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Euronav Cites Scrubber Costs as Future Challenge, But Stays Optimistic on Tanker Market’s Prospects

Euronav NV reported its non-audited financial results for the third quarter of 2018 ended September 30, 2018.

Paddy Rodgers, CEO of Euronav said: “The direction of travel for the large tanker market has changed from going sideways to up. Demand for and supply of crude has continued to improve as OPEC production has increased and the dislocation from Iranian sanctions has boosted and will continue to boost commercial tanker operators. Whilst the VLCC delivery schedule will remain high over the next 12 months, active recycling activity has kept net fleet growth negative so far year to date.

An accretive expansion of over 40% of our fleet size via the Gener8 merger has positioned Euronav with one of the most modern, efficient large tanker fleets accompanied by the strongest balance sheet including $677m of liquidity. This leaves us ideally levered to an upgrade on improving tanker cycle fundamentals through 2019 but also further anticipated positive developments from regulatory changes to shipping markets from the application of IMO 2020.”

For the third quarter of 2018 the Company had a net loss of USD -58.7 million or USD – 0.31 per share (third quarter of 2017: net loss of USD 28 million or USD 0.18 per share). Proportionate EBITDA (a non-IFRS measure) for the same period was USD 50.9 million (third quarter of 2017: USD 46.2 million).

Image: Euronav

The average daily time charter equivalent rates (TCE, a non IFRS-measure) can be summarized as follows:

The Gener8 merger was an important part of our wider IMO 2020 preparation as the transaction substantially improved the fuel consumption dynamics of our VLCC fleet by reducing average age of this fleet by 25% and giving us the youngest VLCC fleet in the quoted tanker sector.

Potential installation of exhaust gas cleaning systems or “scrubbers”
Euronav has 3 areas of concern when assessing scrubber installation on its fleet and continues to thoroughly investigate each of them.

1. Upfront capital investment of $5m per VLCC with very low visibility on returns

Installing scrubbers requires an upfront capital investment today with virtually no visibility of a return on capital. Promoters of scrubbers have used MGO as a proxy for the price of compliant fuel. Some refiners including Sinochem have recently confirmed that they will sell clean compliant fuel at a price likely to be half the difference between dirty HFO and MGO. So the investment case now has half the returns being promoted and it is still 14 months before implementation and nothing suggests this price gap will not further narrow in that time.

2. Risk of pollution from scrubbers and operational concerns
Open-loop scrubbers (OLS) use seawater brought on board to remove sulphur from exhaust gases, but the wastewater produced contains a toxic cocktail of sulphuric acid constituents, polycyclic aromatic hydrocarbons and heavy metals which are pumped into the open ocean, essentially transferring pollution from air to sea.

(a) Pollution risks Putting sulphur back into the sea reduces its natural buffering capacity Unknown cumulative impact of increasing sulphur content in world’s oceans Likely increase in ocean acidity over time OLS use increases CO2 emissions, cheaper fuel will incentivize owners to speed up the use of OLS

(b) Operational risks Additional capex and opex costs of operation Unproven application of this technology in a large volume tanker environment Known risk of corrosion Attention needed to mitigate safety/operational risks which are still quite uncertain

(c) Lack of scrutiny over technology Scrubber waste water disposal never been systematically investigated No valid or long term data available Cumulative impact on sensitive or congested sea lanes unknown

(d) Future regulatory risks Court of public opinion yet to be fully tested on OLS Risk of action by Port or Flag states Increasing application of rising CSR standards by investors & fuel producers

Promoters of this technology argue that the open oceans dilute waste water, rendering it harmless. But the solution to pollution is not dilution. Like plastic contamination over the years, we don’t know what the cumulative effect of this waste water will be or how it will interact with existing seaborne pollutants, particularly in congested sea-lanes like the English Channel, Malacca Straits or Baltic Sea.

3. Implementation and Enforcement regime Breaches of current emissions standards are on the rise in their existing environmental control zones (ECA). So far flag states appear ill-equipped to ensure regulatory compliance. Installing a scrubber enables regulatory compliance with the continued use of non-compliant high sulphur fuel. But weak regulatory oversight means non-compliance in the open sea, whether through breakdown or malfeasance, cannot be effectively controlled.

Euronav wholeheartedly embraces the IMO 2020 regulations – we want to adopt the directive properly, universally and without delay. Refiners and oil producers have increasingly made clear that sufficient compliant fuel will be available. Scrubbers are therefore a loop hole which makes enforcement of the sulphur ban extremely complex, difficult to enforce and likely to facilitate non-compliance.

Euronav continues to work closely with suppliers and producers on alternative mechanisms in which to capture volatility in the prices and differentials between HFO and LSFO and retains a very strong balance sheet providing optionality and flexibility to address the challenges of implementing IMO 2020.

On August 8 and August 29, Euronav took delivery of the Cap Port Arthur (2018 – 156,600 dwt) and the Cap Corpus Christi (2018 – 156,600 dwt) respectively against the payment of the remaining instalments of USD 87.2 million in aggregate. All of the four Suezmax vessels delivered during 2018 are all accompanied by seven-year time charter contracts.

Euronav has no outstanding capital commitments beyond usual maintenance expenditures associated with our dry docking schedule.

The Company sold the Suezmax Cap Romuald (1998- 146,643 dwt) for USD 10.6 million. The vessel was delivered to her new owners on August 22, 2018. The Company recorded a capital gain of approximately USD 9 million on the sale.

Demand for oil continues to be robust despite a higher price for crude in recent months and rising trade tensions from US/China tariff impositions. Rebalancing of the tanker market has continued with modest fleet growth on the global Suezmax fleet and negative fleet growth in the VLCC category year to date driven by recycling of 36 VLCCs. Recycling activity understandably slowed during the third quarter but 7 VLCC equivalents still exited the global fleet.

Trading movements continued to build through Q3 – traditionally the lowest transit quarter for large tanker shipping. This unusual activity was driven largely by returning production increases from both OPEC and from US exports. This trend has progressed further during Q4 augmented by increasing seasonal flows and the developing Iranian situation. Asset prices, albeit with a focus on newbuilds and younger tonnage, have continued to firm during Q3 with new build VLCC now quoted above $92m.

There are three caveats to a more positive outlook for the tanker market. Firstly, trade tensions and a sustained elevated crude price are likely to constrain global GDP growth and indirectly the demand for tanker tonnage. Secondly, fragility amongst some key oil producers could see supply restrictions driving the oil price even higher. Lastly, the next 12 months will bring sustained delivery of (primarily) VLCC new building supply. Recycling of 46 VLCC equivalents year to date has ensured fleet growth has been negative so far but requires further progress.

The development of the US led sanctions against Iran has specific implications for the large global tanker market. Iranian export barrels have largely been unavailable to the global commercial fleet so a direct consequence for large tanker operators is an increase in demand whilst Iranian sanctions are in place. Currently there are 14 inactive Iranian VLCCs implying a similar substitution requirement for tonnage from the global fleet. This requirement is likely to grow and be maintained as US sanctions are fully applied from next month.

A seasonal increase in the flow of cargoes has kick started an improving tanker market which should continue to build through 2019. Demand has remained resilient despite a higher oil price. Ton miles continue to grow via US crude exports. The underlying supply of cargoes has grown as OPEC/Russian production cuts have been reversed.

Encouragingly recycling activity has persisted and contracting restraint has been evidenced with no VLCC orders since May and only four Suezmax orders in total year to date. Further fleet rebalancing is required before this supportive background can be fully translated into improved freight rates on a sustainable basis.

So far in the fourth quarter of 2018, the Euronav VLCC fleet operated in the Tankers International Pool has earned about USD 26,962 and 56% of the available days have been fixed. Euronav’s Suezmax fleet trading on the spot market has earned about USD 19,171 per day on average with 53% of the available days fixed.

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Source: Euronav

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