Rising freight rates: trouble for oil firms, cheer for ship owners

Rising freight rates: trouble for oil firms, cheer for ship owners

Mumbai: The freight bill of India’s oil companies such as state-owned Indian Oil Corp. Ltd, Reliance Petroleum Ltd and Essar Oil Ltd has increased significantly because of a sudden rise in rates for shipping crude oil on very large crude carriers, or VLCCs, a result of a shortage of such vessels.

The hike in ocean freight rates spells trouble for oil refiners who are reeling under soaring crude prices. But it will benefit local VLCC owners such as state-run Shipping Corp. of India Ltd and Essar Shipping and Logistics Ltd. Typically, a VLCC can transport 2 million barrels or about 280,000 tonnes of crude oil in a single journey.

The increase in rates comes after a continuous downtrend in the freight tanker market since the middle of this year.

Last week, Indian Oil Corp. (IOC), India’s largest oil refiner, paid $9 million (about Rs35.64 crore) as freight charges for shipping crude on a VLCC from west Africa to Vadinar in India, according to shipping market reports. This translates into a freight rate of $4.50 per barrel. “Until recently, IOC was paying about $2.5-3 million in freight for hauling crude into India, which equalled about $1.50 per barrel. Due to the upswing in the VLCC market, IOC has to pay $3 more for shipping each barrel of crude oil," said a Mumbai-based ship broker who did not want either himself or his firm to be identified.

The ship broker said rates in the VLCC market soared after oil firms scrambled to hire ships before the holiday season started, leading to a shortage of ships. Expectations of a harsher winter in the northern hemisphere, which typically leads to more demand for oil for heating purposes, also contributed to the shortage.

Growth in global oil demand and increased production by the Organization of Petroleum Exporting Countries and others also boosted sentiment in the crude market, the broker said.

A 7 December accident about 5 miles off the coast and some 93 miles southwest of Seoul, involving the single-bottomed supertanker Hebei Spirit that caused South Korea’s worst oil spill, also triggered the boom in the VLCC market. Single-bottomed tankers are scheduled to be phased out worldwide by 2010 under an international maritime treaty. Following the mishap, demands emerged to ban single-hull tankers ahead of the deadline.

IOC imports about 36 million tonnes of crude a year and most of this is imported on VLCCs to achieve economies of scale in transportation.

Reliance Petroleum buys about 33 million tonnes of crude a year for its refinery located at Jamnagar in Gujarat and much of this is shipped on VLCCs from the Arabian Gulf and west Africa. Essar Oil, owned by the Ruias, also imports crude on VLCCs for its Vadinar refinery.

The Mumbai-based ship broker said the rate for shipping crude on VLCCs has gone up from about 50-55 Worldscale points a month back to more than 300 Worldscale points which translates into a ship hire rate of more than $200,000 a day. Worldscale points are a percentage of a nominal rate, or a so-called flat rate, for a specific route. Flat rates, quoted in dollar/tonne, are revised annually by the London-based Worldscale Association to reflect changing fuel costs, port tariffs and exchange rates.

“All oil firms who buy crude for their refineries are affected by the upswing in the VLCC market," said the ship broker whose company counts IOC and Reliance as its clients.

Among Indian shipowners, only Shipping Corp. and Essar Shipping own and operate VLCCs.