Impacts of Kra Canal and Its Toll Structures On Tanker Traffic

Maritime Policy & Management
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Impacts of Kra Canal and its toll structures on

tanker traffic
Zhi Heng & Tsz Leung Yip
To cite this article: Zhi Heng & Tsz Leung Yip (2017): Impacts of Kra Canal and its toll structures
on tanker traffic, Maritime Policy & Management, DOI: 10.1080/03088839.2017.1407043
To link to this article: https://doi.org/10.1080/03088839.2017.1407043
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Download by: [Gothenburg University Library] Date: 16 December 2017, At: 04:36
MARITIME POLICY & MANAGEMENT, 2017
https://doi.org/10.1080/03088839.2017.1407043
Impacts of Kra Canal and its toll structures on tanker traffic

Zhi Heng and Tsz Leung Yip
Department of Logistics and Maritime Studies, Faculty of Business, The Hong Kong Polytechnic University,
Kowloon, Hong Kong
ABSTRACT KEYWORDS
This article discusses the proposed Kra Canal and its impacts on the tanker Kra Canal; tanker transits;
Downloaded by [Gothenburg University Library] at 04:36 16 December 2017
market from an economic perspective. We forecast tanker size distributions One Belt One Road; toll
and further analyze the impacts of toll structures on tanker traffic. The forecast policy; forecast
for tanker size distributions is based on distance savings for tankers as
potential users of the Kra Canal. The database covers 105 busiest oil transport
routes through the Strait of Malacca for the three-year period 2013–2015.
Forecasts for individual routes are achieved using an autoregressive model.
Two toll polices, namely the willingness-to-pay policy and the differential-
pricing policy, are analyzed in order to maximize the annual toll income of the
Kra Canal. The findings for the proposed Kra Canal will attract large vessels
from the Strait of Malacca. An interesting finding is that the Kra Canal
becomes more profitable during an unfavorable tanker market situation
when the time-charter rate is low and fuel price is high. The article concludes
with a policy that satisfies the goals of canal operator and government.
1. Introduction
The Kra Canal, also known as the Thai Canal, is a canal proposed to be constructed through
Thailand’s Isthmus of Kra or other nearby locations in Thailand. This proposed canal, if constructed,
will connect the Gulf of Thailand with the Andaman Sea across southern Thailand. Discussions about
its economic, technical, and political feasibility are being made in various relevant arenas.
A substantial number of tankers can save sailing distance by passing through the proposed Kra
Canal, and therefore, the tanker market should benefit from the canal. The proposed canal is
regarded as part of the proposed Maritime Silk Road of One Belt One Road. The Kra Canal will be
102 km long, 400 m wide, and 25 m deep. No locks will feature in the canal in its present design.
Very large crude carriers (VLCCs) can transit through a canal with these width and depth
dimensions (Cathcart 2008). As currently designed, the Kra Canal is planned to connect
Songkhla in southern Thailand with Satun. It is interesting to note with respect to the current
design that the proposed Kra Canal is not located within the area of the Isthmus of Kra but the
name ‘Kra Canal’ has been widely used and adopted.
It is expected that the construction of the canal will take 5–7 years and will cost an
estimated USD 36 billion (Seatrade 2015). One of the difficulties of construction is political
concerns. One-third of Thailand’s citizens oppose this project for fear of an unstable political
environment. Most countries in ASEAN, including Singapore and Malaysia, also oppose this
project. Once constructed, the Kra Canal will probably be a better route for many of the
vessels that currently transit through the Strait of Malacca. Depending on the particular route
CONTACT Tsz Leung Yip t.l.yip@polyu.edu.hk Department of Logistics and Maritime Studies, Faculty of Business, The
Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong
© 2017 Informa UK Limited, trading as Taylor & Francis Group
2 Z. HENG AND T. L. YIP
taken, some vessels will save 899 km (Figure 1) if they transit the Kra Canal, and others will
save about 567 km (Figure 2) if they transit the canal. Tankers, especially large tankers sailing
across the Strait of Malacca, are likely to change their routes to save costs. Currently, more
than 70,000 vessels exceeding 300 gross tons transit this busy sea route every year. These
vessels are the proposed Kra Canal’s potential clients. In 2016, nearly one-third of the total
global petroleum and other liquid products or an average of 16 million barrels a day of oil
passed through the Strait of Malacca (EIA 2017). As an alternative route to the Strait of
Figure 1. Kra Canal route and the Malacca Strait route.

Source of map: Google Maps.
Sailing distance saving: 899 km.
Figure 2. Kra Canal route and the Strait of Malacca route.

Source of map: Google Maps.
Sailing distance saving: 567 km saving.
MARITIME POLICY & MANAGEMENT 3
Malacca, the Kra Canal is likely to attract many transits. Singapore, an international shipping
center and the main long-term beneficiary of the Strait of Malacca transit, may be negatively
affected both economically and politically after the Kra Canal is constructed.
The Strait of Malacca has various physical hazards that make ship transits relatively difficult.
The narrow channel and shallow depths in some areas of Malacca have forced many ships in this
area to be driven carefully (Rusli 2012). Congestion is another issue in the Strait of Malacca,
especially in areas around Singapore. Long waiting time and the potential for accidents will also
encourage ship operators to plan a better voyage for their ships (Weng, Meng, and Li 2014).
Security problems, including piracy and terrorist acts, will increase ship operators’ willingness
to pay (WTP) extra charges to a canal authority for a safe and smooth sailing (Sliwinski 2014).
The Strait of Malacca, especially the Singapore Strait, has many competitive advantages as per its
special role. Shipping-related services, including marine insurance, ship repair, and bunkering,
can be easily obtained in Singapore or other ports in Malaysia (Lam 2016). Cheap fuel prices and
high-quality bunkering services are other attractions to many ship owners or operators.
The area of the Middle East to the Far East is the busiest route in the long-distance oil trading
market. As an alternative waterway of the Strait of Malacca, the proposed Kra Canal will attract a
significant share of the tanker transits, because the transit times via the Kra Canal will be
shortened. Given this background, this study aimed to estimate the changes of tanker transits
due to the operation and toll structure of the Kra Canal and the policy implications from the
perspective of the canal market.
The remainder of this article is arranged as follows: Section 2 presents the literature review.
Section 3 discusses the methodology. Section 4 further discusses the data and forecasting of tanker
transits. Section 5 analyzes the toll structures and presents the policy implications. Section 6
concludes the study.
2. Literature review
Previous studies of the Kra Canal have been focused on the following five aspects of the canal:
the construction plans of the new canal (Kiernan 1956; Cathcart 2008); the potential locations
of the Kra Canal (Kiernan 1956; Cathcart 2008; Thapa et al. 2011; Chen and Kumagai 2016);
the distance savings between the Kra Canal and other routes (Graham 1975; Chen and
Kumagai 2016); the potential cost savings (Morisugi, Marsh, and Miatake 1992); and the
political issues surrounding the canal (Toh and Low 1993; Sulong 2013; Sieminski 2014).
Kiernan (1956) conducted an early analysis of the possibility of constructing a canal in the
Kra Isthmus area. Cathcart (2008) proposed excavation using nuclear power, to shorten the
construction period of the Kra Canal.
In many prior studies of the best location for the Kra Canal, the Kra Isthmus area is identified
as the preferred location (e.g. Kiernan 1956). However, more recently, some other locations,
especially the provinces of Songkhla and Satun in southern Thailand, have been regarded as
alternative locations (Thapa et al. 2011). Cathcart (2008) analyzed the best ways of shortening the
construction period for a location across Songkhla and Satun. Chen and Kumagai (2016) used a
GIS (Geographic Information System) system to analyze the economic effect based on this
location. After reviewing previous findings, we assume in the present article that the canal will
be located through Songkhla and Satun, with a minimum construction period of 7 years and will
be open in 2024.
Graham (1975) estimated distance savings provided by the new canal and the impacts on the
USA. Chen and Kumagai (2016) calculated marginal distance savings in terms of different loading
or discharging ports. They estimated distance savings and economic impacts in detail using a GIS.
Morisugi, Marsh, and Miatake (1992) highlighted the important role of the Strait of Malacca and
offered a brief calculation of total cost savings in the dry bulk sector. However, only a limited
number of studies have examined distance savings for different routes, with most studies of the
Kra Canal having examined its political or regional effects. Therefore, distance savings and cost
savings based on different routes require further investigation.
Previous studies of shipping route choice can be divided into research about natural channel
versus natural channel choice (Mulligan and Lombardo 2006; Qu and Meng 2012), natural
channel versus canal choice (Schøyen and Bråthen 2011; Verny and Grigentin 2009), and canal
versus canal choice (Yip and Wong 2015). For the choice between natural channel versus canal,
Verny and Grigentin (2009) analyzed different choices of the northern sea route and the Suez
Canal (SC) in the container shipping sector. Schøyen and Bråthen (2011) subsequently discussed
the same routes, but with respect to the dry bulk sector. Notteboom (2012) analyzed the
comparison of routes via the Cape of Good Hope and the SC.
Studies of the choice between different natural channels are not common. Such studies are less
concerned about cost considerations and more about congestion in busy shipping routes.
Mulligan and Lombardo (2006) analyzed shipping congestion in short-sea shipping areas. Qu
and Meng (2012) analyzed blockade situations in the Strait of Malacca. An extreme scenario for
avoiding such blockade situations is to set voyage along other longer-distance routes, including
the Sunda Strait. Qu and Meng (2012) discussed waiting time and ship owner’s willingness to
change routes based on a choice model.
Canal–canal route choice studies are even rarer. Yip and Wong (2015) analyzed the future of
the proposed Nicaragua canal by firstly developing scenarios and conceptually investigating the
competition between the new canal and the existing Panama Canal. Compared with other types of
route choice, from the economic perspective, the canal–canal choice/competition mode is more
complicated. The previous monopoly market will be changed and potential price competition may
occur in markets characterized by multiple competing canals. Other studies have examined
seaport choices (Bird and Bland 1988; Nir, Lin, and Liang 2003; Tongzon and Sawant 2007;
Wiegmans, Hoest, and Notteboom 2008; Tongzon 2009). However, few studies of route choice
have been based on quantitative analysis. A new quantitative investigation into a new canal should
make a valuable contribution to the shipping route choice literature.
Previous studies of tanker market forecasts have been focused mainly on oil demand and
supply and its impact on the tanker market (Nagatsuka 1988; Lai, Shi, and Hu 2010).
Nagatsuka (1988) addressed the medium-term forecast for tonnage supply and demand for
VLCCs. Lai, Shi, and Hu (2010) forecasted oil import demand using regression models and
analyzed the likely impacts on tanker fleet composition. Those authors also studied tanker
fleet optimization. Other forecast-based investigations in this market include fleet delivery
forecasts (Stopford and Clarkson 2001), freight rate forecasts (Lyridis et al. 2004), and price
risk forecasts (Kavussanos 1996). Most previous forecasts of tanker market have focused on oil
trading volume. However, when deciding future toll strategies, canal authorities need to
consider a more comprehensive tanker size distribution to identify their potential customers
and apply optimal toll strategies.
On the track of optimal toll policies, previous studies have focused on differential pricing
policy. Heitmann, Rehdanz, and Schmidt (2013) generated a WTP method to determine
optimal transit charges for the Kiel Canal in Germany. They also calculated distance savings
for the Kiel Canal using the sum of time-charter cost savings, fuel cost savings, and possible
pilotage costs. If the canal toll is comparable to the WTP, regulators and/or private investors
are quite likely to make canal investment. The WTP is the highest price that a customer is
willing to pay for a good. Under perfect price discrimination, a monopolist charges customers
according to the WTP (Besanko and Braeutigam 2013). Heitmann, Rehdanz, and Schmidt
(2013) applied this WTP approach in determining optimal transit charges for the Kiel Canal.
Those authors defined the Kiel Canal as a monopoly, so that perfect price discrimination can
be applied. Other studies of price discrimination in canals include that of Hutchinson (1912),
who analyzed both distance savings and changes in shipping charges for the Panama Canal.
Notteboom (2012) analyzed the feasibility of the northern sea route as an alternative transit
route to the SC, including the additional cost of ice-breaking in the former route. In the Kiel
Canal case, Heitmann, Rehdanz, and Schmidt (2013) treated potential pilotage cost as an
additional cost, and converted cost savings as the sum of capital cost savings, operating cost
savings, periodic maintenance cost savings, and the remaining part of voyage savings into the
sum of time-charter cost savings, fuel cost savings, and potential pilotage cost savings. Similar
to the Kiel Canal, the Kra Canal can also be treated as a monopoly. Therefore, a WTP method
similar to Heitmann, Rehdanz, and Schmidt (2013) will be applied to estimate the optimal toll
structures for the Kra Canal.
3. Methodology
One of the aims of this research was to estimate the changes of tanker transits due to the
operation and toll structure of the Kra Canal. To achieve this aim, it is necessary to have a
forecast of traffic over years after the canal has been built. The methodology used in this study
includes a linear regression model to estimate the annual number of transits through the Strait of
Malacca in the future and an autoregressive time-series model to estimate tanker size distributions
for each route related to the canal. We adopt the bottom-up approach. We collect the tanker
fixtures of 3 years and group them if they have the same pairs of loading and discharging ports.
Each route has been illustrated from MarineTraffic (www.marinetraffic.com) and is selected for
forecasting if it passes the Strait of Malacca. The eastward and westward routes are also separated.
Selected routes are further disaggregated into six routes according to tanker sizes, while the tanker
sizes denote different trade markets.
One advantage of applying the bottom-up approach is that there exist discrepancies of
reporting. Adland et al. (2017b) found that AIS (Automatic Identification System) data and
official customs-based numbers in aggregate agree with each other but the exports-based AIS
data sometimes exhibit large deviations from official numbers. The deviations reflect some
business operation of temporary storage and blending. In our study, the ‘bottom-up’ approach
is chosen.
Multiple linear regression models the relationship between two or more independent variables
and one continuous dependent variable and is one of the most popular estimation tools in trend
line forecasting. Many of the multiple linear regression applications in tanker market are for risk
management purposes. Tanker transits will be grouped into different tanker sizes along a number
of routes. For each particular tonnage class along each route, forecast will be made on the basis of
available data and information and then historic trends will be adopted as a base for forecasting by
using the autoregressive time-series model.
Autoregressive models have been widely applied in shipping-related studies. Veenstra and
Franses (1997) applied an autoregressive model to estimate freight rates in the dry bulk sector, and
Binkley and Bessler (1983) examined expectations based on behavior analysis using such a model.
Kavussanos and Nomikos (1999) used this model in the shipping futures market as well as for
forward pricing. If other models are not achievable because of the lack of influencing factors or a
lack of historical data, an autoregressive model may be a simple and reasonable forecasting model.
For the present study, each type of tanker distribution applying to each route can be predicted
using this AR model.
4. Data and analysis

In order to develop a framework of transits of Kra Canal, it is first necessary to identify present
tanker transits. This was achieved from two principal sources with each data type contributing to
the identification of the route and ship type of the tanker transits. Straitrep data provide the
reference of tanker transits forecast, as these data provide the annual number of ship transits
across the Strait of Malacca. The Shipping Intelligence Network (SIN) database provides the
individual transit information, as these data held the exact date, loading and discharging ports,
ship particulars within and around the Strait of Malacca.
4.1. Annual transits data analysis

The number of annual tanker transits across the Strait of Malacca is forecast using Equation
(1). Straitrep is the mandatory ship-reporting system used in the Strait of Malacca and
Singapore (Siang 1999). The number of ships reporting under Straitrep represents how
many transits are observed in this area in terms of different ship types. VLCCs, container
vessels, and bulk carriers are the three major ship types passing through the Strait of Malacca
(Table 1). Although Straitrep separates VLCCs and smaller tankers, we combine all tanker
transits in our analysis.
Table 1. Number of ship transits across the Strait of Malacca by type of vessel.
Year
Type of vessel 2009 2010 2011 2012 2013 2014 2015
VLCC/Deep draft 4221 4333 4539 4732 4825 4993 5324
Tanker vessel 16,398 16,247 16,223 17,345 18,296 18,765 18,470
LNG and LPG carrier 3330 3579 3830 4014 4248 4173 3936
Cargo vessel 8560 8445 7996 7950 7613 6989 7144
Container vessel 22,310 24,806 25,552 24,639 24,658 25,071 25,389
Bulk carrier 11,186 11,642 10,851 11,678 12,658 13,454 15,168
Ro-Ro 2394 2624 2545 2980 2998 3146 3117
Passenger vessel 1250 1071 877 861 1063 1041 925
Livestock carrier 43 45 47 38 55 59 76
Tug/Tow 598 545 414 529 563 676 467
Government vessel 67 37 57 50 58 96 87
Fishing vessel 61 20 20 52 27 51 53
Others 941 739 577 609 911 830 803
Total 71,359 74,133 73,538 75,477 77,973 79,344 80,959
Data source: Straitrep (2016).
Table 2. Historical and forecast tanker transits across the Strait of Malacca.
World GDP World oil supply World oil demand
Year Tanker transits [trillion USD] [mil. barrels/day] [mil. barrels/day]
Historical
2009 20,619 54.94 84.2 84.5
2010 20,580 57.67 86.4 86.8
2011 20,762 59.88 87.5 87.8
2012 22,077 61.67 89.7 88.9
2013 23,121 63.41 90.0 90.0
2014 23,758 65.54 92.4 91.3
2015 23,794 68.08 94.5 92.8
Forecast
2016 24,880 70.75 94.7 94.1
2017 25,692 73.42 95.2 95.0
2018 26,500 76.09 96.1 95.9
2019 27,311 78.76 96.8 96.6
2020 28,129 81.45 97.6 97.4
2021 28,957 84.18 98.0 97.9
2022 29,799 86.95 98.3 98.3
2023 30,655 89.77 98.7 98.9
2024 31,527 92.65 99.5 99.5
2025 32,415 95.57 101.1 100.9
Source of historical data of tanker transits (VLCC and tanker vessels) is Straitrep (2016); Source of historical and
forecast data of World GDP, World Oil Supply, and World Oil Demand is OPEC (2015).
Forecast using the fittest model of Table 3.
Table 3. Estimates of multiple linear regression.

Coefficient (Standard Error)
Model 1 Model 2 Model 3 Model 4
World GDP [trillion 1004.167 303.578
USD] (1057.538) (50.522)***
World oil supply 8.822 387.314
[mil. barrels/day] (711.418) (67.636)***
World oil demand −1146.662 485.415
[mil. barrels/day] (1490.244) (88.454)***
Constant 61399.837 3401.495 −12463.465 −21037.98
(80558.436) (3119.304) (6040.104)* (7864.349)**
Number of 7 7 7 7
observations
R-squared 0.8984 0.8784 0.8677 0.8576
Adjusted R-squared 0.7968 0.8540 0.8412 0.8291
Remark: Statistical significance ***p < 0.01; **p < 0.05; *p < 0.10.
We hypothesize that the number of annual tanker transits is determined by world gross
domestic product (GDP), world oil supply, and world oil demand (Table 2). To be more specific,
y ¼ b þ a1 x1 þ a2 x2 þ a3 x3 (1)
where y is the number of annual tanker transits, x1 is world GDP, x2 is world oil supply, and
x3 is world oil demand. World GDP is the market value of all goods and services generated by
a country during the whole year. World oil supply is a summation of the oil supply of all
countries worldwide. Considering that the Strait of Malacca is a natural channel connecting the
Far East with other regions of the world, the determinants selected here are not only data
about Singapore, Malaysia, or Indonesia, but also cover world-related economies and oil data
(Moschos, 1989). The results of this estimation are given in Table 3. According to the
R-squared and adjusted R-squared statistics, Model 2 is the best fitted model such that the
number of tanker transits depends on the world GDP and is used to forecast the future transits
across the Strait of Malacca.
The forecast number of transits is reported in Table 2. According to the scheduled construction
plan for the Kra Canal, the minimum construction period is 7 years (Seatrade 2015). Therefore, a long-
term forecast of the number of tanker transits is needed, and the forecast period used in the present
study is 10 years (up to 2025). It is supposed that the Kra Canal will be constructed from 2017 to 2024,
and therefore, the forecast period includes the first two service years of the Kra Canal.
4.2. Fixture data analysis

We have collected Strait of Malacca chartering records for 2013–2015, based on which we will
estimate the tanker size distribution for each route using the Strait of Malacca and the Sunda
Strait for transits. We have aggregated all these routes into different origin-destination pairs
(loading port—discharging port pairs) from country/region to country/region. Table 4 illustrates
the process of original-destination analysis. After this simple aggregation, we have applied an
autoregressive model to forecast tanker size distributions route by route. This analysis will
generate tanker size distributions in all routes using the Kra Canal, the Strait of Malacca, and
the Sunda Strait as well as tanker size distributions and different distance savings. As the Strait of
Malacca is free of charge, a tanker will pass the new Canal if the saving is higher than the canal
toll. It is generally believed that tankers do not switch cargo, as tankers are designed for purposes.
Adland, Hansson, and von der Wense (2017a) demonstrated that the switching is possible if the
Table 4. Examples of route grouping and analysis.

Route Tanker size [DWT] Load Discharge Distance savings [nm] No. of fixtures (2013) Actual transits (2013)
1 43,000–60,000 Aden Japan 485 34 101
1 60,000–70,000 Aden Japan 485 1 3
1 70,000–80,000 Aden Japan 485 166 495
1 80,000–120,000 Aden Japan 485 318 948
1 120,000–260,000 Aden Japan 485 2 6
1 260,000– Aden Japan 485 66 197
...
52 43,000–60,000 W Africa China 306 0 0
52 60,000–70,000 W Africa China 306 0 0
52 70,000–80,000 W Africa China 306 0 0
52 80,000–120,000 W Africa China 306 0 0
52 120,000–260,000 W Africa China 306 6 18
52 260,000– W Africa China 306 157 468
...
105 43,000–60,000 Labuan EC India 373 0 0

105 60,000–70,000 Labuan EC India 373 0 0
105 70,000–80,000 Labuan EC India 373 0 0
105 80,000–120,000 Labuan EC India 373 11 33
105 120,000–260,000 Labuan EC India 373 0 0
105 260,000– Labuan EC India 373 0 0
Total series: 105 routes × 6 classes × 3 years = 1890 series.
Table 5. Tanker size distributions across the Strait of Malacca and the Sunda Strait.
DWT 0–60,000 60,000–70,000 70,000–80,000 90,000–120,000 145,000–168,000 More than 260,000 Total
GT 29,000 38,750 42,750 58,374 83,078 156,000
Differential GT 29,000 9750 4000 15,624 24,704 72,922
Year Historical
2013 17,694 21 826 1464 444 3178 23,628
2014 17,789 3 1064 1448 753 3299 24,357
2015 17,503 19 1137 1674 715 3376 24,424
Forecast
2016 18,995 8 1067 1530 921 3527 26,047
2017 20,142 7 1246 1647 1083 3646 27,772
2018 21,233 9 1426 1788 1258 3766 29,480
2019 22,534 12 1606 1952 1434 3886 31,423
2020 23,706 14 1786 2157 1609 4005 33,276
2021 25,247 17 1966 2367 1784 4125 35,506
2022 26,945 19 2145 2579 1959 4244 37,892
2023 28,458 21 2329 2791 2135 4364 40,098
2024 30,025 24 2513 3003 2310 4484 42,357
2025 30,735 26 2696 3215 2485 4603 43,761
Source of fixture data: Clarkson’s Shipping Intelligence Network (2016).
benefit is larger than the cost of switching. They took into account of market uncertainty in the
switching.
To quantify ship size distributions, we have accessed the 2013–2015 chartering records of the
SIN database. In the SIN database, routes are divided into more than 5000 different routes, and
the 1000 busiest routes are selected for the present analysis, accounting for more than 85% of all
records in 2013, 2014, and 2015. Of these 1000 busiest routes, 105 routes are directed through the
Strait of Malacca or the Sunda Strait. The historic and forecast distributions of tanker sizes are
summarized in Table 5.
To simplify the forecasting, we have aggregated all these chartering records into 19 pairs of loading/
discharging country or region (Table 6). We ensure that the traffic levels along 19 routes are consistent
with the transit record of Straitrep, as compared Table 5 against Table 2. Canal toll and port charges
are based on the gross tonnage (GT) rather than DWT. Chartering records in the SIN database do not
show ships’ GT, and therefore, a conversion is needed. GTs for ships with similar DWT size are fairly
similar. In Table 5, we report the converted GT as the actual GT for a ship with the average DWT in
Table 6. Sailing distance and time savings between country/region pairs via the Kra Canal.
Country/Region Country/Region Distance saving [nm] Time saving [days]
AG China 485 1.11
AG Japan 485 1.11
AG S Korea 485 1.11
AG Taiwan 485 1.11
AG USWC 485 1.11
W Africa China 306 0.61
S America China 306 0.61
East Coast of Mid America SE Asia 0 or 485 0 or 1.11
East Coast of Mid America China 0 or 485 0 or 1.11
Europe Japan 485 1.11
Europe S Korea 485 1.11
SE Asia India 373 0.80
Europe China 485 1.11
AG SE Asia 373 0.80
S Korea W Africa 306 0.61

W Russia Japan 485 1.11
W India Taiwan 485 1.11
W Russia S Korea 485 1.11
AG East Coast of Thailand 719 1.76
Singapore/Westbound Westbound/Singapore 0 0
Remark: AG stands for Arabian Gulf and denotes the country/region in the Middle East Area.
the selected range. For example, if the selected range is DWT 45,000–53,000, the standard ship is one
with a DWT of 49,000. For the China–AG route, a ship with a GT of 29,000 is the standard ship.
A fixture indicates a successful conclusion of the negotiations between a ship owner and a
charterer, resulting in the charter of a ship. By integrating the results of autoregressive model
estimations for tanker transit distributions in terms of tanker size and different time savings, the
transit distribution will change as estimated. As shown in Table 5, more Suezmax and Panamax
tankers will transit through the area of the Strait of Malacca and the Sunda Strait, while fewer
VLCCs and small tankers will transit this area.
To analyze the potential users of the Kra Canal, we will estimate tanker size distributions based
on the number of tanker transits. Distance savings between routes via the Kra Canal and
alternative shortest routes differ if the loading and/or discharging ports are different. For example,
for the route of AG–China, which is the busiest tanker transportation route in the world, a tanker
route via the Kra Canal can save about 485 nm compared with the alternative shortest route via
the Strait of Malacca. For the route of Angola–China, a tanker route can save 306 nm if it passes
via the Kra Canal rather than the Sunda Strait. From Port Ceyhan terminal to Balikpapan, a
tanker route can save 373 nm by passing the Kra Canal. A tanker route from AG to the eastern
coast of Thailand can save 719 nm. Meanwhile, some tanker routes will not obtain any distance
saving via the Kra canal. For example, most tanker routes loading or discharging in Singapore
cannot shorten their sailing distances. Based on previous studies of distance savings by Chen and
Kumagai (2016) and our estimates using Voyage Planner (MarineTraffic 2016), Table 6 gives the
distance savings for various routes via the proposed Kra Canal.
While we assume that the average tanker sailing speed throughout its voyage to be 15 knots,
the time saving is not simply the distance saving divided by the sailing speed assumed. Because of
the low speed of transit across the canal, some extra time should be considered. Therefore, the
sailing time saving can be calculated by
Ds Lc
Ts ¼ þ Tc (2)
Va Va
where Ts is the time saving; Ds is the distance saving; Va is ship speed as assumed, which is 15
knots; Lc is the length of the Kra Canal; and Tc is transit time in the Kra Canal.
The result of the time-saving calculations is shown in Table 6.
5. Canal toll structure analysis

In this section, we analyze the toll structures for use of the Kra Canal in 2024, when the Kra Canal
would be completed and become operational. We take an approach that is based on the results of
detailed tanker size distributions in terms of distance savings and toll structures.
Whatever tanker market period (favorable or unfavorable conditions), the time-charter rate
and the fuel price are very dynamic, and therefore, it is not realistic to forecast a long-term market
price for either of these variables. We use historical data to explain how to set the toll in different
market situations. In Figure 3, if the blue line is higher (lower) than the black line, then the tanker
market is a so-called favorable (unfavorable) market.
5.1. Canal toll structures of Panama and SCs

For tankers passing Panamax locks, the Panama Canal Authority sets a differential-pricing toll
structure based on PC/UMS, which is based on net GT. The Panama Canal Authority sets a
charge for the first 10,000 gross tons (gt), for the next 10,000 gt, for the next 15,000 gt, and for the
next 10,000 gt as the biggest tanker passing the Panama Canal prior to expansion was about
45,000 gt. Similar to the Panama Canal Authority, the Suez Canal Authority also applies
differential-pricing toll policy. One of the differences between their toll structures is that the SC
charges a fairly low toll for the tankers ‘over 20,000 SC Net Tonnage.’ Another difference is
differential-pricing range. The reason for this toll structure is that the Suez Canal Authority
attempts to occupy the EU/MED (European Union-Mediterranean) to the Far East market and
the EU (European Union) to the Middle East. These tankers are mostly Panamax, Aframax,
Suezmax, and VLCC tankers, which benefit from the extra low tolls. A small tanker charged using
SC Net Tonnage has to pay a much higher unit toll. Based on this comparison and the similarities
of key canal users, the SC toll structure would be the more suitable one for the proposed Kra
Canal, that is, trying to attract more Panamax, Aframax, Suezmax, and VLCC tankers, which will
account for 95% and 96% of all potential transits in 2024 and 2025, respectively.
5.2. Optimal toll structure for the Kra Canal

An optimal toll structure will help the Kra Canal Authority gain the highest tanker toll income.
We analyze cost savings based on five types of tankers, namely Handysize tankers, Panamax
tankers, Aframax tankers, Suezmax tankers, and VLCCs. For each ship size, different distance
savings are considered. Cost savings include capital cost savings, operating cost savings,
periodic maintenance cost savings, and voyage cost savings (which are mostly to do with
fuel cost savings and cargo handling cost savings). Without loss of generality, we assume there
are no differences in cargo handling savings between the Kra Canal route and other routes.
Capital cost savings, operating cost savings, and periodic maintenance cost savings can be
replaced by the time-charter cost. We specify the cost savings with fuel consumption and fuel
cost savings as follows:
Cs ¼ R Ts þ Fs Pf (3)
in which
Fs ¼ ½ðLc þ Ds Þ=Va Lc =Vc Ca (4)
where Cs is cost savings; R is time-charter rate; Ts is transit time savings; Fs is fuel cost savings;
Pf is the price of fuel (or bunker price); Lc is the length of the Kra Canal; Ds is distance saving;
Va is speed, which is assumed to be 15 knots; Vc is the transit speed in the canal, which is 5.86
knots as estimated; and Ca is the average fuel consumption of a laden voyage and ballast
voyage.
Considering that almost all tankers have to keep at ballast in backhaul, to simplify the
calculation, we adopt that a tanker passing through the Kra Canal has a 50% possibility of
being on ballast (Sharma and Lande 2010).
An individual ship will accept a toll charge if the charge does not exceed its cost saving.
Figure 3 shows the market time-charter (T/C) rates of our target tankers for the period
2006–2016. During most of this market period, larger tankers had higher T/C rates, in accordance
with older historical data. In most of this market period, for the same distance-saving routes,
larger tankers had higher charter rates and higher fuel costs. Therefore, larger ships can accept a
higher toll charge compared with smaller ships; that is, the SC toll structure can be applied.
Tables 7 and 8 illustrate the favorable and unfavorable markets, which is defined in the
beginning of Section 5. Our comparison on Tables 7 and 8 is based on the toll rates given and
whether ship operators will accept the toll rates. The toll of one tanker size is the progressive
amount from its smaller size. Of the estimated toll, the only uncertain part is the toll for REST
tonnages (that is, tonnage exceeding 120,000 gt), which is relevant to the case of VLCCs. This is
because the estimated number of VLCCs passing through the Kra Canal with a distance saving of
306 nm and the estimated number of VLCCs passing through with a distance saving of 485 nm
are quite similar. In the year 2024, 1083 VLCC transits will save 306 nm, 146 VLCC transits will
save 373 nm, and 2020 VLCC transits will save 485 nm. So, the toll that is applied for the REST
tonnages depends on the VLCC charter rate and fuel price.
A simple calculation can enable the unit tolls to be computed. Suppose that [WTPVLCC,
485 nm × 2020 transits] > [WTP VLCC, 306 nm × (1083 + 146 + 2020) transits], then [Unit
Table 7. Estimated toll income when the tanker market is favorable.

Tanker size Handysize Small Panamax Panamax Aframax Suezmax VLCC
Gross tonnage First 29,000 gt Next 9750 gt Next 4000 gt Next 15,624 gt Next 24,704 gt REST 72,922 gt
Unit toll [USD per gt] 1.075 0.616 0.585 0.476 0.457 0.415
Time-charter rate 18,500 23,000 25,000 30,000 38,000 57,500
[USD per day]
485 nm 485 nm 485 nm 485 nm 485 nm 485 nm
[Accept] [Accept] [Accept] [Accept] [Accept] [Accept]
Distance saving 373 nm 373 nm
[Reject] [Reject]
306 nm 306 nm 306 nm
[Reject] [Reject] [Reject]
Estimated annual tanker toll income of this toll structure: USD 468,088,898.
Remark: Traffic in 2024 is assumed. Time-charter rates on 7 December 2015 are applied stated above. The fuel price is assumed
to be USD 201 per ton.
Table 8. Estimated toll income if the tanker market is unfavorable.

Tanker size Handysize Small Panamax Panamax Aframax Suezmax VLCC
Gross tonnage First 29,000 gt Next 9750 gt Next 4000 gt Next 15,624 gt Next 24,704 gt REST 72,922 gt
Unit toll [USD per gt] 1.859 0.341 0.532 0.629 0.265 0.265
Time-charter rate 14,000 14,800 15,250 18,000 24,000 29,000
[USD per day]
485 nm 485 nm 485 nm 485 nm 485 nm 485 nm
[Accept] [Accept] [Accept] [Accept] [Accept] [Accept]
Distance saving 373 nm 373 nm
[Reject] [Accept]
306 nm 306 nm 306 nm
[Reject] [Reject] [Accept]
Estimated annual tanker toll income of this toll structure: USD 687,101,231.
Remarks: Traffic in 2024 is assumed. Time-charter rates on 8 August 2014 are applied as stated above. Fuel price is assumed to
be USD 724.5 per ton.
Toll = (WTPVLCC, 485 nm − WTPSuezmax, 485 nm)/REST tonnages] is applicable, otherwise

[Unit Toll = (WTPVLCC, 306 nm − WTPSuezmax, 485 nm)/REST tonnages] is applied. The result
of the inequality is that the VLCC time-charter rate is more than 79 times larger than the
fuel price. Therefore, the T/C rate (blue line) is set at 79 times the fuel price (the red line).
That is to say, if the VLCC time-charter rate is high while the fuel price is low, then
[(WTPVLCC, 485nm − WTPSuezmax, 485nm)/72,922 gt] will be applied as the toll for the REST
tonnages in year 2024. When the tanker T/C rate is high and the fuel price is low, the
tanker market is profitable and favorable. During the times when the tanker market is in
this favorable position, the Kra Canal will give up all short-distance-saving markets to gain
the highest total toll income. However, when the VLCC time-charter rate is relatively low
compared to the fuel price and that is an unfavorable market, the Kra Canal will lower the
unit toll of REST tonnages to [(WTPVLCC, 306 nm − WTPSuezmax, 485 nm)/72,922 gt] in order
to attract those VLCCs from the West Coast of Africa or the East Coast of South America.
Interestingly, the projected toll income of the proposed Kra Canal will be even higher
during an unfavorable market period (Tables 7 and 8).
5.3. Policy implications for Kra Canal

Early in 2016, Egypt’s Suez Canal Authority sets new toll rates for tankers in a short-term experiment.
A VLCC could save the ship operator about USD 70,000 in transit charges because the Suez Canal
Authority lowered the toll for the part of SC Net Tonnage exceeding 120,000, which is the REST
tonnages. This toll rate adjustment was reportedly made because the canal authority attempted to
boost traffic. However, it is not clear why the Suez Canal Authority decided to lower the toll of the
REST tonnages to attract more VLCCs at that particular time (early 2016). Our research helps explain
the authority’s adjustment. Historical data show that in January 2016, tanker time-charter rates were
at a relatively high level (Figure 3). Considering the situation of oil demand and oil supply and
existing floating storage at that time, then oil transportation demand, especially crude oil
1,00,000 1000
90,000 900
80,000 800
Timecharter Rate [USD per day]
70,000 700
Fuel Price [USD per tonne]
60,000 600
50,000 500
40,000 400
30,000 300
20,000 200
10,000 1 Year Timecharter Rate 310,000 dwt D / H Modern Tanker 100

380cst bunker prices, Singapore
0 0
2000-Mar 2002-Nov 2005-Aug 2008-May 2011-Feb 2013-Nov 2016-Aug
Figure 3. VLCC time-charter rate and fuel price.

Source: Clarkson’s Shipping Intelligence Network (2016).
transportation demand, was very likely going to decrease. Therefore, most specialists at that time
predicted that the VLCC T/C rate was about to drop. Meanwhile, the fuel price was at its lowest level
since 2011. Most researchers forecasted the fuel price to rise over the next year. Considering the
similar customer distributions of the SC and this proposed Kra Canal, findings can be referenced. If
the time-charter rate divided by the fuel price is going to decrease, which means an unfavorable
tanker market period is about to start, the canal authority should lower the toll for REST tonnages to
attract greater numbers of shorter-distance-saving VLCCs. The SC did that in early 2016 and, based
on historical data, it was the most correct time to make this decision. On the basis of our research,
existing canals, especially the SC and the Panama Canal, should continue to apply the differential-
pricing toll structure. Canal authorities should conduct oil market surveys and time-charter rate
forecasts more frequently so as to make quick responses to market changes and to adopt optimal toll
structure as soon as possible.
Tolls and differential-pricing range, first some tonnages, second some tonnages, REST
tonnages should also be changed annually or more frequently. With deliveries of new ships
and demolitions of old ships every year, the tanker size distribution based on the number of
canal-related transits changes year by year. However, the differential-pricing toll range of the
existing two canals has not changed annually, and therefore, the tolls of these two canals are
not optimal.
6. Conclusions
This research represents an attempt to analyze potential users of the Kra Canal in the tanker
sector and to determine an optimal toll structure, which is a differential-pricing toll based on
forecast tanker distribution. The key tankers of the Kra Canal in 2024 will be big Handysize
tankers, Panamax tankers, Aframax tankers, Suezmax tankers, and VLCCs with distance savings
of 485 nm during a favorable tanker market, and additionally VLCCs with distance savings of 373
and 306 nm during an unfavorable tanker market. The modified differential-pricing ranges of the
first 30,000 gt, the next 10,000 gt, the next 5000 gt, the next 15,000 gt, the next 25,000 gt, and
REST tonnages should help the Kra Canal Authority achieve its highest (optimal) annual toll
income. The canal authority should set different toll to abandon those VLCCs with routes
covering the Cape of Good Hope to the Far East during high time-charter rate, low fuel price
market conditions while attracting ships and trying to boost traffic during low time-charter rate,
high fuel price market conditions. The profitability of the Kra Canal highly depends on more fuel
price than that of the SC. This conclusion is based on a simple calculation of tolls and annual toll
income for periods characterized by different market conditions.
Acknowledgments
We would like to thank the guest editor Prof. Wen-Kai Hsu and two anonymous referees for their extremely
helpful comments. This research was partially supported by Research Grant of the Hong Kong Polytechnic
University (Project Code G-YBH9).
Disclosure statement
No potential conflict of interest was reported by the authors.
Funding
This research was partially supported by Research Grant of the Hong Kong Polytechnic University (Project Code
G-YBH9).
ORCID
Zhi Heng http://orcid.org/0000-0002-7310-8229
Tsz Leung Yip http://orcid.org/0000-0002-7277-7666
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Impacts of Kra Canal and its toll structures on

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Impacts of Kra Canal and its toll structures on tanker traffic

Figure 1. Kra Canal route and the Malacca Strait route.

Figure 2. Kra Canal route and the Strait of Malacca route.

4. Data and analysis

4.1. Annual transits data analysis

Table 3. Estimates of multiple linear regression.

4.2. Fixture data analysis

Table 4. Examples of route grouping and analysis.

105 43,000–60,000 Labuan EC India 373 0 0

S Korea W Africa 306 0.61

5. Canal toll structure analysis

5.1. Canal toll structures of Panama and SCs

5.2. Optimal toll structure for the Kra Canal

Table 7. Estimated toll income when the tanker market is favorable.

Table 8. Estimated toll income if the tanker market is unfavorable.

Toll = (WTPVLCC, 485 nm − WTPSuezmax, 485 nm)/REST tonnages] is applicable, otherwise

5.3. Policy implications for Kra Canal

10,000 1 Year Timecharter Rate 310,000 dwt D / H Modern Tanker 100

Figure 3. VLCC time-charter rate and fuel price.

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