The movement of oil around the world's oceans is constantly under enormous pressure, from conflicts between nation states, piracy and climate change. Yet, while the uninterrupted flow of oil is essential to globalization, increasingly so as manufacturing and markets move eastwards to Asia, this threat is largely unreported. Out of sight, out of mind is the general reaction.
From reporting aboard giant tankers to examining the geopolitical shift in oil consumption, Oil on Water is an engrossing, all-encompassing look at the security of this vital supply chain.
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About the Author
Paul French has lived and worked in Shanghai for many years and is a highly regarded commentator on Asia and the author of a number of books.
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Oil on Water
Tankers, Pirates and the Rise of China
By Paul French, Sam Chambers
Zed Books LtdCopyright © 2010 Paul French and Sam Chambers
All rights reserved.
Life Without Oil
Sunday 5 October 2008 – The Port of Singapore
The Shinyo Ocean is carrying 180,000 tonnes of oil from Fujairah in the United Arab Emirates down the Malacca Straits, around Singapore and then up past the east coast of the Malay peninsula, Vietnam and across the South China Sea to the island of Taiwan. It's a regular route – owned by a European, the Hong Kong flagged very large crude carrier (VLCC) is contracted to make the run several times a year by Taiwan's plastics industry, which has a thirst for oil that requires constant quenching.
The ship doesn't stop at Singapore, just slows down to pick us up along with some supplies and the essentials of shipboard life – newspapers and SingTel mobile phone top-up cards for the crew. Nobody buys anything else in Singapore – supplies for the run are taken on board in Fujairah – tax free – everything from cigarettes to booze to ice cream.
We head out just over an hour from Singapore's World Trade Centre Ferry Terminal to meet the Shinyo Ocean aboard a small supply vessel, the Jolly Rachel, owned and crewed by three guys from Indonesia's Aceh province who lost their village to the tsunami and seem to have stayed at sea ever since. The tanker is late – caught in traffic, as the shipping lanes around Singapore are packed. Roughly 80 per cent of the world's seaborne freight and oil passes down Malaysia's coast, round Singapore and into the South China Sea or vice versa. We bob about for an hour starting to feel nauseous from the choppy sea and the endless shrill Indonesian pop music blasted at us courtesy of the Jolly Rachel's captain.
The Shinyo Ocean lives up to its 'very large' designation -1,100 feet long, 200 feet wide and riding about 66 feet out of the water – basically a floating island fully loaded with oil and a twenty-two-man Indian crew. The ship is plenty big enough to allow you to go for a jog around the deck if the sea is calm. She's an expensive piece of floating real estate too – the ship alone is worth US$130 mn, while she's carrying a cargo of oil worth over US$120 mn and, in addition, she needs 62 tonnes of 'bunker fuel' a day to power the ship – at US$800 a tonne that means we're spending nearly US$50,000 a day just to keep moving. Factor in the additional costs of all the necessary lubricants, fresh water and food we need aboard and you start to understand how expensive it is to move the 'black gold' around the world.
The captain slows to 7 knots to pick us up, dropping her side ladder as the supply boat comes alongside. At sea level with a VLCC tanker looming up 66 feet above you, 7 knots feels like a hundred; you jump the small gap and then climb up the sixty or so stairs to the deck with your head down, concentrating on putting one foot in front of the other. The Jolly Rachel pulls away sharply as soon as we're aboard – even at these slowed speeds a small boat is fairly powerless against the Shinyo Ocean – if either captain isn't paying attention and lets the speed drop then the Jolly Rachel could get sucked as if by a magnet onto the side of the Shinyo Ocean and then pulled underneath it. If they weren't looking, the crew of the tanker wouldn't even notice the Jolly Rachel being pulverised. Once we're aboard, the captain can increase speed to 14 knots and by nightfall we're passing out of the Singapore Straits, into the South China Sea and close by the Riau Islands of Indonesia.
It's six days constant sailing across the South China Sea to Taiwan.
The imperative of Strategic Reserves
Oil tankers are the behemoths of the world's oceans and absolutely vital to the smooth running of the global production process. Email can go down for a few days, mobile phone signals be lost temporarily, pipeline supplies interrupted intermittently, but if oil tankers stopped sailing for a matter of days or weeks then the world's economy would literally grind to a halt.
The situation is potentially very serious – according to a March 2001 agreement, all twenty-eight members of the International Energy Agency (the IEA) must have an inventory, or 'strategic petroleum reserve', equivalent to ninety days of the prior year's net oil imports for that country. Only a few net-exporter members of the IEA are exempt from the reserve requirement: Canada, Denmark, Norway and the UK. Recently even Denmark and the UK have both created strategic reserves to protect their economies from any interruption in supply.
Currently most nations are operating below the IEA-proposed ninety days – the United States current inventory of 724 mn barrels equates to just thirty-four days of oil at current daily US consumption levels (21 mn bpd). Japan's reserve would allow it to function for just over ninety days. In the EU the situation varies – usually between fifty to ninety days – while in Australia the strategic petroleum reserve equates to just ten days' supply.
However, the emerging powerhouse production economies of East Asia and India, which are the fastest-growing importers of oil, are on far shorter timelines and thus considerably more vulnerable to interrupted flows of delivery. South Korea and Taiwan have approximately thirty days of reserves but China has barely a fortnight's strategic reserve in stock, though it might last out thirty days if stocks held by enterprises are also factored in. India, similarly, has approximately a fortnight's reserves in hand.
Any interruption to the world's SLOCs – whether it were war, internal conflict, piracy or industrial action that blocked any of the vital choke points between the Middle East and the major consuming markets to the West or East – would rapidly be a problem of global proportions. As more and more oil is moved east of the Middle East to East Asia any escalation of problems in the Straits of Hormuz, the Indian Ocean, the Malacca Straits, the Singapore Straits, the South China Sea or the Taiwan Straits could bring the world's new centres of production to a grinding halt. Consider that the Straits of Hormuz at their narrowest are just 33 miles wide, yet approximately 25 per cent of the world's oil supply and over 75 per cent of Japan's oil passes through them daily (something approximating a daily oil flow of 16.5–17 mn barrels or roughly two-fifths of all seaborne traded oil). The Malacca Straits – the crucial connecting passage between the Indian Ocean and the South China Sea – are barely 1.5 miles wide at their narrowest, yet a quarter of all oil carried by sea passes through them, mainly to the markets of East Asia. Vulnerability is the hallmark of the SLOCs.
Most people never see an oil tanker except on television on the relatively rare occasion when one gets into trouble. To most people Somali pirates with their automatic weapons and rocket-propelled grenade launchers are a distant and slightly baffling phenomenon. Little, if any, attention is paid to how many tankers sail the world's oceans, where they go, and who owns and crews them. That oil will arrive somehow, almost magically, and power our economies is taken for granted by most of us. It happens largely outside public view and public consciousness. Oil tankers do not attract the same fascination and media attention as other more visible forms of transportation and transmission of goods and ideas – roads, planes, telephones, the internet. And yet even a slight interruption to the smooth and uninterrupted global flow of oil from producers to consumers would have potentially devastating consequences for consuming nations – from unemployment and closed factories to blackouts and public health crises. Any prolonged interruption to the SLOCs and regular seaborne oil supplies could precipitate internal conflicts, civil strife and even war.
The oceans are the transportation method of the overwhelming majority of the world's oil – highways for the transmission of vital energy supplies – creating wealth for the producer nations and delivering ever larger doses of energy to consumer nations. Oil moves on water – if it ceases to, for even a short time, the world has a major problem.
Oil and the Getting of it
Oil is never far from the news. However, in recent decades the focus has overwhelmingly been on three factors: oil producers, oil consumers and the price of a barrel. This book argues that the missing part of the debate around oil for many commentators and the general public has been the transportation of this 'black gold' from producer to refiner to consumer. Moving oil, primarily by sea (which is the focus of this book), or by pipeline, involves discussion of a wide range of subjects. Invariably and in the case of the bulk of the world's oil, this movement involves transfer from one country to another and often from one continent to another. The ability to move oil successfully from A to B is of crucial concern to the producer nations, for without this they cannot trade and profit from their reserves. It is crucial to the consumer, whether a nation, a factory or an individual at the petrol pump, as without a secure and uninterrupted method of transportation demand would soon exceed supply in the countries with the heaviest usage, shortages would ensue, economies would start to slow and blackouts would follow. And, of course, the cost of transportation ultimately affects the final cost of oil to the consumer – the transportation of oil in whatever form it occurs must eventually be factored into the price paid at its destination.
While many are concerned about the very real fear of the depletion of the world's reserves of oil, the number of points at which oil is being sourced from around the world are actually growing. The now dead Cold War, which saw some major consuming nations unwilling to deal with some major producing nations and vice versa, led to the opening of new markets. Now that ensuring supply has become the crucial factor, pretty much everyone deals with everyone else. While the major world oil reserves may be declining (in 2006, a spokesman for the largest oil corporation in the world, Saudi Aramco, publicly admitted that its mature fields were now declining at a rate of 8 per cent per year) new ones are found in places where serious exploration work is being done for the first time – in African nations such as Mauritania and as a result of various deep-water explorations and finds in the Gulf of Mexico for instance. The search goes on and in the last few years there has been a steady stream of new finds around the world.
Since the turn of the new century the Middle East's proven oil reserves have been revised upwards by 5 per cent (admittedly a matter of great and ongoing dispute), the former Soviet Union's by 35 per cent (as the country entered the world market and revealed more detailed data for the first time), while Africa's proven reserves rose by 45 per cent, as many previously unexplored and unsurveyed areas of the continent were examined and found to contain reserves. The new announcements of reserves have kept on coming in the last couple of years:
In South America Petrobras, Brazil's national oil company, announced a new offshore field of between 5-8 bn barrels of recoverable light oil. In Mexico, an exploration well drilled near the offshore Ku Maloob Zaap heavy oil field, the country's most prolific producer, indicated that reserves at the complex could be greater than Mexico's state oil company Pemex had previously thought. The Gulf of Mexico is attracting much attention with a range of European, Asian, North American and other countries exploring, and now drilling, including those who would dearly love to raise their oil revenues, such as Cuba.
In North America new finds are being made in the Gulf of Mexico as well as in North Dakota in addition to the highly contentious finds and potential further discoveries in Alaska and the Arctic.
In Europe there have been new finds in the North Sea.
In Africa, north of the Sahara, the Kuwait Energy Corporation recently announced two new oilfields in Egypt's East Ras Qattara block, which could boost production from 900 bpd to 5,285 bpd of light crude, while the Algerian state-owned energy group Sonatrach announced seven new hydrocarbon finds in 2009 alone. South of the Sahara, Uganda has made new discoveries in the Victoria Nile Delta off the north-eastern shore of Lake Albert while Ghana and Equatorial Guinea, among other African nations, have announced sizeable new finds.
In East Asia additional oil reserves are proving somewhat harder to find. However, demand growth outstrips that of anywhere else internationally, forcing the region to become ever more reliant on imported supplies. China has announced some new finds offshore from Qinhuangdao in the Bohai Gulf and there have been some new finds in the Timor Sea, leading to some arguments over control of these finds between East Timor (Timor Leste) and Indonesia. Smaller finds have also occurred offshore Malaysia and Indonesia.
The oil being discovered now is often difficult to get at – either geologically (including the fact that offshore exploration and drilling is expensive despite improved technology while other deposits involve drilling through rock) or politically as many of the new finds are in countries with problematic domestic political situations, suffering internal conflict or simply lacking an adequate infrastructure to export the oil after extraction. Despite this, new finds are being exploited worldwide in ever more places. What this all means is that in terms of transportation of oil more tankers will be calling at more ports; as the SLOCs become ever more crowded and develop an ever greater number of branch lines to new sources of supply, the potential threats to the smooth and uninterrupted movement of oil are increasing. The potential number of global choke points continues to grow and oil wealth is spreading to unstable countries, leading to a resurgence of conflict and piracy.
The other new source of oil is from countries whose oil was not previously available on the international market. Russia is the prime example. Following the collapse of the Soviet Union, the Russian Federation has become a petro superpower, pumping more oil than Saudi Arabia. In 2008 Saudi Arabia produced 9.26 mn bpd while Russia produced 9.36 mn. However, Saudi Arabia is technically the bigger exporter, with oil shipments accounting for over 90 per cent of the kingdom's total oil, while Russia, with a sizeable domestic industrial base (and by some measures the world's third largest energy user), exports only 70 per cent of its production and refines the remaining 30 per cent locally for domestic use. Still, oil has changed Russia fundamentally as oil-related wealth has swept across the country transforming the post-Communist economy into a Russian version of a petro state. Importantly, the entry of Russian oil onto the global market has occurred in parallel with the rise of the economies of China and East Asia. Since the turn of the century Russia has accounted for 80 per cent of the growth in oil production outside OPEC. The increase in Russia's output in the early part of the decade matched the growth in demand from China and India almost barrel for barrel.
Russia is still expanding production with vast amounts of money being directed into large oil, and gas, projects. Importantly, given that the major growth in demand for oil is coming from East Asia, many of these new projects are in Siberia and Russia's Far Eastern territories between Siberia and the Pacific Ocean, including Sakhalin Island. Sakhalin, with especially close access to Japan but also to the Korean peninsula and north-east China, is now a classic 'resource economy' (since two large consortiums signed contracts to explore for oil and gas off the north-east coast of the island in 1996) relying on oil and gas exports. With a population of only approximately 600,000 people, Sakhalin has undergone an oil boom that now accounts for over 80 per cent of the island's economy and involves major Russian and international oil companies such as ExxonMobil and Shell tapping into the island's estimated 14 bn barrels of oil (and 96 trn cubic feet of gas).
At the same time as the emergence of a host of new oil exporters across the globe to complement and compete with the Middle East as well as the emergence of Russia (and to a lesser extent the former Soviet republics of Central Asia) as a petro state, the world has seen the most continued increased demand for oil from East Asia. The landscape and the geography of the international oil business has changed with new petro superpowers (including Russia, the Central Asian republics and other states such as Venezuela and Angola as well as the Middle East) and new petro superconsumers (such as China and India). That many of the new petro states rely on an uninterrupted flow of oil-derived revenues for their economic and political stability while the consuming states, such as China, rely on uninterrupted flows of oil into their economies, both to maintain stability and growth, the uninterrupted delivery of oil will be a major continuing concern into the twenty-first century.
Excerpted from Oil on Water by Paul French, Sam Chambers. Copyright © 2010 Paul French and Sam Chambers. Excerpted by permission of Zed Books Ltd.
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Table of Contents
List of Tables, Boxes and Figures vi
Terminology and Definitions viii
Introduction: Oil on Water 1
1 Life Without Oil 13
2 The Shift East 29
3 The Great Voyage 47
4 Securing the SLOCs 65
5 Piracy: The Nebulous Threat 85
6 The Criminalisation of Crews 107
7 Flags of Convenience 127
8 Green Shipping? 143
9 The Politics of Pipelines 167
Conclusion: The Future of Moving Oil 187