The Platou Report 2005

Transcription

1 The Platou Report 25 End 23 $391 billion End 24 $58 billion The world merchant fleet value increased by approximately 3 percent from end 23 to end 24.

2 Contents Introduction 1 The shipping environment 2 The shipbuilding market 7 The tanker market 14 The dry bulk market 21 The containership market 28 Mobile offshore units 31 The supply vessel market 36 PetroAdvisor AS 39 The car carrier market 42 R.S. Platou finans 43 The demolition market 45 Statistics 46 After office number 52 Addresses Cover page Design: Anisdahl, Sand & Partnere AS Photo: Tommy Normann Printing: RK Grafisk AS

3 INTRODUCTION 1 Accidental Empires or a well deserved payoff for Being There? Best shipping markets since the Age of the Vikings... Robert X. Cringley, a Stanford professor, wrote a highly perceptive and entertaining book, Accidental Empires, in 1993 about the nerds who started the PC industry in 198s. They thought they where creating something important and useful for mankind, and the most clever and stubborn of them became rich captains of multibillion dollar industry. Jerzy Kosinski, Polish Jew born 1933, escapes the Nazis, becomes an author, and in 1971 published his most famous book Being There (later made into a movie with Peter Sellers and Shirley MacLaine). The plot is about a slightly retarded gardener who becomes a celebrated adviser to the President, by making clever predictions about the US economy based on what is happening in his confined garden....or a well deserved payoff...? The answer to the question above is probably somewhere in between: The best performers has had the staying power and astuteness needed to prosper in a market that from on average yielded low or no returns for the passive investor in shipping. Now shipping markets have reached a profitability not seen since the age of the Vikings, their long shallow drafted merchant/mercenary ships could a on good round voyage recapture its owners investment (pure equity) a 1 percent +. The modern shipowner has retained the free spirit and courage of the Viking, but fortunately their social graces and table manners are much improved! What lies ahead? With supply more or less given for the next 3 4 years, we are left with an equation with one variable, i.e. demand. Based on the current outlook for growth in world GDP it seems reasonable to assume asset returns through 28, that well compensates for Being There... We hope to serve you well in 25, Yours Sincerely, Peter M. Anker Managing Partner

4 2 THE SHIPPING ENVIRONMENT "24 will most likely be remembered for decades as the most profitable year for shipowners." A paradigm shift in seaborne trade? For the second consecutive year we recorded a sharp upturn in almost all market segments, in utilization rates, freight rates, newbuilding prices and secondhand prices. Return on capital rose to unprecedented levels. After the meagre 199s, this decade has so far delivered a profitability that investors in most other industries have only dreamt of. What is really happening? Was the transition to a new millennium also a transition to a brand new shipping environment? Have we seen a paradigm shift? In last year's report we tried to give an answer to this question, but confined ourselves to the tanker market. We concluded: "We doubt there is a paradigm shift, but some of the supportive factors in the 2-3 period could realistically maintain the profitability at an attractive level also in the next few years." We also made an informal poll among authoritative and well-known participants in the tanker market and got the following precise answer: There is no paradigm shift! After 24 there is definitely a reason for being more in doubt. Has the reduction in international trade barriers and not least China's membership in World Trade Organization released a latent potential for an extended period of higher growth in the global economy as well as in world trade? In addition to a possible higher economic growth trend has there also been a shift in the correlation between economic growth and seaborne trade growth, to the benefit of shipping markets? Global economic growth in 23 and 24 of respectively 3.9 and 5. percent was above the long-term underlying trend of 3.6 percent, but it is still too early to establish this as a permanent shift in growth rates. As will be seen from a chart in this article, the growth in seaborne trade of oil and bulk commodities in 24 was in line with the historical correlation with global economic growth. In 23, however, seaborne trade grew much stronger than this relation should indicate. Against this background we are not able to draw any conclusions about a possible structural shift. If we widen the perspective to the total world merchant fleet, including the 1 most important shipping segments, we find an estimated tonnage demand growth of 1 percent in 23 as well as in 24. In the same years the fleet has increased by 5 percent per year. The average utilization rate rose from 83 percent in 22 to 87.5 in 23 to 91 percent in 24. We define 9 percent as full capacity utilization and at higher levels there is a shortage of transport capacity. The extreme profitability level is driven by the strong demand growth, while the fleet growth has more or less followed the long-term underlying trend. Unfortunately, we do not have sufficient and relevant data to track tonnage demand for the world merchant fleet over decades, but a rough estimate indicates a long-term trend growth of 4 to 5 percent per year since the beginning of the 199s. The 1 percent growth level in 23 and 24 is therefore in sharp contrast to the historical trend. Rough estimates indicate that as much as 4 to 45 percent of the tonnage demand growth in these two years can be attributed to the huge expansion in China. Excluding China, tonnage demand has risen by "only" 5 to 6 percent. China is without doubt the main contributor to the strong upturn in most shipping segments.

5 THE SHIPPING ENVIRONMENT 3 From left: Sven Ziegler, Leif Wollebæk, Bjørn Bodding, Erik M. Andersen If this shift from a tonnage demand growth of 5 percent to a higher level of 1 percent is a lasting shift, a paradigm shift, we have all reason to expect extremely strong shipping markets in the years to come. The world shipbuilding industry is geared to a long-term underlying trend of tonnage demand growth of 4 to 5 percent and to take care of the need for the replacement of old vessels. As a response to the strong demand growth for newbuildings in the last few years, delivery capacity will be expanded by as much as 17 percent from 24 to 25 by a number of short-term actions. Repair and offshore docks will be used for shipbuilding. Extended use of subcontractors and increased overtime are types of immediate measures to expand capacity. This is described more in detail in the Shipbuilding Market article. "China is without doubt the main contributor to the strong upturn in most shipping segments." Despite such a substantial expansion in delivery capacity the shipbuilding industry will in 26 and 27 only be able to take care of a 6 percent per year tonnage demand growth and the replacement of 25 year old vessels. In these years annual delivery capacity is estimated to be about 45 mill cgt. If the tonnage demand growth in 23 and 24 should be of a more permanent nature, 7 to 75 mill cgt of deliveries would be needed in 26 and 27. An expansion to such a capacity level will take many years, and there may not even be investors willing to take the risk to bet on a paradigm shift. The sharp 1 percent growth in tonnage demand can chiefly be ascribed to the markets for container vessels, bulk carriers and tankers including chemical tankers. In all these markets China was the dominating driver. Also in the markets for LPG carriers, car carriers, reefers, roro and cruise vessels the utilization rate increased and the profitability has improved. Only the market for LNG carriers weakened in 24. TANKERS. The year 24 was extremely profitable for tanker owners. VLCC spot rates exceeded $2, per day in mid-november to end up on an average for the year of close to $9,. The main driver behind all this was China with an impressive growth in oil consumption (15 percent, possibly 2!) and oil imports (34 percent). The utilization rate for the tanker fleet climbed from 89 percent in 23 to 91.5 percent in 24. Tanker tonnage demand increased by more than 6 percent, while the fleet was up by less than 4 percent. BULK CARRIERS. 24 is described as the strongest year ever in the dry bulk sector. In addition to an exceptionally sharp 8 percent increase in seaborne trade volumes, transport distances increased and heavy port congestion contributed to a tonnage demand growth of 1 percent. China alone accounted for some 45 percent of this growth, according to our estimates. The fleet increased by 4.5 percent and pushed utilization rate up as much as 5 percentage points. Modern Capesizes achieved an average tripcharter level of $62,5 per day, up from a very profitable $35,6 level in 23.

6 4 THE SHIPPING ENVIRONMENT CONTAINERS. In total, global imports of laden containers rose 12 percent, while tonnage demand increased even more, 13 percent, due to port congestion. The world container fleet was 9 percent larger in 24 than the year before, leading to a strong tightening in the tonnage balance. Again China was "responsible" for a substantial share of the trade growth, rough estimates indicating half of global growth. Timecharter rates for all sizes of container ships rose significantly during 24, while freight rates increased at a slower pace. CHEMICAL CARRIERS. The market for chemical tankers reached unprecedented heights in 24. Rough estimates indicate a tonnage demand growth of 12 to 15 percent. The main driver was China. The strong CPP market added significantly to demand. The fleet grew 7 percent in 24 resulting in a utilization rate some 5 to 6 percentage points higher than in 23. LNG. With deliveries of 2 new LNG carriers 24 represented a turning point in this market. Even if tonnage demand rose by a hefty 1 percent, according to current estimates, it could not absorb the 14 percent increase in the fleet and the utilization rate consequently fell by 4 percentage points. Imports of LNG to USA and South Korea continued its strong growth path and India emerged as a new importer. Europe and Japan on the other hand cut imports modestly. Global economy The global economic growth in 24 of 5. percent was the highest in 3 years and is the result of a strong growth in industrial countries and an exceptionally rapid expansion in emerging markets, notably China. The expansion was strongest in the first half of the year and eased gradually in the second half. Looking ahead, the global expansion seems to be somewhat weaker with further oil price volatility a particular concern. Consensus forecasts indicate a global economic growth of 4.2 percent in 25, the slowdown from 24 affecting all regions. Strongest is the downturn in Japan, which achieved a surprisingly high growth of 3.9 percent last year, but is expected to drop to 1.5 percent this year. In USA growth is predicted to be 3.5 percent in 25, down from 4.4 percent last year. The Chinese growth rate is expected to decline from 9.3 to 8. percent. In the EU only a moderate decline is expected from an already modest 24 level. In most OECD countries, headline inflation has been pushed up, but core inflation and wage demand have remained subdued due to increased competition from emerging countries, chiefly China, but also due to an increased credibility to the central banks. A significant part of the rise in headline inflation was generated by higher commodity prices. Oil prices rose 35 percent from 23 to 24, but end-user prices in national currencies increased more moderately due to a weaker dollar and subsidies on oil products in many countries. Oil prices still matter for the world economy. Several macro-economic models conclude that a $1 oil price increase will reduce global economic growth by some.6 percent. Monetary policy is generally expansive in most countries, but in USA monetary authorities have started to raise interest rates. A further rate upturn can lead to a cut in the credit based consumption growth through an increased savings ratio leading to weaker economic growth. The weakening of the dollar could raise inflation through higher import prices and trigger a need for higher interest rates, but so far core inflation is low. The debt burden in US households is high and vulnerability is significant, should house prices start to fall. The imbalances in the US economy persist. The trade deficit has continued to swell despite a 5 percent drop in the value of the dollar against the euro over the past three years, which had been expected to gradually TRADE VOLUMES VS. WORLD ECONOMIC GROWTH ANNUAL CHANGES IN PERCENT Volume growth* Annual average for 199s: 92 Volume: +1.9% Output: + 3.2% WORLD FLEET OF TANKERS, COMB. AND BULK CARRIERS ANNUAL CHANGES Percent * Seaborne trade of oil and dry bulk commodities World output growth

7 THE SHIPPING ENVIRONMENT 5 narrow the gap. Even though the drop in dollar makes US exports more competitive, demand from major trading partners remains weak. The economic recovery in the EU has been moderate and driven mainly by the global upswing, despite the negative effect on exports from a strong euro. High unemployment combined with a weak real income growth have curbed private consumption. Low inflation and moderate economic growth will most likely keep interest rates low. In China there are signs of a slowdown in economic growth, from a 1 percent level at the beginning of 24 to 8 percent at the beginning of 25. The debate over whether China is heading for a soft or a hard landing could, however, be replaced by a third possibility: that growth is picking up again. Data for the last few months could actually indicate just that. There are two big concerns about China's growth trend in 25: The risk of overheating and the extremely high investment level. From deflation in 22, through a very modest 1 percent inflation in 23, consumer prices in China reached a 5 to 6 percent increase in the second half of 24. The central bank in October raised interest rates for the first time in 9 years. Consumer price inflation has since moderated, but there is still a close watch on inflation and the possible need for higher interest rates. The other key concern is the investment level, which may be unsustainably high, close to 5 percent of the GDP. However, in contrast to the reliance on "hot money" from overseas that contributed to the Asian crisis in the late 199s, China has very high domestic savings and should therefore not be exposed to a similar crisis. On the other hand, China is very much dependent on an investment/export driven growth, while private consumption is rising modestly. Exports were up 35 percent in 24, investments rose by 26 percent, but consumption increased by only 5 to 6 percent. The crucial question is then who will absorb the huge increase in production capacity, should US consumers take a break in order to raise savings. There is definitely a need to rebalance the economy away from investment towards higher consumer spending. "There are two big concerns about China's growth trend in 25: The risk of overheating and the extremely high investment level." The long-term economic growth level in China is assumed to remain around 8 to 9 percent. Despite many years of strong growth, average yearly income per head is still only $5, dollars or 3 percent of the level in South Korea. A crucial question is the availability of cheap energy and important raw materials to fuel China's economic growth. We have already pointed to a possible shortage in shipbuilding capacity. The potential for a number of bottlenecks, which would constrain economic growth, is definitely there. Last year's surge in the prices of oil, coal, iron ore, steel etc. was a reminder. PROSPECTS FOR 25. Again the starting point is excellent a record high utilization rate in most shipping markets. Even if global economic growth is predicted to slow down somewhat from the very high level of 24, tonnage demand will most likely continue to show impressive increases. Possibly it may not be sufficient to absorb the higher fleet growth this year, but it will most likely be sufficient to make 25 another profitable year for shipowners. Erik M. Andersen, R.S. Platou Economic Research a.s WORLD SEABORNE TRADE AND ECONOMIC GROWTH Index 197= Seaborne oil trade Seaborne dry trade World output ANNUAL GROWTH IN REAL GDP Percentage change from previous year USA Japan EU Developing countries Africa China India Other Asia M East and Turkey L America C and E Europe Russia World Source: Consensus Forecasts and IMF

8 6 THE SHIPPING ENVIRONMENT World merchant fleet January 25 The world merchant fleet value increased by approximately 3 percent from end 23 to end 24. EXISTING FLEET 633 MILL. CGT Industrial shipping 185 mill. CGT 29.2% Others 47 mill. CGT 7.4% Car 21 mill. CGT 3.3% RoPax 23 mill. CGT 3.7% RoRo 21 mill. CGT 3.3% Cruise 18 mill. CGT 2.8% LPG 26 mill. CGT 4.% Tankers 185 mill. CGT 29.2% LNG 3 mill. CGT 4.7% Container ships 11 mill. CGT 17.4% Bulk carriers 153 mill. CGT 24.2% EXISTING FLEET $58 BILLION Industrial shipping $146,94 mill. 28.9% Others $18,528 mill. 3.6% Car $19,17 mill. 3.8% RoPax $34,376 mill. 6.8% RoRo $12,97 mill. 2.5% Cruise $24,264 mill. 4.8% LPG $18,467 mill. 3.6% LNG $19,228 mill. 3.8% Tankers $149,115 mill. 29.3% Container ships $98,289 mill. 19.3% Bulk carriers $114,97 mill. 22.4% ORDERBOOK 137 MILL. CGT Industrial shipping 35.2 mill. CGT 25.7% Others.7 mill. CGT.5% Car 6.1 mill. CGT 4.4% RoPax.6 mill. CGT.5% RoRo 1.3 mill. CGT.9% Cruise 3.7 mill. CGT 2.7% LPG 2.6 mill. CGT 1.9% Tankers 36.2 mill. CGT 26.4% LNG 2.2 mill. CGT 14.8% Container ships 42. mill. CGT 3.7% Bulk carriers 23.6 mill. CGT 17.2%

9 THE SHIPBUILDING MARKET 7 "24 Strong ordering activity in the shipbuilding industry" A strong growth in world economic activity in 24, and in China in particular, resulted in strong growth in demand and surging prices and rates in all shipping markets. The spot rate for large tankers and bulk carriers increased almost twofold in 24 compared to 23. Charter rates for other vessels also soared. In the container market, rates were up over 5 percent and that was also the case for chemical tankers and car carriers. One of the few markets where spot rates deteriorated was in the LNG segment. In spite of this a record high number of LNG ships were ordered, due to the high number of new projects coming on stream in the coming years. Record high earnings led to strong ordering activity in the shipbuilding industry in 24. An additional factor that fuelled demand for new ships was the low financing cost. Under normal circumstances one would expect interest rates to rise in periods when high economic activity results in inflation, and lead central bankers to increase interest rates to prevent the economy from overheating. In 24, however, interest rate levels remained low despite the high GDP growth. During the 199s, U.S. 1 year Treasury bills had an average yield of 6.7 percent, while the T-bill yield in 24 was 4.3 percent. TWO YEARS OF SURGING DEMAND LIFTED PRICES SIGNIFICANTLY. During the year we recorded orders equal to 68.5 mill compensated gross tons (cgt), an increase of 3 mill cgt from the previous year. Due to a change in the order mix from tankers and container vessels to other types of tonnage demanding more resources to build per dwt, the total number of dwt recorded was less than in 23. Our estimates show that ordering activity has exceeded building capacity during the last two years and the average building time for the total orderbook has increased from 14. months in the beginning of 23 to 2.3 months at the end of 24. This implies that the order backlog for the industry in general rose from just over two years to more than three years. At the end of 24 most yards were generally fully booked for 27 and well into 28. Due to the uncertainties of currency fluctuations and other costs of material when securing contracts that far ahead, yards were hesitant to fill up their orderbook beyond 28. However, due to a higher share of domestic clients and therefore less currency exposure, some Japanese yards were reported to be fully booked also for 28 and had booked slots well into 29. The total orderbook for yards capable of building tonnage larger than 3, dwt rose from 73 mill cgt to 137 mill cgt from 23 to 24. This led to continued upward pressures on newbuilding prices, which ended the year 24 between 5 and 8 percent higher than the last bottom level in 22. Capesize bulk carriers were priced at $62 mill in December 24, $1 mill higher than the previous record level seen in the early 199s. However, in real terms the record price from 1992 was 12 percent higher than the level seen at the end of 24. The cost of building ships continued to rise during 24 in all major shipbuilding areas. Part of this can be explained by exchange rates for Korean Won, Japanese Yen and Euro, which strengthened against the dollar. The Chinese Yuan remained pegged to the dollar, thus improving China's competitiveness against other builders. The price for steel and other equipment also continued its rising trend. Demand for steel grew by seven to eight percent in 23 and 24. Since production capacity could not keep up with demand, this resulted in a significant hike in the price level. Prices for steel plates used for building ships followed suit, as export

10 8 THE SHIPBUILDING MARKET From left: Petter C. Arentz, Gustave Brun-Lie, Katrine Brekke, Totto Hartmann, Fredrik Gløersen, Siv-Kathrin Toft Remøy prices from Europe rose by more than 6 percent during the 24, while domestic prices for plates in Japan jumped by 74 percent. The direct steel cost hike caused a 1 percent cost increase for a typical Aframax tanker, far less than the price increase over the same period. The order boom also created a huge demand for ship engines. Consequently, producers of engines also enjoyed a price rise for their products. In Japan and Korea, representing 7 percent of shipbuilding capacity, an engine was priced more than 3 percent higher at the end of the year than at the start. The market for ship engines was so tight that a Korean shipbuilder, Dong Yang, had to go to Croatian manufacturer 3. Maj to buy diesel engines for some of their vessels, for delivery in 27. This is the first time a Korean yard has bought engines from a European producer. YARDS REPORTED DECLINING PROFITABILITY IN A BOOMING MARKET. The general cost increase severely reduced profit margins for the yards. In 24, yards delivered tonnage that were contracted two to three years earlier when prices were at the lowest point since the middle of the 198s. In Korea, Daewoo's sales increased by 12 percent in the first three quarters of 24, but costs increased by more than 2 percent. This resulted in a 39 percent slide in operating profits, and sent the overall operating margin down from 8 percent in 23 to 5 percent by third quarter 24. The same could also be seen for Hyundai Heavy Industries, who reported an 11 percent increase in their shipbuilding division sales for the first three quarters, but due to increased costs the operating margin was only an estimated 1 percent. By the third quarter in 24, Hyundai H.I. reported operating losses for the whole group, in which shipbuilding represented almost half of the revenues. Samsung Heavy Industries, where shipbuilding represents more than 7 percent of total revenues, also posted an operating loss of KRW 41.5 billion for third quarter 24, down sharply from a KRW 3.5 billion profit a year earlier. Japanese shipbuilders also experienced a drop in profit. Mitsubishi H.I. saw its shipbuilding sales increased by 28 percent for the first half of fiscal 25 (ending September 24), but the operating loss increased further from 2.5 to 6.7 billion JPY. Kawasaki's shipbuilding department reduced sales by 14 percent and cut operating profit by 25 percent to 2,886 mill JPY for the first half of fiscal 25. HIGHER PRICES RESULT IN AN INCREASE IN DELIVERIES. World shipbuilding capacity is quite flexible. In periods when price levels increase, the willingness at the yards to add extra capacity will also increase. In 24 yards building larger tonnage than 3, dwt increased deliveries by 6.3 percent to 36 mill cgt, almost at the 6.7 percent average increase over the past decade from these yards. Furthermore, the orderbook indicates that this figure can be much higher in the coming years. Not only does China have great ambitions for this industry and are constantly increasing its capacity, through physical expansion as well as improved productivity, but Japanese and Korean yards have also boosted their delivery capacities. According to their schedules for 25 they will increase their deliveries by 8 and 24 percent, respectively.

11 THE SHIPBUILDING MARKET 9 Japanese owners were by far the most active to order new tonnage in 24. Japanese owners ordered vessels within the whole range of segments, in total amounting to 24 percent of all new orders, of which a 7 percent share was placed at domestic yards. German owners, backed by a favourable KG system, were also major players in 24 and took 13 percent of all new orders. These were predominantly for container tonnage, where they accounted for 38 percent of all new orders. Danish owners came in third place in the ordering 'competition', due to the order spree of AP Møller, who stood behind 92 percent of the orders, mainly container vessels, but also oil tankers and gas tankers. Greece took 6 percent of new orders, mainly for tankers and LNG carriers. Activity by country KOREAN YARDS WERE THE MOST AGGRESSIVE. Korea once again proved themselves as the world's leading shipbuilding nation. In 24 deliveries grew by 9 percent to 13.3 mill cgt, and the total orderbook grew from 44.1 mill cgt to 6 mill cgt. By the end of the year, Korea had an order backlog of more than three years. As a result of the order boom of the past two years and the subsequent hike in the price levels, Korean yards are set to increase deliveries by a massive 5 percent from 24 to 2 mill cgt in 27. The majority of the additional deliveries comes without any physical yard expansion or by increasing the number of employees, but by investing in new production equipment and outsourcing. The three largest yards have also utilized their offshore facilities for building conventional tonnage, as demand in the offshore segment has been low in the past years. However, the good times has also resulted in the opening of some new facilities in Korea. (For a further elaboration, see the textbox.) In terms of new orders, Korean yards were also in 24 the most active to sign new commitments. They were awarded 29 mill cgt worth of contracts in 24, a 1 mill cgt drop compared to 23. This represented 43 percent of all new orders, but a 4 percentage point drop in market share. As in previous years Korea maintained a high share of tankers and container vessels, although its share dropped below 5 percent in both segments, as shown in the graph below. Its market share for other types of "Korean yards took 74% of all orders for gas carriers." tonnage increased in 24 as Korea remain dominant in the gas carrier segment and increased its efforts in the car carrier segment, doubling its share to 28 percent of all new orders. By the end of 24 Korean yards were fully booked through 27, and had not even started marketing their 28 slots. Although some contracts with existing clients were signed for late delivery, in general only LNG carriers were listed as firm orders in 28 and onwards. The demand for this type of tonnage was surging in 24 and some of the Korean yards were reported to have signed options for large LNG carriers for the period 29 to 212. On the back of a long-lasting order boom, new Korean yards entered the market in 24. A local cement company, Dawhan Cement, opened a facility in Mokpo, targeting tonnage up to 3, dwt for internal use, but will also consider taking orders from other owners. Other newcomers are the former hull and block-builders Sun Dong Shipbuilding and Dong Yang Heavy Industry. JAPAN TOOK TWO THIRDS OF ALL BULK CARRIER ORDERS IN 24. Japanese yards were also able to increase deliveries further after a period of high ordering activity and booming prices. Japanese yards capable of building tonnage over 3, dwt delivered 11.5 mill EXCHANGE RATES Index 1995/1 = 1 ORDER BOOK (3, DWT+) January 1st 24 vs 25 CGT % 15% 11% 1% 31% 3% 17% 18% 31% 26% YEN/$ WON/$ EUR/$ Tankers Bulk carriers Cotainer ships LNG Others

12 1 THE SHIPBUILDING MARKET cgt in 24, 8 percent more than the year before. The orderbook grew by 1.5 mill cgt during 24 and ended the year at 38 mill cgt, which represented 3.5 years of work for the yards. Looking at the orderbook at the end of 24, the yards have planned a further increase of 7 percent in the 25 delivery schedule. In terms of new orders, Japanese yards increased their market share in 24 by taking 27 percent of all new orders, equal to 19 mill cgt. They increased their "Some Japanese yards are booked well into 29." portion in both the bulker and the tanker segments, while maintaining their position in the container segment and in other tonnage types. In 24, 7 percent of orders in Japan came from domestic owners. The Japanese shipbuilding industry is more diversified in terms of types of tonnage built than Korea. As the majority of contracts fixed at Japanese yards are for domestic accounts, the order book details are not always available to the public, but by the end of 24 some yards claimed to be fully booked for 28 and well into 29. The huge Mega-float project launched as an alternative for Tokyo's Haneda airport several years ago, where yards reserved slots for building steel blocks, experienced further delays due to delayed decision making by authorities and finally a clear tendency away from this alternative. There is still some "official" uncertainty regarding when and what the decision will be, but few yards have kept their reserved slots for this project. JAPANESE YARDS ARE UPGRADING THEIR BUILDING FACILITIES. Mitsubishi Heavy Industry, announced at the end of 24 a workforce reduction plan of 35 percent, or 2,2 jobs, for its main Nagasaki yard over the next five years. However, not all yards are scaling down. The order boom and rise in price levels have turned the wind for some Japanese yards. Fresh cash is now being invested in a much needed modernisation of the aging Japanese shipbuilding facilities. Imabari Shipbuilding is considering building a second dock at its Saijo works, which opened in 2 the first new facility in Japan since the 197s. Other yards were looking at investing in new cranes and assembly facilities to help improve profitability and boost capacity at the yards. Namura Shipbuilding announced plans for investing JPY 6 billion in 25/26 which without any physical expansion should help the yards increase their output by 5 percent, from 8 to 12 Capesize bulk carriers per year. In order to achieve this goal, an extra workforce of 5 will be needed over the next four to five years. Mitsui Engineering and Shipbuilding also invested in a new indoor fabrication and paint factory together with new cranes which is expected operational by mid 25. The investment of JPY 3 billion is estimated to improve productivity and raise production by 5 percent. Shin Kurushima and other yards have also plans to increase their crane capacities. FOREIGN YARDS INVEST IN PRODUCTION FACILITIES IN CHINA. China increased deliveries by 2 percent from 23 to 24 to 4.2 billion cgt, confirming its place as the third largest shipbuilder, with an 12 percent share. The orderbook grew by 4.9 mill cgt during 24 and ended the year at 17.9 mill cgt. This represented a forward workload of 3.25 years for the larger Chinese yards. By the end of 24 they were in general fully booked into the first quarter of 28. Their market share in term of new orders was maintained in 24 as Chinese yards were awarded 14 percent of all new orders. They were aggressive in the container segment, as their share leaped from 8 percent in 23 to 18 percent in 24. Their market share of tankers was slightly up, while a significant decline in the dry bulk segment was recorded. Due to increased building costs some local Chinese yards made attempts to renegotiate contract prices that were too low and would NEW ORDERS FOR KOREAN YARDS NEW ORDERS FOR JAPANESE YARDS Mill. CGT % World market share Mill. CGT % World market share % 5% 4% 3% 2% 1% % 6% 5% 4% 3% 2% 1% % % Tankers CGT Cont CGT Tankers % share Cont % share Bulk c. CGT Others CGT Bulk c. % share Others % share Tankers CGT Cont CGT Tankers % share Cont % share Bulk c. CGT Others CGT Bulk c. % share Others % share

13 THE SHIPBUILDING MARKET 11 result in losses for their yards. Another factor involving delivery risk was the fact that during 24 some of the smaller local yards increased their order intake and thereby their planned yearly output. There is a question mark whether these local yards will be able to perform according to schedule. New large facilities are being planned in China. CSSC will build new yards at Changxing Island and Chongming Island and CSIC are expanding their yards at Dalian and Qingdao Beihai. We have estimated that Chinese building capacity may increase by over 2 percent annually in the years to come. However, as China's government tries to avoid overheating the economy and have stopped the financing of some new projects, they have also restricted the beam size of new facilities, which could postpone some of the new projects. Investment by foreign companies in new Chinese shipbuilding capacity continued in 24. A new joint venture between Mastek Heavy Industries and China Natinal Machinery Export and Import Co. was established at Qingdao, named Mastek Shipyards International. The $121 mill project which combines Korean know-how and cheap Chinese labour, will have an estimated output between 1.3 and 2.5 mill dwt. Other Asian yards have already taken advantage of low labour costs in China by manufacturing hull blocks and exporting them. Kawasaki's tie-up with Cosco and Samsung are examples of this, and during 24 Tsuneishi set up a $7 mill facility in Zhejian province for production of blocks. Furthermore, STX and Daewoo also announced plans to move part of their production to China. "China entered the LNG market." The first LNG carriers to be built in China were signed at Hudong Shipyards in 24. Two import projects in the Guangdong and Fujian provinces contracted for LNG deliveries from Australia and Indonesia. These vessels will be built in China under the technical support from French LNG builder Atlantique. EUROPEAN YARDS STRUGGLING. Deliveries from European yards declined by.2 mill cgt to 5.7 mill cgt from 23 to 24. The order backlog increased by 3 mill cgt during 24, ending the year at 15.8 mill cgt. Germany was the largest builder in Europe by delivering 1.2 mill cgt, the same as the previous year. Poland, in second place, increased its deliveries to.9 mill cgt. Croatia and Italy came in third with.8 mill cgt. A troubled European industry is struggling with unfavorable currency developments and high unit production costs. According to the orderbook, a further decline of.3 mill cgt in deliveries by 25 is anticipated. Europe maintained a 13 percent market share of new orders, helped by Croatian yards' hunger for tankers and car carriers and a much welcome increase in orders for cruise vessels. German and Danish container orders were also major contributors. In Spain, the state owned yard Izar was fined by the EU for illegal state aid and was forced to reorganize into a commercial and a naval shipbuilding entity. In Poland, the largest builder Gdynia, received close to 5 mill dollars in state loans and guarantees during 24, but announced that it was not able to make a profit in 24. Activity by type of vessel TANKER ORDERBOOK PASSED 8 MILL DWT. Tanker owners experienced record earnings in 24. The average spot rate for modern VLCCs was $89,/day and the high rate level resulted in strong ordering activity. However, as most of the category 1 (pre-marpol) tankers in accordance with the IMO phase-out scheme were already removed from the market, and facing an orderbook of 28 percent of the existing fleet, owners were more hesitant to order new tonnage than the extremely NEW ORDERS FOR CHINESE YARDS BUILDING PRICES FOR CONTAINER SHIPS Mill. CGT % World market share Mill. $ % 3% 2% 1% % Tankers CGT Cont CGT Tankers % share Cont % share Bulk c. CGT Others CGT Bulk c. % share Others % share 13,5 DWT / 17 KN / 1TEU 22,5 DWT / 19.5 KN / 17 TEU 43, DWT / 21 KN / 3 TEU

14 12 THE SHIPBUILDING MARKET high rate level would indicate. Newbuilding prices, which increased between 25 and 4 percent in 24, also curbed demand for new orders, which in 24 ended at 36 mill dwt, a decline from 49 mill dwt from the year before. Ordering of product tankers declined by 12 percent and amounted to 1 mill dwt, while new "The amount of chemical tankers almost doubled." orders for crude carriers slumped 33 percent and ended at 22 mill dwt. The amount of chemical tankers almost doubled, ending the year at 2 mill dwt. There seemed to be a greater interest for smaller tankers during 24, as only two thirds of the orders were for Aframax tankers and larger, compared to 8 percent the year before. Japanese owners were again the most hungry, accounting for 25 percent of the orders. As much as 12 percent of the Japanese orders were placed outside Japan compared to only 4 percent the previous year. In second place, the Greeks ended up with a 15 percent share. BULK CARRIERS: CONTINUED HIGH ORDERING ACTIVITY. Charter rates in the dry bulk market in 24 reached levels never recorded before. In spite of an almost doubling of timecharter and spot rates, new orders ended up at only 1 mill dwt higher than the previous year. A growing orderbook, which at the end of the year represented 18 percent of the fleet, and high newbuilding prices, seemed to be of concern also for bulker owners. During the year prices for bulkers increased by 32 to 36 percent and of the 29 mill dwt ordered Japanese owners accounted for some 54 percent. Driven by an increase in transportation costs and thus increased incentives to economies of scale, size seemed to matter this year. As many as 11 vessels of 3, dwt or more were ordered, crowned by a Greek owner that placed an order for two 363, dwt bulkers towards the end of the year. CONTAINER ORDERBOOK REACHED 5 PERCENT OF EXISTING FLEET. The container market also experienced a boom in demand in 24, and charter rates improved considerably. As a result, the number of new contracts signed amounted to 1.72 mill teu, only 13, short of the record level seen the previous year. Germans were again the most active in the segment, accounting for 35 percent, followed by Denmark's AP Möller who alone stood behind 2 percent of the new orders. The long-term trend towards larger container vessels seemed to come to a halt. Only 29 percent of the orders were for tonnage larger than 8, teu, while the corresponding figure in 23 was 35 percent. The orderbook grew from 37 percent of the existing fleet to over 5 percent during the year. Prices increased between 3 and 5 percent. OTHERS. Two segments stood out in terms of ordering activity in the smaller shipping segments: car carriers and LNG carriers. A continued high interest for new car carriers was seen in 24 on the back of strong economic growth and increased sales of Korean cars, which resulted in strong growth in vessel demand. One owner made a bold move by signing contracts for two large vessels with a capacity of 8, units each. At the end of the year new contracts numbered 47 and the orderbook represented 25 percent of the existing fleet. NEW HIGH IN ORDERING OF LNG CARRIERS. The LNG segment has been one of the fastest growing segments in the shipping industry, and a sustained strong interest in newbuildings resulted in an exceptionally high ordering activity in 24. Qatar finally awarded two large tenders amounting to 16 ships, of which 8 were larger than the established 145, 153, cbm standard and equipped with diesel engines and liquefaction plants. In addition, they have announced further need for up to 44 vessels to be contracted in the next two years and BUILDING PRICES FOR BULK CARRIERS Mill. $ BUILDING PRICES FOR TANKERS Mill. $ Handymax Panamax Capesize Mr product Aframax DH Suezmax DH VLCC DH

15 THE SHIPBUILDING MARKET 13 have reserved a number of slots for large LNG carriers at the three Korean yards from 29 to 212. A total of 72 new contracts were signed in 24, bringing the orderbook up to a massive 78 percent of the existing fleet. PROSPECTS FOR 25: A GOOD BALANCE BETWEEN SUPPLY AND DEMAND. The last two years have been exceptionally good years for the shipping industry. The world has experienced high economic growth, and China has been the major contributor in generating demand for new tonnage. The consensus prediction for 25 is a slow-down in economic growth, but the forecasted 4 percent is still a relatively high growth rate. What is more of a concern is the size of the orderbook in most segments. We therefore expect more moderate rate levels in the major segments. This should result in decelerating ordering activity, albeit still at a high level. The supply side in the shipbuilding industry is set to grow more rapidly than previously expected, mainly due to the sharp increase in prices. We have estimated the long-term growth trend for the world shipbuilding capacity to be 6 percent per year. Heavy investment in new steel production capacity in China could lead to lower steel prices in In conclusion, we expect a good balance between supply and demand for 25, indicating stable newbuilding prices throughout the year. The downside risk is limited as the yards now have the highest order backlog since the 197s and therefore have little incentive to cut prices in order to attract new contracts. As always, significant changes in exchange rates and freight markets could alter the picture. Shipbuilding capacity in 25 Mill. CGT CHINA SOUTH KOREA Due to the recent strength in the shipping markets, activity in the shipbuilding industry has been intense in 24. With full order books and record newbuilding prices, the yards are pushing their capacity limits in order to maximise profits. World shipbuilding output, measured in compensated gross tons (CGT), is expected to increase by 14 percent from 24 to 25, compared to a 6 percent increase from 23 to 24. With Chinese shipbuilding on the rise, a significant growth in world shipbuilding capacity is of no surprise. However, 64 percent of the expected added capacity, 3.2 mill CGT, will come from South Korea. According to the order books, South Korea will have a stunning 24 percent growth from 24 to 25, and JAPAN this is planned to be achieved without any significant physical yard expansion. When analysing this figure further, we find that the South Korean yards on average estimate a productivity improvement of 4 percent per annum. Approximately.7 mill CGT, or 5 percentage points, stem from repair and offshore docks being used for newbuilding. Discounting these factors, there remains an unaccounted growth of 15 percent. One important explanation to this is that the South Korean yards, due to the tight order books worldwide, are positioned to accept mainly orders of long series of ships. Repeat vessels allow for shorter building times. Dry docks have limited capacity and are a constraint to increased output. This is to some degree circumvented by performing more work, or building entire vessels, on land. On land construction, however, is costlier than dry dock construction. Another limit to capacity is labour. Korean yards are planning to increase their capacity by use of overtime and extended use of subcontractors. None of the yards seem to plan on increasing the numbers of fixed employees. A side-effect of the impressive South Korean building schedule is that it acts as a preemptive measure to up-and-coming shipbuilders, especially Chinese, who want to use the current strong market to catch up with the South Koreans. There is currently great pressure on scarcity factors, such as ship steel and main engines. South Korean engine manufacturers used to export main engines to the world market, but now they are even struggling to supply their domestic shipbuilding industry. This is hurting Chinese shipbuilders in particular, who are reportedly experiencing difficulties in securing deliveries of main engines. It will be interesting to see whether the South Korean capacity increase will be a lasting one. The fact that it will primarily be achieved by temporary measures indicates that the yards want to keep their options open in case of more meagre times ahead.

16 14 THE TANKER MARKET "24 the tanker year you never forget" The year 24 was an extremely profitable year for tanker owners. Return on equity has been between 8 and 13 percent, based on newbuildings with a typical financial gearing. Based on export volume data, preliminary estimates indicate an increase in seaborne oil trade of 7 percent from 23 to 24. We have recorded an only insignificant increase in the average transport distance. There seems to have been a small improvement in productivity due to the modernization of the tanker fleet and to a reduction in waiting days in Turkish straits from 23 to 24. Our preliminary estimates show a growth in tanker tonnage demand of between 6 and 6.5 percent. The active tanker fleet rose by 3.7 percent from 23 to 24 resulting in an increase in the utilization rate from 89 percent in 23 to 91.5 percent in 24, the highest level ever recorded since we started with this methodology in Freight rates in 24 have fluctuated wildly, a logical consequence of such a record high utilization rate level. The highest global economic growth since 1976 stimulated world oil consumption, which rose by 3.3 percent in 24 according to the most recent estimates. This is the highest oil consumption growth rate since the 197s. Global oil production climbed an exceptional 4.5 percent resulting in a moderate building of oil inventories. OPEC raised its crude oil production by more than 7 percent and reached a peak of more than 3 mbd in the fourth quarter of the year. This was very close to its production capacity, leading to a 35 percent surge in crude oil prices from 23 to 24. When oil consumption increased so strongly despite the sharp rise in oil prices it must be attributed to the fact that end-user prices were heavily subsidized in many of the countries with strong consumption growth. The main driver behind these extremely strong freight market conditions was China with its exceptional growth in oil consumption and imports. In the first half of 24 Chinese oil consumption was 22 percent higher than in the same period the year before. Oil imports rose by more than 3 percent for the second year in a row. FREIGHT RATES VLCC RATES PEAKED AT $2, + IN NOVEMBER. Tanker freight rates in 24 were significantly higher than in the previous booms in 2 and 23. In the single voyage market VLCCs achieved an average of close to $9, per day compared to the $5, level in the two previous peak years. In mid- November average VLCC rates exceeded $2,! For the year as a whole Suezmaxes reached an average of $65, and Aframaxes $47, per day. For product carriers the average for the year was $42, for LR2, $33, for LR1 and $26, for the MR type. The rate figures in this article are t/c equivalents based on January to December spot rates, as opposed to operator earnings with time-lags of two to three months, due to forward fixing and calculating principles. Waiting days for cargo for purely commercial reasons are not included. A RECORD YEAR IN THE S&P MARKET. 24 has definitely been a record-breaking year in the sale and purchase market with regard to transaction volumes as well as ship market values. The tankers monitored by R.S. Platou Shipbrokers have increased in market value by some 45 percent (2 percent in 23) Double hull tankers rose by 4 percent (25 percent), whereas single hull tankers were up between 35 and 75 percent. The "winner" was a single hull VLCC which more than doubled its value since the previous low in September 23.

17 THE TANKER MARKET 15 OIL MARKET CRUDE OIL PRICES UP 35 PERCENT. The sharp price rise dominated the oil market in 24. In late October WTI reached almost $56 and Brent $52. All producers were at full capacity, except possibly Saudi Arabia. The refineries were running at full blast and the tanker fleet utilized at its maximum capacity. For many years there has been a high and stable correlation between commercial oil inventories in the OECD countries and crude oil prices. This pattern was well maintained up to the spring of 24. Despite a relative robust stockbuilding in the second and third quarter oil prices were skyrocketing. According to the historical relationship between stocks and prices, the price level for crude should have been around $3. A fear of a crude shortage in a global oil market at the edge of capacity was clearly the major reason for the deviation from the robust price/stock correlation. The chaos in Iraq more than one year after the capture of Saddam Hussein, terrorist attacks in Saudi Arabia and in Madrid, and the uncertainty around Yukos and Russian oil exports contributed to the sharp surge in prices. Record-high prices and soaring oil output boosted OPEC revenues by some 36 percent above the level in 23. The OPEC basket price was up from $28.1 in 23 to $36.5 in 24, but the $22 to $28 band was unchanged, despite some members' arguments for the need to adjust it to reflect market reality and a weaker dollar. OIL CONSUMPTION HIGHEST GROWTH SINCE THE 197S. After the three years 2-2 with a very weak trend in world oil consumption, between and 1 percent, consumption recovered in 23 with a 2.3 percent growth. Most oil analysts explained this upswing in consumption by special events (cold winter, fuel switching from nuclear to oil in Japan and from gas to oil in the USA), which hardly would be repeated in 24. The typical forecast for oil consumption growth in 24 was between 1. and 1.5 percent. The outcome seems to be a 3.3 percent growth, or 2.6 mbd, the steepest growth since Forecasters were not only wildly wrong for the world total, but were also taken by surprise for almost all regions. It was definitely China that represented the biggest deviation. Roughly one half of the increase in world oil consumption in 24 occurred in emerging Asian countries, most of it in China. The main drivers behind "Roughly one half of the increase in world oil consumption in 24 occurred in emerging Asian countries, most of it in China." the extremely strong consumption trend in China, with more than 15 percent growth (some sources say 2 percent), were high economic growth and replacement of coal to power generation by diesel to small-scale back-up generators. The OECD countries only accounted for one fourth of the growth, even if also USA, Canada and Europe increased their consumption more than expected, while OECD Pacific (Japan, Korea, Australia and New Zealand) ended up with a decline. Higher economic growth than predicted gives a partial explanation. The sharp rise in diesel consumption has been the most important factor. We believe this is due to the close connection between the accelerated outsourcing of manufactured goods from the OECD region to emerging countries, notably China. Diesel consumption in AVERAGE FREIGHT RATES $1, PER DAY Single voyage VLCC Suezmax Aframax LR2 product MR product FREIGHT RATES SINGLE VOYAGE CRUDE CARRIERS 1, $/Day WORLD OIL CONSUMPTION GROWTH Percent , DWT 15, DWT 3, DWT

18 16 THE TANKER MARKET From left: Thomas Holst Argel, Nicolai Olsen, Wenche C. Egelund, Jon T. Boasson, Herman A. Foss, Carl A. Bech (behind), Ulf Rydén, Dag E. Sanderberg "Our calculations show that as much as 6 percent of the consumption growth in 24 took place in countries with subsidized oil products." industrialized countries is now much more linked to international trade than to domestic industrial activity. IEA has pointed out that the rapid growth in US diesel demand over the last two years appears closely linked to the growth in Chinese industrial activity. It may be difficult to understand why the consumption growth was so brisk when crude oil prices increased so heavily. As already mentioned, end-user prices for oil products in many countries with a strong consumption growth were shielded from sharply higher worldwide crude oil prices. Our calculations show that as much as 6 percent of the consumption growth in 24 took place in countries with subsidized oil products. End-user prices in national currencies rose more moderately than crude prices in dollar terms, even in countries that did not subsidize oil products. As an illustration, crude prices in the first 1 months of 24 were on average 25 percent higher than in the same period of 23, while the end-user prices of diesel fuel in Germany as well as in Japan were only 5 percent higher. The weakening of the dollar and heavy taxation on oil products are the main reasons. In the Former Soviet Union (FSU) oil consumption rose by 3.6 percent, higher than in previous years, but much lower than the economic growth of 8 percent. In the Middle East consumption growth is estimated to be as high as 6 percent in 24, and in Latin America close to 4 percent. All these regions have seen consumption growth significantly higher than expected. MARKET VALUES OF TANKERS 5 YEARS OLD Mill. $ WORLD FLEET OF TANKERS (EXCL. COMBINED CARRIERS) ANNUAL CHANGES FROM YEAR-END TO YEAR-END Percent Mr product DS Suezmax SH Mr product DH Suezmax DH Aframax DS VLCC SH Aframax DH VLCC DH

19 THE TANKER MARKET 17 OIL PRODUCTION OPEC OUTPUT UP 14 PERCENT FROM 22 TO 24. For the second year in a row oil production rose significantly more than oil consumption. Preliminary estimates indicate that production increased by 4.5 percent, from 79.5 mbd in 23 to 83. mbd in 24. A weak stockdrawing in 23 seems to have been followed by a moderate stockbuilding in 24. Non- OPEC production rose by 2.3 percent, from 49. mbd to 5.1 mbd. Most of the increase again came from FSU with.9 mbd, of which Russia accounted for.75 mbd. West African producers (excluding Nigeria which is an OPEC member) also raised their production significantly, by.3 mbd. USA, UK and Norway all experienced a decline in production, by a total.4 mbd compared to 23. OPEC output (including NGL) increased by as much as 2.4 mbd or close to 8 percent. OPEC crude production rose from 27.1 mbd to 29.1 mbd, of which Middle East accounted for 1.4 mbd. OPEC output was at its lowest in the first quarter with 28.3 mbd, rising to 3. mbd in the fourth quarter. Production in Iraq increased from 1.3 mbd in 23 to 2. mbd in 24. Some 1.6 mbd were exported, of which only 12, b/d went via Ceyhan in Turkey. In 2 Iraq exported 2.1 mbd. Crude production by the cartel was up 14 percent in the two years from 22 to 24, from 25.5 to 29.1 mbd. This was in sharp contrast to the very stable period from 1994 to 23, when output remained within a band of between 25 and 28 mbd. WORLD OIL PRODUCTION AND TRADE MBD NEW ORDERS OF TANKERS 1, DWT + Mill. DWT OPEC production Non-OPEC production World oil trade

20 18 THE TANKER MARKET From left: Fridtjof B. Falck, Wilhelm L. Holst, Petter Andrup SEABORNE OIL TRADE ROSE 6 TO 7 PERCENT. World seaborne trade in crude oil and refined products was up by 7 percent, according to our preliminary estimates based on export data. Based on import data the growth was a little lower, due to the strong trade growth towards the end of the year. This was the second year in a row with an extraordinary strong growth, driven especially by 6 percent export growth out of the Middle East, 15 percent growth from West Africa and 12 percent growth from the FSU. Imports of seaborne oil to China were up by 34 percent, by 5 percent to USA as well as to Europe, while there was a modest drop of 1 percent to Japan and to South Korea. Our preliminary estimates (based on import data) show an expansion in crude trades by 5.5 percent, in refined products by 7. percent. Overall transport distances seem to have been roughly unchanged. Average distances to China have increased strongly, due to a rising market share for West Africa. Distances to the USA have fallen, in line with a reduced dependence on Middle East oil. Taking into account volumes, transport distances and changes in productivity (including reduced delays in Turkish straits), tonnage demand has risen by 6.2 percent from 23 to 24. This is somewhat below the sharp 8 percent growth in 23. THE TANKER FLEET ROSE BY 3.7 PERCENT. The active tanker fleet increased by 3.7 percent from 23 to 24, calculated on an annual average basis. The active VLCC fleet increased by 2 percent, while the rest of FREIGHT RATES SINGLE VOYAGE CLEAN CARRIERS 1, $/Day DELETIONS AND DELIVERIES OF TANKERS Mill. DWT , DWT 7/85, DWT 85/11, DWT Deletions Deliveries

21 THE TANKER MARKET 19 the tanker fleet rose by 5 percent. Deliveries of new tankers reached 27 mill dwt, down from 3 mill dwt in 23. VLCCs accounted for 9.1 mill dwt of the total. Removals amounted to 1 mill dwt in 24 compared to an average of 19 mill dwt in the previous four years. Removals are based on the point in time vessels are actually removed from the market and not when reported sold for scrapping or for conversions. Some 8 mill dwt were sold for scrapping in 24 and 2 mill dwt were sold for conversion. The average age for all tankers sold for scrapping was 27.4 years, compared to 26.5 years in 23. As a result of the extremely strong dry bulk market, 2 mill dwt of combined carriers moved from oil trades to dry trades from 23 to 24 and limited the fleet growth in oil transportation. CAPACITY UTILIZATION AT A RECORD HIGH. The capacity utilization rate for the active fleet rose from 89 percent in 23 to 91.5 percent in 24. It was highest in the fourth quarter with 93.5 percent, the highest level we have recorded in any quarter since we started this monitoring system in Market prospects LAST YEAR'S PREDICTIONS WERE TOO BEARISH. Nobody had expected the extremely high tanker rates in 23. We admit that we have been too bearish for the second year in a row. In our 23 report, we predicted rates that would give tanker owners a healthy profitability, but at lower levels than the 23 rates turned out to be. We mentioned Chinese oil consumption as one of the most critical factors. We have already described how actual oil consumption growth exceeded forecasts. In last year's report we expected non-opec oil production to increase between SUPPLY, DEMAND AND UTILIZATION RATE TANKER FLEET 1, DWT + Mill. DWT Utilization rate and 1.5 mbd with.8 mbd from FSU and.4 mbd from West Africa. This proved to be close to reality. We also referred to ten different well-known sources that predicted an OPEC crude production in 24 between 25.7 and 26.8 mbd. Our forecast of 26.5 to 27. mbd was consequently at the upper end of this range. As mentioned, OPEC output was as high as 29.1 mbd. While we expected a 2 percent growth in seaborne oil trade, the latest estimates now point to a 6 to 7 percent growth. On the tonnage supply side we predicted the active tanker fleet to grow by 2 percent, taking into account large volumes of pre-marpol tankers to be removed from trading within April 25, due to the accelerated IMO phase-out plan. However, scrapping numbers proved to be significantly lower than expected and the fleet growth ended up at 3.7 percent. This can partly be explained by the extremely strong freight market, but also by the fact that a large number of old tankers in 24 were converted from so-called Cat 1 tankers to Cat 2 tankers and thus can continue trading for a few more years. A recent study by R.S. Platou Economic Research now points to a fleet of Cat 1 tankers of less than 5 mill dwt. Relative small costs involved compared with the high earnings potential have obviously made these conversion decisions easy to make. OIL MARKET IN 25 A SLOWDOWN IN CONSUMPTION GROWTH IS WIDELY EXPECTED. The strong growth in oil consumption is not predicted to continue into 25. Typical forecasts point to a growth between 1.5 and 2. percent. Weaker economic growth, higher end-user prices for oil products and a more moderate growth in Chinese oil consumption will be the main reasons for this slowdown. Consensus forecasts point to a global economic growth of 4.2 percent in 25, down from 5. percent in 24. A continued high crude oil price in 25 may be somewhat mitigated by a weaker dollar. On the other hand there are reasons to believe that some countries will cut subsidies on oil products. There is a significant uncertainty for the Chinese oil market, but we expect Chinese oil consumption to grow much stronger than the IEA forecast of between 5 and 6 percent. Non- OPEC production is again expected by most oil analysts to increase by 1. mbd. Active fleet Demand for trading Utilization rate for active fleet

22 2 THE TANKER MARKET After an annual increase in FSU oil output of between.8 and 1. mbd over the last three years, the increase in 25 is now expected to slow to.6 mbd. The slowdown reflects the uncertainties of export capacity and the tightening of Russian government controls. A continued strong growth in West Africa is predicted as well as a relatively high increase in Latin America, driven by Brazil. In the North Sea output is believed to continue on its declining trend, while USA and Canada most likely will be able to raise output somewhat. "OPEC fears that a continued 3 mbd output level will result in a sharp drop in prices." Against this background forecasters typically end up with a need for OPEC crude production between 28.5 and 29. mbd in 25, taking also into account an increase in OPEC NGL production. There should be room for a certain stockbuilding of oil in 25. In such a scenario OPEC must cut its production by approximately 1 mbd from the 3. mbd level reached in the fourth quarter of 24. At the start of 25 this is exactly what OPEC has signalled to the market, despite crude prices fluctuating between $4 and $45. OPEC fears that a continued 3 mbd output level will result in a sharp drop in prices. Such a scenario will according to our calculations result in a tonnage demand growth of between 1 and 2 percent. The situation is thus very similar to what we experienced in the last two years. Oil consumption growth has been significantly underestimated. So has the historical baseline level for oil consumption. This could easily be repeated in 25. If consumption growth should be significantly higher than the consensus view indicates, OPEC crude output may be 3 mbd or higher. In such a case tonnage demand may rise by 3 to 4 percent, or more. If tonnage demand growth should reach the same 6.2 percent level as in 24, OPEC crude production must be raised to an average of 31 mbd. This is most likely very close to the maximum capacity level for OPEC output as well as for the global refineries. Some argue that it is even above these levels. TONNAGE SUPPLY GROWTH WILL ACCELERATE. According to the current order book, 32 mill dwt of new tankers will be delivered in 25. In our own study we concluded that some 5 mill dwt of pre-marpol tonnage should be phased out in 25. In addition to this obligatory phase-out we expect 2 to 3 mill dwt to be removed from trading. We then predict the annual average growth of the active tanker fleet to be between 6 and 7 percent from 24 to 25. The VLCC fleet will grow by 7 percent, while the Suezmax and Aframax fleets will grow by between 5 and 6 percent. For most product carrier segments growth rates seems to be even higher than for the VLCCs. CONCLUSION ANOTHER HEALTHY YEAR FOR TANKER OWNERS. Against this background there will most likely be a decline in the capacity utilization rate of the active tanker fleet from 24 to 25. Based on the consensus view in the oil market at the beginning of 25 the utilization rate for the active tanker fleet will fall by 5 percentage points to an average of 86.5 percent. This is equal to the average utilization rate in 21, when we had rates of $35, for a VLCC and $3, for Suezmax as well as for Aframax. A higher oil consumption growth of 2.5 to 3. percent should lead to a capacity utilization rate in 25 of 89 percent, equal to the 23 level, when VLCC achieved $5,, Suezmax $4, and Aframax $3, per day. In both alternatives tanker owners will obtain satisfying returns on equity. 25 therefore seems to be another year of healthy profitability for tanker owners. The most critical factors will be Chinese oil consumption and global economic growth. Erik M. Andersen, R.S. Platou Economic Research a.s

23 THE DRY BULK MARKET 21 "24 the strongest dry bulk market ever!" Preliminary estimates show an increase of close to 8 percent in seaborne dry bulk trade from 23 to 24. Adjusted for longer transport distances in coal and grain and lower fleet productivity, dry bulk tonnage demand rose by as much as 1 percent. The operating dry bulk fleet increased by 4.8 percent and the utilization rate rose from 92 percent in 23 to 97 percent in 24, measured on an yearly average basis. The dry bulk market in 24 was driven by strong growth in the trades of iron ore, steel products and steam coal. Our estimates suggest a near 15 percent increase in iron ore shipments and a 9 percent increase in transport of steel products. For steam coal shipments, we noted close to 1 percent higher volumes than last year. Heavy port congestions in Australia, Brazil, India and China also contributed to the strong growth in tonnage demand. FREIGHT RATES. Modern Capesizes achieved an average tripcharter rate of $62,5 per day in 24, up from $35,6 in 23. Strong fluctuations were noted over the year: $1, per day at the top level and about $4, per day at the lowest. Panamaxes averaged $35,2 per day, up from $2,3 in 23. Again there were strong variations, from $2, to $5, per day. Handymax rates rose from $14,8 per day in 23 to $28, per day in 24, fluctuating between $17, and $35,. Freight rates were highest for all sizes in the first and final quarters, and lowest in the second quarter. SHIP VALUES. Sales volumes were strong over the year and ship values followed the freight market trends closely. On average, prices for 1 year old vessels were 65 8 percent higher than in 23. The strongest price increases were noted for Capesize and Panamax ships, while we registered a more moderate upturn for Handy/Handymax vessels. Firmer newbuilding prices also contributed to the upturn in secondhand prices. "Our estimates suggest a near 15 percent increase in iron ore shipment." SEABORNE TRADE IN 24. Our provisional estimates suggest that overall seaborne trade in steel-related products rose by 11 percent from 23 to 24. Iron ore transports rose by more than 15 percent as China increased it's imports by 41 percent: from 148 mill tonnes to 29 mill tonnes. Other Asian countries increased their iron ore imports only moderately. Western Europe imported nearly 8 percent more iron ore than last year. The average transport distance declined slightly due to an increased Australian market share of Asian imports at the expense of of Brazil. Coking coal transports rose 5 percent overall. China and Western Europe accounted for the strongest increases. Among other importers, we noted a slight drop in Japan's imports.

24 22 THE DRY BULK MARKET From left: Thomas G. Røed, Terje B. Herlofsen, Knut Raabe, Arne Tvedt, Nicolai Garland, Anders Østang, Nils Andersen, Gunnar Ose "A 5 percent increase in US steel imports." World seaborne trade in steel products increased by about 8 percent from the year before. The major changes were an 21 percent drop in Chinese imports, but a 5 percent increase in US steel imports. A slight drop in the average transport distance came as a result of less long hauls from Europa/Black Sea to Asia due to China's lower steel imports. A larger share of European steel exports were directed to USA. Ferrous scrap transports increased by about 7 percent, mainly driven by higher imports to Asia and Turkey. High oil and gas prices and continued low productivity in the Japanese nuclear industry were factors contributing to a nearly 15 percent jump in steam coal transports. Asian and European countries typically raised their coal imports by double digit figures. Among exporters, China lowered coal exports by approximately 1 mill tonnes. This volume was mainly taken over by Indonesia and Australia in the Pacific and by South Africa and USA for Atlantic destinations. Due to reduced Chinese exports, an increase in the average distance was registered. In the grain and soyabean/soyabean meal trades, overall volumes rose by approximately 3 percent. Grain volumes increased by 2.5 percent, while soyabean transports were slightly lower due to a drop of 3 mill tonnes in China's imports and unchanged European imports. In the soyabean meals trade, increased European imports lifted overall volumes by 2 percent. In the grain sector, more long hauls were noted due to higher Australian exports to the Middle East and Africa than in 23, and more South American grain was sold to Asia. Volumes of soyabean/meals increased from South America to all destinations, but volumes dropped from USA. This also meant longer transport distances. In our estimate, transports of forestry products rose by approximately 6 percent. Shipments of paper and board rose by 4.5 percent, basically as a result of higher MARKET VALUES OF BULK CARRIERS 1 YEARS OLD Mill. $ 12 MONTHS T/C RATES BULK CARRIERS 1, $/Day Capesize Panamax Handymax 25, DWT 45, DWT 7, DWT 15, DWT

25 THE DRY BULK MARKET 23 trade volumes in short haul trades in Europe and Asia. Woodpulp transport increased by 4.3 mill tonnes of which China accounted for 1 mill tonnes. USA and Japan also imported slightly more woodpulp than last year. Wastepaper volumes continued to increase by an impressive 18 percent, of which China was the main contributor. Shipments of lumber rose by 9 percent driven by higher imports to USA. In woodchips, Japan imported slightly less than last year, but China, Europe and USA increased their volumes somewhat. All in all, woodchip transports rose by 3 percent from 23 to 24. Transport of roundwood were up by 1.5 mill cubic metres, mainly as a result of higher European imports. For other dry bulk cargoes, we estimate seaborne trade to have increased by about 2 percent. All in all, we estimate that the world seaborne trade rose by about 8 percent in 23. Due to the significant decrease in fleet productivity caused by port congestion, a higher ballasting factor and not least, more long haul trades in some commodities, our calculations show an increase of 1 percent in tonnage demand. FLEET DEVELOPMENT. The active dry bulk fleet, including combined carriers in dry trades, increased by 4.8 percent from 23 to 24 calculated on an yearly average basis. 18 mill dwt of newbuildings were delivered and.8 mill dwt were removed. Combined carriers in dry trade increased by 1.5 mill dwt from year-end to year-end. The Capesize sector expanded by 8.5 percent, WORLD FLEET OF BULK CARRIERS (EXCL. COMBINED CARRIERS) ANNUAL CHANGES YEAR-END TO YEAR-END Percent CRUDE STEEL PRODUCTION 6 MONTHS MOVING AVERAGE Mill. tonnes/month EU USA Japan Taiwan S. Korea China

26 24 THE DRY BULK MARKET while the Panamax fleet rose by 6.5 percent. For the sizes between 1, and 59,999 dwt, a fleet increase of 4.8 percent was registered. Scrapping was most frequent within the smaller sizes. The average age for bulk carriers sold for scrapping was 27.8 years. CAPACITY UTILIZATION. The capacity utilization rate for the operating dry bulk fleet rose from 92 percent in 23 to 97 percent in 24. It was highest in the first and the last quarters: 98.5 percent and 98 percent, respectively. In the second and third quarters, the utilization rate was slightly below 97 percent. Market prospects LAST YEAR'S PREDICTIONS. In last year's report, we suggested that tonnage demand was likely to increase by some 6 7 percent and that fleet expansion would be in the region of 4 percent from 23 to 24. Our fleet scenario was pretty close to the actual growth of 4.8 percent, but we overestimated the amount of scrapping. In our demand scenario, we estimated a 15 2 percent increase in Chinese steel consumption, which turned out to be fairly correct. We underestimated, however, the growth in Chinese steel production and the accompanying growth in Chinese iron ore imports. Steel production jumped by 25 percent and iron ore imports climbed by 41 percent. China s steel imports fell by 21 percent, but exports more than doubled, albeit from a low level. DELETIONS AND DELIVERIES OF BULK CARRIERS Mill. DWT NEW ORDERS OF BULK CARRIERS 1, DWT + Mill. DWT Delitions Deliveries

27 THE DRY BULK MARKET 25 From left: Stian Bratsberg, Hugo Figueiredo, Thor Bierge, Vigdis L. Hagland, Thor Emil Brandrud, Jan Egil Roald, Morten Kristmoen, Erik Bjønnes Our assumption of a strong growth in import volumes to Asia and Western Europe was in line with what actually took place, but volumes rose more than anticipated. We forecasted lower Chinese coal exports due to stronger domestic demand, and we expected that changes in trading patterns would lead to more long haul trades. In our last report we also said that China would continue to raise its soyabean imports in 24. This turned out to be wrong, as China actually reduced soyabean imports by 1 mill tonnes. The reason was probably that imports in 23 were much higher than consumption and consquently resulted in a huge increase in soyabean stocks which had to be depleted before new imports were necessary. Our estimates for the trade in forestry products turned out to be fairly correct. We expected higher imports of woodpulp and raw fibre to China for paper and pulp production. We have seen that a larger market share of wood supply for woodpulp production came from fast growing wood plantations in South American and Australia. We also noted the first contracts for shipments of woodchips and wood pellets for bioenergy production. SEABORNE TRADE IN 25. World steel consumption is estimated to increase roughly by 5 percent from 24 to 25. This scenario is based on a 1 12 percent increase in China's consumption and a 2 3 percent growth in the rest of the world. China is expected to raise its steel production significantly also in 25 as a number of new steel mills will become operational. Iron ore imports are therefore expected to climb further. Chinese steel imports will most likely be reduced, while exports will increase. The downside risk for Chinese steel producers is the possibility of trade restrictions initiated by industralized countries where domestic steel producers fear a stronger competition from China in the coming years. "China s import of soyabeans is expected to recover this year." Steam coal shipments are expected to increase significantly also in 25. This assumption is based on new coal burning utilities in Asia which are scheduled to start operation during the year. We also expect that European countries will continue to import more steam coal, not because of increasing consumption, but due to lower domestic supply. China s export of steam coal is expected to decrease further because of strong domestic demand and Chinese imports of coking coal are estimated to increase because of increasing demand within the steel sector. Australia and Indonesia will take over most of the expected shortfall of Chinese exports. This will involve more long haul trades in the steam coal trade. In cereals, small changes are foreseen in the overall grain volumes. China is expected to increase imports by 5 mill tonnes, while Western Europe and FSU are assumed to import less. Grain exports are forecasted to increase from Argentina, Australia and Western Europe, while USA is foreseen to lower its exports. China s import of soyabeans is expected to recover this year and there are also expectations of higher soyabean meals imports to

28 26 THE DRY BULK MARKET Steel demand vital for dry bulk shipping Over the most recent years, demand for dry bulk ships has been intense and resulted in freight rates and ship values never experienced earlier. The strongest increase in dry bulk imports has been in iron ore and other steel related products, which together account for nearly 5 percent of the total dry bulk demand. What has happened? The main factor for brisk dry bulk demand can be related to substantially higher use of steel over the last years. From year 2 through 24, world steel consumption increased by nearly 6 percent per year on average. This is significantly higher than the.7 percent p.a. increase in the 198s and the.1 percent annual growth in the 199s. We have to go back to the 196s to find similar growth rates in global steel demand seen this decade. In that period, global use of steel rose by more than 5 percent per year. What is the driving force for steel consumption? There is a significant correlation between world steel consumption and world economic growth. Nearly 7 percent of the yearly changes in world steel consumption can be explained by the annual changes in world GDP. The yearly changes in fixed investments shows an ever closer correlation with steel demand. The brisk increase in economic activity in the 196's was to a large extent driven by high investments and industralization in the OECD area, especially in Japan and Europe. In the period from 197 upto end of the 199s, WORLD STEEL CONSUMPTION VS IRON ORE TRADE Mill. tonnes per year iron ore World steel consumption Seaborne trade iron ore OECD economic growth rate and investments slowed considerably. Even though some Asian countries went through industralization in this period, these were not large enough to support the steel demand considerably in a global perspective. The dramatic shift in world steel consumption this decade came after China's entry of WTO in 21. The industralization process in China has accelerated very quickly, driven by strong increase in fixed investments. With a GDP growth of more than 9 percent per year and investment growth of 2 percent p.a., steel consumption increased by more than 2 percent p.a. three years in a row. In 24, China accounted for nearly one third of the total world steel consumption! China's quick economic expansion recently has resulted in an substantial increase in seaborne imports of dry bulk commodities, particularly in iron ore. From 2 to 24, iron ore imports increased from 7 to 29 mill tonnes. In addition, we have also noticed strong increases in imports of coking coal, steel products, soyabeans and forestry Mill. tonnes steel cons per year 6 1, products. In this period, world seaborne trade of dry bulk commodities rose by 5.3 percent per year. In paralell, from 196 and upto the early 197s, seaborne transporation of dry bulk cargoes climbed by 6 percent per year. In comparison, the average increase in dry bulk shipments from 198 upto year 2 was a meagre 2.3 percent p.a. A vital question for future dry bulk demand is therefore China's economic performance. It is expected that China's long term trend in economic growth is some 8 percent per year. This is somewhat lower than in 23/4, but still at a level which should generate continued healthy growth in investments and consequently in steel consumption. On this basis, seaborne trade in dry bulk commodities looks set to expand at a continued high rate over the next coming years. With supply of new tonnage more or less given upto 27, shipowners could realistically expect acceptable profitability also in this period. PER CAPITA CONSUMPTION OF STEEL Kilograms TOTAL CONSUMPTION OF STEEL IN 24 Mill tonnes USA EU CHINA JAPAN Estimated population USA 294 mill. China 1,3 mill. EU mill. Japan 127 mill.

29 THE DRY BULK MARKET 27 Europe. Exports are foreseen to increase from South America, but fall from USA. In the forestry product trade, we foresee a continuation of 24 trends. We anticipate higher import volumes of logs and woodchips for use in woodpulp production in China, USA and Europe. Woodpulp volumes are likely to increase to China and USA and we also expect a further increase in transports of woodchips and wood pellets for use in bioenergy production. Total lumber volumes are expected to increase only moderately because Japan is assumed to import less than in 24, while USA and China are expected to import more. In sum, we foresee an increase of around 5 percent in the overall seaborne dry trade from 24 to 25. Expansions of port and on-land infrastrutures both in importing and exporting countries should reduce the severe congestion somewhat during the course of the year and lead to improved fleet productivity. We therefore expect the increase in tonnage demand to be somewhat less than in trade volumes. SUMMARY AND CONCLUSION. Based on this scenario, there will be a moderate drop in the capacity utilization rate for the active dry bulk fleet from 24 to 25. We therefore expect the dry bulk freight rates to be lower than the very high levels in 24, but remain high in a historical perspective. The most critical factors will be Chinese steel consumption, US steel imports and port congestion. Bjørn Bodding, R.S. Platou Economic Research a.s "The fleet is expected to increase by roughly 6 percent in 25." TONNAGE SUPPLY. 21 mill dwt of new ships are due for delivery in 25. We expect scrapping to total between 1 2 mill dwt. The share of combined carriers employed in dry trades is expected to remain stable. On this basis, the fleet is expected to increase by roughly 6 percent on an yearly average basis. AVERAGE FREIGHT RATES $1, PER DAY Trip charter Handymax Panamax Capesize WORLD SEABORNE TRADE Mill. tonnes SUPPLY, DEMAND AND UTILIZATION RATE DRY BULK FLEET 1, DWT+ Mill. DWT Utilization rate 2, 1, , Others Forestry Grains Coal Iron ore Supply Demand Utilization rate

30 28 THE CONTAINERSHIP MARKET "The container ship market 24 another vintage year" 24 was another vintage year for the container shipping business. All ocean carriers reported improved performance even though rates for chartering in ships increased rapidly. The combination of stronger freight rates and significantly higher volumes increased revenues more than the extra costs of chartering ships. CHARTER RATES. Timecharter rates for all sizes of container ships rose significantly during 24 and ended the year at all-time high levels. On a yearly average basis, rates for 1, teu ships increased from $8,3 per day in 23 to $13,7 in 24. For 17 teu ships, charter rates increased to $21,9 per day against $13,2 last year, and for 3 teu ships an average of $33,3 was noted, up from $21,5 in 23. "Extreme growth in European imports of finished goods from China." Strong growth in container movements from Asia to North America and Europe was the most important factor behind the strong increase in container ships demand in 24. The brisk increase in Chinese exports to Europe and USA is to a large extent still driven by outsourcing of production, but the stronger Euro against US$ (and Renminbi Yuan) has probably also contributed significantly to the extreme growth in European imports of finished goods from China. Increasing port delays due to limited physical space in ports to handle the increasing volumes of boxes, and the strain on inland transportation networks, also contributed to the higher demand for charter tonnage. A number of new services were initiated in 24, adding to the extra demand for charter tonnage. FREIGHT RATES. Freight rates rose in most trade lanes, but at a slower pace than charter rates. The strongest rise was noted on the route between Asia and Europe: 14 percent as a yearly average. From Asia to USA, box rates increased by 6 percent. On other trade lanes, we registered 3 4 percent higher rates from Europe to USA and from USA to Asia. Between USA and Europe and Europe to Asia, freight rates declined moderately. Intra-Asian freight rates showed only minor changes, mainly as a result of extremely strong competition between the many operators. CONTAINER MOVEMENTS AND TONNAGE DEMAND. According to port statistics, the flow of laden containers from Asia to USA rose by around 15 percent in 24 compared to 23. Due to congestion problems on the US West Coast, a higher share of the US container imports were directed to the US East Coast by new services of smaller ships through the Panama Canal. Our figures indicate a 2 percent increase in East Coast import volumes. From USA to Asia, container traffic increased by 7 percent. This increase is higher than in the previous years, but still much lower than imports, further increasing the imbalance in US foreign trade. In the second largest deepsea trade lane, between Asia and Europe, container volumes rose by 16 percent In the trade from Europe to Asia, preliminary figures suggest an increase of around 12 percent.

31 THE CONTAINERSHIP MARKET 29 In the westbound transatlantic trade from Europe to USA, cargo flows were up by a moderate 3 percent. The weakening of the $ against the Euro probably had a negative impact on US imports from Europe. In the eastbound trade from USA to Europe, however, USA benefitted from the weaker $, and container volumes rose by 6 percent. Intra-Asian trades increased significantly in 24, in particular between China and Japan/ SouthKorea and between China and South East Asia. We also noted a brisk increase in container movements between Asia and the Middle East and not least a strong growth in container imports from and exports to India. In the South American trades, exports rose by approximately 1 percent, with USA and Europe as the main destinations. South American imports of loaded containers was up by 5 percent in 24 versus 2 percent in 23. In total, we estimate that the global import of laden containers rose by 12 percent, while tonnage demand increased by 13 percent. The reason for the stronger growth in tonnage demand than in container volumes can be explained by lower fleet productivity because of logistical problems such as port congestion. FLEET DEVELOPMENT. The world container fleet increased by slightly less than 9 percent from 23 to 24, calculated on a yearly average basis. Deliveres of cellular container ships were 612, teu while removals were only 3,2 teu. Deliveres of 14,5 teu of noncellular tonnage was registered while deletions amounted to 7,8 teu. The tight tonnage balance forced operators to use non-cellular tonnage in their services to a higher extent than in previous years. CAPACITY UTILIZATION. The combination of a 9 percent increase in container ship capacity and a 13 percent increase in tonnage demand resulted in a jump in the yearly average capacity utilization rate from 83 percent in 23 to 87 percent in 24. Market prospects LAST YEAR S PREDICTION. In our previous report, we forecasted an 8 9 percent increase in container capacity and a 1 percent increase in tonnage demand. We were too conservative in our demand scenario, mainly because we had not expected that US container imports would increase so strongly. Also, we did not foresee the degree of increasing port congestion and thereby reduced fleet productivity. Our fleet scenario was much in line with what took place. "Tonnage demand increased by 13 percent." TONNAGE DEMAND IN 25. In our last report, we mentioned that the correlation between world economic growth (GDP) and the container trade had become less strong in the most recent years. Historically, container trade has increased by 2.4 times world GDP. In 22 and 23, however, container trade rose by 2.8 and 3.6 times GDP, respectively. The main reason for this was probably a result of the significant outsourcing of manufacturing capacity to China. In 24 the container trade increased by 2.4 times GDP, back to the historical level. This may indicate that offshoring to China could be running out of steam, but it could also be a result of strong economic growth in countries which are less involved in container imports. MARKET VALUES FOR CONTAINER SHIPS 5 YEARS OLD Mill. $ FREIGHT RATES IN US$/TEU US$/TEU 2, 1,5 1, , DWT / 21 KN / 3 TEU 13,5 DWT / 17 KN / 1 TEU 22,5 DWT / 19.5 KN / 17 TEU. Europe/Asia EB Europe/US WB Asia/Europe WB US/Asia WB US/Europe EB Asia/US EB

32 3 THE CONTAINERSHIP MARKET In 25, world GDP is forecasted to increase by some 4 percent. Container trade should on this basis increase about 1 percent, based on the above-mentioned multiple of 2.4 times GDP. Port congestion problems will probably continue in 25 and lead to a somewhat higher increase in tonnage demand compared with volumes. The development of exchange rates will also be an important factor. For example, a weaker Euro against $ and/or a revaluation of the Renminbi Yuan against $ may affect the world trade of goods and thereby container movements. CONCLUSION. The combination of a 1 11 percent increase in tonnage supply and a similar increase in tonnage demand, leads to our prediction of relatively small changes in the overall capacity utilization rate in 25 compared with 24. The main critical factors for liner business in 25 will be the growth in US private consumption, how exchange rates develop and whether port congestion will be even more of a problem, or improve. Bjørn Bodding, R.S. Platou Economic Research a.s TONNAGE SUPPLY. New container ships scheduled to enter operation in 25 amount to 86, teu. A large portion of these ships are Post-Panamax ships and are mainly dedicated for service between Asia and Europe and the TransPacific trade. There are also a high number of ships between 4, and 5, teu, and in the sizes around 2,5 teu, entering service in 25. Scrapping is expected to remain at a very low level due to high capacity utilization and high time charter rates. Noncellular ships for delivery in 25 amount to about 4, teu, of which a significant portion potentially may find employment in the container market. We foresee low scrapping activity in this sector as well. Taking all the above elements into consideration, container ship capacity will increase by 1 11 percent in 25, on a yearly average basis. AVERAGE CHARTER RATES FOR CONTAINER SHIPS 1. $/DAY 12 month Time Charter , TEU ,7 TEU , TEU , TEU CHARTER RATES FOR CONTAINER SHIPS 1, $/Day NEW ORDERS OF CELLULAR CONTAINER SHIPS 1, TEUs 1,8 1,6 1,4 1,2 1, TEU 17 TEU 3 TEU 4 TEU

33 MOBILE OFFSHORE UNITS 31 "Strong growth in 24" The stagnant activity trend of 23 continued into the beginning of 24. However, activity began to improve in the second quarter. Strong activity growth through the remainder of the year led to many market segments experiencing close to full utilization by year-end. Total supply of rigs at the end of the year was 566 versus 562 at the end of 23. Despite the increase in total supply, utilization increased markedly, reaching 83 percent in December 24 compared to 79 percent at the end of 23. In the past twelve months oil prices have been in excess of $3/bbl. During the fourth quarter of 24 oil prices rose to records levels of more than $5/bbl. Brent spot closed the year at $39.79 versus $3.12 one year earlier. The U.S. spot price for natural gas (Henry Hub) closed the year at $6.2/MMBtu against $5.98/MMBtu a year earlier. Only 15 percent of total E&P spending in 24 went to exploration. Analysts have been struggling to come up with reasonable explanations for this low exploration spending ratio in an environment of steeply rising oil and gas prices. With sustained higher oil prices, however, it seams likely that we will now see increased emphasis on exploration. The combination of increased exploration and high rig utilization is likely to result in further increases in day rates. We have already seen day rates for medium water depth semisubmersibles (semis) increase from $6, to over $1, in the UK sector of the North Sea. Rates for mild environment deepwater units shot up from $125 15, to $18 21, during the last months of 24. The dayrate paid for a harsh environment rig operating in the Barents Sea reached more than $3,, when including the cost of mobilization and upgrading paid for by the oil companies into the day rate. The oil and gas industry's long-term budgeting prices (hurdle prices) remained during most of 24 in the range of $16 18/bbl. These hurdle prices, as a result of increased oil price trends, have now jumped to $22 24 and could go even higher in 25. Unless oil prices should reestablish themselves in the old OPEC price band of $26 28/ bbl in the medium term, regarded by most analysts as very unlikely, we would not be surprised to see another $3 4/bbl increase in oil company hurdle prices in the near future. "Dayrates for ultra deepwater units increased by more than 4 percent in 24." Global oil demand is inextricably linked to the global economy and future oil price development is therefore contingent on the state of the world economy. Factors such as how the conflict in the Middle East is solved, OPEC discipline and non-opec production will all have an effect. India, Mexico, Russia and countries in West Africa have initiated plans to increase output which will increase total oil supplies in the medium to long term. We have, however, seen again and again how sensitive the market is in the short term, reacting to events such as the Yukos Oil debacle in Russia and political problems in Nigeria. Short-term volatility, combined with a marked increase in demand for oil in China and India make it likely that we will see continued high oil prices. OPEC today produces only about one third of total world production and if the ex-soviet states and poor West African countries increase their market shares as Iran and Iraq try to increase their proportional share of OPEC output, there is a risk the cartel may lose control of pricing. These concerns keep major oil companies moving ahead cautiously in an environment that otherwise should be producing a bonanza for drillers.

34 32 MOBILE OFFSHORE UNITS From left: Fredrik Mack, Per Engeset, Guttorm Bentsen, Erik Arthur, Kjell Faraasen, Magne Spillum MARKET AREAS AND SEGMENTS. Demand for premium jack-ups strengthened through 24 with strong activity in the last quarter of the year. Drilling activity remained strong in the Pacific Rim, Middle East, and India. After a relatively soft beginning, the Gulf of Mexico and the North Sea markets also followed the trend of the above markets. West Africa saw a slight weakening of activity during 23, primarily due to the Nigerian state oil company NNPC failing to fund their share of E&P spending on projects managed by foreign multinationals. This market remained a bit soft in early 24, but the jackup market started to show signs of tightening with the departure of Perro Negro 5 in September and firm contrtact commitments for Noble's two last available jack-ups. The African deepwater floater market looks extremely promising for 25. Demand for ultra-deep units in particular is high, with several units confirmed to enter the West African market in early 25. The Middle East is a bright spot having absorbed an increasing number of rigs, and seems poised to see further increases in activity in 25. India has also increased its jack-up rig count and indications are that the Indian market will remain firm throughout 25. Activity in the Central American jack-up market remained constant through the latter part of 24 and the beginning of 25. The domestic U.S. jack-up market saw some signs of recovery in mid 24 with day rates increasing continually, albeit slowly. However, improving day rates were not only due to an increase in rig demand. The improvement was also to a large extent due to a MARKET DEVELOPMENT JACK-UPS No of rigs MARKET DEVELOPMENT FLOATERS No of rigs Demand Active supply Total supply Demand Active supply Total supply

35 MOBILE OFFSHORE UNITS 33 reactivated and being awarded contracts. The largest markets for these rigs are the North Sea and the Gulf of Mexico. Both areas are mature, and have generated little exploration excitement in recent years for standard semis. Rig utilization in the North Sea experienced five consecutive month-on-month increases in 24, and demand is almost 2 percent up on a year ago. A total of five semis came out of long-term lay-up in 24 and Diamond's Ocean Nomad is scheduled to return to the North Sea from West Africa in early 25. Market signs indicate that standard semi dayrates in the North Atlantic will continue to be in excess of $1, in UK and around $2, in Norway for 25. Utilization of jack-ups has also improved and is close to 1 percent, with forward rates increasing sharply. dramatic fall in the supply of jack-ups as rigs moved overseas to seek better employment. Day rates for ultra deepwater rigs capable of drilling in 1, feet increased by more than 4 percent in 24, to more than $2,. There are few such 5th generation rigs, and only two more to be delivered in 25. Most analysts expect dayrates to go even higher due to increased exploration activity and the limited supply of rigs. Increased demand has also affected average contract lengths. As opposed to only a year ago, long term contracts are now the rule. The market for standard and medium water depth semis remained soft in the early part of 24. However, the segment saw a fair increase in demand towards the end of the year. The Norwegian market remained strong, and this region is now seeing cold-stacked units FLOATING PRODUCTION. The strong drive towards deepwater plays in key offshore areas, as well as field development in areas with little or no existing offshore infrastructure, have given floating production solutions a dominant position in the development of new fields. This strong position will continue in the foreseeable future. A growing preference for use of dry well heads and/or the need for dedicated storage and offshore "Delivery times for new floating drilling rigs could reach more than 3 to 4 years." tanker loading facilities, have paved the way for FPSOs, SPAR type platforms and TLPs. With some exceptions, the recent projects using semi-submersibles, have been mammoth projects using purpose-designed units in areas with some existing infrastructure. Given the present oil price regime, it seems logical that more medium size projects will favour fast-track solutions (as has UTILIZATION RATE VS DAY RATE VS SECOND-HAND VALUE SEMIS JACK-UPS 3 ft US Gulf of Mexico Utilization rate 1, $ Utilization rate (left axis) Day rate (right axis) S-H value (right axis)

36 34 MOBILE OFFSHORE UNITS been seen with Bergesen Offshore's speculative FPSO conversions). An increasing number of new deepwater fields are now on stream in areas that previously lacked offshore infrastructure. This in itself is creating a new, different type of infrastructure compared to the traditional areas of the North Sea and the US Gulf. Quite often, existing storage and offshore loading facilities (sometimes also process facilities) have a potential to handle increased production volumes. Nearby fields can be tied in, either as a full subsea solution or with a wellhead platform with or without some process equipment. The simplest solution, in case a surface platform is required or preferred, would be to use a semi-submersible. As we understand it, new, proven, and competitive technology is now available to make it possible to tie in rigid risers to a semi-submersible in moderate or benign areas. This would open a new market niche for semis. As the drilling markets improve and second hand prices escalate, however, the purchase and conversion of second hand existing semi-submersible rigs for production purposes will become even less attractive than it already is today. Newbuildings will be the logical answer. "Eighteen jack-up drilling rigs are under construction or order. ACCOMODATION. Continued demand for accommodation units in Mexico has absorbed most of the excess capacity that existed in the North Sea. New requirements in connection with hook-up and commissioning of large floating production facilities worldwide as well as the need for increased flexibility in connection with maintenance and refurbishment activity, have boosted demand for DP accommodation units. Some of the older units with conventional chain mooring systems have struggled in spite of a fairly tight market overall. The redevelopment of the Statfjord field, now in the planning stage, is likely to give this market a further boost. There are, however, relatively few players in this market and investment in new DP units will only come if required capacity is not available. NEWBUILDING PRICES. The order book for newbuildings stands at 2 units at the start of 25, of which 18 are jack-ups and 2 are semi-submersibles for the competitive market. The two semis were originally ordered more than 3 years ago against contracts that later were terminated, in part due to shipyard bankruptcy, and were moved to a new yard for completion with anticipated deliveries now in 25. The construction of the Maersk semi-submersible in Baku was completed ahead of schedule and the unit has started operations for Exxon. Eighteen jack-up drilling rigs are under construction or order. Their water depth capabilities range from 15 to 5ft. The second of Maersk's super large harsh environment jack-ups missed its slot on the only heavy lift carrier that could transport it, and has been stuck in the shipyard in Korea. The yard, which had agreed to deliver the jack-up in the North Sea now has to wait for the next transportation slot. Projects for new jack-ups are under way in China, Vietnam and India, all for government controlled entities. In the meantime, the trend for major upgrades of more than 3 years old slot type units to ultra premium jack-ups is continuing, with Ensco planning to spend around $5 mill on Ensco 68. Comparisons between historical newbuilding prices and current estimated market prices for newbuildings are difficult because of the increasing sophistication of the new units. The majority of the yards that built deepwater units in the last decade made significant losses on this activity. Most of these yards have either gone out of business or lost their appetite for rig building, given the current very strong shipbuilding market. SECOND-HAND VALUES OF RIGS Mill. $ Semis 2. generation Semis 3. generation Semis 4. generation Jack-ups 3 feet

37 MOBILE OFFSHORE UNITS 35 Prices for new semi-submersible drilling rigs would now have to be based on avoiding previous losses and cover recent price increases based on strong demand for traditional shipbuilding, much higher steel prices and higher equipment prices. Normal shipbuilding prices have risen in the order of 3 percent since the deepwater boom in 1997/98. The general opinion today seems to be that a modern deepwater semi for mild environments will cost $3 35 mill while a harsh environment deepwater unit, fulfilling Norwegian regulations, is likely to cost in the range of $4 45 mill. As yard capacity is filled up with orders for commercial shipbuilding until end 27, capacity to build floaters in regular shipbuilding docks is limited for the coming two years. Some of the major builders have a separate offshore facility where units can be built on land. These groups are, however, are also starting to get busy on topside modules and FPSO projects etc. Delivery times for new floating drilling rigs could therefore easily reach more than 3 4 years, before even considering additional potential bottlenecks in the drilling equipment sector. RIG DEMAND BY AREA End 22 End 23 End 24 Floaters Jack-ups Floaters Jack-ups Floaters Jack-ups Total North Atlantic Gulf of Mexico / Caribbean South America West and South Africa Pacific Rim Rest-of-World OFFSHORE DRILLING RIG MARKET, KEY FIGURES End 9 End 95 End End 2 End 3 End 4 Oil price (Brent, $/barrel) Gas price (Henry Hub, $/bcf) Oil consumption (mbd) Total rig demand Total rig supply Rig utilization (on total supply) 77 % 81 % 82 % 79 % 79 % 84 % Day rates, semis ($1,) 1) Day rates, jack-ups ($1,) 2) Second-hand values, semis ($mill.) 3) Second-hand values, jack-ups ($mill.) 4) Newbuilding prices, semis ($mill.) 5) Newbuilding prices, jack-ups ($mill.) 6) ) North Atlantic average 2) US Gulf 25-3 ft IC type 3) 3rd generation 4) Modern 3 ft MLT116 5) from 1999 deep water unit 6) from 2 premium 35 ft AGE PROFILE - CURRENT RIG FLEET No of rigs Semis Drillships Jack-ups

38 36 THE SUPPLY VESSEL MARKET Will it be full utilization in 25? Utilization rate of supply vessels had a modest increase in nearly all areas during 24, but this led to almost full utilization in some areas during second half of the year which again led to significant increase in dayrates for all types of vessels. Supply vessel owners have therefore good reason to be very optimistic about the outlook for 25. This situation should not come as a surprise to the supply vessel owners because the average age of the world wide fleet is nearly 2 years, and some vessels do not any longer meet the oil companies' requirements and had to be withdrawn from the active fleet. In addition, the world wide drilling activity increased by about 5 percent in 24, which led to increased demand for vessels. It seems also that the oil companies are increasing their exploration activity, which normally means that they need a higher number of supply vessels per rig than when the rigs are used for development and production drilling. We have registered close to 1 newbuilding contracts in 25, however, most of the contracts have been placed by small companies, or even newcomers, in the supply vessel market. The major supply vessel companies have placed relatively few newbuilding contracts in 24. Most of the newbuilding contracts is for small or medium sized anchor handling tug supply vessels, and most of the contracts for this type of vessels have been placed at yards in China, Singapore, Indonesia (Batam) and India, at prices from about $8 mill to about $16 mill, whilst Norwegian yards have secured most of the newbuilding contracts for the medium sized and large platform supply vessels built to North Sea standards and requirements. Prices for the North Sea type vessels have been from about $19 mill for the UT 755-L type to about $35 mill for the large diesel electric vessels of about 5, dwt with clean class and comfort class, which seems to be necessary to obtain long term work on the Norwegian continental shelf. The outlook for 25 seems positive for the Owners. The world wide fleet is still very old and need to be replaced by new vessels. In addition we believe the rig activity will continue to increase probably to nearly full utilization in 25, which means an increase of about 5 percent. We believe also that the construction market will be very active in 25 and absorb more vessels than in 24. We believe that Owners will continue to place newbuilding contracts for small and medium sized anchorhandling tug supply vessels. We also believe that we again will see orders for large anchorhandling tug supply vessels, but Owners will perhaps be more reluctant to place newbuilding contracts for large platform supply vessels. NORTH SEA ACTIVITY. Regarding utilization of offshore supply vessels in the North Sea, the general picture has been one of fluctuations. There have been times when the market was completely sold out with charterers desperate for tonnage, and, other times when central ports

39 THE SUPPLY VESSEL MARKET 37 From left: Lars J. Middelthon, Tor Dragøy, Erik Helseth, Max Hartvigsen, Arne Rustad, Marianne Aamodt, Hans F. Christensen have been crowded. Newbuildings have been delivered uncommitted from yards, and then gone straight into successful spot market operations. At the end of 24 the total utilization of offshore vessels in the North Sea was at 86.7 percent, based on 163 vessels on contracts (term and spot) against a total fleet of 188 vessels. This is a 1 percent increase compared to a year earlier. The total fleet increased from 178 vessels at the end 23 to 188 at the end of 24. A total of 14 large newbuildings were delivered from European yards 11 PSVs and 3 AHTSs. The PSV fleet above 3,1 dwt increased by 11 vessels to 79, whereas the total AHTS fleet above 1, bhp remained as in the previous year at 48 vessels. At the end of 24 the order book for large supply vessels from European yards dropped from 3 to for AHTSs above 1, bhp. For PSVs above 3,1 dwt the order book increased from 9 to 33, of which 8 vessels have future term contract commitments. NORTH SEA TERM CONTRACTS. Large PSVs above 31 dwt have been fixed on term contracts in a range from 6,3 to 9,1 per day on monthly average in 24, the year's last two months representing the two successive highest rates. The yearly average increased from 7, to 7,3, which aspires from a total utilization rate of 95.2 percent. For medium sized PSVs between 2,2 and 3,1 dwt term contract rates ranged from 4,85 to 8,1 on a monthly average basis. The yearly average was 5,7, an increase of about 1, from 23. The average utilization rate was 89.9 percent. The smaller PSVs of 1,5 2,199 dwt size obtained term contracts ranging on a monthly average from 3,82 to 4,25. The average daily rate over the year was 4,25, whereas the average utilization rate was 96.1 percent. Large AHTSs of more than 16, bhp obtained day rates between 7,28 and 13,. The average for the year as a whole was 9,15 which is a decrease from AVERAGE T/C RATES NORTH SEA PSV (REPORTED AND ESTIMATED) GBP 1,/day 12, 1, 8, 6, 4, 2, SECOND-HAND VALUES AHTS/PSV Mill. $ UT74-I BLT ' 75 UT74-II BLT ' 82 ME33 BLT ' 82 ME33-II BLT ' 91 UT74-I 1,5+DWT BLT ' 75 PSV 2,2+DWT BLT ' 81 UT74-I BLT ' 9 UT 745 BLT ' ,5-2,199 DWT 2,2+ DWT (pre 1996) 2,2-3,99 DWT 3,1+ DWT

40 38 THE SUPPLY VESSEL MARKET 12,1 in 23. Utilization rate was 9.5 percent. AHTSs of 1, 15,999 bhp obtained day rates between 5,35 and 8,5. The average for the year as a whole was 6,4 a decrease from 7,7 in the previous year. The average utilization rate was 84.6 percent. THE NORTH SEA SPOT MARKET. At the end of 24, 3 vessels were in lay-up, and 54 vessels were trading the spot market, which was also the average during the year. This number is also the same as at the end of 23, although the spot tonnage has been in constant change as vessels have arrived, departed and newbuildings have been delivered. "About 28 percent of the vessels in the North Sea are trading the spot market. The spot market in 24 experienced a constant increase in rates, especially the second half of the year. In November a large PSV earned 42, for a cargo run, and in December an AHTS obtained in excess of 55, for a rig move. AHTSs between 1, bhp and 15,999 bhp earned a daily rate of 8,4 on yearly average basis, and AHTSs in excess of 16, bhp earned 1,65 on an average basis. As for PSVs, in the category 2,2 3,99 dwt, the vessels achieved 6,75 per day on yearly average. The large vessels above 3,1 dwt obtained an average of 9, per day. SALE & PURCHASE / CORPORATE. No major corporate deals took place during 24, nor any individual transactions involving modern high specification supply/ support vessels. After a decline in values during the first two quarters of 24, influenced by a weakening US$ and somewhat weak charter rates, an optimistic view on the future and firm charter rates influenced values in a positive way at the end of 24. Some important transactions that took place during 24: Malaysian company Intra Oil Services Berhad, a member of the Petra Perdana Group of Companies, acquired a number of second-hand units: "Bourbon Captain" / "Bourbon Champion" (AHTS 1, bhp, built Holland 1983). "Bourbon Castle" (AHTS 12,27 bhp, built UK 1982) and "Bourbon Trader" (PSV 4, dwt, built Norway 1978). "Lady Elaine" (AHTS 1,56 bhp, built Holland 1983). Scottish company NOMIS Shipping Limited acquired 7 vessels, of which 5 standby/rescue class vessel type from TOISA Ltd and Solstad Offshore ASA: "Toisa Widgeon", "Toisa Teal", "Toisa Puffin", "Normand Skipper", "Normand Protector", "Normand Ondur", and AHTS "Smit-Lloyd 57" from Seacor Marine Inc. Shanghai Offshore Petroleum Exploration and Development, Shanghai, a subsidiary of SINOPEC, acquired 2 high horsepower AHTS vessels of UT 78 design during the autumn of 24: "Far Turbot" from Farstad Supply AS and "Maersk Trader" from A.P. Møller-Maersk. Yantai Salvage, Yantai, China acquired a fleet of 5 vessels from FEMCO, of which 4 Neftegas type AHTS and 1 purpose built FiFi / rescue tug enbloc price about $14 mill. At the end of 24, Solstad Offshore ASA, Norway acquired 5 offshore vessels from TFDS Offshore AS. The deal involved AHTS "Troms Titan" (12,6 bhp, built 1985) and PSV "Troms Falken" (3,3 dwt, built 21), both vessels wholly owned by Sellers, and AHTS/MSV "Troms Skarven" (13, bhp, built 1986), PSV "Troms Steggen" (3, dwt, built 2), and AHTS "Troms Supporter", ex. "Seabulk South Atlantic" (1,8 bhp, built 23), partly owned by Sellers. NORTH SEA SUPPLY VESSEL ACTIVITY END YEAR FIGURES No of vessels AVERAGE T/C RATES NORTH SEA AHTS (REPORTED AND ESTIMATED) GBP 1,/day 1 8 PSV -2,199 dwt PSV 2,2+ dwt AHTS 7-1, bhp AHTS 1,1+ bhp 15, 6 1, 4 2 5, Term Spot-work Spot-idle Yard/lay-up 8-1, BHP 1,1+ BHP

41 PETROADVISOR AS 39 Change of Operator is often the key to game changing actions From left: Ivar Haaland, Fridtjof A. Jebsen, Einar Fr. Semb In the latest Norwegian Government White Paper related to the petroleum industry (May 24) the positive effects of new players, diversity, increased competition, improved turnover of acreage, increased transaction of assets, etc. were highlighted relative to extracting more value from the Norwegian Continental Shelf (NCS). These changes are highly important for the general activity level, and to prolong and increase production from NCS (the 3rd largest oil exporter in the world). Other regions, such as GoM and UKCS, have experienced clear positive spiral relationships between improved framework conditions, increased liquidity in second hand acreage and assets markets, and the shelf activity level in terms of number of wells drilled and development decisions. New non-operator participants usually have a distinct positive influence on licence groups, bringing in alternative strategies, ideas and experiences and, perhaps most importantly, coming onboard with new investment appetite. In our view, however, the opportunity to introduce new Operators to existing fields and licences may be the most important effect of higher acreage/asset turnover and increased number of transactions. New Operators can apply fresh human, technological and financial resources, renewed focus on challenging exploration/appraisal areas and field developments, or to revitalize existing fields. A more frequent change of Operator may actually be a central key for the activity level and value of the NCS in the long run, and we shall in the following highlight some examples where the PetroAdvisor team has participated actively or monitored the processes closely. THE ÅSGARD & VARG "1" CASE. In the early 199s, Saga Petroleum was struggling to develop their Mid- Norway Midgard gas field. At that stage no gas-export infrastructure existed in the area, and it was clear that the first gas field development at Haltenbanken would gain a strategic position as a gas processing and export hub. It was also a fact that stand-alone economics for Midgard was not that good (low liquid content being one major reason). In addition, Statoil, the Operator of the nearby Smøbukk and Smørbukk Sør gas/condensate fields, was not interested in allowing the Norwegian

42 4 PETROADVISOR AS independent and 'baby brother' Saga to become the prime Operator of Haltenbanken gas exports. The solution to the situation became the foundation for the Åsgard field development. In 1994/1995 Statoil, Saga and the other partners agreed to go for a joint Midgard, "New Operators can apply fresh human, technological and financial resources. Smørbukk and Smørbukk Sør development and to establish the Åsgard Unit with Statoil as the Operator. The authorities contributed actively to establish common incentives. The State Direct Financial Interest (SDFI) sold a 5 percent interest in the Smørbukk licences to Saga, in a deal where Saga got 7 percent in Smørbukk from Statoil/SDFI in exchange for interests in Heidrun and Varg (15 percent), plus cash. In addition, Statoil transferred the Operatorship of the Varg field to Saga. Prior to the Åsgard deal Saga had acquired the 5 percent partner interest of Exxon in Varg. Becoming Operator of Varg, Saga was eager and willing to develop the field, as a pioneer stand-alone small field FPSO development that otherwise probably would not have gone forward at the time. With regards to Åsgard, it could be argued that these huge resources would have been developed sooner or later anyway (ref. table 1 below). In our view, however, the change of control from Saga to Statoil was necessary at that stage in order to move the development forward for the benefit of the licence holders and the NCS. VARG 2. In 22 PGS/Pertra took over the licence interests and Operatorship for the Varg field from Hydro and Statoil (who in the meantime had acquired Saga). Hydro had plans to shut down Varg in 22, but after interpretation of new seismic data and mapping of the field, PGS/Pertra initiated well workover and drilling operations that have increased the reserves in the field by some 1 percent to 9.3 mill Sm 3, as well as postponing the closing of the field until 29/21 an important achievement both for PGS shareholders and for the Norwegian society. RESERVES AND VALUES RELEASED BY SELECTION OF NCS TRANSACTIONS Project/ Reserves, Gross value, Field Year Seller Buyer MBOE* mill $** Comments Åsgard 1995 Saga, SDFI, Statoil, Saga 2,391 56,5 Midgard, Smørbukk and Smørbukk Sør was combined in Statoil the Åsgard development with Statoil as operator Varg "1" 1994 Statoil, Esso, Saga, Statoil 28 7 Saga took over the operatorship of Varg as part of the Åsgard Saga deal with Statoil Varg "2" 22 Hydro, Statoil Pertra 3 75 PGS/Pertra took over the licence interests and has increased reserves and prolonged field life Heimdal 23 Elf Hydro N/A N/A Hydro transformed Heimdal to a hub for processing and gas transportation. Abandonment post phoned Alvheim 22 Hydro, Statoil, Marathon 184 4,6 Several transactions established the reserve basis and aligned SDFI, Total interests for the Alvheim development Gyda 23 BP Talisman?? Talisman increased investment and activity level and will likely prolong field life 6 8 years Gjøa 24 Hydro GdF (/Statoil) 244 5,9 The field will likely be deemed commercial with Statoil resp. for development and GdF for operations * Recoverable reserves according to NPD ** Indicative gross revenue value (undiscounted) applying 25 $/bbl, 1 NOK/Sm 3 of gas and 15 NOK/ton of NGL INVESTMENT GYDA, NORWAY (Source: Talisman) Mill. $ 1 5 BP Talisman INVESTMENT (Source: Wood Mackenzie) Mill. $ Lyell 94 Hutton 94 Murchison 94 Expected future capex at time of deal ( mm) Current expectations on post-deal capex ( mm) Ninian 96 Beatrice 96 Clyde/Leven 96 Buchan 96 Blenheim 97 Sedgwick 97 Heather 97 Ninian 99 Claymore 99 Anglia 99 Murchison 99 Lyell 99 Saltire/Iona 99 Hutton 99 Piper 99 Audrey 99 Scapa 99 Columba Orwell Trees THP Johnston 1 Ninian 2 Anglia 2

43 PETROADVISOR AS 41 HEIMDAL. For the Heimdal field the change of Operator was again important in prolonging field life and for further development. Heimdal is a medium sized gas/ condensate field that started production in 1985 with Elf as the Operator. In 1996/1997 it was clear that Elf was close to abandoning the field. However Hydro bought 15 percent of the field from Elf and took over as Operator from 1998.The same year the MPE received development plans for the Heimdal gas centre. Heimdal has continued as an important gas export hub, with the ability to send gas to UK through the Vesterled pipeline system and to the Continent through Statpipe. Heimdal is also ensured long-term operations by providing processing services to Huldra and other surrounding fields. ALVHEIM. One of the major successes on NCS in the last few years has been the Alvheim development with Marathon as operator and ConocoPhillips and Lundin as partners. The Alvheim development consists of three main structures, Boa, Kneler (discovered in 23 by Marathon) and Kamelon (discovered in 1998 by Norsk Hydro). Several transactions established the reserve basis and aligned interests for the Alvheim development, including the 22 transfer of the 35 percent interest and operatorship from Norsk Hydro to Marathon in PL 23. The Alvheim development plan was approved by the authorities in October 24. Recoverable reserves are estimated to 9.3 mill Sm 3 oil and 5.7 billion Sm 3 gas. GJØA. Another example of change of control was when Hydro sold off their licence interests in PL 153/Gjøa to Gaz de France (GdF) in early 24. Hydro had been the Operator for Gjøa and GdF entered into a creative deal with Statoil that made Statoil development Operator and GdF responsible for the operations phase. The licence group plans to submit the PDO in 25, aiming to make Gjøa a fast track commercial development. Was Hydro mistaken to sell off their PL 23 and 153 Licence Interests to Marathon and GdF? It is as always a question about interpretations, perceptions, ideas, priorities and different hurdle rate assumptions. At the time Hydro probably had to make a judgement call on the considerable exploration and commercial risks that existed, and it is likely that all in all they found that their limited resources were better utilized elsewhere, considering the amount of consideration offered for the interests from the purchasers. GYDA. Change of Operator also for fields in the tail-end phase has been very important in mature areas such as Gulf of Mexico and UKCS. The takeover of Gyda by Talisman from BP is a very good example of this trend at NCS. For the major or the large independent oil company the time to sell off their assets is usually a question about economics: what are the unit costs, what is return on capital employed, what does the required man-power generate, etc., compared to the company portfolio. It is also a fact that larger oil companies have access to more alternative opportunities worldwide and may better utilize their resources elsewhere. At some point the time comes to divest, and compared to similar transactions BP got a very good price for Gyda. On their side Talisman got into the driver's seat as a new Operator and their current plan is to increase investments in the Gyda field by several hundred percent (se figure 1 below) and prolong field-life by 6 to 8 years. According to analyst Wood Mackenzie, transfer of operated assets generally leads to large increases in investments, ref. figure 2 below. "Change of Operator also for fields in the tail-end phase has been very important in mature areas." CONCLUSIONS AND LESSONS LEARNT. It is important that fresh initiatives are given working opportunities and that existing players know when to step down. We are not necessarily talking only about incumbents relinquishing tasks to newcomers. New energy and fresh focus can generate game-changing action and improved performance, whether the new Operator is a small/ medium size independent or a large experienced player, as long as vision, focus, drive/determination and capabilities are in place. A well functioning asset market should facilitate assets and Operatorships, changing hands to the natural holders. Existing Operators should take an honest stance on their own relative position with regards to interpretation, technical/economic evaluation, focus, view of materiality, investment willingness, and position as natural Operator. New Operator candidates need to prove willingness and ability to pro-actively "step up to the plate" and willingness to compensate for the transfer of performance control and take the risk of believing in their own vision and execution competence. As to the authorities, they need to continue to facilitate fallow acreage and fallow discoveries initiatives plus closely monitor the main Operators' abilities to pursue the prize in each and every field/licence situation. The fact that companies like Hydro, Statoil, BP and Total divest of assets and Operatorships and focus resources elsewhere should be commended and encouraged rather than scrutinized. In the long run this is likely to be an important value creation key for the NCS and all its stakeholders. Incumbents should further have an additional separate interest in creating a solid exit market for their future non-core/non-material assets. For further information about PetroAdvisor see

44 42 THE CAR CARRIER MARKET Strong growth in transport demand From left: Tallak Strandenæs, Jan Erik Holthe, Jørgen von Tangen, Thomas Chr. Beck The PCTC market tightened significantly in 24. We estimate that the rate for a 12 month T/C for a 6, car unit vessel rose from $24, in 23 to more than $3, in 24. Demand growth was exceptionally strong,12 percent, and we must go back to 1997 to see a similar growth rate. We estimate Western European automobile imports to have grown by 9 percent in 24. The strong Euro gave Far Eastern manufacturers the economic incentive to export larger volumes of cars to Western Europe. In addition, Far Eastern manufacturers acquired market share by focusing on sales in Europe's high growth segments, such as the SUV segment. North American automobile imports grew by 3 percent in 24. Most of the import growth was a result of Korean car makers managing to increase sales almost 1 percent. Japanese car makers decreased their exports to North America by 3 4 percent, as they transferred more production of their vehicle production to plants in North America. Elsewhere, demand grew primarily as a result of the high economic growth worldwide (the highest since 1976), which in turn led to increases in automobile sales and imports. We have recorded increases in car imports in the Pacific of 9 percent, Latin America 3 percent, Middle East/Africa 3 percent and Eastern Europe 1 percent. Another contributing factor to the large increase in the automobile trade was South Korea's weak domestic car demand. If domestic car demand had been stronger, part of the 3 percent increase in Korean car exports would have been absorbed by domestic sales. The PCTC fleet increased by 7.8 percent in 24, up from a 4.1 percent increase in 23, ending at 456 vessels (2.8 mill car units) at year end. 25 newbuildings were delivered (147,4 car units). No vessels were scrapped. As of 1st January 25 there were 114 newbuildings on order for delivery between 25 and 29, of which 33 are for delivery in the current year, 31 in 26, 3 in 27, 15 in 28 and 5 in 29. DEEP SEA PASSENGER CARS DEVELOPMENT Mill. cars TOTAL CAR INTAKE CAPACITY BY PCC ABOVE 1, UNITS Mill. cars (end of year) Europe/N. America Japan/Europe Korea/Europe Japan/N. America Korea/N. America

45 R.S. PLATOU FINANS 43 K/S financing from dust to boom R.S. Platou Finans AS was established in 24 with the main objective to find attractive investment opportunities involving purchase of merchant vessels mainly with long term employment attached. The most common legal structure for such investments is by establishing a limited partnership also defined as a kommandittselskap for each separate project. A limited partnership (KS) is an enterprise where at least one partner has unlimited liability for the company s total obligation, while the liability for each of the other partners is limited to a fixed amount. This corporate form is regulated in the Partnership Act of There is no requirement as to the minimum equity investment in a KS, but at least 4 percent of the agreed partnership capital shall be restricted corporate equity which must be transferred to the partnership and which the partners may not dispose of freely. Before the Norwegian tax reform in 1991, there was a great tax incentive in investments in ships through KS companies. However, the effect of the new tax law was dramatic for the Norwegian KS scheme and its popularity dissapeared overnight. We can still read the defintion of a kommandittselskap in the Norwegian Shipowners Association s home page as follows: Kommandittselskap (KS) limited partnership. A form of shipfinancing very popular in Norway before the tax reform in Now almost obsolete. However, during the last five years, there has been a steady growth in the number of KS projects placed in the Norwegian investor market with 24 as the most active year for a long time. More than 65 vessels with a value of more than $1.2 billion was purchased by Norwegian KS companies last year. There is only a handfull of financial houses in Norway that specialize on this type of projects and their strategies are quite similar. Without the tax benefits, the projects should involve long term employment unless there is a good asset play opportunity. There is also a close cooperation with a number of Norwegian shipowners who see the opportunity to become the disponent owner with an investment participation of about 25 percent in the company. This way, the KS company will have a professional team looking after both the technical and the financial aspects for each separate investment. LENGTH OF EMPLOYMENT FOR VESSELS BOUGHT BY KS COMPANIES 24 TYPE OF VESSELS BOUGHT BY KS COMPANIES 24 No of vessels Spot 9% 1 3 years 17% 3 5 years 31% 5 15 years 43% Tank/Chem Container Bulk Gas Offshore Reefer RoRo/PCC Ferry

46 44 R.S. PLATOU FINANS From left: Axel Moltzau Aas, Øystein Leonhard Nilsen, Christian Wessel Svensson R.S. Platou Finans AS has developed a big network receiving daily information about potential shipping deals from all over the world. Our contacts include shipbrokers, shipowners, ship managers, bankers, lawyers and consultants. With competition from other financial schemes, like UK tax lease, German KG financing and large shipping funds, we have developed a very flexible scheme consentrating on purchase of vessels of medium age with charter back. Our competitive advantage is the flexibility not found in other financial instruments. This includes the possibility "Our competitive advantages is the flexibility not found in other financial instruments." to give optional charter periods, purchase options, a choice between time charter and bareboat charter, no limit to age or tonnage type and no limit to number of vessels included in one transaction. This flexibility has become well known among shipowners around the world and the last couple of years, names like Finnlines, DFDS, Stelmar Tankers, Bergesen and Maersk has been involved in KS transactions. Since our offcial opening in october 24, R.S Platou Finans has established three KS companies with a total project price of about $12 mill. Our investments includes one bulker with 3 years bareboat charter back to seller, two container vessels with 5 years time charter to a major container operator and one Aframax OBO with 6 years bareboat charter back to seller. In addition, R.S. Platou Finans has been appointed as the corporate manager in an offshore supply KS company. We expect 25 to be another year with high activity and several new KS comapnies to be established. However, having experienced a period with strong impovement in ship prices and charter rates, the risk factor becomes even more important. We turn down a lot of deals where a combination of high purchase price and a high residual risk make the project less attractive. The importance of a first class charterer will also be a major factor in our project evaluation. We will look at all type of vessel segments, but still consentrate on traditional ship types, like bulkers, tankers, container vessels, gas tankers, roro vessels and car carriers. This has traditionally been good investments with an average return between percent per annum on the paid in equity during the last five years.