Nova FPSO

UnknownAker Smart 2

Modec Venture 1Pioneer

Ivory CoastEspoir Ivoirien

TunisiaIkdam China

Bohai Shi JiGlobal Producer VIIIHai Yang Shi You 111Hai Yang Shi You 113Nan Hai Kai TuoNan Hai Sheng LiNan Hai Xi WangNanhai Fen Jin

VietnamBa ViChi LinhRang Dong 1Ruby PrincessSu Tu Den/Cuulong

LibyaFarwah

Thailand

Tantawan Explorer

IndonesiaKakap Natuna

ItalyFirenze

NigeriaAboKnock TaggartMystrasPeace (Wharkaaropai)

GabonOlowiPetroleo Nautipa

AustraliaChallis VentureCossack PioneerJabiru VentureModec Venture 11Montara VentureNganhurraNorthern EndeavourStybarrow Venture Mv16Vincent

NorwayAsgard A


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FPSO Aframax

UKAoka MizuBleo Holm

CaptainGlobal Producer III

Gryphon AHaewene Brim

Hahne KnutsenMaersk Curlew

North Sea ProducerTriton I

Uisge Gorm

MalaysiaBunga Kertas (FSO)Perintis

UnknownAl ZaafaranaCrystal Sea

NorwayAlvheimJotun ANorne

AustraliaFront PuffinGriffin VentureWoollybutt

ChinaMuninWenchang IIXijiang

South AfricaGlas Dowr

ThailandJasmine Venture MV7

AngolaOcean Producer

New ZealandRaroaUmuroa

CongoNKossa


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3.4 Calendar of Events 2008/9

Spring

April 2008

April is the Democratstarget for withdrawal of UStroops from Iraq, butblocked by Senate July 07.

Biometric visas requiredto visit UK

20thNato summit (2nd-

4th) WHO 60thbirthday

May

Coastal EnvironmentConference (19th-21st)UK

Israels 60th

anniversary Launch of the

Gamma-ray Large Areaspace telescope +Phoenix to land on Mars

June

The Atlantichurricane season starts(1stJune)

Posidonia 3rd6th

June

Summer

July

France takes over the

EU presidency. The 34thG8 summit is

held in Hokkaido Toyaka,Japan. Bill Gates to step backfrom day to day running ofMicrosoft

August

Beijing Olympics 8th

to 24th Democratic National

Convention 25thto 28th

September

Republican National

Convention 1stto 4th OPEC 149thOrdinary

Meeting

Autumn

October

UN Security Councilmeeting

UN World Urban forum

November

US Presidentialelection also elections

to Congress and onethird of Senate

General election New

Zealand The Atlantichurricane season ends(30thNovember)

December

Burj Dubaicompleted. It will be the

worlds tallest building OPEC 150thExtraordinary Meeting

Winter

January 2009

Czech Republic takesover the presidency of theEU from France Italy takes over G8presidency from Japan

US Presidentinaugurated

February

Chinese celebratethe Year of the Ox.

11 Years since

Osama bin Laden issueda fatwa against all Jewsand Crusaders

March

OPEC 151stOrdinary Meeting

The 21stLeague of

Arab States summit Connecticut MaritimeAssociation- Shipping2009

Chases Calendar of Events (subscription) and Wikipedia (free) and OPEC Bulletinhttp://www.bloomberg.com/markets/ecalendar/index.htmlandandhttp://www.cfr.org/media/world_events_calendar.html?day=1&month=2&year=2008


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Peak Oil

The debate continues about how much of the worlds oil resources have been usedup. Two divergent points of view have recently been provided by John B. Hess,chairman and chief executive of Hess Corp and Abdallah S. Jum'ah, president and

CEO of Saudi Aramco.

While Hess comes over as a spokesman for that section of the oil industry that has belatedly discoveredits aware planet in crisis side, Abdallah S. Jum'ah is more sanguine taking the crisis-what-crisis viewthat our energy resources are still bountiful and there is time to face up to environmental challenges.

John B. Hess sees the worlds demand for energy as a train that is in danger of running away. For himmeasures like the US governments commitment to increase average passenger car fuel efficiency from23.4 mpg to 35 mpg by 2020 are completely inadequate and a smokescreen. He points to a GoldmanSachs forecast that China (600Mn) and India (500Mn) will see the number of cars increase from less than20 million cars three years ago to 1.1Bn in 2050. He also fears the impact on energy demand from anongoing population explosion that is projected to boost the worlds population from 6.6Bn to 9BN by2050. His pragmatic solution is based on a massive increase in investment across three fronts from blackto green (1) to find more oil (2) to improve the efficiency and expand the market share of hybridvehicles, and (3) to boost renewable energy sources and technologies such as hydrogen cell vehicles.

With regard to finding more oil, Hess comments "We need to find a new production province like the

Alaska North Slope or Angola every year to ensure that we can grow our oil resource base to supportincreases in production for future generations. We stopped making such meaningful discoveries duringthe late 1990s.Within the next few years; conventional non-OPEC production will reach a plateau. In fact,60% of the world's oil production is from countries that have already peaked," Hess warned.Renewable fuels, natural gas liquids, and unconventional oil resources such as oil sands and oil shale"need to be encouraged," Hess said. However, he said, "Their contributions to supply are not materialenough to bridge the gap in oil requirements over the next 10 years." However, Hess argues that OPEChas the resource base to make up the difference and it is not investing enough in exploration anddevelopment. According to Hess the 15% pa global increase in exploration budgets in each of the last 5years is not enough. His call to OPEC is to act now.

In stark contrast to Hess, Abdallah S. Jum'ah believes that the worlds energy resources are largelyintact. "Even if we leave aside the potential of coal-to-liquids, gas-to-liquids, and biofuels, the world'stotal in-place endowment of conventional oil and nonconventional fuels ranges between 13-16 trillion bbl.To put that number in perspective, to date the world has consumed roughly 1.1 trillion bbl, or between 7-

9% of the in-place endowment." Analysts estimate recoverable conventional and unconventionalresources at 3-6 trillion bbl "depending on the economics of development, improvements in technology,recovery factors to be achieved, environmental considerations, government policies, and of courseregional and global political trends." For Jum'ah the 3 trillion bbl estimate is "ultraconservative".

According to Abdallah S. Jum'ah, Aramco plans to invest $90 billion in upstream and downstreamprojects in Saudi Arabia and around the world over the next 5 years, Jum'ah said. "The oil productionincrements we currently have in progress total about 3 million b/d. Some of this capacity will be utilizedto offset natural decline of oil fields while the rest will be employed to expand our production capacityfrom about 11 million b/d presently to 12 million b/d next year," he said. The company's worldwiderefining capacity will almost double to 6 million b/d from the current 3 million b/d. Saudi Arabia's Motiva

joint venture with Shell Oil Co. is expanding its Port Arthur, Tex., refinery by 325,000 b/d to 600,000 b/dto become the largest US refinery and one of the largest in the world.

Individual and Collective Responsibility

Hess argues that "each of us has the responsibility to act in the long-term global interest rather thanshort-term self interest so that we leave a more secure world for future generations," Hess said."Resolving this issue through greater global collaboration can be a model for managing other futureshortages, such as water, and benefit the global community. The more interdependent we are, thegreater our chances of having a sustainable future together."

Abdallah S. Jum'ah recognises that environmental dangers threaten the world but believes a consensuson how to address these dangers has yet to be achieved. Environmental issues"particularly reducinggreenhouse gas emissions"are important and pressing imperatives, "though the methods by which theycan be achieved while minimizing damage to the world's economies and societies, particularly indeveloping countries, remain divisive,"

Pu l s e Se r i e s


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4. Future Vision

In this section, possible events that will impact the market in the medium to long term are reviewed.

Shipping

Financing the Orderbook The total shipping orderbook is at an all time high level. Clarkson estimatesthat the value of the total orderbook is USD488 Bn which is equivalent to 44% of the worlds tradingfleet. To put this in context, in the whole of the 1990s, shipping invested USD200 Bn in new orders.Clarksons estimate that USD300 Bn has still to be raised to finance the current building programme. Ofcourse, it can be argued that the industry is cash rich after a prolonged period of high rates across mostsectors. It can also be argued that unlike the development economies, parts of the Middle East and Asiahave ample investment funds and so it may be a case of the shipping industry searching for new sourcesof funding. However, it should be noted that some owners like OSG anticipate problems with financing innear term.

Single Hulls under more pressure from 2009 according to OSG 2009 will be the testing year forsingle hull tankers ahead of the 2010 deadline when the majority of these vessels are due to be phasedout. They argue that single hull vessels will become marginalized and forced to exit when their numbersfall into a critical range equivalent to 10-15% of the trading fleet which they expect to coincide with thepeak delivery year for tankers in 2009.

A New Shipping Trade Route a new shipping export market moved a step closer following anannouncement in March by Russia's state-owned pipeline concern OAO Transneft that it will beginconstruction for the export terminal of the East Siberia Pacific Ocean oil pipeline. The Kozmino exportterminal will have two berths for tankers, first one for 80,000 dwt ships and eventually another for150,000 dwt ships. Plans call for an initial 300 visits per year, rising to 800 when the second berth iscompleted.

Will regulators lay down the law for ship emissions In February, the UN Intergovernmental Panelon Climate Change (IPCC) Chairman, Dr Rajendra Pachauri expressed concern that the [shippingindustry] had so far been left out of the climate change discussion, and determination to include it in thenext UN agreement. The comments come following a leaked UN report claiming ship emissions were

almost three times higher than previously feared. The report says carbon dioxide emissions from

merchant ships have reached 1.12 BnTons per year (up from a previous estimate of 400 MnTons). Thenew estimate is double that of the aviation industry (650 MnTons). It also warns that the figure forshipping is set to rise 30% by 2020.

Caroline Lucas, Green MEP for South-east England, told the Guardian newspaper: These new figureshighlight the shocking complacency of governments which have completely ignored shipping emissions. Itis essential that our own government's new climate change bill includes both shipping and aviationemissions and measures are urgently brought forward at EU level.

Last year the Times and Independent newspapers and the BBC website published similar articles afterbeing handed a report, destined for the IMO, which claimed ships carbon dioxide emissions had reached1.2bn tonnes per year. TradeWinds reported earlier this month that the IMO had narrowed down to threeits options to update Marpol Annex VI.

Oil Industry

Are oil companies serious about alternative energy? Oil company CEOs are starting to talk aboutenvironmental responsibility in the way they manage the worlds oil resources, while oil company budgetsfor alternative energy are on the rise. In March, OGJ highlighted the Chevron/ Weyerhaeuser biofuels

joint venture first mooted in April to 2007 to develop the next generation of renewable transportationfuels from nonfood sources.

Weyerhaeuser is involved in nearly every facet of the forest products industry, from growing andharvesting trees to producing products, including cellulose fibers. The JV is to research and developtechnology for converting cellulose-based biomass into economical, low-carbon biofuels.

More Pledges on Green House Gas Emissions (from CERA conference in Houston 2/08). The

European Union, Japan, and Canada have pledged to reduce emissions by 50% in 2050. In December,


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178 countries at the UN climate conference in Bali signed what Tanaka calls the "Bali roadmap, whichtakes up where the Kyoto treaty leaves off." Our preliminary analysis suggests that investment ofaround $50 trillion would be needed for a 50% reduction in emissions, on top of what would be requiredunder a business as usual scenario," Tanaka said. "This amounts to roughly 1% of total gross domesticproduct from 2005-50."

Canadian oil sands and CO2 sequestration some commentators believe the massive Canadian oilsands currently being developed will be the first large scale test for the feasibility of CO2 sequestration.

Crude Oil Supply Increases- Institut Francais du Petrole (IFP) said demand growth will be limited bysupply constraints, and oil supply should grow by 1.64 million b/d/year during 2007-12, when worldproduction capacity will reach 93.6 million b/d. This is based on projects announced at year end 2007 anddoes not consider production development delays. OPEC is expected to account for 90% of the supplyincrease, with production rising in all countries except Algeria and Indonesia. Non-OPEC capacity shouldincrease by 800,000 b/d (1.7%) over the same period, IFP said. BP expects to produce at least 4Mnbduntil 2020 even without any new discoveries. The importance of West Africa - Following the discovery oflarge deepwater reserves off Angola, West Africa has assumed increasing importance in the search fornew oil according to Adebola Adejumo of IHS Energy, West Africa has accounted for 22% of the worldsnew oil discoveries in the last two years.

Structural problems with Russian Refinery Industry the Russian tax regime is orientated toencouraging refining not exploration according to Tony Considine, TNK-BP downstream executive vice-president. Russia's prospective fields in Siberia and offshore in the Arctic require huge investments andpose major development and financial risks. Russia also has encouraged the creation of petroleum

products because it adds value to oil. About 100 mini refineries have sprung up, but future growth isbeing jeopardized by a shortage of skilled personnel and a lack of financial investment, Considine said."We are cautiously optimistic; we can be competitive with European refineries if oil prices are at $60/bbl."Refiners are under great pressure to change the specification of petroleum products in Russia, withdifferent requirements set for 2009, 2010, and 2013, Considine said, criticizing the timetable as"aggressive."

Mark Gyetvay, chief financial officer of Russian gas independent Novatek, told OGJ it does not expect theforthcoming government to severely increase mineral extraction taxes, as large investments are requiredfor projects. None of the presidential candidates, who will finish their campaigns in March, has indicatedthat he would change the investment climate to benefit independents, which are expected to beimportant players in supplying oil and gas to the market in the midterm.

Middle Export Refinery construction going well - OSG sees the export only refineries in the MiddleEast being constructed on schedule these refineries are expected to boost long haul trades

Refiners face changes in liquid supply composition (from CERA conference 2/08) According toCERA the growth in liquids supply capacity will be "more than sufficient" to match the volumetric increasein demand, but the "cocktail" of hydrocarbons in the liquids supply will change, with light l iquids(including natural gas liquids, condensates, andto a lesser degreebiofuels, gas-to-liquids, and coal-to-liquids) accounting for 32% of the total supply in 2020, up from 19% in 2007. "As we move beyond2010, the key challenge for the refining industry will be adding the appropriate type of conversioncapacityparticularly hydrocrackingand not necessarily adding more volumes of simple crudedistillation capacity," said Olivier Abadie, CERA's downstream director. "In the dynamic oil industry,investment responds to market signals. The degree to which refiners invest in adequate conversion

capacity will be critical in successfully addressing this significant change in the composition of globalliquids supply." Or to put it another way middle distillate products (diesel, heating oil, jet fuel, andkerosine) are projected to account for more than half of world oil demand growth during 2007-20.However, light liquidsthe largest additional component of liquids supplyyields only an average of 20%middle distillates, resulting in a middle distillates deficit of about 3 million b/d and gasoline supply 3

million b/d higher than demand. "The global refining system has the challenge to adapt its configurationto cope with this significant mismatch,.

European Biofuels Market in Confusion there are significant problems on two fronts (1) buildingsufficient capacity according to Peter New, president of global biofuels at BP PLC. 30 billion/year to2030 of investment is required to just build conversion facilities for biofuels, said "That means building a300 million gal plant every 5-6 days.", and (2) with quality - several leading retailers have troublekeeping their new biofuel powered distribution lorry fleets on the road.


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B r i e f i n g S e r i e s


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Chukchi Sea Americas next oil producing region

Weber is committed to providing a balanced approach to the analysis of the shipping markets. Thefollowing article, looking at the opening up of oil exploration in the Chukchi Sea and what it means in thecontext of US energy policy, is written by an environmental journalist and seeks to give an alternative

perspective on the fine balancing act that is required to secure world energy supply and preserve thenatural world.

DESPITE passionate opposition from conservationists and indigenous groups, the Chukchi Sea off north-west Alaska was opened up for oil production last month.

A pristine ocean, ice-bound for much of the year, it is home to a magnificent fauna including walruses,endangered bowhead whales and as many as ten per cent of the worlds polar bears.

According to a worldwide chorus of condemnation, the US governments desperation for new domesticsupplies to reverse the long-term trend of increasing reliance on imports is driving forward a dangerouslyirresponsible exploitation of the Arctic.

It is hard to believe the decision by the US Fish and Wildlife Service to postpone classification of the polarbear as threatened until after the Chukchi lease auction is a coincidence.

If the bears, gravely imperiled by a warming climate which is rapidly melting sea ice, had received theirclassification earlier, opponents could have thwarted the sale in the courts using the Endangered Species

Act.

Reduction of the nation's reliance on oil imports has long been one of George W Bush's priorities,reinforced by the political volatility of the Middle East, and worsening relations with major producers suchas Russia and Venezuela.

Success would be bad news for international shipping firms, which have enjoyed a long honeymoon withthe USA's ever-growing appetite for overseas oil.

They would not be able to exploit any new trade between the Arctic and west coast ports such as SanFrancisco as it would be reserved for US-flagged short-haul vessels.

So the US governments move, which rapidly saw bids totaling USD2.66 billion for extraction leaseslodged by eager oil businesses, creates an unusual alliance of interests between international shipping,wildlife and the indigenous people who live in the harsh environment of northern Alaska.

Their representatives have already launched a legal challenge certain to delay, if not actually derail,production.

The doomsday scenario feared by critics, of course, is a major spill like that of the Exxon Valdez in 1989,which devastated wildlife in southern Alaska.

The fall-out forced the industry to confront, with some discomfort, its own impact on the environment,with the single-hulled tankers most vulnerable to accidents banished from such environmentally sensitiveareas.

These vessels, however, have continued to carry oil through less regulated seas in the Far East - theExxon Valdez itself has only just been taken out of commission for conversion to a dry bulk carrier.

Fears of similar disasters have inhibited lease sales of seas around Alaska until now, and there have been

only a few preliminary test drills.

It remains to be seen whether tankers will actually brave the ice to take the oil direct from the new Arcticfields, but the more likely method of transportation undersea pipes to connect with the existing pipelineacross the giant US state to the southern terminal of Valdez - would certainly not remove environmentalobjections.

As illustrated by the recent problems to beset BP, the impact of a leaking pipe on the environment can bevery serious, while the ice-bound conditions would inhibit safe dispersal of spilled oil.

Even if such catastrophes are averted, the effect of large-scale industrialization on a part of the worldhitherto almost untouched by man can only be guessed at.


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But supporting these environmental objections are well-grounded doubts over whether the benefits of theChukchi project, both commercial and strategic, are all they have been cracked up to be.

With the area subjected so far to only the most limited test drilling, a long-term lease on any of the6,156 blocks in the 53,000 square-mile zone, situated between 50 and 200 miles off the coast, is clearlya speculative investment.

Estimates based on geological data swing wildly - super optimists put the Chukchi's total reserves at 15

billion barrels, but more cautious analysts warn there could be as little as one billion.

To put these figures in context, consider that the United States consumes more than 20 million barrels ofcrude oil every single day, and known domestic reserves are just less than 30 billion barrels.

If the pessimists are proved right, the entire Chukchi Sea would not support the US economy for muchmore than a year.

The Chucky blocks are being leased on the basis of reserves of about three billion, exploited over a 30-year period, with at best 250,000 barrels pumped out a day a mere 1.25 per cent of US demand.

With refineries currently happy to pay nearly $100 dollars a barrel for raw crude, producers are eager toextract the stuff wherever they can find it, even braving the immense technical difficulties of drilling inice-bound seas.

But can they be sure of a long term shortage of supply to maintain such eye-watering prices?

Much of the world is still totally unexplored for oil some analysts believe we may have used only tenper cent or so of the entire stock since the dawn of the Industrial Revolution.

Even in the territory of the oil-desperate United States, there has been virtually no exploitation of deep-water deposits, although the deeper parts of the Gulf of Mexico are just beginning to be penetrated byproducers and there have been some significant discoveries.

It will be at least ten years before the exploration and infrastructure problems surrounding Chukchi Seaproject are overcome, and oil is actually flowing to consumers.

Meanwhile, there is a little matter of an election, with a president long accused of being in hock to the oilindustry certain to be replaced, perhaps by a potentially more environmentally conscious Democrat.

Even if all the Chukchi project's legal and political hurdles are smoothly cleared, the exploration andinfrastructure problems will delay actual production for at least ten years.

By that time, the world will look very different, and the depredation of an Arctic wilderness may well beseen as not only environmental vandalism, but entirely unnecessary.


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5. Tanker Companies

With many tanker companies having reported their results, a picture of listed tanker companyperformance in 2007 is starting to emerge. The following table provides a primitive method of comparingthese companies. It ranks companies by size in terms of market capitalization and then highlights thechange in net profits from 2006 to 2007, and the size of 2007 profits in comparison with marketcapitalization.

Tanker Company Results 2005-2007

CompanyMkt Cap

$Mill Units

NetProfit05

Net Profit06

Net Profit07

% Chg NetProfit06/07

Net Profit07

as % MktCap

Frontline - NYSE 3296 USD Mn 606.8 516 574.3 11% 17%

Teekay 2942 USD Mn 570.9 262.2 181.3 -31% 6%

D/S Torm 2142 USD Mn 299 235 na na na

Euronav 1988 USD Mn 209.4 218 100.1 -54% 5%

OSG 1843 USD Mn 464.8 392.7 211.3 -46% 11%

Ship Finance Int'l 1800 USD Mn 209.5 180.8 167.7 -7% 9%

Tsakos Energy Navigation 1241 USD Mn 143.3 161.8 196.4 21% 16%

Berlian Laju Tanker 1047 IDR Mn 645186 1205279 na na na

NATS 796 USD Mn 46.3 67.4 44.2 -34% 6%

Gulf Navigation 743 AED Mn na na 116 na na

Genmar 703 USD Mn 212.4 156.8 44.5 -72% 6%

D'Amico Inlt Shipping 517 USD Mn na na 75.1 na 15%

Brostrom B 430 SEK Mn 622.9 503 450.4 -10% na

Capital Product Partners 430 USD Mn na na 27.8 na 6%

Knightsbridge 415 USD Mn 43.9 45.7 84.8 86% 20%

Double Hull Tankers 330 USD Mn 9.5 35.8 27.5 -23% 8%

Arlington Tankers 310 USD Mn 21.9 21.5 11.7 -46% 4%

Omega Navigation 230 USD Mn na 14.1 15.1 7% 7%

US Shipping Partners 172 USD Mn 18.1 5.9 4.8 -19% 3%

Concordia B 164 SEK Mn 57.2 51.9 62.9 21% na

Nordic Tankers 162 USD Mn na 8.7 na na na

Taiheiyo Kaiun 120 YEN Mn 86 210 na na na

B&H Ocean 83 USD Mn 20.1 18.8 na na na

Top Ships 78 USD Mn 68.7 15.1 na na na

The table shows that across the tanker sector the overall direction of profits is downward. Of the 15companies that have reported 2007 results, 10 companies have seen profits fall compared with 2006.Amongst the big players, only Frontline and Tsakos Energy Navigation produced net profits grow lastyear.

Knightsbridge produced the best results in terms of net profit growth last year, while Genmar had themost disappointing year. Knightsbridge also had the best results when comparing net profits for 2007against market capitalization.


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Shipping Share Price Indices see chartwall308.doc

This series of charts shows the relative performance of shipping sectors in 2007 in terms of indexed shareprices. It is clear that share price performance was volatile across all sectors. Even the dry bulk sector,which previously could do no wrong, suffered from significant share price erosion during 2H07. However,the tanker sector was one of the worst performers, slipping to 9thplace out of the 12 sectors.

Tanker Owners and In Vogue Strategies

In recent months, as downward pressure on share prices has intensified, tanker owners have workedhard to retain the loyalty of their shareholders in part through consistent dividend policies, share buybackpolicies (design to support share prices) and also through greater emphasis on getting their individualstrategies across.

Tanker owners have also been looked to widen their appeal through diversification into other sectors asa means of mitigating the impact of a potential tanker rate slump. OSG has been one of the mostproactive companies in the search for new markets with moves into the LNG sector and increasedinvolvement in the Jones Act Trade. It may well look to invest further in non-international tanker marketsin the future, and has made its first steps in February (along with Euronav) to enter the FPSO/FSOmarket. Ship Finance International (SFL) is another company looking in new directions. Originally theeffective banker for the Frontline tanker fleet, SFL has taken on a more independent profile with non-Frontline financing of vessels in the Offshore and Container sectors.

There has also been a noticeable trend of listed companies investing in other listed companies. Suchinvestments include Frontline in Navig8, and Torm in FR8. The strategy of investing in other companies isnot a phenomenon restricted to the tanker sector. Even some dry bulk owners - perhaps fearing thattheir record breaking run may be coming to an end, or at least wishing to take advantage of theirabundant cash reserves - are looking to invest in other sectors. For example in February Dryships pickedup the rights to 2 drillship newbuildings. Meanwhile another dry bulk company, Genco had been seekingto increase its global reach by buying shares in Jinhui Holding.

Like the rest of the world, tanker companies are keeping a eye of the world economic wobble and someare adopting a wait and see attitude. This is not the case with Frontline, which in an almost desertedIPO market has managed to push through the listing of Independent Tanker Corporation on the OsloOTC exchange.


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5.4 Chart Wall Appendix B Shipping Share Indices Last 12 Months

Chart based on 3 companies.Change year-on-year 3/07 to 3/08= -9%Performance Ranking = 11 of 12



Chart based on 30 companies.Change year-on-year 3/07 to 3/08= 109%Performance Ranking = 2 of 12




Chart based on 7 companies.Change year-on-year 3/07 to 3/08= 32 %Performance Ranking = 7 of 12





Tanker 08 q 1 Report

Documents

Transcript of Tanker 08 q 1 Report