Across the globe, tanker owners are facing another tough year as the market struggles with overcapacity. Weak freight rates and higher bunker prices have discouraged owners from placing new orders, despite falling ship prices, states the UK’s Drewry Maritime Research in its latest tanker forecast published in February.

With earnings at unattractive levels, owners are reluctant to take new deliveries. Even the strategy of yards seeking to attract owners by offering vessel designs with improved efficiency is not working.

Crude tanker owners are increasingly beleaguered with too many ships on the water. “VLCC [very large crude carrier] tanker rates are very low and in a lot of cases they aren’t covering their operating costs, let alone repaying any of the debt,” says an analyst at UK ship broker EA Gibson.  

Shipping fund

Some segments of the tanker market, however, are performing better than others. The market for product tankers, used to transport refined oil products, is looking more bullish.

According to Denmark-headquartered shipping industry association Bimco, just 77 new product tankers entered the global fleet in 2012. The lack of oversupply compared with the broader tanker market is important in firming up the investment case for this segment.

A new shipping fund launched in late February by the Saudi-headquartered multilateral development bank Arab Petroleum Investments Corporation (Apicorp) is predicated on favourable conditions for market growth that reflect, at least in part, the decline in the vessel order book.

Apicorp’s Petroleum Shipping Fund is a $150m sharia-compliant investment aimed at helping oil and gas companies grow their business while generating regular yield and returns for equity investors.

The fund seeks to follow the shift in seaborne trade patterns, says Ahmad bin Hamad al-Nuaimi, chief executive and general manager of Apicorp. “Growing economies such as China and India are lifting product carrier demand well above general economic activity levels,” he says. “We also have megaprojects being implemented in the Gulf region that will help on the supply side.”

The fund is co-managed by Tufton Oceanic, a global fund manager in the maritime and energy-related industries. It forecasts burgeoning demand growth in the product tanker segment.

“The medium-range [MR] tanker market is a defined segment in which we see positive growth in the next five years,” says Marcus Machin, director of Tufton Oceanic. “The consensus among analysts is that there will be 5 per cent annual demand growth for this particular class of tanker.”

The order book for MR class vessels is just 8 per cent of the existing fleet, a low percentage in the context of what are essentially wasting assets with a defined life.

“We feel that, coupled with the shifting patterns of the refining industry between 2010 and 2012, with some 2 million barrels a day [b/d] of refining capacity taken out of the Atlantic Basin, this is creating a change in trade patterns that we think is favourable for this type of vessel,” says Machin.

A wave of new refinery projects in the Middle East is supporting investment in the MR market. “What we’re seeing is a shift from a crude to a products market,” says the EA Gibson analyst. “Markets like the US are becoming less dependent on imported crude from areas such as West Africa. Meanwhile, countries like Saudi Arabia are putting much more emphasis on refining their own crude and selling it as product, which they then market worldwide.”

There are signs of growth in the product tanker order book, with UK/Dutch Shell Group reportedly creating 10 MR product tankers, while commodities trader Trafigura is said to be buying product tankers for the first time.

Attractive transport strategy

Apicorp’s approach is different in that the fund is designed to help companies meet their requirements for petroleum products transport without burdening their balance sheets. It has acquired five MR product tankers – at what it describes as highly competitive rates in a low point in the shipping market cycle. They will now be chartered out to the market.

Countries like Saudi Arabia are putting more emphasis on refining their own crude and selling it as product

Analyst at EA Gibson

This strategy is particularly attractive in that MR vessels have a lower energy consumption than equivalent crude tankers, entailing lower daily costs for operators. “The ships we have acquired, which are 50,000 dwt [deadweight tonnes], are as efficient as any vessels on the market and provide a sensible long-term investment,” says Machin.

The fund is a first for Apicorp. Its main activity is lending and investing in the oil and gas sector. As an equity owner, the Dammam-headquartered bank has invested in a total of 22 oil and gas joint-venture projects worth in excess of $16bn. The Petroleum Shipping Fund will support its strategic objectives of diversifying its business into new midstream sectors, as well as tapping promising growth avenues in the industry.

“This is Apicorp’s first shipping fund, but it’s only the beginning. Our intention is to develop more funds covering different assets, and to develop ideas that are appealing to investors,” says Al-Nuaimi. “One of our aims is to apply the fund structure to other segments within the shipping market, maybe in future larger ships – oil tankers and chemical carriers for example. This model could be replicated where companies want to utilise certain assets. We could set up a fund to acquire those assets and lease them out to these companies.”

Islamic investment

The sharia-compliant structure is particularly appealing to the market, says Al-Nuaimi. “The Islamic market is very large and is looking for such opportunities. There is already interest from certain institutions,” he says.

The sharia-compliant fund manages a total of $150m fully underwritten by Apicorp, of which 70 per cent is composed of debt and 30 per cent is equity provided by Apicorp and Tufton Oceanic. Apicorp will provide $40m of the equity, with $2.5m coming from Tufton Oceanic.

Fundamentally, the fund provides a mechanism for regional investors to participate in investment class in international marine assets not normally open to them.

“We have the option to involve other investors by selling down part of the fund, providing an opportunity for those who ordinarily do not have access to this highly specialised segment of the tanker market,” says Al-Nuaimi. “The fund offers guaranteed 8 per cent dividends from day one, which is very attractive.”

Although a new avenue for Apicorp, the launch of the shipping fund fits a broader strategic aim in providing new investment tools to local and regional investors, in order to help deepen the market in the region.

“For Apicorp, the launch of the fund is about how we best serve our shareholders to complement our activities as a multilateral development bank. After seeing 100 per cent growth in assets over the past five years, we are now providing new services, new investment tools to complement those activities,” says Al-Nuaimi.

Owned by the Organisation of Arab Petroleum Exporting Countries (Oapec), Apicorp may be well placed to identify and capture emerging opportunities within the oil and gas market. It is already an active lender to the downstream sector.

In January, Apicorp was appointed, along with Paris-based Natixis, to syndicate a two-year $200m loan for Switzerland-headquartered Glencore Energy, to finance repayment for Glencore’s purchase of oil products from Morocco-based petroleum refinery Societe Anonyme Marocaine de l’Industrie du Raffinage (Samir).

The lender is keenly aware of the sizeable expansion in the Gulf’s refining capacity that is under way through projects such as the Jubail refinery in Saudi Arabia, backed by France’s Total. Jubail will have a 400,000 b/d capacity – designed to meet growing demand for refined products in the Middle East and Asia.

An estimated 8.5 million b/d of new refining capacity is expected to come onstream in the Middle East and India in 2013-17, creating conditions for a robust product tanker market. 

Product tanker growth

There are downside risks. Countries such as India and China, for example, may choose to build more refining capacity locally in future, which would remove the need for additional product tanker traffic.

But for the next five years at least, the outlook is healthy for the product tanker market. More refineries are closing down in the Atlantic Basin, generating positive spin-offs for Middle Eastern exporters, as several former refining facilities in the US and Europe are turned into storage depots.

“These countries are no longer importing crude, they are going to be buying the product in and that has to be shipped in special tankers – so that is where the money is going,” says the EA Gibson analyst.

As more investors move into this specialised segment, Apicorp will be hoping that its first-mover advantage gives it a decisive edge.