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Shipping

Emission limits: Time to act

The shipping industry has been going through turbulent times. For a sector accustomed to planning
decades ahead, the sequence of unexpected major events, from the inancial crisis to depressed freight and
charter rates, and from dropping fossil fuel prices to new international tensions, has certainly added plenty
of headache to investment decisions. Many shipowners delayed investing in new anti-pollution
technology hoping for a clearer field of vision, while others took action early to gain competitive
advantage.
With new sulphur limits now in force for European Emission Control Areas (ECAs), and the North
American and US Caribbean Sea ECAs also regulating NOX and PM, those who chose to wait must act
now. Further regulations will take effect soon, and additional regional and national regimes are emerging
around the globe. Investing now will save shipowners money and protect their reputation. However, the
substantial capital requirement, a lack of mature technology and uncertainty regarding compliance
documentation add to the complexity of this decision.
The IMOs new ECA regulations, in effect for Northern Europe and North America since 1 January 2015,
were announced as far back as 2008. As the year advances, the majority of shipowners will without doubt
take the required steps since full compliance has to be substantiated now. Shipowners and operators
hammering out their ECA strategies have to find answers to a number of difficult questions, and DNV GL
is ready to help them devise the right compliance and technology strategy.
More than 40 per cent of the ships trading in the Baltic Sea are general cargo vessels which typically do
not cross larger oceans; they either sail within the Baltic Sea only, or within Northern European waters.
Oil and chemical tankers, bulk carriers, and passenger ferries are other major ship types operating in the
Baltic Sea. The age of these ships is fairly evenly distributed from new to about 40 years old, which
means that old vessels are being replaced at a steady pace. In other words, it takes about ten years to
replace 25 per cent of the fleet. The shipowners point of view The most obvious choice to ensure
compliance with ECA regulations is switching to low-sulphur distillate fuel. The investment requirement
is moderate, but detailed guidelines for the fuel changeover should be prepared, and the crews must be
trained properly to understand the technical implications of the switchover procedure. The following
special considerations should be made to avoid engine failure:
Temperature: As the operating temperatures of the two fuels differ by about 100 degrees, special care
must be taken.
Viscosity/lubricity: Heavy fuel oil (HFO) and marine gas oil (MGO) have very different viscosities,
which may cause fuel pump failure.
Fuel incompatibilities: HFO and MGO are mixed in various ratios during the changeover procedure,
which may clog filters and cause engine shutdown.

Cylinder lubrication acidity: Decreasing the sulphur content affects fuel acidity so another type of
cylinder oil must be used.
Contamination: Tanks formerly used for HFO need to be cleaned thoroughly before switching to MGO.
The solution is often dedicated fuel tanks and separate tanks for different lubrication oils.
An alternative solution is to use a scrubber while continuing to burn HFO. A scrubber washes the SOX
out of the exhaust gas by spraying either seawater on it or a freshwater solution with chemicals added.
Seawater scrubbers are simpler to install since the water is not recirculated but used once in a so-called
open-loop system before being treated, neutralized and discharged to the sea. To achieve the right
efficiency levels, seawater scrubbers rely on high-capacity pumps, which consume significant amounts of
energy.
Scrubber installation
A more sophisticated installation is a closed loop scrubber, which dissolves chemicals in freshwater and
recirculates this solution after each use, partially replacing it. The spent part of the solution is purified and
released to sea. These scrubbers consume less electrical power but rely on chemicals. All scrubbers
produce a hazardous sludge which must be properly disposed of in ports. One scrubber can treat exhaust
fumes from several engines; some can switch between closed and open-loop operation, depending on the
shipmasters preference. In general, scrubbers increase fuel consumption by one or two per cent, thereby
raising the overall fuel costs and CO2 emissions. Many ships have been retrofitted with scrubbers to
ensure ECA compliance. For example, the US-based cruise ship fleet has adopted scrubbers as its
preferred means of complying with ECA regulations. Globally more than 160 ships have installed or
ordered scrubbers.
The cleanest option
The third alternative is to fuel the ship with LNG. Natural gas is the cleanest fossil fuel available, and
when fuelling a ship with LNG no additional abatement measures are required to meet the ECA SOX
requirements.
The additional cost of the on-board LNG equipment can be recovered in three to six years, depending on
the LNG fuel price and the extent of ECA exposure. An LNG-fuelled ship requires purpose-built or
modified engines and special fuel tanks, a vaporizer, and double-insulated piping. Accommodating the
LNG fuel tanks can be challenging and will reduce
cargo space, but with new prismatic tanks entering the market the negative effects can be minimized.
DNV GL estimates see the fleet of LNG-fuelled ships increasing over the coming decade, forming a
diversified fleet of smaller coastal vessels and large ocean-going ships. More than 50 LNG-equipped
vessels are currently in service (refer to graphic), and more than 75 LNG-fuelled newbuilds have been
ordered. New technical solutions are under development, and work on the new International Code of
Safety for Ships Using Gases or Other Low Flashpoint Fuels (IMO IGF Code) is practically finalized.
The code will create a common platform for LNG-fuelled ships. Vessels currently in service or under
construction
are covered by the IMO interim guidelines for LNG as a ship fuel (MSC-285(86)) and related class rules,
which together form the basis for lag administrations to issue the required SOLAS certificates. Having
served both industries for decades, DNV GL is in an excellent position to help find smart solutions to

advance LNG as a ship fuel. For ports, DNV GL has published a five-step methodology for LNG fuel
logistics assessments:
1.
2.
3.
4.
5.

Define future LNG bunker demand for a given port over typically 10 to 20 years, broken down by
the ports main ship categories.
Define alternative elements in various relevant LNG supply chains.
Estimate cost-efficiency of alternative LNG main supply concepts.
Perform a detailed analysis of an LNG main supply and distribution concept, covering incoming
and port logistics, bunkering operations, port investments and utilization.
Create and recommend a solution, accounting for annual volumes and fluctuations.

Beyond this, ports should develop their safety regimes for LNG bunkering, bunkering practice, a scheme
for licencing LNG providers, and port traffic safety assessments with present LNG-fuelled traffic. DNV
GL has been working on these topics on a global scale for over ten years and performed financial analyses
for LNG providers. The conclusion is that LNG bunkering can be a safe, lucrative business for providers,
especially around ECAs which, by coincidence, have relatively low LNG feedstock prices.
DNV GL encourages major ports around the ECA regions to assess their options regarding LNG fuel. A
number of recent initiatives and new construction projects seem to indicate that the development of an
LNG infrastructure is picking up speed. While LNG fuel offers great opportunities to shipping, many
owners prefer scrubbers or low-sulphur fuels. New and even more cost-effective solutions will emerge
and there are some financial support programmes available. DNV GL looks forward to seeing more clean
ships plying the seas these coming years!
Source: DNV GL, Maritime Impact Issue 01.2015 (Reproduced By Hellenic Shipping News Worldwide
with permission from DNV GL)

Is Payment Of Time Charter Hire A Condition? The Astra Re-Considered

In Kuwait Rocks Co v AMB Bulkcarriers Inc (The Astra), the court determined that the obligation to
make punctual payment of hire under the amended NYPE time charter in that case was a condition of the
contract, so that failure to pay a single hire payment entitled the vessel owners both to withdraw the
vessel and to claim damages for loss of profit for the remainder of the charter period. On 18 March 2015,
judgment was handed down in Spar Shipping AS v Grand China Logistics Holding (Group) Co., Ltd. The
court disagreed with the analysis in The Astra, finding that payment of hire was not a condition of the
contract.
Owners had withdrawn three vessels from Charterers service due to non-payment of hire. They claimed
from the party which had guaranteed Charterers performance, inter alia, the unpaid hire which had fallen
due and damages for loss of bargain for the unexpired charter periods. In light of the courts finding that
payment of hire was not a condition, Owners were only entitled to damages for loss of bargain if they
could show that Charterers conduct was repudiatory and/or constituted a renunciation of the charters.

The judgment in this case effectively reverses the somewhat controversial position set out, albeit obiter, in
The Astra, a position which had potentially strengthened owners position where charterers failed to make
full and punctual hire payments. Reed Smith will be publishing a client alert which will consider this
case, and the comparison with The Astra in more detail, a link to which will be posted in due course.
Source: Reed Smith

Indias Alang will suffer if EU ship breaking law passed

European, Turkish and Chinese ship breakers are set to benefit from strict new EU laws on scrapping old
ships, potentially significantly impacting South Asian beach scrap yards. Of 1,026 ocean-going ships
scrapped in 2014, 641 were broken up on beaches in India, Bangladesh, and Pakistan, according to
figures from the NGO Shipbreaking Platform. Cargo ships and cruise liners that have reached the end of
their useful life are driven at full speed onto beaches and stripped down by hundreds of unskilled workers
using simple tools with little health and safety measures or environmental protections. Chemicals
routinely leak into the ocean when the tide comes in and there is a huge human cost, according to the Tata
Institute of Social Sciences in Mumbai, which estimates that during the last 20 years 470 workers have
been killed in Alang-Sosiya, the worlds largest stretch of ship-breaking beaches. Almost half of all
scrapped ships are sent to the beaches of Alang, known as the graveyard of all ships.
Karmenu Vella, European Commissioner for the Environment and Maritime Affairs, says the shameful
practice of European ships being dismantled on beaches will be ended with the introduction of the new
law.
The measure will require that EU-registered ships be scrapped only at sustainable facilities with proven
safeguards for the environment and its workers.
An approved list of ship breakers is expected to be published next year and is likely to include yards in
China, Turkey, North America and the European Union, but not South Asia.The European list will split
the market into a safe and substandard market, says Patrizia Heidegger of Shipbreaking Platform. It will
be the first large-scale implementation of the International Maritime Organizations 2009 Hong Kong
convention on ship recycling, which until now has only been ratified by three countries: Congo Republic,
France, and Norway.
The incentive of ship owners to sell their decommissioned vessels to South Asian ship breakers is huge,
as their lenient rules for disposing of asbestos and other forms of waste make the profits for breaking up a
ship higher. The ship owner therefore gets a better scrap metal rate based on the tonnage of the vessel. For
South Asian yards it can be a difference of almost 50%.
To counter this incentive, the European Commission is looking at ways to reward ship owners for
recycling their vessels at approved facilities, although no details have been announced. Indian shipyard

owners saw the new rules are merely a ploy to fill empty yards in Europe because less than 4% of all
scrapped ocean-going ships were broken up at European facilities in 2014. European shipping groups
such as Denmarks Maersk and Germanys Hapag-Lloyd have pre-emptively adopted policies to recycle
only at facilities that meet international environmental standards.
Source: India Gazette

Once Over $12 Trillion, the Worlds Reserves Are Now Shrinking

The decade-long surge in foreign-currency reserves held by the worlds central banks is coming to an end.
Global reserves declined to $11.6 trillion in March from a record $12.03 trillion in August 2014, halting a
five-fold increase that began in 2004, according to data compiled by Bloomberg. While the drop may be
overstated because the strengthening dollar reduced the value of other reserve currencies such as the euro,
it still underlines a shift after central banks with most of them located in developing nations like China
and Russia added an average $824 billion to reserves each year over the past decade.
Beyond being emblematic of the dollars return to its role as the worlds undisputed dominant currency,
the drop in reserves has several potential implications for global markets. It could make it harder for
emerging-market countries to boost their money supply and shore up faltering economic growth; it could
add to declines in the euro; and it could damp demand for U.S. Treasury bonds. Its a big challenge for
emerging markets, Stephen Jen, a former International Monetary Fund economist whos co-founder of
SLJ Macro Partners LLP in London, said by phone. They now need more stimulus. The seed has been
sowed for future volatility, he said. China Sells Stripping out the effect from foreign-exchange
fluctuations, Credit Suisse Group AG estimates that developing countries, which hold about two-thirds of
global reserves, spent a net $54 billion of this stash in the fourth quarter, the most since the global
financial crisis in 2008. China, the worlds largest reserve holder, together with commodity producers
contributed to most of the declines, as central banks sold dollars to offset capital outflows and shore up
their currencies. A Bloomberg gauge of emerging-market currencies has lost 15 percent against the dollar
over the past year.
China cut its stockpile to $3.8 trillion in December from a peak of $4 trillion in June, central bank data
show. Russias supply tumbled 25 percent over the past year to $361 billion in March, while Saudi
Arabia, the third-largest holder after China and Japan, has burned through $10 billion in reserves since
August to $721 billion.
Euros Decline The trend is likely to continue as oil prices stay low and growth in emerging markets
remains weak, reducing the dollar inflows that central banks used to build reserves, according to Deutsche
Bank AG.
Such a development is detrimental to the euro, which had benefited from purchases in recent years by
central banks seeking to diversify their reserves, according to George Saravelos, co-head of foreignexchange research at Deutsche Bank. The euros share of global reserves dropped to 22 percent in 2014,
the lowest since 2002, while the dollars rose to a five-year high of 63 percent, the International Monetary
Fund reported March 31.

The Middle East and China stand out as two regions that are likely to face ongoing pressures to run
down reserves over the next few years, Saravelos wrote in a note. The central banks there need to sell
euros, he said. The euro has declined against 29 of 31 major currencies this year as the European Central
Bank stepped up monetary stimulus to avert deflation. The currency tumbled to a 12-year low of $1.0458
on March 16, before rebounding to $1.0981 at 11:11 a.m. on Monday in Tokyo.
Growth Slows Central banks in emerging nations started to build up reserves in the wake of the Asian
financial crisis in the late 1990s to safeguard their markets for periods when access to foreign capital dries
up. They also bought dollars to limit appreciation in their own exchange rates, quadrupling reserves from
2003 and boosting their holdings of U.S. Treasuries to $4.1 trillion from $934 billion, data compiled by
Bloomberg show. The reserve accumulation adds money supply to the financial system each dollar
purchase creates a corresponding amount of new local currency and helps stimulate the economy.
Annual monetary base in China and Russia grew at an average 17 percent in the decade through 2013,
data compiled by Bloomberg show. The expansion rate tumbled to 6 percent last year. While central banks
have other ways of pumping cash into the banking system, such moves without the backing of increased
foreign reserves could end up weakening their currencies further an outcome they may want to avoid.
The swing in global foreign exchange reserves is one key measure of the global liquidity tap being
turned on and off, Albert Edwards, a global strategist at Societe Generale SA, wrote in a note on March
6. When a regime of loose money suddenly ends, emerging-market asset prices are usually one of the
first casualties, he said.
Source: Bloomberg

Dry

Rising thermal coal imports set to propel India to top spot


India may soon become the worlds largest importer of thermal coal, nudging the current top-ranking
China to second position. Indias thermal coal imports have begun to attract global attention as volumes
steadily grow and China begins to slow. Although India has been among the top destination markets for
thermal coal over the last ten years or so, the expectation of increased demand in the coming years on
account of economic growth prospects, growing power demand and government policies is driving
traders to keep a close watch on developments here.
Over the last decade, Indias thermal coal demand has grown robustly, estimated at around 25 per cent
CAGR. Currently, at 150 million tonnes (mt) import, the country accounts for about 16 per cent of the
seaborne trade of 915 mt. Although a large coal producer, Indian coal quality is sub-standard with a high
ash content of over 30 per cent. So, many power plants routinely blend indigenous coal with imported
ones to derive productivity benefits.
Starting at a modest 25 mt in the year 2000, thermal coal imports expanded to 50 mt in 2009 and to 100
mt in 2012 and further to 150 mt in 2014. Projections for the next three years are placed at 165 mt, 180 mt
and 190 mt until 2017. At the same time, domestic thermal coal production is expected to increase by
approximately 30 mt per annum from 510 mt in 2014.

For years, coal-fired power capacity additions have exceeded other forms of power generation while
domestic feedstock production growth has trailed demand growth. By 2018, India is poised to overtake
China as imports potentially reach 200 mt accounting for a fifth of the world seaborne thermal coal trade.
According to the Ministry of Coal, although India has adequate coal reserves (over 300 billion tonnes of
which 125 billion tonnes are in the proved category), actual production falls short of consumption
demand and the gap is met through imports.
The domestic production of coal has been constrained due to problems in expanding the capacity arising
from difficulties in land acquisition, geo-mining conditions, environment and forest clearance issues.
Inadequate infrastructure is another constraining factor, the government has said. For coal exporters such
as Indonesia, South Africa and Australia, India is some kind of a saviour even as Chinese coal imports are
slowing and may not anymore be the buyer of last resort. It is generally known that Chinas metals and
mining sector is not in a good financial shape.
Source: The Hindu Business Line

Port Hedland Iron Exports to China Climb in March as Prices Sink


Iron ore shipments to China from Australias Port Hedland increased 3.2 percent last month from
February as mining companies in the worlds largest exporter boosted output, hurting prices amid a global
glut. Exports to China totaled 31.2 million metric tons in March, the most since October, according to
data from the Pilbara Ports Authority. That compares with 30.26 million tons in February and 27 million
tons a year earlier, data show. Total iron ore shipments from the worlds biggest bulk-export terminal were
36.6 million tons from 35.7 million tons a month earlier and 34.4 million tons in March 2014, port
authority data showed.
Iron ore prices collapsed 18 percent last month as low-cost producers in Australia including BHP Billiton
Ltd., which routes cargoes through Port Hedland, boosted shipments amid slowing growth in China. A
call in March by Fortescue Metals Group Ltd., which also uses Port Hedland, for major miners to cap
supply to revive prices was spurned by rivals, with Rio Tinto Group Ltd. describing the proposal as harebrained. Global iron ore demand will contract this year, according to Deutsche Bank AG.
Ore with 62 percent content at Qingdao sank 34 percent since the start of the year, according to daily data
from Metal Bulletin Ltd. The raw material retreated to $47.08 a dry ton on April 2. Thats the lowest price
since 2004-2005, based on daily and weekly data from Metal Bulletin and annual benchmarks compiled
by Clarkson Plc, the worlds largest shipbroker.
Source: Bloomberg

Indias 2014/15 iron ore imports hit record 15.5 mln T as prices tank
Indias iron ore imports jumped to a record above 15 million tonnes in the fiscal year to end-March as
tumbling global prices and limited domestic supply pushed steelmakers to buy more of the raw material
overseas, industry data showed on Monday. Formerly the worlds No. 3 supplier of iron ore, India has
been importing it over the past three years due to court-imposed restrictions aimed at curbing illegal
mining in the major producing states of Karnataka and Goa. The shortage deepened last year when some
mines in the states of Odisha and Jharkhand were ordered to close after the expiry of licences.
Indias iron ore imports totalled 15.5 million tonnes in the past fiscal year, according to data compiled by
industry consultancy SteelMint, which tracks shipments at 18 ports across the country. In the year to
March 2014, imports were just 320,000 tonnes. More than half of imports in fiscal 2014/15 were brought
in by JSW Steel, Indias third-largest steel producer, with 8.4 million tonnes. Tata Steel followed with
3.06 million. Official Indian government data only covers April-December, with imports totalling 7.38
million tonnes, according to the trade ministry.
Despite the jump in shipments to India, global iron ore prices fell below $50 a tonne last week to the
lowest level since a key benchmark pricing index began in 2008. The steelmaking commodity has lost
about two-thirds of its value since the start of last year amid a global glut and slow demand from top iron

ore buyer China. The reopening of iron ore mines in states such as Odisha, Jharkhand and Goa may
reduce Indias imports in the current fiscal year, said Dhruv Goel, managing partner at SteelMint. We
expect imports will be limited to 6-7 million tonnes, subject to global iron ore prices, Goel said.
Source: Reuters (Reporting by Manolo Serapio Jr.; Additional reporting by Mayank Bhardwaj in New
Delhi; Editing by Alan Raybould)

Baltic sea freight index down on weak vessel demand


The Baltic Exchanges main sea freight index, which tracks rates for ships carrying dry bulk commodities,
fell last week as weak demand took its toll on vessel rates. The index, which factors in the average daily
earnings of capesize, panamax, supramax and handysize dry bulk transport vessels, dropped eight points
or 1.34 percent to 588 points. The capesize index fell nine points to 454 points.
Average daily earnings for capesizes, which typically transport 150,000-tonne cargoes such as iron ore
and coal, fell $87 to $4,218. The panamax index fell seven points to 589 points. Average daily earnings
for panamaxes, which usually carry 60,000 to 70,000-tonne cargoes of coal or grain, decreased by $54 to
$4,708. The handysize index fell three points to 386 points and the supramax index was down 10 points at
636 points. Handysize and supramax are smaller than capesize and panamax vessels.
Source: Reuters (Reporting By Nallur Sethuraman in Bengaluru, editing by David Evans)

Wet

Big Oil Companies Brace for Weak Quarter After Fall in Prices

The worlds big oil companies and their investors are bracing for some of the worst quarterly financial
results in recent memory as the first three months of the year closed with oil trading at about half of its
2014 peak.
The final quarter of 2014 was bad enough. British giant BP PLC announced its biggest quarterly loss
since the Deepwater Horizon spill in the Gulf of Mexico in 2010. Exxon Mobil Corps. cash flow fell to
its lowest level since the midst of the financial crisis in 2009. The year-end carnage was for a three-month
period in which a barrel of oil traded at $77. In the latest quarter, the Brent international oil benchmark
averaged $55.13 a barrel. Its going to be ugly, said Jason Gammel, an analyst at Jefferies. Its going to
be a really bad quarter.
Most of the worlds biggest oil companies have already slashed spending, with many of them cutting jobs.
Underscoring the severity of the oil-price pressure, they have also turned to investors to help them
preserve cash. Eni SpA of Italy cut its dividend in March, a dramatic move within a group of companies
that holds as almost sacred the ability to maintain steady payments to shareholders.

Royal Dutch Shell PLC and French giant Total SA recently said they would offer investors the option to
receive their dividend in shares, a move that could bolster the companies cash holdings. In February,
Exxon said to cut costs it would reduce first-quarter spending on share buybacks by two-thirds from the
preceding quarter to $1 billion. Chevron Corp. has suspended its buyback program altogether. After a
quarter of even lower oil prices, Big Oil is likely to continue to impose measures of austerity and
negotiate better deals with contractors. Consultancy Wood Mackenzie estimates that by next year
exploration costs will be driven down by about a third compared with 2014.
Companies are also working to cut operating costs, said Andrew Mackenzie, chief executive of BHP
Billiton Ltd., the Anglo-Australian mining giant that also has a sizable oil-and-gas arm. Its going to be
tightening the supply chain and sharing the pain, Mr. Mackenzie said in a recent interview. Some cost
cutting may show up when oil companies start reporting results later this month, providing some relief.
BP and Shell are among the first big companies to report first-quarter earnings, on April 28 and April 30,
respectively.
I think youll find that when BP and Shell report results there will be quite a sharp revenue drop, but
costs will have also fallen, said Paul Mumford, a senior fund manager at Cavendish Asset management,
which holds small stakes in both companies. BP, Shell and Exxon referred questions to previous
statements about how they are managing the weaker price environment. Chevron also noted previously
announced plans to cut costs, reduce spending and pursue assets sales, while adding that it remains
confident of its long-term business plans and its ability to manage the downturn.
Spending cuts are a Catch-22 for oil companies caught in a relentless race to replace the oil reserves they
draw down every year. Reduce exploration spending too much, and companies run the risk of failing to
line up new supplies to bolster their oil reserves, a closely watched metric for energy investors. And if
they cut development costs too deeply, production suffers, affecting cash flow. The pressure is acute.
Chevron Chairman and Chief Executive John Watson told analysts in March that the companys negative
returns for shareholders in 2014 were unacceptable and outlined significant cost-reduction programs
under way. The company is rebidding contracts and negotiating reductions with suppliers, even as it
works toward production growth of 20% by 2017.
To meet their substantial costs amid the price drop and fall in cash flow, companies have been piling on
debt in recent months. According to Morgan Stanley, large integrated oil companies led by Exxon, Total,
Chevron and BP raised $31 billion in debt in the first two months of the year, beating the previous
quarterly record of $28 billion amassed at the height of the financial crisis in early 2009. Loading up on
debt isnt necessarily a problem in the short term. Big integrated oil companies generate billions of dollars
in cash each year and have substantial refining and trading arms that provide some cover in a low-price
environment.
They have strong balance sheets and can take advantage of low borrowing costs. Morgan Stanley suggests
that the enormous amount of debt Exxon, Chevron and others have taken on could signal that the oil
majors have one eye on funding possible acquisitions. With many in the industry expecting crude prices
to start recovering in the second half of the year, some analysts are suggesting pricesand oil companies
earningsmay have hit a floor in the just-ended quarter. The first quarter is going to be, I hope, the
bottom of earnings for many years to come, said Fadel Gheit, analyst at Oppenheimer.
Source: Wall Street Journal

India: Oil Marketing Companies headed for sharp rise in profits

Good times are back for Indias public sector oil marketing companies (OMCs) namely, Indian Oil (IOC),
Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL). While falling global crude oil prices had led
to a sharp fall in under-recoveries on retail fuels like diesel and LPG (petrol price was decontrolled in
June 2010) and later the decontrol of diesel price, margins in the fuel marketing business, especially of
diesel, are expected to rise providing a boost to Ebidta of these OMCs.
An imminent expansion in diesel marketing margin is a key trigger for OMCs, in our view. It was
capped at Rs 1.4 per litre (versus Rs 2+ per litre for petrol) for over five years. Marketing segment
contributes 50-85% of EBITDA for OMCs and diesel is about 50% of volumes, said HDFC Securities
analysts in recent note. Bhaskar Chakraborty, Oil & Gas sector analysts at IIFL echoes a similar view.
The three OMCs are on a very good wicket because private players Reliance Industries and Essar have
not entered fuel retailing in a big way. Now that diesel price is fully decontrolled, there is a good scope of
diesel marketing margins rising by 50 basis points from Rs 1.4/litre to Rs 1.9/litre over the next one year.
The positive impact of higher margins on Ebidta will be Rs 1,000 crore for BPCL, Rs 800 crore for HPCL
and Rs 2,100 crore for IOC.
But, even if Reliance and Essar turn aggressive, it is unlikely to have a major dent on the profitability of
OMCs given the increased break-even level for private players. Our IRR (internal rate of return) model
indicates that to earn reasonable RoI (return on investment), new entrants require minimum diesel retail
margin of Rs 1.6/litre versus Rs 0.7/litre prevalent prior to deregulation, say Edelweiss analysts Jal Irani
and Yusufi Kapadia in last months report. Importantly, over these years, the public sector OMCs have
significantly upgraded their infrastructure, leading to high brand recall and loyal customers. For private
players to set up such a vast modern distribution network would cost far higher. Edelweiss analysts
believe that new entrants are likely to target customer loyalty and highway outlets to gain market share,
but may in fact drive up margins, a trend seen during the earlier free pricing era (2002-04). Chakraborty
though believes that private players will enter only when they are convinced that diesel will not be
brought back into the subsidy mechanism if crude price goes back to three figures.
Meanwhile, the gains from lower crude oil prices leading to a sharp fall in under recoveries will fully
reflect in FY16. Under recoveries reflect the loss incurred on selling fuel at below cost price. Although
majority of the loss is compensated by the government and upstream players (ONGC and Oil India) by
way of cash compensation and subsidy, the compensation came with a lag of 5-6 months leading to stress
on OMCs working capital and higher interest costs. But, with under recoveries seen falling from Rs
140,000 crore in FY14 to about Rs 70,000 crore for FY15, and further to Rs 30,000-35,000 crore in
FY16, OMCs working capital and interest costs will also plummeting. Total debt of OMCs will reduce
from Rs 133,000 crore to Rs 75,000 crore and interest costs from Rs 7,800 crore to Rs 4,300-4,500
crore, said an analyst.
Secondly, the decline in prices which had led to a huge inventory loss of over Rs 14,000 crore for OMCs
in the December quarter thereby impacting their profits, will also vanish going ahead. Average per barrel
price of Brent crude, which fell to $76.11 in December 2014 quarter from $109.78 in September 2014

quarter and $109.39 in the year ago period, averaged at $53.89 in March 2015 quarter and is expected to
stabilise at these levels for a few quarters. The US deal with Iran will only add to the supplies, and keep a
tab on prices. But, even as oil prices are down, gross refining margins (GRMs) are up sharply and signal
more gains for the OMCs.
However, one will need to watch the trend going forward as there is limited medium-term visibility.
Higher planned refinery outages across the globe during March to May this year has led to higher product
prices, thereby boosting GRMs. The Singapore-benchmark GRMs has risen to $9-10/barrel. Chakraborty
says, With regards the GRMs, there is no clear trend. Demand remains weak and hence margin trajectory
remains difficult to predict. Nevertheless, the refining business contributes about a fourth to revenues of
these companies (except IOC at about a third). Hence, unless the trend reverses sharply, the impact on
overall profits should not be meaningful.
In this backdrop, earnings of OMCs are estimated to increase sharply over the next 1-2 years, though part
of the surge can be attributed to the low-base effect given the earnings decline in FY15. While Edelweiss
analysts forecast HPCLs EPS to grow at a CAGR of 85% during FY15?17, BPCLs is expected to grow
by 29% and IOCs by 24%. HDFC Securities analyst Satish Mishra, too, expects earnings of OMCs to
grow at a fast clip. He expects their earnings to more than double (close to double for HPCL) during
FY15-17. Chakraborty adds, If the government increases the price of LPG or keeps affluent section out,
it would prove to be another positive trigger. On the negative side, there is no clear roadmap on subsidy
sharing. Hypothetically, if the government asks these OMCs to share more of the subsidy burden (which
so far is Rs 2,000 crore), then the stocks will react negatively, says Chakraborty. The street has been
awaiting clarity on subsidy sharing mechanism which is essential to enhance earnings predictability, and
the lack of it is preventing re-rating of these stocks. Given the outperformance in last three months,
investors could consider the stocks on corrections.
Source: Business Standard

Sub-Sahara Africa loses 85 percent of oil trade with US

Sub-Sahara Africas oil trade with the US has dropped by 85 percent in 2015, relative to performance in
2008, Victor Eromosele, a Nigerian Petroleum expert has disclosed. According to him, as of March 2015
annual petroleum export to the US from Sub-Sahara Africa has reduced to 15 billion US dollars relative to
the 100 billion dollars annual transactions in 2008. Eromosele disclosed this in his presentation at the
three-day Sub-Sahara Africa Oil and Gas Summit which ended here.
As US oil production booms, Africa, and not the Middle East has suffered more than all other oil
producers, the expert stressed. He attributed this slump in the volume of oil trade between Africa and US
to activities of Shale Producers and agreed with The Economist magazine in its assertion: The contest
between the shalemen and the sheikhs has tipped the world from a shortage of oil to a surplus. Nigeria
and other sub-sahara African countries, must get ready to compete and develop projects in the new world
of shale production, especially the one coming from the US, Eromosele urged.

For Shale gas alone, he indicated that the US has granted licenses to six of 26 projects on the queue in
Chinieres Sabine Pass, Freeport, Corpus Christi, Cove Point and Cameron to export Liquefied Natural
Gas (LNG) helping the country to save 100 billion dollars a year from not importing LNG. In Tight
(shale) oil, he said the US domestic production already exceeds that of Saudi Arabia while incentives are
being offered to help grow the renewable energy in the US. Meanwhile oil prices had slid on the global
market from 106 dollars per barrel in August 2014 to a low of 48 dollars last January, before inching up
slowly to 57 dollars per barrel in February and 60.43 dollars in March 2014.
Most developing countries whose budgets depend partly or heavily on oil exports have had serious jolts in
their annual estimates with Ghana reviewing downwards its estimates for the 2015 fiscal year as a result
of the moribund crude prices on the global stage. To save the situation, Eromosele urged sub-sahara
African countries to pool resources to build huge refineries to serve the sub-region. The three-day Summit
and Exhibition was on the theme: Unlocking the Upstream Potentials of Sub-Sahara Africa. Adeyemi
Adeyemo, a certified petroleum engineer said the sub- saharan potentials lay in deep waters, adding that
Subsea technologies hold the key for future field developments in deeper waters, complex reservoirs and
longer step-outs. Enditem
Source: Xinhua

Kuwaits crude oil exports to China up more than tripled

Kuwaits crude oil exports to China in February more than tripled, or rose 263.8 percent from a year
earlier to 1.04 million tons, equivalent to around 273,000 barrels per day (bpd), government data showed.
Kuwaiti shipments of crude oil to China exceeded 200,000 bpd level for the sixth consecutive month
since September, according to the General Administration of Customs. Chinas overall imports of crude
oil rose 10.8 percent in February on the year to 25.53 million ton (6.69 million bpd). Saudi Arabia
remained Chinas top supplier in the reporting month, with its shipments slightly increasing 1.8 percent to
1.15 million bpd, followed by Angola with 812,000 bpd, down 16.6 percent.
Russia became third but imports from the country declined 1.5 percent to 703,000 bpd. Iraq ranked fourth
and Oman fifth, respectively. The State-run Kuwait Petroleum Corporation (KPC) signed a 10-year crude
supply deal with Chinas top energy trader Unipec in August, the biggest-ever sales contract in KPCs
history by volume and revenues in all regions. Under the landmark agreement, the KPC supplies Unipec
300,000 bpd of crude oil, with a strong possibility of increasing the volume to 400,000 bpd.
Source: KUNA

Bunkering

Sri Lankan Bunker Association Urges Open Bunkering at Hambantota

The Association of Licensed Bunker Operators of Sri Lanka (ALBOSL) Sunday was said to have urged
the country's government to operate Hambantota port as a common user facility for bunkering, local
media reports. It is understood that ALBOSL is concerned that certain parties are trying to secure a single
user deal for operation of storage tank farms at the port, something the association says harks back to the
way the recently departed Rajapaksagovernment conducted business. According to ALBOSL, a single
user "monopoly" deal would be bad for bunkering in Sri Lanka, which it says should aim to develop
towards becoming a regional hub. But prices need to be competitive with the likes
of Fujairah and Singapore in order to develop, said ALBOSL. Currently storage capacity constraints mean
Sri Lanka's 12 licensed bunkering firms can only take delivery of small quantities at a time pushing up
unit costs and damaging price competitiveness. "Operating Hambantota tanks storage as a common
facility will enable ALBOSL members to utilise storage in both Colombo and Hambantota and import
larger cargo parcels with better economics," said ALBOSL. "This will lead to an overall improvement of
bunker prices in Sri Lanka and facilitates capturing more bunkering businesses in and around Sri Lanka
and increasing the foreign exchange income to the country." According to the report, bunker sales
volumes in Sri Lanka have remained at around the same levels for some years. However, the Indian
bunker industry has developed said ALBOSL and its ports now achieve prices much closer to those
offered at Singapore and Fujairah. "The monopoly will further lead to uncompetitive bunker prices and
definitely hinder the growth of the bunkering and maritime industries in Sri Lanka as a whole," it said.
"We believe such a situation will be contrary to the Government's vision of developing the maritime
industry and creating more employment opportunities." In February, the Sri Lanka Ports Authority was
said to be set to exit the bunker trade at Hambantota.
Ship & Bunker News Team

First LNG-powered ferry to operate in North America delivered


133-metre-long LNG-fuelled ferry F.-A.-Gauthier was delivered yesterday at Italys Fincantieri
Castellammare di Stabia shipyard. It will be the first LNG-powered ferry to operate in North America.
The vessel is the first in a series of gas-fuelled vessels built to LR class for the Canadian operator Societe
des traversiers du Quebec (STQ). With a capacity for 800 passengers and 180 vehicles, the ferry is also
the first LNG-powered ferry to be built in Italy.
The ferry, which is fitted with an ultra-compliant, low emission, dual-fuel LNG and diesel system, will
enter service at Matane in the Canadian province of Quebec. "This hi-tech vessel meets all the maximum
standards to deal with environmental pollution and is also certified as ice class in compliance with an
integrated bridge system notation as well as a dynamic propulsion system," said Claudio Percivale, LRs
Senior Surveyor in Charge for the project. This project was covered in detail in LR's November 2013 Gas
Technology Report.
Source: Lloyd's Register

Force Majeure in Bunkering Operations Declared Following Fire at Santos Fuel


Storage Facility

An ongoing fire at Ultracargo's fuel storage facility at Brazil's Port of Santos has interfered with
bunkering operations, Petrleo Brasileiro S.A. (Petrobras) said in an emailed statement. Petrobras said
that due to the fire, which is now past its fourth day, the company is not allowed to load bunker barges, as
per the port authority's decision. It has therefore declared a Force Majeure in bunker operations in Santos.
According to reports, the cause of the fire is unknown, with various vessels calling on the port have
already been diverted. Firefighters have reportedly been focusing on preventing surrounding tanks, which
are mostly filled with ethanol or gasoline, from catching fire as well, as there was little they could do until
all of the fuel currently burning was consumed.
Last week, operations at the Brasil Terminal Portuario reportedly halted after three loud explosions were
heard, setting fire to four tanks. Since then, the blaze is thought to have caught on to two other tanks.
According to a port authority spokeswoman, only two out of 53 docks have been affected. Nearby
facilities include ones operated by Norway's Stolt-Nielsen Ltd and Transpetro, a subsidiary of Petrobras.
Last month, Petrobras bunker deliveries at the Port of Santos was also temporarily suspendedfor a few
days due to "replenishment" issues.
Ship & Bunker News Team