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Blog: What Low Oil Prices Means for Investment

from Ship Owners and Managers

Money and Calculators

By Shane McCarthy 2015-04-24 20:35:02

The tanker industry has always been very volatile, but few swings in history can match what the industry has dealt with this past year. New fuel regulations, slumped global demand, fear of overproduction and uncertainty of oil futures have dominated headlines the past 12 months. For ship owners and managers, the silver lining here is that the low price of oil has meant significantly lower bunker costs resulting in good spot returns. Still the questions remains, just how long will that last?

Oil prices slumped nearly 60 percent between June 2014 and January 2015 and while some in the industry are optimistic following a recent surge, others see a long road ahead before we see $100 a barrel again(1).

Current market conditions have caused industry leaders like BP’s Bob Dudley to liken the current glut to that of the 1980s where it took 4 years for prices to recover. Oil companies seem to be bracing for the long haul as we have seen drastic cuts in company spending, most notably Royal Dutch Shell Plc who announced more than $15 billion in spending cuts(2). Drewry Shipping Consultants predicts a positive short term outlook for tanker rates, due in large part to strong cargo demand fueled by floating storage and a modest fleet supply growth for 2015, owners and operators will need to capitalize now before another unexpected swing changes everything.

For the short and medium term, owners and operators have the difficult task of capitalizing on a favorable market, while simultaneously positioning themselves for the future. Keeping costs down, while remaining ahead of the curve – easier said than done right?

Capitalizing on today’s market

The price of oil has fallen nearly 60% from June to January(3). This drop in price has given owners and operators the option to defer on retrofitting their tankers, a major concern in 2014 through the start of the New Year.

With low sulfur bunker prices as low as they might ever be, owners are not interested in undertaking a $5-10 million per vessel investment when low sulfur fuels are lower than what high sulfur fuels were 8 months ago.

This month Platts’ survey of dirty tanker and dry bulk ship owners showed that they are holding back from installing this technology on their vessels due in large part to bunker prices being so inexpensive(4).And while scrubber technology companies are optimistic that the market will recover and the sense of urgency to invest in scrubbers will buoy, some forecasts from the world’s leading analysts do not support the idea of a quick comeback. Optimistic forecasts like Bloomberg’s at $74 and $75 a barrel for 2016 and 2017 respectively are only 70% of its price in June where it reached $107 a barrel(5).

Greenships’ ECA retrofit study released in 2012 estimated that the payback time for a retrofitted vessel operating in 50% ECA is approximately 6 years and 8 years for 25% ECA operation(6). You can expect those payback periods to be longer than first expected due to the extreme low price of oil, while the price of scrubbers has remained constant. And while it is true that the payback period of the scrubber is primarily sensitive to the price spread between HFO and MGO, CAPEX and absolute HFO price have more of an impact than first estimated with fuel costs being this low. So if not in scrubbers, where do owners and operators invest?

Positioning for the future

While today’s market doesn’t resemble pre-2008, there is still room for owners and operators to use favorable rates to position themselves for future success.

With existing concern over an influx of new buildings scheduled for 2016, a trend to look out for is owners and operators investing more in technology and innovation, pivoting from the idea of technology as a “nice to have” to a critical business system that could propel them to the next level.

This industry has long been criticized for lagging on tech innovation. Recently there has been a small surge in the industry’s adoption of progressive technologies including cutting edge ship simulators, voyage management software, electronic charts, etc., but heavy pushback still exists and advocates of technology and system innovations still remain in the minority. Look for this surge to strengthen and continue with the price of oil down. Unlike investment in new buildings or other traditional shipping investments, software can be purchased and maintained relatively inexpensively, eliminating potential debt, not to mention it won’t inflict additional fear of flooding the market.

Tech projects have never been at the top of the priority list when budget time rolls around for shipping companies. Year after year these projects have been put on the back burner where others have been thrust to the front. We live in a digital age, with smart devices all around us. SaaS software companies in our industry have developed technologies that cater to the perpetual connectedness of our industry and society as a whole. Owners and operators can now search on any particular vessel, whenever, wherever. Chartering and Operations can fix and manage vessels in their voyage management system on their iPhones at the pub or at the pitch. Management has access to real-time advanced KPIs and fleet analytics outside of Excel, in more manageable, readable dashboards on their mobile, tablet or computer. The impact these innovations can have on an organization can be exponential and lasting.

Tech savvy companies also have a leg up on their competitors when trying to attract new talent. This can be all the difference for a company hitting or missing on top talent. Being able to float the latest and greatest, most intuitive and responsive technology to prospective employees reinforces the prospect’s vision of the company as an industry leader, well positioned for the future. This is not only an extremely powerful recruiting tool, but also further promotes morale within an organization.

Strengthening systems and staying ahead of the curve in regards to technology could be the answer that shipping companies may be looking for in the short and medium term. Once perceived as an afterthought in this industry, software and system innovations are gaining steam and expect to see an increased investment. These tools position organizations for both immediate and future success, empowering their employees and partner organizations, while keeping operating costs relatively low in an opportune market.

References

  1. 1.Kennedy, Will, and Ryan Chilcote. “BP Chief: No Hope of $100 Oil for ‘Long Time’.” Bloomberg. 3 Feb. 2015. Web: http://www.bloomberg.com/news/articles/bp-chief-no-hope-of-100-for-a-long-time-as-stocks-build

 

  1. 2.Smith, Geoffrey. “Shell slashes spending by $15 billion as oil price bites” Fortune. 29 Jan. 2015. Web: http://fortune.com/2015/01/29/shell-slashes-spending-by-15-billion-as-oil-price-bites/

 

  1. 3.Brent crude closed at $115.19 a barrel on June 19th. On January 30th Brent crude had fallen to $47.52 a barrel. A 58.75% drop in price. Web: http://ycharts.com/indicators/brent_crude_oil_spot_price

 

  1. 4.Jameson, Nick. “Shipowners Hold Back on Scrubber Investments.” Bunkerworld. 5 Feb. 2015. Web: http://www.bunkerworld.com/news/Shipowners-hold-back-on-scrubber-investments-134540.

 

  1. 5.“Kennedy, Will, and Ryan Chilcote, loc.cit.

 

  1.  6.ECA Retrofit Study. Comparison of Various Abatement Technologies to Meet Emission Levels for ECA’s.” Green Ship of the Future.Web: http://www.greenship.org/lowemissionconceptstudy/ecaretrofitstudy/.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.