TANKERS: International Seaways orders three dual-fuel VLCCs to achieve ESG goals

Despite shipowner reluctance to engage in newbuilds due to unclear future fuel and propulsion technology and environmental regulations, tanker owner International Seaways in partnership with Shell ordered three dual-fuel LNG VLCCs for delivery in 2023, president and CEO Lois Zabrocky said on March 12.

International Seaways, which commissioned South Korean shipyard DSME to build the three VLCCs, has decided to renew the fleet at a cyclical low point of the tanker market.

"Adding these vessels to our fleet on seven-year time charters to a market leading counterparty in Shell both allows us access to very competitive financing as we renew our fleet at attractive levels and provides strong, stable cash flows with added upside [...]," said Zabrocky during the company's fourth-quarter 2020 earnings call.

Beyond the International Maritime Organization's announced emission reduction targets of cutting CO2 by at least 40% by 2030 and GHG emissions by 50% by 2050 compared to a base level of 2008, future IMO regulations on shipping fuels and carbon offsets are still unclear.

However, Zabrocky explained that these dual-fuel VLCCs not only meet the current Energy Efficiency Design Index, or EEDI, but also beat the 2025 Phase III EEDI target by about 8%.

According to International Seaways head of ship operations William Nugent, IMO has not agreed yet on what they will do in 2023 and 2030 although regulations will get more stringent and vessels with lower emissions will be less impacted. "LNG produces 13% less CO2 than VLSFO and together with more efficient engines and propellers, you get to 20%-40% lower emissions," Nugent said. "Highly efficient ship design coupled with lower carbon fuel results in trading through this decade and the decade that follows."

According to the earnings presentation, these newbuild VLCCs will be 40% more efficient than a 10-year old VLCC and 20% more efficient than a modern ECO VLCC.

"We expect these tankers to be well suited to adhere to future environmental regulation throughout their life," said Zabrocky.

The ships are slated to hit the water in 2023 and will be on a time charter to Shell until 2030, who is heavily vested in LNG bunkering operations along global trading routes at major ports in Asia, Europe and North America. Expectations are that by 2023 LNG bunker demand will reach around 3.6 million tons with 45 bunker vessels in service, according to Shell.

Partnership with oil companies

Oil major Shell has made significant investments in LNG for its long-term charter fleet with 14 in service by the end of 2021 and has also partnered with AET and Advantage Tankers to build three and four dual-fuel LNG VLCCs, respectively, the company announced March 11.

These ten new VLCCs takes the total number of ships powered by dual-fuel LNG globally up to 475, according to Shell's announcement, and brings the proportion of Shell's time chartered crude tankers powered by dual-fuel LNG up to 50%, hitting a new milestone in Shell's decarbonization endeavors.

International Seaways said the cost of the LNG fuel technology, as well as the ships' engine efficiency will be partially offset by the 7-year contract with Shell, as well as by the ships' lower fuel consumption after the contract expires.

"We would not order dual-fuel engines naked and so without a contract," Zabrocky said adding that both Total and Shell were the two oil majors heavily vested in LNG.

International Seaways operates a fleet of 34 tankers, including 11 VLCCs, two Suezmaxes, three Aframaxes, one Long Range 2 tanker, seven Panamaxes, six LR1s and four Medium Range tankers as well as two floating storage and offloading vessels.

Future supply looks balanced

Despite Shell's partnerships, which will bring 10 new VLCCs onto the market, International Seaways executives noted the historically low tanker orderbook.

Tanker deliveries in 2020 fell to 165 vessels compared to 255 in 2019, when a record number of VLCCs were delivered, with the overall tanker orderbook capped at 8%, the lowest seen in the past 10 years, according to S&P Global Platts Analytics.

Yet new vessel deliveries in 2021 are expected to be somewhat higher and the so far minimal uptake on LNG dual-fuel option could increase over the coming months into 2022, Platts Analytics said in its Freight Market Outlook March 8.

Given the slowdown in new tanker orders and the sharp decline in scrapping over the past couple of years, the global tanker fleet has been aging, with currently 177 VLCCs 16 years of age or older out of a total fleet of 836 units, forming a large base of potential scrapping candidates.

Coupled with a high level of scrapping indicated by an aging global fleet, a lean orderbook would be a positive factor for freight rates in the coming years.

"The uncertainty regarding the market as well as decarbonization regulations, higher steel input costs and already increasing newbuild prices is tempering the orderbook," Zabrocky said.

"Regarding the potential for recycling, the number of candidates based on the aging global fleet exceeds the VLCC orderbook by deadweight in the coming years," Zabrocky added.