CRUDE TANKER

PRODUCT CARRIER

OFFSHORE

PLATFORM

STORAGE

TANKS

EXPORTS

STORAGE

TANKS

REFINERY

END USER

SPECIAL REPORT

DWT Barrel

capacity

Length (m) Breadth (m) Draught (m) Fleet size* % owned

by top 10

VLCC 300,000 2,000,000 320 60 20 735 43%

Suezmax 160,000 1,000,000 265 50 17 523 39%

Aframax 115,000 600,000 240 45 15 959 36%

Crude oil tankers have a vital role to play within the energy value chain. Their main

role is to transport crude oil from production point to refinery, although they are

also sometimes used for storing crude oil post production. Crude tankers can also

be used for carrying oil products such as fuel oil. Any clean products that come out

of the refinery are carried on 'clean' or 'product' tankers, which are smaller in size

due to the smaller parcel sizes in which these products are traded. Euronav only

operates in the VLCC and Suezmax segment, this report will therefore focus on crude

oil tankers.

The Asset

Crude oil tankers come in various sizes, the biggest standard size being a Very Large

Crude Carrier – or 'VLCC'. These tankers take up to 2 million barrels of crude oil per

shipment, while the second largest size is the 'Suezmax' which takes around half of

that amount and is the largest size ship that can sail through the Suez Canal fully

laden. The smallest size of dedicated crude oil tankers is an 'Aframax' which can

carry around 600,000 barrels of oil. There are smaller tankers in the market, but

these tend to carry refined oil products and fuel oil, not crude oil.

, we

depreciate the

original cost of a

vessel to zero value

over 20 years.

"

Construction of crude oil tankers takes 9 to 15 months from the time the keel is

first laid. This means that it will take at least two years from the time of newbuilding

contract signature (ordering) until the vessel is delivered because many critical parts

are long-lead items that needs to be ordered and produced before the construction

of the ship can commence. Their sheer size dictates that there is a limited number of

sites capable of building them and these are concentrated in Asia, more specifically

in South Korea, China, and Japan. The price for contracting a tanker newbuilding is

influenced by a number of factors such as the underlying price of energy, steel, labor

costs and available construction finance. The relative demand for contracting new

tonnage also plays a role and may lengthen or shorten waiting time to delivery and

affect price. Over the last ten years the cost of a new VLCC has ranged from around

USD 80 million to USD 160 million. The payment profile on the ships tends to be

very back loaded, typically with a 10% deposit on signing the contract, 20% to 40% in

milestone payments and finally 50% to 70% on delivery.

The economic lifespan of an oil tanker has historically been 25 years, although more

recently this has dropped closer to 20 years. Different tanker companies operate with

their own asset depreciation policies, ranging from 18 to 25 years. At Euronav, we

depreciate the original cost of a vessel to zero value over 20 years.

The Cost Structure

A ship owner chartering his vessel to a customer is paid 'freight'; this is the gross

revenue agreed with the charterer to cover the entire voyage from port of loading to

port of discharge. This revenue is used to cover the cost for the owner to undertake

the voyage, the cost of operating the vessel, any interest payments to loan providers

and other costs associated with owning a ship. Certain fixed costs vary between

shipping companies, most important the purchase price, and each will therefore

have their individual breakeven cost at which it becomes profitable to run the vessels.

However once these fixed costs are covered, all additional revenue results in profit.

Earnings are reported by companies and market watchers in terms of 'dollars per

day' also known as the Time Charter Equivalent (TCE). The cash breakeven TCE for a

VLCC is between USD 20,000 per day to USD 35,000 per day depending for example

THE BASICS OF THE TANKER SHIP MARKET 11

on the level of loan interest, fixed operating costs depreciation (or amortization) and

G&A expenses.

Each $5,000 uplift in both VLCC and Suezmax rates

improves net revenue and EBIDTA by $72 mm

$267

+ $5,000

per day

VLCC TCE rates

Suezmax TCE rates

$25,000

$20,000 $25,000

$30,000

$339

$35,000

$40,000

+ $15,000

per day

$483

$45,000

$50,000

+ $25,000

per day

$627

$75,000

$80,000

+ $55,000

per day

$1,059

AVG TCE

OPEX

G&A

EBITDA

Interest

Debt Repayment

Maintenance

Cash flow

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

(Source: Euronav)

(Source: Investor Presentation High Yield

Conference 2017)

Gross Revenue: Money agreed with

charterer to cover entire voyage from

A to B

Voyage Expenses: Cost of fuel, port

stay, tolls, cargo handling, commission

Net Revenue: Gross revenue minus

voyage expenses

Vessel Expenses (OPEX): cost of crew,

vessel stores & supplies, lubrication,

oils, insurance

Interest: cost of debt servicing

Debt repayment: debt repayment will

depend on financing but depreciation is

a real cost

Maintenance Capex: Cost of special

surveys

For the purpose of this report, the tax issues will not be covered in-depth, but

for more details please refer to the annual report. As a consequence of this cost

structure, most tanker companies are highly operationally levered. Therefore, every

additional dollar earned in revenue over and above the “fixed” cost base will fall

through to profit. Euronav’s illustrative operational leverage for its cost structure is

depicted below.

Tanker Customers

Tanker shipping is a business to business environment with a number of key

customers who regard the shipping element as an integral part of their logistical

chain. These key customers are the oil majors – both National Oil Companies (e.g.

Unipec, Saudi Aramco, Petrobras) and International Oil Companies (e.g. Total, Shell

and Chevron) – and there are trading houses such as Trafigura and Glencore, and

SPECIAL REPORT

large refiners. The oil majors generally require ships to take oil or to deliver to or from

third party refineries oil to their customers. This type of business depends on physical

oil flows, which refineries require what type of crude oil at any given time. The trading

houses are often more opportunistic in their trading of oil and therefore also more

unpredictable in terms of when and where they may need a ship. Most counterparties

in the large crude tanker space are large multinational companies with strong credit

ratings. The customer is often referred to as the 'charterer' of the vessel.

When a charterer requires a tanker to move oil from A to B they will typically get in

touch with a ship broker, who will in turn contact a number of vessel owners and act

as a middle man in negotiating price, terms and conditions for carrying the cargo. The

charterer can go directly to the ship owner himself, although this happens less often.

How the price of freight is set

The following chart gives a broad worked example on how the price of freight is set.

A number of vessels will be eligible to take a cargo and the broker (who has been

mandated by the cargo owner to find a vessel to carry the cargo) will over the course

of several rounds bring down the number of potential ships. This process will also

be driven by the ship owners themselves as some will voluntarily drop out of any

potential bidding for a range of reasons (logistics, price, other cargo to bid on etc.).

Round 1 Potential Vessel 10 Vessels that can make the lifting

window and are interested in this route

Round 2 Vessel evaluation 7 Brokers narrow down field basis e.g. logistics,

age of ship, embargo restriction, etc

Round 3 Selection 4 Viable vessels go into auction process

with often lowest bid the winning ship

Round 4 Vetting 1 Only one vessel goes on 'subjects' for the

cargo, charterer vetting process begins

Quite simply the higher the number of potential ships, the lower the eventual freight (Source: Euronav)

rate will likely be as more qualifying bidders logically should mean more pressure

on the price. However, it is important to understand only one ship will be selected

to go through a final vetting process whereby the cargo owner will assess the

vessel’s seaworthiness and suitability for the trade via previous survey results and

inspections. Ship owners competing with each other drive pricing down sometimes

below fixed costs.

THE BASICS OF THE TANKER SHIP MARKET 13

Price of Oil – impact on tankers

Like any commodity, the greater the demand for it, the more demand for its

transportation. Crude is no different and the sharp reduction in the price of oil the

market experienced from the fourth quarter of 2014 prompted a boost in demand in

both the U.S. and Europe where oil demand is highly price sensitive. With improved

demand for oil products, more crude oil was needed by refineries worldwide. These

refineries are rarely located close to the sources of crude oil, so more oil tankers

were needed to transport the crude from oil field to refinery. Generally speaking the

lower the oil price the stronger demand for it. However the relationship is not linear.

In our view there is a band between USD 35 and USD 70 where the oil price will be

demand stimulating. Between around USD 70 and USD 80 this is neutral and above

this level the price is demand destructive. However, as the market saw in the first

quarter of 2016, a very low oil price can be demand disruptive – primarily for oil

producing and exporting nations; hence the relationship is not linear. Ships also burn

oil as fuel so high prices increase costs of transport.

Key Market Drivers – Demand for Oil

The demand for oil is an obvious driver of crude tanker demand; the more oil that is

needed around the world, the bigger the demand for moving this oil from production

to refinery. Global demand for oil has generally been rising year-on-year with the

average growth rate from 1990 being 1.1 million barrels per annum. Since 2015 this

growth rate has been above trend and is forecast to remain so until 2022.

0

-20

-40

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

20

40

60

80

100

120

140

0.5

0.0

-0.5

-1.0

1.0

1.5

2.0

2.5

3.0

3.5

Neutral

Demand Destructive

Demand Disruptive

Demand Stimulating

(Source: Euronav, Bloomberg, IEA)

Oil Demand Growth

Oil Price

Oil Price vs. Oil Demand Growth

Oil Price $/bbl

Oil Demand Growth (mbpd)

SPECIAL REPORT

Translating oil demand growth into actual vessel demand is an inexact science as

many factors impact how this oil is being traded and what means of transportation

is used to move it. A rough calculation looks something like this: demand growth

of say 1 million barrels per day equates to 365 million barrels per year. If all

this incremental demand was shipped and carried on VLCCs in 2 million barrel

parcels this would be an additional 182 cargoes per year. With a VLCC performing

on average six voyages a year we can conclude that these additional cargoes

would require around 30 extra ships provided all the additional demand is carried

by sea.

Key Market Drivers – Supply of Oil

Clearly for any oil transportation business the supply of oil is critical to the status

of its markets. Oil supply dynamics have undergone a transformation in the past

decade, away from being very Middle East focused to having a more diverse supply

base, in particular with the development of U.S. shale oil. This quick-to-production

process of shale oil (less than six months) has made global oil production far more

responsive to short-term changes in demand. The fact that the U.S. government

started to allow the export of crude oil in December 2015 has developed a new

trade flow currently exporting 1.4 mbpd compared to zero exports two years ago

(since end September 2017 average weekly export 1.424 mbpd (source: DOE)). Oil

supply is dynamic with for instance OPEC (the national oil producers cartel) and

Russia voluntarily cutting their crude production and removing cargoes from the

traditional trade routes emanating in the Middle East as from the first quarter of

2017.

Key Market Drivers – Vessel Supply

Perhaps the key driver of tanker markets is vessel supply. This is the ultimate

driver of market fluctuation; when the market is in short supply of ships, the cost

of chartering a ship – the freight – goes up but of course down if there are too many

ships available. This over- or undersupply of vessels can be viewed on a macro level

with the total global supply of ships, which will drive more long-term trends in freight

levels, but it can also be viewed on a more regional level where the number of ships

available in a specific load area can drive short-term freight fluctuations, which may

vary in different load areas.

On a global scale the supply of ships is a function of how many newbuild ships are

delivered versus how many ships are removed from the fleet. The vessel supply

picture can be compared to a bathtub – new vessel order flow reflect when the taps

are on filling up the fleet with more ships. Vessel scrapping is when the plug is out

and vessels are removed from the fleet rebalancing what is in the tub. The water

contained in the bathtub represents the size of the fleet – see in this respect also the

special report included in the 2016 annual report 'What is the effective size of the

operational tanker fleet'.

The demand for oil

is an obvious driver

of crude tanker

demand.

"

THE BASICS OF THE TANKER SHIP MARKET 15

Trade Routes & Dynamic Market

The different sizes of ships cater for different trade routes. We have already discussed

how smaller ships carry oil products, but within the crude tanker segment we also

see a divergence. Economies of scale dictate that. The size of a VLCC makes them

more cost efficient for longer international trade routes between large ports that

can physically accommodate their larger size. The smaller the vessel size, the more

regional the trade routes become. However, there is cross elasticity between vessel

sizes when the price of utilizing a VLCC becomes too expensive it may become more

price efficient for a customer to use two Suezmax vessels to transport the same

amount of oil instead. So we do sometimes see Suezmaxes compete for the long haul

international routes that are dominated by VLCCs and vice versa. The same applies

for smaller vessel segments.

It is important to keep in mind that trade routes are not static; these routes are highly

dependent on oil flows. For example when we began to see crude oil exports from the

U.S. destined for the Far East, the market developed a need for large crude tankers

to load in the U.S. Gulf, something not seen before. Please find more details below.

Regulation of assets and operating businesses

The tanker industry is highly regulated, to ensure that all vessels are safe to use

for the crew, the cargo and the environment. Until the age of 15 years, the ship

must undergo a survey in dry dock only every five years. The vessels have to have

certification of classification society, which is an independent organization that

establishes and maintains technical standards for the operation of all ships. Vessels

have a five year survey cycle with an annual survey (12 months), intermediate survey

(30 months) and special survey (60 months). Performing this survey can take a couple

of weeks and will test for steel thickness and other indicators of seaworthiness. After

15 years, the intermediate survey cycle also needs to be done in dry dock every 30

months so at 17.5 years and 22.5 years. This is to account for the associated wearand-tear due to the vessel’s age. The cost of these surveys increase as the vessel

gets older - see diagram.

Some important charterers consider the overall risks associated with carrying oil

on an older ship as being too large when the vessel reaches 15 years of age, and

only charter ships until this age limit. However, most oil tankers find employment

up until around their 20th anniversary, which is currently the expected life of a

vessel, although some trade for longer. Looking at tankers that have been scrapped

since 2009, the average scrapping age for both VLCCs and Suezmaxes has been

around 20 years.

100% Utilisation

5Special Survey #1

Special Survey #2

Special Survey #3

Intermediate Survey

Special Survey #4

7.5 10 12.5 15 17.5 20 22.5

USD 4.0m

good day

thanks for the mail below

contents noted --highlight --no prepayments or deposits, only goodwill and decency

and 100 million USD / EUR.

the project in hand

requires layout of 168 million usd

short details buying 4 in number lr tankers

BWTS-fitted series of LR2 tankers for sale

with period employment attached:

MT 'UST LUGA' / MT 'PUROVSKY'

------------- --------------

DOUBLE HULL

BLT 7/2017 – 09/2018 IN CHR BY QINGDAO BEIHAI SHIPBUILDING HE

CLASS CC S/S DUE 09/11/2022 D/D DUE 08/11/2022 (UST LUGA)

CLASS CC S/S DUE 23/01/2023 D/D DUE 23/01/2023 (PUROVSKY)

MT 'CHASELKA' / MT 'SABETTA'

------------- -----------

DOUBLE HULL

BLT 6/2017 – 09/ 2017 IN CHR BY DALIAN SHIPBUILDING INDUSTRY C

CLASS CC S/S DUE 19/06/2022 D/D DUE 19/06/2022 (CHASELKA)

CLASS CC S/S DUE 11/09/2022 D/D DUE 10/10/2022 (SABETTA)

ABT 109,989MT DWT ON 14.691M DRAFT

lumpsum price about 110 million +

please advise

arrangements funding : interst emi etc

joint venture if available

r o i : assuming each vessel is chartered at about USD 20000 per day

all four will provide 80000

running and Maintainance usd 40 000

servicing of debt usd 30 000 pd x350 x10 years will give 105 +value of vessels end 10 years 20 million

to turn the capital +interst of 125 million +liquid cash of 35 million used as cash in hand to service

funds recd