Global Oil Glut Roils an English Tourist Village

THE WALL STREET JOURNAL

By SPENCER SWARTZ

SOUTHWOLD, England — Café owner Ken Kennard sees the glut in the global oil market as a potential environmental threat to this sleepy seaside tourist hub.

Mr. Kennard is worried about a fleet of oil tankers — almost 40 in all, each packing hundreds of thousands of barrels of crude and oil-derived products — that have anchored several miles off the coast of southeast England in recent months.

The heavy traffic stems from a near-record excess oil supply, a byproduct of the recession, that is prompting producers to stash oil offshore until they can find customers. The excess supply hasn’t stopped oil prices from surging almost 80% this year and padding the pockets of big oil producers like Royal Dutch Shell PLC and the Organization of Petroleum Exporting Countries.

Oil tankers have had a small presence off Southwold’s coast for almost two decades, a function of the relatively calm waters and proximity to European and U.S. markets. But the armada’s growth in recent months has raised worries here about the potential for an oil spill in an area where pristine beaches, a quiet ambiance and an array of bed-and-breakfast inns help rake in around £25 million ($41 million) annually in tourism for Southwold and the surrounding villages, local officials say.

Despite the safe track record, the 58-year-old Mr. Kennard and many local officials in this village of around 1,500 are pushing for a ban on tankers parking in their coastal waters. A senior U.K. official says the government is considering a total ban on oil transfers between tankers in the area.

“This village and region thrive on tourism,” Mr. Kennard said in a recent interview at Tilly’s, a tea room in Southwold’s quaint town center. “The increased number of tankers has raised the odds of an accident. If a major oil spill were to happen you can say goodbye to our beaches,” he added. Mr. Kennard and his partner opened Tilly’s about nine months ago.

What most concerns Mr. Kennard and government officials like Simon Tobin, a local councilman, are so-called ship-to-ship oil transfers. For efficiency reasons, small ships routinely pull up close to a much-larger tanker and deposit their cargo via pipeline. The loaded tanker then voyages to markets in the U.S. or Asia.

Despite occasional run-ins between ships, the routine procedure has been performed safely for years off Southwold with never a major spill. But oil transfers have become more frequent, because more ships are now in the area, North Sea oil traders and local officials like Mr. Tobin say.

“Given the increased frequency of [ship-to-ship] transfers, there’s a much greater risk of something going wrong and we can’t afford that happening,” said Mr. Tobin.

Some locals aren’t bothered by the “tanker park” off Southwold, and say it brings in commerce when crews come ashore.

The U.K. government is expected to submit legislation to Parliament by early next year that would prohibit oil transfers in most U.K. waters up to 12 miles off the coast, though it would still allow them in areas such as the waters off Scotland that have long permitted ship-to-ship transfers and have regulations in place, the senior U.K. official said.

Bill Box, a spokesman for Intertanko, a group representing about 270 independent tanker operators, says a U.K. government ban on ship-to-ship oil transfers off Southwold would probably lead the tankers to move to other U.K. locations where transfers are allowed, or to a nearby country such as the Netherlands.

How long tankers linger here and elsewhere will boil down to near-term crude demand and whether prices on the world’s main oil-futures exchanges continue to trade in a staircase-shaped pattern known as “contango,” which reflects today’s weak crude consumption and a high level of unused crude.

The escalating price curve is highlighted by near-term oil futures contracts currently trading at about $78 a barrel compared with contracts into 2010 priced at almost $85 a barrel. Oil is up about 80% this year, on a mixture of OPEC production cuts and financial investors’ purchases of oil futures contracts as a hedge against a weak dollar.

The price premium of oil contracts dated further in the future relative to near-term contracts has made it profitable to buy crude, store it on a tanker for several months in places such as Southwold, and sell it later at a healthy return. The contango has been heightened by hedge funds and pension funds buying oil contracts far into the future, in a bet that supply won’t keep up with emerging-market demand further down the road because of political barriers that could hobble production.

Global oil demand is widely expected to return to growth next year after declining over the past two years. As that happens, analysts say, oil-laden ships will probably stop idling offshore and begin emptying their tanks at ports. If consumers don’t absorb all the excess, the result will be further increases in supply at already-saturated onshore storage facilities — and thus, weaker prices.

“The [offshore storage] buildup has created a major risk of a very sharp price correction” next year, when tankers eventually start delivering their cargo, says Olivier Jakob, an oil analyst at Petromatrix in Switzerland.

—Nicholas Heath contributed to this article.

Write to Spencer Swartz at [email protected]

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