Valuing cargo flexibility in oil transportation

ABSTRACT

The seaborne oil transportation market is served by two main types of vessels—crude oil tankers and product tankers. Product tankers are designed to move refined oil products, yet they can also opportunistically carry ‘dirty’ products such as crude and heavy fuel oil, subject to the cost of tank cleaning when re-entering the clean products trade. We apply an entry-exit real option model with a stochastic freight rate differential to derive optimal triggers for switching between the two cargo types and estimate the value of the switching option. We show that the value of active switching has grown over time, and generally exceeds the additional construction cost of a product tanker. Our findings are important both from a practical point of view and for our understanding of market integration in the tanker freight market. Specifically, shipowners can use our model as a basis for optimizing chartering policy for clean product tankers. We also show that there are periods where the dirty market is persistently stronger, and discuss the possible reasons for such apparent inefficiencies.

KEYWORDS:

• Cargo flexibility
• tankers
• oil products
• switching options
• real options

Acknowledgments

This paper is a rewritten version of the master thesis of the coauthors Hansson and Wense (2015) and relies on their empirical estimates and numerical experiments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Private communications with Maersk Tankers, Copenhagen, and United Tankers Pool, Cyprus.

2. An owner will not enter the market for a new cargo until he is fairly certain that the vessel will be able to meet the future loading window (laycan). The actual lead time between fixture and loading can vary between nil (a prompt vessel) and several weeks.