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October 2012

Tanker Market Drivers, Issues and Outlook For The Major Tanker Sectors – VLCC, Suez, Afra, Pmx & MR. October 2012. Jerry Lichtblau True North Chartering. Jerry Lichtblau. jnl@truenorthchartering.com. 203-202-7490. Broad Theme.

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October 2012

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  1. Tanker MarketDrivers, Issues and Outlook For The Major Tanker Sectors –VLCC, Suez, Afra, Pmx & MR October 2012 Jerry Lichtblau True North Chartering Jerry Lichtblau jnl@truenorthchartering.com 203-202-7490

  2. Broad Theme • Impact of evolving oil demand has been joined by changing logistics of crude supply to negatively impact tanker demand. • Increased tanker supply and shorter voyages from source to destination of primary areas of demand growth have … • Combined with increased crude production from historic centers of demand that remain critical for tankers due to nominal volume of oil consumed to weaken earnings • Growth of crude supply has exceeded oil demand during 2012 • Aided tanker rates pre-summer 2012; impact of Iranian sanctions and softer Chinese demand have helped thwart any kind of post-summer recovery – are among primary issues to monitor going forward • U.S. “new crude”, in particular, not necessarily crude of choice – displacing some crudes while increasing demand for others • Increased attention to crude specifications as historic trade patterns impacted • Evolving demand/production has impacted product as well as crude trades

  3. Supply Picture • Past growth has been centered in Suez & Afra sectors • This year growth will be significant and/or increase its pace for VL’s& Suez, while moderating for Aframaxes • VL’s – 2012/’13 – 106 deliveries -- 62 in 2012 & 44 in 2013 • Suez – 2012/’13 – 117 deliveries -- 63 in 2012 & 54 in 2013 • Afra – 2012/’13 – 83 deliveries -- 54 in 2012 & 26 in 2013 • Proj. approximately 25 scrapping/removals for both VL’s and Sz in 2012 • Proj. approximately 45 scrapping/removals of Afra’s in 2012 • Thru September 7 VL’s, 19 Sz and 27 Afra’s have been scrapped • Historically VL’s have large # of “other removals” – 20 in 2011 vs. 12 scrap

  4. Supply Picture Con’t • Growth for the Panamax sector anticipated to continue to be moderate • MR sector growth to flatten after 50% supply growth during the ‘06/’12 period • Pmx – 2012/’13 – 40 deliveries -- 22 in 2012 & 18 in 2013 • MR – 2012/’13 – 156 deliveries -- 80 in 2012 & 76 in 2013 • Proj. approximately 12 scrapping/removals for Panamax in 2012 • Proj. approximately 40 scrapping/removals of MR’s in 2012 • In 2011 there were 12 Panamaxes and 35 MR’s ≥ 35k dwt scrapped/removed

  5. VLCC Environment • Shift in demand from US/Europe to China/India has augmented the impact of supply growth since end 2007 by over 75% • This was dampened during the 1st half of 2012 by increased WAF/East volumes and increased AG/USG due to Motiva ramp-up & increased U.S. light sweet production – • Both moderated during the 1st part of summer – WAF/East volume returned during September, but … • Seasonal reduction of AG exports Q3 – for regional power generation outweighed impact of increased WAF/East activity for September cargoes • Potential for a near-term Iranianexportsincrease (state backed cargo insurance)to augment increased Q4 oil supply thisyr, but not near 100% • Very soft Q3 market experienced the last two years may become more pronounced in coming years if regional demand for power requires increased volumes of direct run crude

  6. VLCC EnvironmentContinued • 2013/2014 to be further impacted by: • Previously noted tanker supply issues - increased deliveries in 2012 and 2013 – >100+ vessels (or 18%+ Jan ‘12 fleet) scheduled between both years  2% ≥ 20 years, near 15% ≥ 15 years • Increased ESPO volumes likely to impact Chinese VL usage – slowly at first as export ramp-up likely to be gradual – but a source for increased Afra demand – slides 19 & 20 for further detail • Above to be countered by increased AG/USG volumes once Motiva addition back on-line as well as incrementally higher imports due to increased indigenous light sweet crude requiring increased heavy sour volumes to meet target slate in USG – approx. avg API of about 27.3 and sulfur of 1.9% -- Timing to be key regarding Q1 seasonal strength

  7. Oil Demand Impact on Tanker Market Since Financial Crisis ∆ VL Supply • Shift in demand from US/Europe to China/India have essentially balanced each other nominally, but have augmented the impact of moderate VL supply growth since end 2007 by 75%+ as previously noted – supply growth had been moderate until 2012, but tanker demand hurt by changing geography of oil demand …

  8. Oil Demand Impact on Tanker Market Since Financial Crisis ∆ Oil Demand • Globally – demand grew by about 2.7 mm bpd from 2007 through the end of 2011 and YTD 9/12 has added an additional 0.9 mm bpd • U.S., Europe, China and India -- four focal protagonists split East and West of Suez have nearly balanced each other nominally – the rest of the world “in-effect” providing the growth in oil demand, both occurring to the detriment of long-haul trades …

  9. Chronology of Evolving Oil Demand’s Impact on VL Sector A decline in VL demand of 70 – 80 tankers since the end of 2007

  10. Easing Chinese Demand Easing Chinese Crude imports – point to softening demand • Indications are September imports/demand have improved, will need additional data points to determine if this is a revival

  11. 2012 WAF/East Volumes • WAF/East activity coincided with a firm market • September was obvious exception – lower AG volumes in 3rd qtr dominate market • Angola has been beneficiary of incremental growth • Future of increased 2012 volume is a question, as Sudan output returns • Continuing reduction to U.S. demand for imports of light/sweet crude imply that if Sudan bumps Angolan exports to China - There will likely be another surprise/revision to trade patterns as the Angolan crude will need a destination, government budgets should resist reductions to actual output regardless of quotas

  12. U.S. AG Sourcing Vs. North Dakota Bakken Production • Increased light/sweet crude production has coincided with increased AG imports. • Hiatus likely in coming reporting months, but will return with Motiva expansion • 2015+ AG sourced crude will increasingly be competing with Western Canadian sourced crude – planned pipelines will be able to deliver larger volumes of this crude to USG region • Additionally – will need to monitor plans for refineries basis crude slates – in order to run shale oil efficiently significant investment required – Flint Hills refinery recently announced it will spend $250 mm to better run shale oil

  13. U.S. AG Sourcing Vs. North Dakota Bakken Production – Con’t Sulfur content of USG has generally increased and the crude has gotten heavier as Bakken production has grown – The July drop in avg. API is tied to the decline in Iraqi imports whose API average for U.S. crude imports is about 30.5

  14. Reduced Q 3 Flows From AG Expected to Recover • AG direct crude-burn increases seasonally – a reduction in this usage and the bullet below point to increased AG crude supply in Q4 • Japan and India have worked out state-backed supplementary cargo insurance schemes and Korea expects to increase imports going forward Source: Citibank Commodity Research Source: Citibank Commodity Research

  15. Suez Environment • Correlated to VLCC’s due to substitution issues, WAF market – particularly Sz East movements and to a lesser extent AG volumes • Concerns regarding USAC refinery closures have been both alleviated and re-born although the issues driving the re-birth are not a surprise • 2 of 3 refineries to remain open, but alternative crude sourcing to temper support for sector • Reduced U.S. crude imports has led to sector owners seeking/finding increased diversity in demand, particularly in Caribbean, but … • 2013 developments in Russian logistics likely to counter this to some degree and weigh on sector demand • Increased Kozmino and Baltic (Ust-Luga) volumes expected to reduce Black Sea exports which utilize Suez tonnage • Sudan production shut-in aided WAF/East market during ’12, but pending 2013 return raises issues regarding level of Chinese imports from WAF in coming year – to impact both Suez and VL sectors

  16. Bakken Production Vs. U.S. Nigerian Imports • Bakken, Eagle Ford, Permian Basin & other shale oil pushed Nigerian crude out of USG – USAC imports from WAF nation to face similar competition • USAC refineries usage of rail delivery of Bakken crude to compete with mainstay of Suez delivery • PBF to have as much as 140k bpd of rail delivery capability at its Delaware City facility • Among planned investments at Philadelphia refinery by new owners is a high speed rail unloading facility at the refinery

  17. Total Chinese Crude Imports & From Angola Specifically • Chinese imports from Angola soared when strife between Sudan and South Sudan effectively removed Sudan as a reliable source of crude – with agreement with the “South” Sudan production expected to return in 2013 • Chinese imports came off in total & from WAF during Q3 as AG exports declined – expect Q4 increase as AG & global supply increase

  18. Suez Supply • Largest amount of scheduled NB’s of crude carrier both in number and percentage of fleet at 117 – over 25% of Jan ‘12 fleet • 8% of beginning of 2012 fleet is ≥ 20 years of age and about 18% is ≥ 15 years of age • Scrapping through mid-year about 3% of beginning year fleet • Reality may be a little less onerous as over 40% of the scheduled 2013 NB’s are from China and may be delayed based upon recent history • Approximately 25% of total 2012/2013 scheduled deliveries are being built in China – majority from the Rongsheng yard

  19. Aframax Environment • After years of supply pressure that had seen the fleet size grow by about 50% from 2004 to the beginning of this year, supply pressure has begun to alleviate – growth rate expected to subside this year and 2013 scheduled deliveries are less than half that for 2012 • This will coincide with increased demand as Russian export logistics undergoes significant changes • Kozmino volumes to expand – initially believed to about 425k bpd; increased Baltic volumes is a trend that is already visible • 600k bpd Kozmino exports was original plan, but recent reports indicate current East Siberian production is less than was expected – view is that productionwillstepupgoingforward600k will happen (will be 25 cargoes/mth) • Two-tier market potential due to 100k MT Russian stems and relatively small portion of fleet ≥ 110k Dwt • Anticipation of increased VLCC volumes to USG will aid regional Aframax market that has suffered since Venezuelan exports to the U.S. have declined

  20. Historical Russian Logistics & Aframax Fleet Profile • 110k+ Dwt portion of fleet is less than 30%, but was utilized for nearly 60% of 2012 Baltic volume* * As per TNC and Lloyds data

  21. Aframax Supply • 2012 scheduled deliveries are similar to 2011 amount but 2013 scheduled deliveries decline by over 55% • Scrapping through August has exceeded the 2011 total • 9% of beginning of 2012 fleet is ≥ 20 years of age and about 19% is ≥ 15 years of age • For all three sectors, 2014 and beyond orderbook is negligible – the combination of earnings and yard prices have dissuaded ordering thus far, but if yard prices are reduced during 2013 the market could be surprised • A non-fundamental issue to monitor going forward is the EU implementation of regulations regarding carbon taxes that will set limits on shipping as well as other industries – this could provide incentive to order newer more fuel efficient vessels for all sectors – may become an incentive regarding vessel ordering.

  22. Panamax Environment • Softening Atlantic Basin fundamentals • Core demand provided by residual/fuel oil under attack on both sides of the Atlantic • European environmental pressures felt most severely on dirtiest crude products • U.S. • Inventories – most of 2012 below 5-yr range • Demand – 4 week rolling avg. below 5-yr range for most of 2012 • Production – 4 week rolling avg. lower end of 5-yr range through 2012 • Imports – total imports below 5 yr range 5 of 7 months and below or bottom of range for 6 of 7 months on the USAC • Exports – middle or upper end of 5 yr range most of 2012 • However, flexibility has made this the “Traders Sector” – increased opaqueness of the spot market vs. similar sectors has aided earnings • Increasing utilization, particularly in Europe for the transport of clean products

  23. U.S. Residual Fuel PictureStocks, Demand & Production

  24. U.S. Residual Fuel PictureImports & Exports Other Info USG imports not pictured totaled 105k bpd in 2008 YTD 7/12 They are 43k bpd

  25. MR Environment – Atlantic Basin • Demand began year as a three-legged entity, but has transitioned to having a dominate single leg • European, Caribbean and U.S. sourced cargoes all provided or were perceived as providing substantial cargo volume … • Closing/idling of Caribbean refineries and decline of European capacity/production … • Bankruptcy of Petroplus followed 3 other earlier European refineries closings removing near 1 mm bpd of capacity • Market has risen and fallen based upon ability of U.S. export market to absorb tonnage • 2013 expected to experience 200k+ increase in Caribbean refinery capacity – approximately half of additions in Colombia -- exports vs. indigenous consumption will impact market • Return of operation of Aruba or its sale &/or increased European refinery utilization levels could provide positive surprise for 2013 market

  26. U.S. Product Exports Increasing Dominance of Caribs • YTD U.S. product exports continue to firm, but Caribbean sourced volumes have declined • U.S. sourced cargoes have more than doubled Q1 ‘11 to Q3 ’12 • Total regional declined early 2012 following refinery closures, but Q3 activity is within 5-7% of peak 2011 levels – however, tanker supply has become concentrated

  27. U.S. Product Export Development • Total product exports have more than doubled since 2007 • Diesel exports have risen over four-fold YTD 7/12 vs. YTD 7/07

  28. Preliminary 2013/’14 Outlook • Timing of Motiva ramp-up will be critical for VL sector earning in 2013 due to its potential impact on seasonally strong Q1 results and … • Due to correlation of 2 sectors this will also shape Q1 for Suez sector • Iranian sanctions could cap recovery of VL demand from AG • 2 wildcards to monitor … • If U.S. allows for limited export of shale crude as a sort of “quality swap” or similar scheme – it would increase tanker demand & the global supply/demand imbalance – will traditional producers need to reduce supply? • Routes utilized in Aframax outlook do not fully reflect changing Russian logistics, market to be stronger than index below – increased Baltic rates to aid North Sea market, but reduced Black Sea volumes expected to result in softer X-Med earnings • Longer term, the geography of new oil supply will shape the oil movement and thereby the tanker market • The issues tied to U.S. product exports/pricing, reduced U.S. distillate yields may shape the “options available” for shale oil

  29. Preliminary 2013/’14 OutlookAm Early Earnings View • Earnings on left do not reflect impact of slow steaming during last 2 yrs and for 2013/’14 • Approx. impact of • $4-$5k aid to VL’s • $3.5-$4.5k for Suez • $0.5 - $1.5k for Afra and smaller dwt sectors • Post 2014 wider Panama Canal will impact crude and clean trades as Aframax & Suezmax tonnage will have easier USWC & Asian access

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