Aging VLCC sector bracing for a deficit of ECO ships

The global shipping industry is grappling with the pressing need to transition towards eco-friendly practices, as ambitious demands for decarbonization and impending carbon taxes loom on the horizon.

The very large crude carrier (VLCC) sector is in a unique position with a large portion of its fleet, around 30%, expected to struggle to meet energy efficiency regulations, particularly the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII).

What is more, 14% of the VLCC ships are older than 20 years, and 30% of the VLCC fleet is older than 15 years, the highest fleet age since 2001. These ships are likely to become recycling candidates in the upcoming period due to their inefficiency.

That being said, the global demand for oil is expected to continue rising, with projections from the U.S. Energy Information Administration (EIA) indicating that oil demand would increase by  2.8 million barrels per day totaling 104.6 mbd by December 2024.

“The order book is at record low levels, hovering at around 2% of existing coverage,” Frontline’s CEO, Lars Barstad, said in a recent investor call following Frontline’s deal with CMB set to result in the acquisition of 24 ECO VLCCs from Euronav.

“While the oil market has expanded considerably in recent years, reminiscent of the 1980s and 1990s, ordering of new vessels remains muted.”

Indeed, the past 12 months have seen the ordering of just 1% of existing ships, a mere 11 vessels, representing a fraction of the fleet.

Further complicating matters, the VLCC sector is faced with reduced yard capacity, mostly filled with orders from other sectors, such as liquefied natural gas (LNG) and container shipping. Therefore, the earliest newbuilding slots are not expected until 2026, with substantial orders not anticipated until 2027.

“We argue that the carrying capacity of deep-sea tankers is in question,” Barstad noted.

As explained, projections indicate that there could be a deficit in shipping capacity in the coming years. Meeting expected growth in global oil demand would require 92 new vessels by the end of 2024, but only 17 are currently in the pipeline. Furthermore, 54 VLCC equivalents are expected to turn 20 years by 2025, resulting in an estimated deficit of 129 ships by the end of 2024.

As ships age, their efficiency diminishes, which poses further challenges. However, Barstad suggested that age limitations imposed by traders and national companies might come into question, particularly if strong pricing dynamics prevail.

Given the overall VLCC market status, Frontline sees its acquisition as a strategic move putting it in a ‘unique position to benefit from a tight market balance’.

The deal will increase Frontline’s fleet size from 65 to 89 vessels, making the company the largest pure-play tanker owner in the public domain measured by dwt.

The move also reduces the average fleet age of the company to 6.1 years, and the addition of 24 ECO vessels is set to improve the company’s fuel efficiency and lower fleet emissions.