VLCC in Suez Canal

Satellite photo of VLCC in Suez Canal
30°13'21"
32°33'10"
340 meters by 55 meters

Suez Canal Allows VLCCs

November 28th, 2006

Egypt to Spend $5 Billion on Suez, Allow Supertankers (Update1)
By Abeer Allam
(Bloomberg)

Egypt plans to spend at least $5 billion over five years to expand the Suez Canal, speeding up Middle East oil shipments to Europe and the U.S. and increasing revenue from the world's longest man-made waterway.

The canal will be deepened by 10 feet and widened by 17 percent to an average of 365 meters (1,198 feet), Admiral Ahmed Fadel, chairman of the Suez Canal Authority, said in an interview in Ismailia. The Egyptian government will spend at least $1 billion a year from 2010 through 2015 on the project.

``We want to get the biggest possible share of future world trade,'' said Fadel in an interview yesterday. ``We want to create more bypasses to handle future huge tankers.''

The expansion will let vessels use the canal without emptying half their cargoes into the adjacent Sumed pipeline first, stoking demand for very large crude carriers, or VLCCs, operated by Frontline Ltd. and Euronav NV. The largest vessels that can use the link without stopping are suezmaxes. About 7 percent of the world's seaborne trade transits through the canal. The waterway earned Egypt $3.6 billion in the past year.

``It will create stronger demand for VLCCs,'' James Davis, an analyst for Lloyd's Marine Intelligence Unit, said by phone from London. Demand for suezmaxes and so-called aframaxes, which haul 650,000-barrel cargoes, may fall, he said.

Previous Expansion

The canal, through which 18,000 ships passed in 2005, has spent about $800 million on expansion projects since 1980 to accommodate growing traffic. Global trade will grow 8.9 percent this year and 7.6 percent in 2007, according to the International Monetary Fund.

As many as 220 VLCCs, each able to transport 2 million- barrel consignments, transited the canal in the past 12 months, according to Lloyd's MIU. A further 264 elected to take the longer journey around South Africa.

Some oil companies discharge their entire 2 million-barrel cargoes into the pipeline that runs by the 166-kilometer (103- mile) waterway from the Red Sea terminal of Ain Sukhna to storage tanks at Sidi Kerir on Egypt's Mediterranean coast. They then return to the Persian Gulf for new cargoes and the oil they discharge is collected by smaller vessels in the Mediterranean.

Quicker transits through the canal may encourage some oil- tanker operators to take cargoes directly to where they are needed, curtailing demand for smaller vessels operating in the Mediterranean Sea, according to Lloyd's MIU.

Suez Crisis

The waterway, built by Ferdinand de Lesseps in 1869, was nationalized in 1956 by President Gamal Abdel Nasser after the U.S. and the U.K. withdrew financial support for the Aswan High Dam project. The move prompted an Anglo-French-Israeli invasion of Egypt in what is known as the ``Suez Crisis'' or ``the Tripartite Aggression'' in Egypt. International pressure forced the troops to withdraw and Egypt retained control of the canal.

The waterway is one of Egypt's largest foreign-currency earners, together with tourism, oil and gas exports and remittances from Egyptian workers abroad.

Suez Canal revenue rose 8 percent in the fiscal year that ended June 30 because of growing trade between Europe and Asia, the surge in oil prices and the 3 percent increase in Suez Canal transit fees. In the first 10 months of this year, revenue rose 10 percent to $3.2 billion from a year earlier.

The expansion will enable tankers carrying 350,000 metric tons of cargo, equivalent to more than 2 million barrels, to pass through the canal. Ships carrying a maximum of 200,000 tons are currently able to use the waterway.

Sumed Capacity

The Sumed oil pipeline has a capacity of 2.5 million barrels of oil a day. Egypt and Persian Gulf monarchies, including Saudi Arabia, Kuwait and Qatar, own the pipeline, which mainly carries Saudi oil. The pipeline opened in 1977.

``We agreed with Sumed officials in 1997 that we should be complementing each other and we should offer transit service as a package,'' Fadel said. ``We would do anything to keep Suez Canal's route the most economically competitive and that is why we are conducting current expansions.''

The project also will speed up shipments of oil from Europe to Asia, according to Lloyd's MIU. A BP Plc-led pipeline will pump up to 1 million barrels of Azeri crude oil to the Turkish port of Ceyhan. Fuel oil that's used to power ships is also transported from Russian exporters in the Baltic Sea to Singapore and China.

The Suez Canal has gone through several expansion stages. Following nationalization, it was deepened 4 feet to handle ships with a 38-foot draft. It then closed for eight years after Israel occupied the Sinai Peninsula, east of Suez.

Five-Year Plan

When the canal was opened for international trade in June 1975, the authority began a five-year plan to build three bypasses near Port Said, Timsah Lake and Deversoir along the canal coastline to allow transit of ships in both directions. The bypasses' combined length reached 69 kilometers.

From 1980 through July 2001 the canal was deepened in two stages to allow passage of ships with a 62-foot draft, and 200,000 tons capacity. By the end of 2007, it will be able to handle 66 foot-draft ships, with 220,000 tons capacity.

``With every stage we make sure the return will be higher than the spending and we keep adjusting our plans to cater for a changing world,'' Fadel said.

Morgan Stanley May Run Larger Tankers

February 22, 2006

Morgan Stanley May Run Larger Tankers for Oil Trades
By Alaric Nightingale

Morgan Stanley, the world's second- largest securities firm, plans to expand its oil tanker business as global demand for crude rises, according to two people briefed on the discussions.

The company is considering operating suezmaxes, 1 million- barrel vessels that would be the largest Morgan Stanley controls, said the people, who declined to be identified because the plan is still being debated. The ships often haul crude from West Africa and the Black Sea to the U.S. and Europe.

Morgan Stanley, which has traded crude oil since 1984, wants to bolster its shipping unit to compete with companies such as Glencore International AG and Vitol Group. The New York-based company purchased a tanker operator last year for $200 million. Taking control of larger ships would help ensure the bank has sufficient quantities of crude to support its trades.

``Morgan Stanley is everywhere, but the physical presence is the one big thing missing in their book,'' Anthony Nunan, deputy general manager for international petroleum business at Mitsubishi Corp. in Tokyo, said by telephone. ``The physical business is getting bigger but more competitive.''

Carlos Melville, a Morgan Stanley spokesman in London, declined to comment on the plans.

By having tankers, a trader can try to influence the underlying oil price by buying or selling crude, boosting profit, according to Nunan. The price at which most derivative contracts are settled is determined by the price of the underlying oil.

Flexible Storage

Morgan Stanley is the world's biggest trader of oil derivatives, according to rankings compiled by Risk magazine.

It had more money at risk trading commodities than equities last year, according to an annual filing. So called value-at-risk, or the estimated amount its positions could lose in a day, was $30 million for commodities on average in the year to Nov. 30 and $28 million for equities, the filing showed.

No other banks operate oil tankers, said Nikos Varvaropoulos, a tanker broker for Optima Shipbrokers in Athens.

``It gives them the flexibility to target markets where there's a short-term demand that might have a higher price,'' said Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh. ``It gives them floating storage so they can deliver to anyone, anywhere in the world.''

The Paris-based International Energy Agency estimates demand for oil will rise 1.8 percent to 86 million barrels a day in 2007.

Heidmar Ships

The ships would be run by the Heidmar Group, a Connecticut- based shipping company Morgan Stanley bought in September. As the operator of the vessels, Morgan Stanley doesn't own the assets so it doesn't carry the risk of their value depreciating.

The Heidmar acquisition gave Morgan Stanley access to a fleet of 87 smaller tankers, with the biggest capacities approaching 843,000 barrels. The purchase price was disclosed in a regulatory filing Oct. 6.

Morgan Stanley does not disclose how much it uses the Heidmar fleet, Mark Lake, a spokesman for the bank in New York, said.

The bank rarely ships physical crude oil, according to Jean- Francois Vincke, a freight trader for Riverlake Shipping SA in Geneva. When the bank wants to ship refined oils the vessel booking is discussed privately with Heidmar, making it impossible to judge how much Morgan Stanley uses its current fleet, said Truls Dahl, a tanker broker for Fearnleys AS in Oslo.

Suez Canal

Suezmaxes carry the name because they're the biggest tankers that can navigate Egypt's Suez Canal when fully loaded. They cost about $80 million, according to Fearnleys, a shipping broker.

``They don't want to be caught with a cargo in the market place and have freight rates destabilizing their trading activities,'' said Sverre Bjorn Svenning, a director at Fearnleys.

A larger class of tanker, called Very Large Crude Carriers, or VLCCs, can transport more than 2 million barrels of oil.

A bigger fleet of ships gives an owner more bargaining power over hiring prices. Heidmar doesn't have to disclose how much the carriers cost to hire, or who is buying the cargo. Heidmar also ships oil products such as gasoline, naphtha and jet fuel.

Morgan Stanley said today its investment management division agreed to buy 80 percent of Montreal Gateway Terminals from European tour operator TUI AG.