What Is The Effective Size Of The Operational World Tanker Fleet?
What Is The Effective Size Of The Operational World Tanker Fleet?
With the oil price looking capped by the potential for export of U.S. shale oil, and with industry opinion formers and analysts predicting steady demand growth over the coming three to five years (IEA forecast demand growth 1.4 million barrels per day 2017, 1.2m barrels per day per annum 2018-22), the freight market will in all likelihood be a supply driven market.
When looking at the supply side most analysts will quite rightly focus on three main areas: (1) the orders for new ships that have been placed at the shipyard with emphasis on the (2) expected deliveries and then the (3) projected or likely scrapping of existing older tonnage.
Fit To Sail?
The utilization of the existing world fleet, the vessels on the water, varies from time to time. The fleet is subject to requirements to be ‘in class’, which is part of a regime of regulations for sea worthiness and incorporates a survey cycle including periodic dry-docking. Any ship, which is not in class, is not available for service, nor is any ship that is undergoing periodic dry-dock, to complete repair, maintenance and survey for the purpose of staying in class.
This system provides the minimum required standard to operate as a commercial ship and is common to all types of vessel. For tankers this is only the start of inspections that make up the reviews of quality assurance necessary to trade. The operator/manager of a ship will need to have a certified management system in compliance with the International Maritime Organization’s (IMO) International Safety Management Code requirements, called ISM, with a Document of Compliance (DOC) issued for the company and a Safety Management Certificate (SMC) issued for each of the vessels it operates and manages. These certificates are issued by a recognized Classification Society (“class society”) acting on behalf of a flag state.
The inspection authorities that derive their authority through legally constituted bodies are the flag state, which may authorize class societies to issue on their behalf certificates required under IMO rules for international navigation. Both have a permanent interest in the vessel as long as its owner keeps it registered under their flag or entered with their class society. There is a second group of interested parties who, on the other hand have an interest limited to the performance of particular voyages. These are the Port State Authorities, the cargo terminal operators, the charterers and cargo interests – in short the customers or their agents.
Fit for Cargo?
In respect of the parties related to the cargo their interest is limited in time to the period that the vessel is in their employ, carries their cargo or is in their port or at their terminal, they need to be assured prior to loading or arrival that the ship’s operation and performance will meet their requirements. This provides considerable problems due to the nature of shipping as a dynamic business affected by the human element, the perils of the sea and weather, and last but not least, the cyclicality of the markets. How can the cargo interest be assured of the required quality during the relevant time when there is so much potential for change and so little opportunity to check through physical inspection?
Oil companies originally operated their own fleets and to some extent this continues. However, as the companies broke up their logistical integration one of the first parts to be outsourced was ship operation. The process then began of trying to be sure that the service had not only been well performed but would also be well performed in the future. Lessons were learned from the other end of the oil business in the exploration and production industry where outsourcing became the norm for offshore expertise and drilling and many lessons were also learned about quality assurance.
Fitness Check Up
The initial point was written maintenance and operation manuals, which resulted in Guidelines issued by Oil Companies International Maritime Forum (OCIMF) and constitutes the basis for a vessel’s acceptability and which were instituted into an international requirement for Chartering.
The next critical point was inspecting against those manuals to ensure that they were followed and that adherence was evidenced in the records of the ship. This is known as vetting, which in its early stages meant an employee or direct subcontractor of the customer visiting the ship, whilst in port, to meet the crew and review the ship and its records. Vetting immediately threw up two problems. For the inspecting company the ship and its crew may appear to be performing in an acceptable manner, but in not rejecting were they approving? If they were approving, who could rely on the approval and for how long?
Inspection must take place before the company contracts for the business that is contemplated, otherwise it is not an approval for future business. If a voyage (particularly for a large tanker) takes three months and the vessel needs pre-approving at a port, then the period of six months looks like a bare minimum that could be workable for effectiveness of the approval period. Owners would like it to be much longer as repeated inspection is burdensome for the ships’ crew, but shipping is dynamic and the crew changes continuously with service on board being for periods anywhere between three and nine months for each crew member.
There was also the issue of man power for staffing vetting, with risk of cost duplication if all oil companies had their own vetting staff. This combined with periodic review that was necessary for the Safety Management System (SMS) meant that more efficient solutions were sought.
For the SMS review OCIMF issued the Tanker Management Self Assessment (TMSA) program in 2004 ‘as a tool to help operators measure, assess and improve their safety management systems. Each tanker operator must report to OCIMF the results of their own assessment of their SMS based on a number of KPIs and Best Practices with four levels of compliance for each one. Oil Companies can then perform periodical assessment usually every three years of the operators’ SMS, to confirm that the scoring declared by the operator is verified and to suggest areas in need of attention or correction.
The vetting system itself, was also developed overtime under the guidance of OCIMF. This resulted in the current system, which it is fair to say is under continuous review and change. The following is a description of how OCIMF describe the Ship Inspection Report Evaluation program (SIRE).
What is it?
The Ship Inspection Report Evaluation program, or SIRE system, is a very large database of up-to-date information about tankers. Essentially, SIRE has focused tanker industry awareness on the importance of meeting satisfactory tanker quality and ship safety standards. Since its introduction, the SIRE Program has received industry-wide acceptance and participation by both OCIMF members, program recipients and by ship operators.
Since its introduction, more than 180,000 inspection reports have been submitted to SIRE. Currently there are over 22,500 reports on over 8,000 vessels for inspections that have been conducted in the last 12 months. On average program recipients access the SIRE database at a rate of more than 8,000 reports per month.
How Does It Work?
The SIRE program uses a uniform inspection protocol using:
- Vessel Inspection Questionnaire (VIQ)
- Uniform SIRE Inspection Report
- Vessels Particulars Questionnaire (VPQ)
These make the program uniform and provide a level of transparency.
SIRE has established itself as a major source of crew, technical and operational information to prospective charterers and other program users. Its increasing use corresponds with oil industry efforts to better ascertain whether vessels are well managed and maintained. It is a risk assessment tool for the charterers. OCIMF is in no doubt that better informed vetting decisions are leading to improvements in the quality of ships, accelerating its continuing drive for safer ships and cleaner seas.
Inspection reports are maintained on the index for a period of 12 months from the date of receipt and are maintained on the database for two years. SIRE access is available, at a nominal cost, to OCIMF members, bulk oil terminal operators, port authorities, canal authorities, oil, power, industrial or oil trader companies which charter tankers as a normal part of their business. It is also available to governmental bodies which supervise safety and/or pollution prevention in respect of oil tankers/barges (e.g. Port State Control Authorities, MOUs, etc.).
What Impact Has It Had?
This system combined with the requirement for tankers to have a double hull has had a significant impact on operational performance and on oil spills. It has been a success.
It has some important negatives for staff on board. Whilst it reduces the number of inspections through data sharing via the SIRE database between several parties it does not establish an approval. So, one customer’s acceptable report may be another customer’s unacceptable level of deficiency. It also has no period of validity with the customers expressing a view through the market place that they require a report to have been filed within six months of using the vessel. As described above, this inclines an owner to want it to be constantly up to date, effectively requiring inspection at every port. The inspections occur when the crew is at its busiest and draws resources to give assurance that the ship is properly run at the very time when the ship wants all resources available to run properly. Incidentally, inspections by Port State Authorities are on the rise independently of SIRE, notwithstanding their ability to access SIRE and this seems to be an unnecessary additional burden. Inspection has a business side to it so from an owner’s perspective less inspections with more sharing of results is welcomed.
For owners the biggest change has been from an old style of relationship building with the customer where repeated performance, built trust as to future performance, to a system where service is assured through data sharing and the relationship has become commoditized. The slight problem with this approach is that despite all efforts from OCIMF the quality of inspections may vary with the individual performing the inspection. Uniformity is important and each customer will have specific limitations of which two nearly always crop up.
The first and most well-known is the age of the vessel. Most charterers will not use vessels over 15 years of age to carry their cargo and in addition most Atlantic Basin terminals will not accept vessels over 18 years of age. The same is true for some refiners in China and North-western Europe. The second is less well known but is based on the crew ‘matrix’. This is based around the period of experience of the officers of a tanker (usually top 4 in seniority) in the tanker type, the rank or responsibility and the amount of time employed by the owner.
The differences, in individual company requirements, present the owners with some complicated calculations in determining with whom they are at any time qualified to do business. The business challenge is to be qualified to do business with everyone all of the time. If this means more inspections, more crew changes to meet ‘matrix’ requirements, and the selling of older ships to have a young fleet, so be it, provided that it delivers a better business model and adequate financial returns to justify the additional expense.
What is the sanction for not complying?
A ship may find it more difficult to be chartered if the requisite approvals are not in place. In theory this will reduce the efficiency of the ship causing it to earn less as it will have less choice in business and be unable to optimize its utilization. Whilst the point about optimization is true, nevertheless the ship operates in a dynamic commoditized market. Ironically if 11 cargoes look for 10 ships the undersupply only becomes obvious on the last fixture, so the least favored ship may be faced with the best market conditions, one ship and two customers with no choice. The volatility of the freight market, because it is a commodity market, means that the lost efficiency, due to unfavored approval status, can be easily compensated by the surge pricing caused by the ‘last in the shop’ position. It is an unintended consequence but very real.
The role that acceptability of ships through inspection plays on the market is important. It dominates the working day of the chartering desks (sales point) of every ship owner and every customer. The ‘world fleet’ on a graph showing the ships built that have not yet been scrapped is not the world’s ‘workable fleet’ but no one has yet been able to graph that. However, this is what constitutes supply! It is the missing x factor that ruins the predictions of analysts when they foresee an oversupplied market and then contrary to all forecastable data there is a surge in the market price due to a shortage which is not apparent to a market observer, who does not actively participate!
If the status of tankers, as approved, could be publicized, it would identify and should stabilize the world’s workable fleet, reduce supply, increasing freight but guaranteeing by funding, full and thorough compliance thus improving quality assurance and performance.
Rather like the mice wanting to put a bell around the neck of the cat, the industry can see it is a good idea but cannot see how it can be done.
The system has achieved a first primary goal, an overall significant reduction in oil spills, so the excellent should not be in opposition to the good and all ship owners should embrace the system, and then work to improve it.
Other shipping sectors, most notably gas and chemicals, have a similar system but with a single inspectorate called CDI, which is independent and funded by the industry – owners and charterers that would confer an approval in a manner not dissimilar to a temporary license to trade. This would encourage uniformity of inspection as well as clarity of rules over age of vessel, and qualifications and experience of officers. The inspectorate would be answerable in terms of its remit to the members but have separate liability independent from them. This would allow the inspection results to be more widely available and consequently minimize uncertainty and disruption in the market place.
A single regime would surely then suffice for all interested parties, terminal operators, Port State Authorities, cargo interests and governmental organizations.
Three other factors may reduce the available fleet: storage (temporary or permanent); newly delivered ships (which are untried and have not been operationally inspected); and ex-dry-dock ships (which may have operational problems with equipment disassembled or repaired or replaced during the docking).
All of these developments impact on one simple fact. The world’s operational tanker fleet is smaller than it may appear.
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