February 2008
China–Feeding the Dragon Short Sea Shipping and Horizon Lines Environmental Criminal Enforcement
Cruise Central Port Everglades Phillip C. Allen, Port Director
executive achievement
the maritime executive
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contents 02.08
24
Case Study : Port Everglades
Executive Achievement
Cruise Central
• Derek Foster and Foster Magnetics • New SEACOR Management Group
by Tony munoz
8
Phillip C. Allen, Director of Port Everglades
30
by Tony munoz
Washington Insider Congress Considers New Oil Pollution Measures
Editorial
10
6
The Jones Act: Shot Through the Heart, and You’re to Blame…
Environmental Criminal Enforcement
16
by Jeanne M. Grasso and Gregory F. Linsin
Prevention, Not Reaction
Smooth Sailing in ‘07 for Maritime Stocks
The Unified and Uniform Approach
by Jack O’Connell
by joseph keefe
China Feeding the Dragon
42
A Record-Setting Year in Review, Troubling Trends and Future Opportunities
by Larry kiern
Upgrades & Downgrades
36
CEO Chuck Raymond Is Bullish on Short Sea Shipping – and Horizon Lines by joseph keefe
by Tony munoz
Executive Interview
Big Things on the Horizon?
18
by Tony munoz
Zero Discharge The Gold Standard in Black Water
46 50
by MAREX STAFF
by Tony munoz
NEW Features
14
Letter to the Editor-by Capt. Tim Brown Crossword Puzzle-by Myles Mellor (page 56)
Conversion Economics
20
When Should an Oil Tanker Become an Ore Carrier?
Ending Invasive Species Relief in Sight?
53
by joseph keefe
by barry parker
the maritime executive
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editorial staff
editor in chief Tony Munoz tonymunoz@maritime-executive.com managing editor Joseph A. Keefe jkeefe@maritime-executive.com senior copy editor John J. O’Connell, Jr. harvardjo@maritime-executive.com copy editor Valerie K. Leichtman vleichtman@maritime-executive.com senior vice president sales & marketing Brett Keil bkeil@maritime-executive.com sales & marketing executive Irena Ortlani irena@maritime-executive.com art director Daniel Bastien dbastien@maritime-executive.com internet services manager Matthew Miller matt@maritime-executive.com sales administrator Elizabeth Cash elizabeth@maritime-executive.com sales associate - Germanic Europe Hansjorg Brans jbrans@maritime-executive.com sales associate - Eastern Europe Maciej Wedzinski maciej@maritime-executive.com published by TM Marketing Group, LLC The Maritime Executive, LLC (ISSN 1096-2751) 3200 S. Andrews Avenue, Ste. 100 Fort Lauderdale, FL 33316 Telephone: (866) 884-9034 Fax: (954) 848-9948 www.maritime-executive.com For subscriptions please visit www.maritime-executive.com.
4 the maritime executive
editorial The Jones Act: Shot Through the Heart, and You’re to Blame…
D
Tony munoz
Editor in Chief
uring the past 30 years, cruise vacations have exploded into a multibillion dollar business, and projections suggest 22 million passengers will be climbing onboard the ships by 2010. This is a staggering number considering a mere 13 million passengers made it on board in 2007, with 11 million passengers boarding in North America.
The two largest cruise operators, Carnival and Royal Caribbean, both based in Miami, recently reported profits for 2007 of $2.4 billion and $603 million, respectively, the one a record and the other a near-record. Neither company paid U.S. federal tax or Florida state corporate tax because Carnival is incorporated in Panama and Royal Caribbean in Liberia. Moreover, their ships are registered internationally, which exempts them from U.S. labor laws and trips to federal court over workplace disputes. Today, the U.S. Customs and Border Protection agency intends to crack down on the cruise lines for infractions of the U.S. Passenger Vessel Services Act (PVSA), which requires foreign-flagged cruise ships to stop at a foreign port during U.S. port rotations. The PVSA requires a foreign port call to be at least 48 hours – not a cursory call in the middle of the night. At the heart of the Customs dispute is Miami-based NCL America, which operates three U.S.-flagged cruise ships in Hawaii and provides 4,000 American seagoing jobs. NCL invested $1.3 billion and bailed out U.S. taxpayers when it took over the ships being built by American Hawaii Cruises after its demise. While NCL has revitalized the U.S. cruise industry, it has now lost more than $250 million since 2004. Remember, NCL is subject to U.S. tax and employment laws and supports the economy of Hawaii by purchasing only products and services from the state. Additionally, the state of Hawaii has always been a major anti-Jones Act proponent because its citizens have traditionally paid much more for consumer products than mainlanders, who support legislative mandates requiring that U.S.-flag lines transport Hawaii’s products. Shall we tell the 1,285,498 Hawaiian taxpayers that the last 49 years of statehood were just a minor oversight and that our nation must support the interests of a few international cruise companies? What are we to do? NCL is reflagging the 2,500-passenger Pride of Hawaii with a Bahamas registry and relocating the vessel to Europe. If the AAPA, CLIA and its 12,500 travel agents, and the cruise lines get their way and revoke the pending PVSA regulation, NCL America is history. And so too are 4,000 American jobs. Lobbyists for foreign interests have always taken precedence over the American people. When does it stop? As far as the AAPA is concerned, the cruise lines aren’t leaving! These foreign corporations owning flags-of-convenience ships do 90 percent of their business on the shores of America; we’re sorry they might have to abide by a few U.S. rules while making billions of dollars here. I side with NCL America, which played by the rules, paid U.S. taxes, and hired Americans. If the “Cruise Foreign-Port Requirement” is ruled in favor of the cruise lines, then the Jones Act should be put in mothballs forever, and foreign commercial vessels should be allowed to operate in the U.S. coastwise trade with their foreign crews just like the cruise companies. What’s the difference? MarEx
Distribution of The Maritime Executive:
Naval architects, lawyers, consultants, and insurers
16% Shipbuilders and repairers
6 the maritime executive
59%
6%
Other
Other West Coast
28%
38%
5% 2%
Government
Domestic Circulation:
Canada
Ship owners, operators, managers, charterers, and brokers Western Europe & Mediterranean
12%
Marine equipment manufacturers
International Circulation:
Markets Served:
29% 20%
1% 2% 3%
28%
8%
Other South & (Africa, Central America Australia, Misc. Island Nations)
East Coast
26%
Scandinavia
Asia & Middle East Eastern Europe
2%
Gulf Coast
15% Midwest
executive achievement
Proven Performance with Safety & Efficiency.
With our ultra-large towing vessels and deepwater offshore supply vessels, we provide offshore rig moving services and support to jack-up and semisubmersible drilling rigs for every major Drilling Contractor and Oil Company, as well as rendering tug and barge transportation services for cargo movements, platform rig installations and ocean towing services. VESSEL NAME / TYPE Offshore Towing Vessels Harvey Commander Harvey Gladiator Harvey Invader Harvey Viking Harvey Warrior Harvey Trojan Harvey Titan - DP Harvey Intruder Harvey Thunder Harvey War Horse Harvey War Horse II - DP* Dive Support Vessel Harvey Discovery DP 2 Cert. Offshore Supply Vessels Harvey Provider DP 2 Cert. Harvey Explorer DP 2 Cert. Harvey Spirit DP 2 Cert. Harvey Supplier DP 2 Cert. Harvey Carrier DP 2 Cert.**
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executive achievement
executiveachievement
By Tony Munoz
Derek Foster and Foster Magnetics Begin Manufacturing Transformers and Inductors in China
Foster Magnetics, based in Houston, Texas, has begun building its new plant in Yangzhou, China, which is expected to be online in March 2008. Derek Foster, the President of Foster Magnetics, is a renowned designer of dry-type transformers and inductors for a number of industries, including the maritime and offshore sectors. He is chairman of the IEEE Transformers Committee Working Group for ANSI/IEEE Standard C57.12.91 - IEEE Standard Test Code for Dry-Type Distribution and Power Transformers, and is the Transformers Committee representative on the IEEE Technical Committee Advisory Board. Born and educated in England, Foster is an Incorporated Engineer and a member of the Institute of Engineering and Technology in the UK. He entered the transformer industry in 1974 and has since become a leading designer and manufacturer of specialty transformers and inductors. Currently, Foster is supplying electrical products for BOURBON Offshore’s
Liberty Series, which is being built at SinoPacific Shipyards in China, and for Rigdon Marine Corporation’s 4000 Class Platform Support Vessels being built at Bollinger Shipyards in Lockport, Louisiana. John Janik, President and CEO of EPD, Inc. (Houston) and EPD Asia (Yangzhou, China), whose company revolutionized power controls for vessels by designing a protective containerized system, and Foster have formed an intellectual partnership called Foster Magnetics. Since transformers and inductors are major components in the power systems produced by the EPD group, Janik and Foster took control of the design and manufacturing of these critical and essential products to ensure availability and technological quality. Foster Magnetics is currently manufacturing in Houston, Texas and constructing a 45,000-square-foot plant in Yangzhou, China near the EPD Asia facility in the Economic Zone of the region. Foster points out that, in
addition to supplying products for the marine industry, the company also supports systems requiring dry-type transformers for manufacturing companies, commercial buildings, original equipment manufacturers and any application requiring transformers and inductors. Foster Magnetics was recently selected to manufacture water-cooled, high-current inductors for the National High Magnetic Field Laboratory operated by Florida State University. MarEx asked Foster about some of his better-known projects. Among others, he designed the transformers powering the drilling machines for the construction of the French-UK Channel Tunnel (the “Chunnel”). Following the 1987 fire in the London Underground system, he was engaged in the design of fire-resistant transformers for the rail network. Foster eventually came to the U.S. after being hired by Olsun Electrics of Richmond, Illinois, where he worked for 13 years prior to MarEx opening Foster Magnetics.
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8 the maritime executive Cruise_7x4.875.indd 1
1/18/08 12:40:24 PM
executive achievement
Kenny Rogers Heads New SEACOR Management Group Kenny Rogers has been appointed President of SEACOR Ocean Transport (SOT), which will manage the operations of Seabulk Towing, Seabulk Tankers and Seabulk Island Transport. Rogers states that the new organization was established to manage $600 million in operating assets for the combined companies and act as a growth vehicle for any potential new business, whether in tankers, tugs, barges, dry-cargo ships, liner services or short-sea shipping. MarEx inquired about the recent demolition of two of the company’s tankers, which had reached the end of their useful lives, and asked if they would be replaced through purchases or a newbuilding program. Rogers said the company still owns seven modern double-hull tankers and the Seabulk America, which is a chemical tanker that will be phased-out by 2015 in accordance with OPA 90 regulations. Nevertheless, the company is actively reviewing tanker ownership and management opportunities in all tanker segments, domestic and foreign. Seabulk Towing operates 30 modern tugs throughout the southeastern United States, from Port Canaveral, Florida to Port Arthur, Texas. In Lake Charles, Louisiana, Seabulk is providing two tractor tugs under a 20-year contract to British Gas for its LNG vessel escort and docking services. Additionally, over the last two years, Eastern Shipbuilding of Panama City has built five high-horsepower tractor tugs for the towing division, two of which are now operating in Lake Charles for British Gas, one in Port Arthur, and the two recently christened boats Buccaneer and Gasparilla in Tampa Bay. Seabulk Island Transport operates four tugs and five bunker barges in St. Eustatius in the Caribbean for Nustar Energy. Rogers says the company’s investment will hopefully lead to expanded opportunities with Nustar. He also says that the division is building doublehull petroleum barges at Jeff Boat in Indiana, which should provide opportunities in oil transport and coastwise towing. In terms of management, Rogers said the parent corporation has enormous management assets, which will be available to SEACOR Ocean Transport. Teamed with Rogers is Dan Throrogood, Senior Vice President of SOT. Rogers is not shy about his intentions to build a vessel management organization to assist ship operators around the world, envisioning global operations for tankers, tugs and barges. “We have always been traditional owners and feel the strength and structure of our organization can fulfill the needs of ship operators worldwide,” Rogers said. “I have been in the ocean transportation industry for over 30 years, and Dan has acquired solid financial management, acquisition and operating experience during his tenure with SEACOR in Europe, West Africa and the Middle East. We are strategically positioned to build SEACOR Ocean Transport into a premier ship owning, operating and management group.” MarEx
the maritime executive
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washington insider
washington insider
Congress Considers New Oil Pollution Measures
By Larry Kiern, Winston & Strawn LLP
San Francisco Spill Highlights Marine Safety Deficiencies and Prompts New Proposals Damages from the November 7, 2007 oil spill in San Francisco Bay from the Cosco Busan’s allision with the San FranciscoOakland Bay Bridge now exceed $70 million and are expected to approach $100 million as natural resource damages are assessed. The seriousness of this incident, occurring in such a pristine and ecologically sensitive region, cannot be underestimated. Immediately after the vessel’s discharge of approximately 54,000 gallons of heavy fuel oil into the bay, serious questions arose about the adequacy of prevention and response measures. The public outcry about the slowness of key notifications, confusion about the spill’s size, and the inability of federal officials to use volunteers stung the Coast Guard, causing its leadership to scramble to get ahead of the bad news. These and other questions about the cause of the spill have sparked Congress to consider new legislation to reform the nation’s system of oil pollution prevention and response. Many of the questions warrant attention by not only Congress but also the Coast Guard, which should carefully examine its own performance. Following closely on the heels of intense criticism from maritime industry critics last fall about the Coast Guard’s inattention to marine safety, the criticism of the agency’s performance in this incident is particularly stinging. Considering all of these developments together and given the practical nature of key legislative proposals, there appears to be a reasonable likelihood of enactment into law of useful changes, even though it is an election year. Both members of Congress and state and 10 the maritime executive
local officials raised serious questions about how the accident could have occurred. They also expressed concern about what appear to be unreasonable delays in understanding the seriousness of the spill and the challenges encountered by local communities in carrying out the response. Congressional hearings were quickly held by subcommittees of both the House of Representatives and the Senate. These hearings highlighted significant areas for potential improvement in the current system, which has remained largely unchanged since the enactment of the Oil Pollution Act of 1990 (OPA 90), almost 20 years ago. Legislative proposals soon followed to reform the oil pollution regime, and other measures are being considered. Following the criticisms leveled at the Coast Guard, Commandant Admiral Thad Allen ordered an investigation to learn what went wrong with the response and to make proposals for reform. The investigative report issued on January 28, 2008, largely confirmed key criticisms leveled at the response. Its list of 138 recommendations for improvement raise serious questions about the state of our nation’s oil pollution response system. The results of this and other investigations could also bear on the final form of any legislation.
How Could This Have Happened? Improvements in the marine transportation system and rigorous Coast Guard regulation and enforcement have produced a dramatic drop in the amount of oil spilled from vessels in the waters of the United States since the enactment of OPA 90. Since then and before this incident, the United States experienced only 51 major oil spills, or three a year on aver-
age. This drop in major spills is especially impressive in the context of America’s growing appetite for oil and cargo transported by vessels. The United States receives over 40,000 shipments of oil per year, and there are over 100,000 commercial vessels navigating United States waters annually. So was the San Francisco spill a failure of the system implemented by OPA 90, or a failure in those charged with executing it, or perhaps a failure on both counts? And putting fault aside, are there any larger lessons the spill teaches us that warrant legislative change? While it is difficult at this early stage to understand precisely what occurred, the information provided to Congress suggests that both human and systemic failures contributed. The vessel’s allision with the bridge, absent a loss of power or control of the vessel’s steering, strongly suggests a remarkable lack of situational awareness on the ship’s bridge. The Coast Guard announced that it found no mechanical malfunction on the vessel. The California Board of Pilot Commissioners charged the pilot with misconduct, and the allegations read like a laundry list of what not to do when navigating a vessel. Astonishingly, the Coast Guard now believes that the pilot was not physically competent to maintain his license, and he has surrendered it. While public attention focused immediately on the vessel’s pilot, his local attorney blamed the vessel’s master for misdirecting the pilot into the bridge tower. Whether that is true or not, one cannot help but ask what the vessel’s master was doing. Reports indicate that language barriers between the pilot and the master existed. But given the training and
washington insider experience of these mariners, it is hard to understand how either of them could stand by and allow the vessel to miss the 2,210-footwide opening between the bridge’s towers. Questions have also emerged about the functioning of the vessel’s radar and navigational equipment. Reports indicated that the pilot asserted there were problems with the radar and the electronic chart system. Other reports indicated that the vessel’s systems were functioning properly. The differing accounts on this point remain foggy and will have to be clarified by the Coast Guard and National Transportation Safety Board (NTSB) reports. Next, the Coast Guard’s testimony to Congress about the functioning of its Vessel Traffic Service (VTS) fails to inspire confidence. According to the testimony of Rear Admiral Craig Bone, three minutes before the allision the VTS merely “questioned the pilot’s course of action regarding continued intent to pass through the Delta Echo span” of the bridge. According to the NTSB, the Coast Guard VTS then “went silent.” This constitutes a remarkably laissez-faire performance.
146 gallons of oil had been spilled. Indeed, the Coast Guard’s own report issued on January 28, 2008 confirms that it was reasonable to suspect that the urgency of responding to a 146-gallon spill differed markedly from what turned out to be a 54,000-gallon spill. Additionally, a chorus of state and local officials decried the failure of those directing the response to enlist the assistance of the army and navy of local volunteers. According to the testimony of San Francisco’s mayor, city officials were not notified until 12 hours after the spill and then were excluded from the Unified Command for days following the spill. The leader of the local fishermen’s federation testified that local fishermen and their boats
VTS authority by empowering VTS operators to function more like air traffic controllers. According to the senators, the Coast Guard VTS should have the authority to intervene to direct vessels how to proceed “if a vessel is in imminent danger or distress.” However, as a practical matter, the Coast Guard has long enjoyed such authority and, given the apparent critical minutes of inaction by the VTS, it does not appear the allision here occurred because of a lack of authority. Rather, it appears that the principal failure of the VTS was not that it failed to order a new course but that it failed to communicate with the vessel at all during the critical minutes before the allision and warn the vessel of its proximity to the bridge tower. The Boxer-Feinstein legislation would also require the use of laptop computers with electronic charts for pilots. This is aimed at addressing the problems that allegedly arise from the different electronic chart systems used on vessels. It remains unclear how serious a problem this is or if it contributed to the accident. Other legislative measures being considered by Congress include requiring newly built domestic vessels to comply with the international requirement for double-hulls to protect fuel tanks. Considering the threat presented to the environment by fuel carried on ships and the effectiveness of double hulls, this appears to be a reasonable requirement. Additionally, concern remains in Congress about the levels of liability for vessels under OPA 90, especially for non-tank vessels. As this incident painfully illustrates, a major discharge of fuel oil from a cargo vessel can quickly result in massive damages estimated
...the United States experienced only 51 major oil spills, or three a year on average. This drop in major spills is especially impressive in the context of America’s growing appetite for oil and cargo transported by vessels. The United States receives over 40,000 shipments of oil per year, and there are over 100,000 commercial vessels navigating United States waters annually.
Why Was the Response Apparently Feckless? If there was one lesson learned by Coast Guard officers following the Exxon Valdez and the other major oil spills of the era, it was that they should err on the side of responding aggressively. Simply stated, the public puts a premium on aggressive response to the threat presented by a major oil spill, and on-scene Coast Guard coordinators put themselves at peril by adopting a timid posture. While Admiral Bone described the response as “one of the most successful cleanups I’ve ever experienced,” he also admitted that he had identified problems “related to the initial spill response and coordination.” Criticism also quickly surfaced from local officials that not enough was being done to combat the spill. Indeed, a review of the chronology of events that day fails to disclose any real sense of urgency. While the Coast Guard has denied this, it appears that the agency’s critical response error occurred very early – within two hours of the spill – when its pollution investigators erroneously concluded that only
were not used effectively but instead were told “if any fisherman wanted to help they could volunteer to clean birds.” Finally, widespread frustration was expressed about the mismanagement of volunteers by federal authorities. The serious problems uncovered in the feckless response to the San Francisco spill are all the more troubling because the Coast Guard trumpets its program of oil spill exercises as “rigorous.” Yet its Safe Seas 2006 exercise in the Bay area failed to identify these problems and avoid their occurrence in the real spill that occurred a year later. That such serious problems could occur on the heels of an exercise supposedly designed to prevent them raises more concerns about complacency in the oil spill response program nationwide.
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Legislative Proposals California Senators Barbara Boxer and Dianne Feinstein introduced legislation in Congress ostensibly aimed at strengthening the Coast Guard’s
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the maritime executive
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washington insider ultimately to approach $100 million. Meanwhile, the vessel’s limit of liability under OPA 90, even as amended by Congress in 2006, remains only $61 million. As a practical matter, that means that the Oil Spill Liability Trust Fund may be responsible for the excess unless grounds are established that will allow the limitation to be broken. In his testimony before the Senate, Admiral Allen specifically called for consideration of increases in the liability limits of non-tank vessels.
More Pressure Arises for State Activism Besides legislative initiatives by Congress, major spills like this one inevitably spur states to address the weaknesses of the federal system by enacting laws of their own. These state measures often challenge the principle of federal preemption. Legislators in California have already launched that state’s legislative process with multiple proposals, including measures to mandate escort tugs and to levy a tax on imported oil to create a fund to purchase cleanup equipment to be stationed in California ports. A similar effort by Massachusetts following the Buzzards Bay spill has provoked prolonged litigation as the maritime industry and the Coast Guard challenged that state’s oil spill legislation as preempted by federal law. Most of the new requirements of the Massachusetts legislation have been struck down by the federal court. But the legality of the state’s unique requirements for tug escorts and manning remain to be decided. Massachusetts has gone so far as to sue the Coast Guard, challenging the agency’s newly regulated navigation area for Buzzards Bay. Thus the tenacity of the individual states should not be
in Congress last year about a serious lack of skill and experience among Coast Guard marine safety personnel. In his response, the Commandant highlighted a lack of funding as central. Therefore, in addition to the policy proposals currently being debated in Congress, funding must be increased if real improvement is to be realized. To accomplish that, the Administration must take the lead and recommend increased funding to Congress. Although the Coast Guard has led investigations of environmental crimes yielding over $200 million in the past decade, the Coast Guard marine safety program has not received these funds. Rather than using such funds for local habitat programs or to reduce the deficit, they could have been used to bolster the Coast Guard’s marine safety and environmental protection programs. It is not too much to ask the Administration and Congress to provide increased funding to restore the effectiveness of these critical national programs. MarEx
underestimated when it comes to asserting their sovereignty over this politically sensitive subject. As Admiral Allen testified, “vessels seeking to trade between states have to satisfy increasingly disparate requirements…”
Conclusion The San Francisco oil spill serves as a wake-up call for our nation’s oil spill prevention and response system. Despite the progress made in the almost two decades since OPA 90, this incident should spur the Coast Guard to reinvigorate its pollution prevention and response programs. Otherwise, we risk
Although the Coast Guard has led investigations of environmental crimes yielding over $200 million in the past decade, the Coast Guard marine safety program has not received these funds. Rather than using such funds for local habitat programs or to reduce the deficit, they could have been used to bolster the Coast Guard’s marine safety and environmental protection programs. It is not too much to ask the Administration and Congress to provide increased funding to restore the effectiveness of these critical national programs. further eroding of the nation’s confidence in the federal government’s ability to respond effectively. Federal failures exacerbate balkanization of safety and environmental regulation as coastal states conclude they cannot rely on the federal government. The proposal to require double hulls around fuel tanks appears sensible as does the proposal to increase the limit of liability for non-tank vessels. Most importantly, however, the Coast Guard needs increased funding to improve the quality of its marine safety and environmental protection program. Key shortcomings in experience and training of essential personnel revealed in the San Francisco spill remind us of criticism leveled
Larry Kiern is a partner at Winston & Strawn LLP, an international law firm of 900 lawyers. His practice concentrates on maritime issues, including legislative, regulatory, and litigation matters. Before joining Winston & Strawn, he was a Captain and law specialist in the U.S. Coast Guard who served as the Legislative Counsel and Deputy Chief of the Coast Guard’s Congressional Affairs Office.
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washington insider
MarEx
Letter to the Editor
S s
N OF TIO
AS s M
T
Former Coast Guard attorney Larry Kiern [“Reviving the ‘Bureau of Marine Inspection and Navigation,’ Maritime Executive, September 2007] takes a shot across the bow at our labor union, The Masters, Mates & Pilots (MM&P), to deflect any real discussion about the problems in the Coast Guard’s marine inspection program. Kiern writes that maritime labor witnesses at an Aug. 2 congressional hearing on the matter “unabashedly lobbied Congress for the creation of civilian marine inspector positions for their own members to fill.” Kiern accuses MM&P of being “more interested in civil service jobs for its members” than in the competency of Coast Guard marine inspectors. Let’s keep in mind that the hearing in question, before the House Subcommittee on Coast Guard and Maritime Transportation, was organized in response to serious concerns across the industry regarding the capability of a military organization to regulate a civilian industry. Inside the Coast Guard, there is in fact a lack of in-depth experience in commercial maritime operations. This lack of experience affects the Coast Guard’s competency and effectiveness as a regulator.
OT
Dear Mr. Keefe,
IL
Re: Reviving the “Bureau of Marine Inspection and Navigation,” The Maritime Executive, September 2007, p. 8
The lack of experience is the result of a marine inspection program akin to those two factors: the military system of rotating that have operated successfully for years in assignments, which views gaining expertise most maritime nations, where experienced in a specialty as a “career killer,” and the lack civilian maritime professionals fill key posiof any hands-on experience in the commertions. If former senior management level cial operation of today’s large and complex officers with extensive seagoing experience ships and tankers, which operate under tight fill such positions, undoubtedly some will schedules with minimal crew. The lack of have been members of a union at one time. experience equates to a generally held belief We fail to see any conflict between that fact across the industry that while Coast Guard and the goals of an effective maritime safety officers are intelligent and well-trained, program, however. they lack the foundation necessary to make informed decisions requiring professional Sincerely judgment that can only be gained through experience. The result is a system that relies Captain Timothy A. Brown on the application of a set of rules that are International President often inappropriate to the situation. The Masters, Mates & Pilots There is also concern with the compatibility of the Coast Guard’s OR NAL GANIZ new role as a military force in the A TIO war on terror and its continuing to function as the regulator of a civilian industry. The military role ER P SM is undoubtedly high profile and ATES AND leads to the funding and promotions needed to attract the best talent in the security field. This has led to a belief within the industry that the focus of the Coast Guard has changed along with its priorities, and that the resources to support an adequate maritime safety program are just not there. The new military mindset required for carrying out a military mission does not mesh well with the role of a civilian regulatory agency. MM&P advocated in its testimony at the Captain Timothy A. Brown Aug. 2 hearing that the United States adopt INTER NA
Nov. 5, 2007
MarEx 14 the maritime executive
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upgradesp qdowngrades
Upgrades & Downgrades By Jack O’Connell
Smooth Sailing in 2007 for Maritime Stocks Shipping stocks did well in 2007, easily beating the market and, in some cases, providing spectacular returns. This should come as no surprise to readers of The Maritime Executive, who know that freight rates and utilization have risen steadily over the last 12 months in response to the increasing demand for vessel services. Surging GNP growth in China and India, increased global energy consumption and expanding world trade have stretched the capacity of the existing world fleet. Shipyards are chock full of new orders and cannot keep up with the demand for additional tonnage. Has there ever been a better time for the shipping industry, whether for investors or owner/operators? This was not always the case, of course. For years shipping stocks were dismissed as highly cyclical in nature and below-average performers historically, to be avoided by smart investors. They were lightly traded and hard to find. There weren’t many public companies out there. The industry was fragmented and largely family-owned. Only in the last 10 years have these companies come into public view, driven by a raft of IPOs, first in the energy services sector and more recently in the tanker and dry-
Take, for example, Tsakos Energy Navigation (NYSE: TNP). Tsakos transports crude oil and refined products like gasoline, jet fuel, diesel and other distillates on a fleet of 47 tankers, all double-hull, ranging in size from Handymaxes to VLCCs and divided almost equally between crude and products carriers. Some of Tsakos’s long-haul routes include Venezuela to China, and the Middle East to Japan. The longer the route – or “ton miles,” as they say in the industry – the bigger the profit. Tsakos pays a dividend of close to 5%, and its shares appreciated an impressive 61% in 2007. It rewarded investors with a 2-for-1 stock split in November and still has fewer than 40 million shares outstanding. Like most shipping companies, its shares trade at a substantial discount to the average P/E of S&P 500 companies, which is 16, so there would appear to be substantial upside potential. Yet Tsakos was not even the best performer among its tanker company peers. That honor goes to John Fredriksen’s Frontline (NYSE: FRO), whose stock appreciated 81% in 2007. Norwegian-based Frontline also pays an eyepopping 12.5% dividend. So whether you’re
Chart A. PETROLEUM CARRIERS Company (Symbol) 12/31/07 P/E Yld. Frontline (FRO)* $48.00 6 12.5% Tsakos (TNP)* 37.03 7 4.4 OverseaShipGrp (OSG) 74.43 9 1.7 Teekay (TK) 53.21 17 2.0 GenMar (GMR)* 24.45 10 8.2 * split in 2007
bulk arenas. Backed by knowledgeable investors and guided by experienced, professional managers, these newly minted companies have for the most part performed admirably. 16 the maritime executive
Change in 2007 +81% +61 +32 +22 + 9
demand grew and the supply of available vessels remained tight. If you think tanker companies did well in 2007, take a look at what the drybulk carriers did (see Chart B). This sector benefited from surging demand for commodities of all kinds – iron ore, coal, copper, aluminum, lumber, cement, fertilizers and grains – and a shortage of available vessel space. Most of the demand came from, you guessed it, China, but also from India, Japan, smaller Asian Tigers, Europe and the Middle East. The London-based Baltic Dry Index, which measures freight rates in the drybulk sector, was up 108% in 2007. One of the most profitable routes was the carriage of iron ore from Brazil to steel mills in China, an approximately 6,000-mile voyage. At $100,000 a day and more for a Capesize carrier, you can see how the dollars would add up. The shortage of vessels in this sector has become so acute that some companies are converting their single-hull crude carriers to bulkers. The year’s most spectacular performer was a company called DryShips (Nasdaq: DRYS). Like many drybulk companies, DryShips went public only in the last three years in response
Chart B. DRYBULK CARRIERS Company (Symbol) 12/31/07 P/E Yld. DryShips (DRYS) $77.40 9 1.0% Excel (EXM) 40.19 13 2.0 Quintana (QMAR) 22.98 21 5.4 Diana (DSX) 31.46 16 7.4 Genco (GNK) 54.76 21 4.8
looking for price appreciation or dividend yield, you could do a lot worse than Frontline. In fact, almost any stock in this sector (see Chart A) performed well in 2007, as energy
Change in 2007 +330% +175 +109 + 99 + 96
to the growth in world trade and the need for investment capital to expand its fleet. Its stock finished the year at $77.40, up 330%, and had traded as high as 130 in the face of frenzied
upgradesp qdowngrades buying by momentum investors. In Chart C. OILFIELD SERVICE COMPANIES fact, this stock became the poster boy of the entire shipping indusCompany (Symbol) 12/31/07 P/E Yld. try (and the laughing stock of some Hornbeck (HOS) $44.95 14 - - online message boards), attracting Gulfmark (GLF) 46.79 9 - - Tidewater (TDW) 54.86 9 1.1 investors who had never before conTrico (TRMA) 37.02 12 - - sidered investing in shipping. The Seacor (CKH) 92.74 11 - - secret, alas, was finally out: There’s money to be made in this hitherto little-known sector. Every one of the compa(NYSE: GLF) and the industry leader, Tidewanies in our select universe of drybulkers outper- ter (NYSE: TDW). formed the best company in the tanker sector. For those who remain unconvinced about Trailing the hit parade in 2007, but still the merits of shipping stocks, an interestbeating the market averages*, were the oiling way to play both the transportation and field service companies (see Chart C), which energy sectors is Aegean Marine Petroleum haul everything from drill pipe and liquid mud (NYSE: ANW). Aegean is a bunkering compato food and personnel to offshore drilling rigs. ny, providing marine fuel to ships of all kinds They also help move and reposition masfrom six service centers around the world sive offshore platforms from one location to and a fleet of 12 bunkering tankers. Aegean another. Their stocks had a good year in 2006 went public in March 2007 at 17 and closed but stumbled somewhat in 2007 as new vesthe year at 38.39. Not bad for nine months sels entered the market and rate competition of work. Aegean is not for the faint of heart, intensified. Unlike companies in the drybulk however. Its P/E is 55, right up there with and tanker segments, these stocks generally Google, Yahoo and other tech favorites. It do not pay a dividend and depend on share pays a nominal dividend. price appreciation to attract investor interest. What about 2008? Shipping stocks, along Hornbeck Offshore (NYSE: HOS) led the way with everything else, plummeted in January in our select universe, followed by Gulfmark amid forecasts of a U.S. recession triggered by
the housing collapse and the credit crunch. Yet it is hard not to be optimistic over the longer term. China and India and Vietnam and all the other emerging economies in the world continue to grow at a rapid pace, and their appetite for energy, materials and finished goods shows no signs of slowing. In this kind of environment, the outlook for world trade and the ships that deliver the goods is bright indeed. Similarly, the search for new sources of oil and gas continues unabated, and this bodes well for the earnings of oilfield service companies. Barring a major recession in the U.S., which the Fed seems determined to prevent, shipping stocks seem poised for another good year, though perhaps not as spectacular as 2007. MarEx
Change in 2007 +26% +25 +13 – 3 – 7
* For the record, the Dow was up 6.4% in 2007, the Nasdaq 9.8% and the S&P 500 3.5%. Jack O’Connell, the senior copy editor of this magazine and a former maritime executive, is a private investor who owns shares in some of the companies mentioned in this article.
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the maritime executive
17
china
feeding the dragon
China – Feeding the Dragon Popular wisdom says that China’s economic growth depends on the exportation of cheap goods to the industrialized world. While that is a fair assumption, in the six years to 2005 exports accounted for only five percent of China’s total Gross Domestic Product (GDP) growth, while 95 percent of the growth came from domestic demand. In 2001, when the global tech markets slumped, China’s exports fell by 35 percent. Yet its GDP slowed by less than one percent. In fact, only one-third of China’s manufacturing workers are in the export sectors, which is equivalent to just six percent of the total workforce. Investments are the primary driver of the Chinese economy, accounting for over 40 percent of GDP. Since 1979, China has reformed and opened its economy, and these market-oriented reforms implemented over the past two decades have unleashed individual initiative and entrepreneurship. The result has been the largest reduction of poverty and one of the fastest increases in income levels ever seen.
Trade Today, China has the fourth largest economy in the world and has sustained average annual economic growth of over 9.5 percent during the past 26 years. Yet China’s booming $2.68-trillion economy is still only one-fifth the size of the U.S. economy. However, China is now the third-largest U.S. trading partner (after Canada and Mexico) with total U.S.China trade in 2006 of $343.0 billion. Unfortunately, a major trade issue has been brewing 18 the maritime executive
on Capitol Hill as China’s trade surplus with the U.S. continues to grow, reaching $232.5 billion in 2006. Although the U.S. trade deficit with the Asia-Pacific region has fallen over the last 10 years, China’s share of total U.S. imports has grown steadily, to about 15 percent in 2006. Yet American exports to China in 2006 accounted for only five percent of total U.S. exports. And that doesn’t sit well with Washington. In 2005, Senators Charles Schumer and Lindsey Graham introduced a bill threatening to slap a tariff of 27.5 percent on all Chinese imports. While that particular legislation was dropped, there are still several “China-bashing” bills working their way through Congress, and accusations about unfair Chinese competition will surely play a big role in this year’s presidential elections. In May 2007, U.S. Treasury Secretary Paulson met with China’s Vice Premier Wu Yi in Washington for a second round of the Strategic Economic Dialogue, which addresses bilateral issues such as trade, currency and foreign investment. China’s lack of protection for intellectual property rights (IPR) has become one of the most important issues in the U.S.-China bilateral trade. According to calculations from U.S. industry sources, IPR piracy has cost U.S. firms $2.5 billion in lost sales, and the IPR piracy rate in China for U.S. products is estimated at around 90 percent. In 2001, China formally joined the World Trade Organization (WTO) and, as part of its trade liberalization agreement, agreed to lower tariffs and abolish market impediments. Chi-
By Tony Munoz nese and foreign businessmen, for example, gained the right to import and export on their own and to sell their products without going through a government middleman. By 2005, average tariff rates on key U.S. agricultural exports dropped from 31 percent to 14 percent and from 25 percent to nine percent on industrial products. While the agreement opens up new opportunities for U.S. service providers in banking, insurance and telecommunications, serious concerns remain about IPR issues.
Currency China’s currency valuation is another sore spot in Washington, as Congress has accused China of keeping its currency artificially low against the dollar and, indirectly, against the yen and euro. Until 2005, China pegged its currency, the renminbi (RMB or yuan), to the U.S. dollar at a rate of about 8.3 RMB per dollar. But since that time, the RMB has appreciated about 14 percent. On the surface it may appear that Beijing has appeased Washington by letting its currency float on world markets. But economists point out that China probably understands the benefits of its rising currency will out-weigh the costs. Today, inflation, which rose to 6.9 percent in November, is the government’s main concern. While the People’s Bank of China (PBOC) increased interest rates six times in 2007 in an effort to control the inflation monster, it is widely agreed that these measures have to date had minimal impact. The RMB’s recent rise will have little effect on Capitol Hill. Since 2005, the dollar has lost 10 percent of its value, which means the yuan
china
has risen only five percent in trade terms according to the Bank for International Settlements. Furthermore, the PBOC is “whitewashing” most foreign exchange inflows by printing RMBs to buy incoming dollars and then selling bonds to equalize the excess liquidity. It has made a profit in the process because the return on its dollar reserves exceeded the rate paid out in bonds. Today, however, the POBC is losing money, thanks to falling interest rates in the U.S. and rising rates in China. Nonetheless, the U.S. government believes the yuan is undervalued by 30-40 percent despite gains against the dollar over the last two years. A recent report from the Conference Board, an American business-research organization, stated, “Although an undervalued currency contributes to China’s surplus, it is not the primary reason for it and has very little to do with the bilateral U.S.-China trade deficit.”
Energy Together with strong economic growth, China’s demand for energy is surging, which is of concern to the U.S. In 2003 China passed Japan to become the second largest global consumer of petroleum products, after the United States. In 2006 China’s demand for oil represented 38 percent of the total world increase in demand, and it is expected that China will import 3.5 million barrels per day by 2010. China’s primary source of foreign oil is the Middle East, but it has been aggressively investing in oil fields around the world. Beijing is a major player in world oil markets because, like the U.S, it understands that energy is a critical component of national security and military strategy. Much has been written recently about a “future China” going to war over petroleum resources. But as China becomes the next superpower, the West will certainly be challenged at every juncture for energy resources. China has already become
a net importer of oil, and it is increasingly becoming dependent on imported oil. With 1.4 billion people and a booming economy, last year auto sales were up 70 percent and oil imports were up 30 percent from the previous year. By 2030, China is expected to have more cars than the U.S. and import as much oil as the U.S. does today. China’s own proven oil reserves are small in relation to its current consumption, and it’s estimated these reserves will last for only another 20 years. While China is accused of downplaying its use of oil, it is estimated that oil consumption in China is growing at 7.5 percent per year, which is seven times faster than in the U.S. China’s estimate of future oil imports has led to its acquiring interests in exploration and production projects in Kazakhstan, Russia, Venezuela, Sudan, West Africa, Iran, Saudi Arabia and Canada. But despite all of its efforts to diversify sources, China remains uncontrollably dependent on Middle East oil, with 58 percent of its oil coming from the region. By 2015, its importation of Middle East oil will be around 70 percent.
Global Tensions Due to Oil Outside the Middle East, China’s pursuit of oil could undercut U.S. security interests on multiple fronts. In the South China Sea, for example, China is involved in territorial disputes with Malaysia, the Philippines, Taiwan, Vietnam and Brunei over access to energy in the Spratly and Paracel Islands. In the East China Sea, where rich oil and gas reserves are believed to exist, a rivalry is developing between China and Japan over access. While China has already begun oil exploration on its side, the Japanese are furiously protesting China’s encroachment on the Japanese side of the demarcation line and have accused the Chinese of extracting hydrocarbons from its waters. Russian oil is another source of tension
feeding the dragon
between Japan and China as a bidding war erupted over a major pipeline deal to deliver Russian oil from Eastern Siberia. Japan eventually won the pipeline rights. Tensions fed generational animosities, which resulted in waves of anti-Japanese demonstrations in China. In Sudan, China has invested more than $8 billion in joint exploration contracts, including a 900-mile pipeline to the Red Sea, and is accused of deploying thousands of military personnel disguised as oil workers and providing arms to the Sudanese government in support of its 20-year civil war. In the Western Hemisphere, China concluded oil and gas deals with Argentina, Brazil, Peru and Ecuador. However, Venezuela, which provides the U.S. with 15 percent of its exports, remains China’s primary interest. The Chinese and the Chávez government have signed numerous agreements for oil and gas exploration, which includes building a refinery. China’s energy interests also extend to Canada, where the two governments have a series of agreements, which include gas, nuclear, and oil from the massive tar sands in Alberta. Additionally, Enbridge, a Canadian pipeline company, is building a $2.2-billion pipeline to transport oil from Alberta’s tar sands to the West Coast for shipment to wider markets, including China. There are hopes that global imports will satisfy China’s oil appetite and that Beijing and Washington can, and will, work together to bring stability to the Middle East. Fortunately, China has already embarked on an aggressive renewable resources program and has instituted subsidies and tax breaks to encourage renewable energy development. In 2005, China pledged to have 15 percent of the country’s power drawn from renewable sources by 2020, which is about $265 billion or one-tenth of its 2006 GDP. MarEx Tony Munoz is Editor in Chief of The Maritime Executive.
the maritime executive
19
economic conversions
CONVERSION ECONOMICS When Should an Oil Tanker Become an Ore Carrier? By Barry Parker In 2007 drybulk freight rates and asset prices were soaring for much of the year – largely due to demand growth tied to movements of iron ore, much of it going into China. Data from consultants Drewry Shipping, in a November prospectus from Navios Maritime Partners, showed 2006 worldwide iron ore shipments of 722 million metric tons (up nearly 40 percent, from 524 million metric tons in 2003). Elsewhere, Drewry estimates 2007 seaborne iron ore trade at 787.7 metric tons and forecasts 822.2 metric tons for 2008. Data culled from multiple sources in a December presentation from Genco Shipping & Trading shows Chinese monthly iron ore imports growing from around 20 million metric tons in 2005 to nearly 30 million metric tons in 2007. Not surprisingly, the price of ore-suitable vessels has surged. During the fourth quarter of 2007, Navios Maritime Holdings contracted for a series of 172,000-dwt and 180,000-dwt. Capesize bulk carriers, suitable for transportation of ore, at prices of $110-$120 million for late 2009 delivery. For nearby delivery, such vessels have changed hands north of $150 million. At the same time, rising oil prices turbocharged what was already a boom in offshore oil exploration and production. Throughout 2007, oil prices moved steadily upward from around $55/bbl. before peaking close to $100/ bbl. late in the year. Higher oil prices cause production of hard-to-reach oil to become economical – which means deeper waters offshore. Consultants Douglas Westwood were estimating that Floating Production, Storage and Offloading units (FPSOs) would account for 73 percent of a $38-billion market for floating production systems generally during 2007-2011. Steve Robertson of Douglas 20 the maritime executive
Westwood tells MarEx, “According to our data, 119 FPSOs are operational and 97 are forecast to be installed over the 2007-2011 period. Of these, 44 are conversions, 34 are newbuilds and 13 are upgrades (remainder are yet to be determined).” Against this backdrop, the tanker industry was fast moving up against a regulatory constraint, in the form of IMO Rule 13G, which (after post-Prestige revisions) imposes a phase-out date of the vessel’s delivery anniversary in 2010 for single-hull tankers. Individual flag states and port states may extend this deadline out to 2015 provided that the vessels achieve the highest ratings under the Condition Assessment Scheme (CAS). In the ore carrier realm, where potential economies of scale have dictated a preference for larger vessels, conversion candidates will come from the ranks of the VLCCs (typically 250,000-300,000 dwt). But conventional Capesize bulkers provide workable substitutes for the large ore carriers. Conversions from tanker to ore carrier are a relatively new phenomenon, while FPSO conversions have been a market mainstay since the early 1990s, with Stena and Frontline leading an early 2000s’ charge as they both sought alternatives to scrapping their single-hull vessels. For short-lived fields or oil discoveries in deeper waters beyond the reach of subsea pipelines, FPSOs do not find ready substitutes. FPSOs are expensive when vessel acquisition and conversion costs are figured in. BW Shipping recently converted the BW Enterprise, a 1980s’ vintage ULCC, into an FPSO (now producing Mayan crude in the Gulf of Mexico under a charter to Pemex) at a price reported to be $90 million. FPSOs may be
drawn from the ranks of larger vessels, such as ULCCs and VLCCs. An older double-hulled unit, the 1993-built, 300,000-ton Titan Virgomay, was sold in July 2007 for $93 million to Bluewater – a Netherlands-based specialist in FPSO conversions that also acts as an equipment lessor. Conversions are an economical alternative for FPSO newbuilds that may cost as much as $400 million, such as Norway’s Nexus FPSO (under construction in South Korea). FPSOs typically offload their oil cargo onto smaller shuttle tankers for transfer to shore. Depending on the desired throughput, Suezmaxes (usually 150,000-180,000 dwt) and even Aframax tankers (typically 80,000-110,000 dwt) can be workable as conversion candidates. Another alternative is the practice of “double hulling” – where single-skin units are converted into double-hulled 13G-compliant ships. Hebei Ocean Shipping Company (HOSCO) reportedly spent $13 million in 2006 on double-hulling the Hebei Innovator, a Japanese 1986-built VLCC it had purchased for $20 million. With recent changes in IMO rules on chemical carriage, single-hull product tankers have been repurposed into chemical tankers. DNV’s Head of Operations in Shanghai, Mr. Richard Simpson, said, “Much more challenging (than a typical double-hulling project) is the conversion of a product tanker into a chemical tanker.” More recently, Norwegian owners have morphed single-hull VLCCs into semi-submersible heavy-lift vessels for transporting project cargo such as oil rigs. Frontline has recently sold six single-hull Suezmaxes into a new entity called Sealift. DNV’s Simpson
economic conversions says, “Here the bow and stern of the vessel, including the machinery, have been kept, while the midsection is brand new.” Four of the vessels were sold to Sealift on a fully converted basis for $100 million each, and two others were sold to Sealift for $38 million each along with yard options for conversion estimated to cost $45 million each. There is a large universe of candidates for the various conversions. Late 2007 Clarkson’s data showed 100 VLCCs that were 15 years old and over, plus another 54 between 10 and 14 years old. In the Suezmax category, data show 11 (15 years and older) and 58 (10-14 years old) non-compliant ships; in Aframaxes, 63 and 60 vessels. After summer holidays (when both oil prices and drybulk hires soared), the shipping markets were buzzing with talk of conversions. In late summer, analysts estimated that some 30 projects were on the drawing table. Jonathan Feffer, a New York-based consultant on vessel disposals and conversions, tells MarEx that a further 28 tankers were sold for conversion projects during September, October and November. The vessels included three VLCCs, eight Suezmaxes and 14 Aframaxes. But by year-end the dynamics appeared
set to change. Following the December 2007 oil spill from the single-skinned tanker Hebei Spirit in Korean waters, economists were suddenly wondering whether older, single-hull ships would be allowed to trade post-2010 in South Korea and other erstwhile destinations. In late November and into December a chartering spree beginning in the Arabian Gulf (where OPEC may have opened its taps by more than the announced 500,000 bbl./day) sent tanker rates soaring to levels not seen since 2004. Suddenly, VLCCs worth $22,000/ day in early November were worth $220,000/ day six weeks later. Throughout the industry, the big question is whether sufficient yard capacity exists to handle conversions. The rising tanker hire wave also lifted single-hull freight earnings, militating against deletions from the tanker rolls. If the tanker market strength proves to be more than temporary, it may be just as well – there may be no place to do the conversions. Consultant Jonathan Feffer expressed concern about yard availability in the Far East and wondered whether non-traditional yards (for example, in Turkey) could possibly be brought into the conversion fray. Prices on VLOCs (Very Large Ore Carriers)
are comparable to Capesizes, such as those ordered by Navios. State-owned China Shipping Development, with ties to large steel mills, ordered four 300,000-dwt VLOCs from Dalian Shipbuilding in August for a reported $455 million with four more, worth an aggregate $467 million, slated for 2012 delivery from Dalian. Privately held BW Shipping, imbued with Bergesen’s heritage in ore transportation (for such names as Brazil’s CVRD) and Pao’s reach into China, has ordered four VLOCs of 388,000 dwt from China’s Bohai Yard with a 2011 delivery date for $400 million. Australia’s mining giant Rio Tinto will be taking three 250,000-tonners for 2012 delivery for $315 million en bloc to haul ore from Western Australia. If a suitable yard can be found, converted vessels are a cheaper and quicker alternative to conventional newbuildings. One early prototype was the 2005 conversion by HOSCO of the VLCC Hebei Galaxy into an ore carrier at the Shanhaiguan yard. Clarkson’s estimates the conversion cost at around $13 million. Two years later, in the third quarter of 2007, McQuilling Services suggested $25 million as the cost of a VLOC conversion; Clarkson used a number of $15-$20 million. Added to the cost of an older tanker in mid-2007 of $50-$60
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the maritime executive
21
economic conversions marex.xlsCase 1
million, conversions are still a cheaper alternative to new construction. But shipping markets have a way of defying the best efforts of planners. Even before December’s run-up in tanker rates, Fearnley’s research guru Sverre Svenning and others all acknowledged the salutary impact of reduced vessel supply for tanker owners. Management at Genco Shipping & Trading, in the midst of taking deliveries on nine conventional Capesize bulkers bought for $1.1 billion in July 2007, feels that “…the ships won’t trade continuously...they will be used for iron ore storage in China.” The sentiment was echoed by Mr. Svenning, who, after noting the large number of VLOCs on order, said, “We question the commercial soundness (of conversions) as we believe they will have trouble securing steady business.” Consultant Jonathan Feffer was blunt, telling MarEx, “…some of these projects may not ever happen.” MarEx
Case Case11– Ore Carrier Rates Double Tanker Rates
Assume conversion cost is $25 Million Assume as an ore carrier, TCE below Capesize rates due to reduced lift
Earnings Matrix Year 1 per day Year 2 per day Year 3 per day Year 4 per day Year 5 per day
Ore Carrier
$
NPV @ 10%
87.5 Million
Earnings per day
Onhire Days
Year 1 Year 2 Year 3 Year 4 Year 5 Scrap $ Tanker
$
55.6
22 the maritime executive
180 360 360 360 360 10
$ 18.0 $ 36.0 $ 36.0 $ 36.0 $ 36.0 Million
Opex per day $ (10,000) Million Million Million Million Million
$ $ $ $ $
(3.7) (3.7) (3.7) (3.7) (3.7)
Million Million Million Million Million
Capex CONVERSION $ (25.0) Million
Net
$ (25.0 $ 14.4 $ 32.4 $ 32.4 $ 32.4 $ 32.4 $ 10.0
Million
Onhire Days
Year 1 Year 2 Year 3 Year 4 Year 5 Scrap $
Earnings 330 360 360 360 360 10
$ 16.5 $ 18.0 $ 18.0 $ 18.0 $ 18.0 Million
Opex per day $ (9,000) Million Million Million Million Million
$ $ $ $ $
(3.3) (3.3) (3.3) (3.3) (3.3)
Million Million Million Million Million
Capex DD / SS $ (5.0) Million
Net $ $ $ $ $ $ $
(5.0 13.2 14.7 14.7 14.7 14.7 10.0
Case Case22– Ore Carrier Rates Identical to Tanker Rates
Assume conversion cost is $25 Million Assume as an ore carrier, TCE below Capesize rates due to reduced lift
Earnings Matrix Year 1 per day Year 2 per day Year 3 per day Year 4 per day Year 5 per day
CASE STUDIES IN CONVERSION
The economic rationale for converting tankers to large ore carriers is a simple one: They will earn buckets of money because the ravenous demand for iron ore transportation will continue. But shipowners’ crystal balls are cloudy at best. Assumptions in economic models (including the highly simplified one here) can easily go awry, depending on the vagaries of geopolitics and economics. MarEx developed a back-of-the-envelope model for evaluating the Net Present Value (NPV) of a hypothetical single-hull tanker with a remaining useful life of five years. It can continue trading as a tanker if its owners put it through an expensive special survey, costing $5 million, so that it can achieve the highest CAP ratings. Or, alternatively, the owners can pull it out of service for six months, spend $25 million on conversion, and then trade the vessel as an ore carrier. Case 1 presents an extremely powerful case for conversion, with ore carrier earnings of $100,000/day (TCE) eclipsing tanker earnings over the five-year period by a healthy $50,000/day. The very strong ore carrier earnings suggest both a firm overall market as well as steady work in the ore trades. Case 2 moves the TCE for the converted ore carrier down to $50,000/day over the five-year period, reflecting a more cautious view of the overall market and/or utilization. This scenario bears out the views of some participants who have suggested that ore carriers might, in fact, end up on storage duty, which would result in a lower hire rate and possibly more idle time. In this case, the NPV of not doing the conversion greatly exceeds the “ore carrier” alternative. Case 3 presents the murkiest of the three scenarios, maintaining the same lowered TCE for the ore carrier but also illustrating the example of a single-hull tanker that sees one good year at $50,000/ day and then meager earnings of $20,000/day until the end of its useful life. In spite of the owner’s CAP investment, a pollution incident with a single-hull vessel, such as the recent Hebei Spirit casualty in South Korea, may result in fewer trading opportunities for the tanker.
Earnings
NPV @ 10%
Earnings per day
marex.xls Case 2
Ore Carrier Tankers $ 100,000 $ 50,000 $ 100,000 $ 50,000 $ 100,000 $ 50,000 $ 100,000 $ 50,000 $ 100,000 $ 50,000
Ore Carrier
$
NPV @ 10%
27.4 Million
Earnings per day
Onhire Days
Year 1 Year 2 Year 3 Year 4 Year 5 Scrap $ Tanker
$
Earnings 180 360 360 360 360 10
$ 9.0 $ 18.0 $ 18.0 $ 18.0 $ 18.0 Million
Opex per day $ (10,000) Million Million Million Million Million
$ $ $ $ $
(3.7) (3.7) (3.7) (3.7) (3.7)
Million Million Million Million Million
Capex CONVERSION $ (25.0) Million
Net
$ (25.0 $ 5.4 $ 14.4 $ 14.4 $ 14.4 $ 14.4 $ 10.0
NPV @ 10%
55.6
Earnings per day
Million
Onhire Days
Year 1 Year 2 Year 3 Year 4 Year 5 Scrap $
marex.xls Case 3
Ore Carrier Tankers $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
Earnings 330 360 360 360 360 10
$ 16.5 $ 18.0 $ 18.0 $ 18.0 $ 18.0 Million
Opex per day $ (9,000) Million Million Million Million Million
$ $ $ $ $
(3.3) (3.3) (3.3) (3.3) (3.3)
Million Million Million Million Million
Capex DD / SS $ (5.0) Million
Net $ $ $ $ $ $ $
(5.0 13.2 14.7 14.7 14.7 14.7 10.0
Case Case33– Identical Rates in Year One Followed by Decline in Tanker Rates for Years Two Through Five Assume conversion cost is $25 Million Assume as an ore carrier, TCE below Capesize rates due to reduced lift
Earnings Matrix Year 1 per day Year 2 per day Year 3 per day Year 4 per day Year 5 per day
Ore Carrier
$
NPV @ 10%
27.4 Million
Earnings per day
Onhire Days
Year 1 Year 2 Year 3 Year 4 Year 5 Scrap $ Tanker Earnings per day
$
Ore Carrier Tankers $ 50,000 $ 50,000 $ 50,000 $ 20,000 $ 50,000 $ 20,000 $ 50,000 $ 20,000 $ 50,000 $ 20,000
Earnings 180 360 360 360 360 10
$ 9.0 $ 18.0 $ 18.0 $ 18.0 $ 18.0 Million
Opex per day $ (10,000) Million Million Million Million Million
$ $ $ $ $
(3.7) (3.7) (3.7) (3.7) (3.7)
Million Million Million Million Million
Capex CONVERSION $ (25.0) Million
Net
$ (25.0 $ 5.4 $ 14.4 $ 14.4 $ 14.4 $ 14.4 $ 10.0
NPV @ 10%
23.3
Million
Onhire Days
Year 1 Year 2 Year 3 Year 4 Year 5 Scrap $
Earnings 330 360 360 360 360 8
$ 16.5 $ 7.2 $ 7.2 $ 7.2 $ 7.2 Million
Opex per day $ (9,000) Million Million Million Million Million
$ $ $ $ $
(3.3) (3.3) (3.3) (3.3) (3.3)
Million Million Million Million Million
Capex DD / SS $ (5.0) Million
Net $ $ $ $ $ $ $
(5.0 13.2 3.9 3.9 3.9 3.9 8.0
case study : port everglades
PORT EVERGLADES CRUISE CENTRAL By Tony Munoz
It is winter in South Florida, and millions swarm in from around the
world to vacation in the Caribbean on the cruise ships waiting at their
berths in Port Everglades. For the residents of Fort Lauderdale, the sight of tourists crowding the streets, restaurants, shops and hotels means it’s another busy season. For the Chamber of Commerce and the cruise lines, the exuberant masses armed with pockets of credit cards and cash mean it’s yet another glorious season of revenues. But no matter what the perspective, there is no denying the world is in love with South Florida. Fort Lauderdale is known as the “Venice of America” because its Intracoastal Waterway, filled with expensive yachts, meanders throughout the city, offering breathtaking views of sprawling waterfront homes, the towering civic center, and the inviting white sandy beaches of ocean state parks. The swaying palms, aqua blue waters, pleasurable temperatures and world-class tourist amenities are just a few of the key ingredients in the Port Everglades’ success story. Travelers arriving at Fort Lauderdale-Hollywood International, a low-cost airport, can grab a $10-$15 taxi ride and be in the heart of the city or at the cruise terminals, about two 24 the maritime executive
miles away, in minutes. While Port Everglades is currently ranked as one of the three largest cruise ports in the world, in the next few years it will surpass Miami and Port Canaveral to become the largest on the planet. Phillip C. Allen, Port Everglades’ Port Director, and the “City Fathers” couldn’t be happier. Allen says the recently signed agreement with Royal Caribbean Lines (RCL) is the main reason Port Everglades will surpass Miami. RCL will “home-port” two new Genesis Class ships, currently being built in Europe, at Port Everglades. At 220,000 tons, each Genesis vessel can transport up to 6,000 passengers per voyage. RCL currently moves 700,000 pas-
sengers annually through the port. This is projected to increase to two million passengers with the scheduled deployment of RCL’s second Genesis Class cruise ship in the fall of 2010. Under RCL’s agreement with the port, 2,094,952 passengers are guaranteed annually beginning in 2012. Furthermore, because of the logistical advantages of the port, RCL is
case study : port everglades
case study : port everglades committing additional ships as well. In 2007, Port Everglades passed Port Canaveral as the number two multi-day cruise port in the world with a total throughput of 2.69 million multi-day passengers (embarking and disembarking). However, it expects slightly lower traffic in 2008 and the first half of 2009 because a few vessels are being redeployed back to the Mediterranean. That all changes in the fall of 2009 when the first Genesis ship comes online. In 2010, when the second Genesis enters the rotation and has been sailing for the better part of a year, Port Everglades will clearly be the number one cruise port in the world.
A few years ago, Port Everglades unveiled an ambitious Master/Vision Plan to the media, which included a monorail system to transport cruise passengers directly from the airport to the seaport. However, Allen states the monorail system is most likely not going to happen, at least in the near future, because it’s hard to justify building such an elaborate transportation system when folks can grab a $10-$15 cab ride to the port. Like most Florida ports, Port Everglades had an advantage over other U.S. ports when it was required to submit security plans to the Department of Homeland Security (DHS) in order to receive federal funds for security
upgrades after 9/11. During the late ‘90s, President Clinton had instructed then-Florida Senator Bob Graham to provide him with an official study and analysis of increased security needs at the state’s ports to stem the flow of illegal immigration and illicit drugs. Consequently, Port Everglades was one of the first ports in the nation to file for federal funding against possible terrorist attacks because all of the issues surrounding security upgrades had only recently been reviewed. Today, Port Everglades is a model of a wellmanaged security system. The port employs approximately 175 personnel from the Broward County Sheriff’s Office to staff the gates, hanthe maritime executive
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case study : port everglades dle crowd control at the cruise terminals, conduct vehicle, air and waterside patrols of the port complex, and provide background checks and badge issuance services for port workers. Additionally, Sheriff’s Office boats patrol the waters surrounding the port as does the U.S. Coast Guard, which, along with U.S. Customs and Border Protection (CBP), are all based within the port complex. The cruise lines also hire private security firms to manage their terminals and are required to file security plans
Nonetheless, MarEx pressed the issue. Given the fact that millions of people passed through the port each year, it seemed unimaginable that security could be so finite and controlled. Responding within the confines of public knowledge, Allen said that each passenger’s security begins when they purchase a cruise ticket and register with the cruise line. The next level comes at the airport, where passengers and their bags are thoroughly checked. Eventually, the passenger
with the Coast Guard. The port has weekly meetings with all security forces to discuss arriving commercial ships and what kinds of security alerts have been issued. Since 2001 the port has invested over $47 million in infrastructure, fiber optic networks, cameras, fences and other security measures, seen and unseen, in a layered approach to deterrence. The port and especially the cruise terminals are swept by security forces each morning before the ships arrive. In addition, uniformed sheriffs and private security forces are in place as passengers come and go from the terminals. “We have invested in every conceivable way to ensure the port is secured,” says Allen. “No one can say they’re 100 percent secure because you cannot know of all the threats. But we do weekly and quarterly threat assessments and make changes to our plans based on those assessments. We have a great responsibly to ensure our complex is safe for the millions of people who pass through it each year as well as for the commercial operators calling our port. It’s a responsibility I don’t take lightly.”
enters the port in a vehicle of some manner, which must pass through an armed sheriff’s check point where their cruise documents are again reviewed to ensure they are bona fide. Passengers must present a ticket and receipt at the terminal and go through a metal detector before boarding the ship. Allen also points out that all bags are security-checked again before the luggage is put on the vessel. Furthermore, all passengers disembarking a vessel are screened by CBP for customs and immigration purposes upon returning. The cruise line industry currently has about $30 billion worth of orders on the construction books. Allen states that the ships are getting larger, and the port is actually downsizing its berths from 11 to eight or nine longer berths capable of handling the new generation of mega-size cruise ships. By super-sizing the terminals, the port can now manage more efficiently the six thousand passengers the Genesis ships will throughput on each voyage. The Genesis terminal will be double the size of a standard berth and cost the port $37 million to reconstruct and support. Rather than
26 the maritime executive
11 berths handling 2,000 to 3,500 passengers each, the consolidation will help the port manage the increasing influx of people passing through the complex. Port Everglades’ diversity makes it one of the most unique ports in the nation. In addition to being a cruise line center, it handles petroleum products for over seven million people and all 12 counties in South Florida. It is also ranked 11th in the nation in terms of containerized cargo throughput (out of 360 ports in the U.S.). The port has increased its containerized cargoes by 20 percent over the last two years. Its strategic location has allowed for continued growth as a major interstate highway, I-595, basically ends at the port gates and intersects with I-95, I-75 and the Florida Turnpike. Just as passengers coming from the airport have less than two miles to go to get to the cruise terminals, so cargoes can also be easily transported to and from the port via a highly accessible interstate highway system. Currently, the rail system is about a mile offsite. However, Allen says the railhead will be brought into the port over the next six to ten years to accommodate intermodal transfers and reduce the number of trucks on the road. Allen states that the port’s short access to the ocean and the short transit to and from the terminals provide it with additional advantages over other seaports. The ability of a consignee to get his cargo off a vessel, through the screening process and onto a highway and, eventually, into stores is a remarkably easy and quick process at Port Everglades. He proclaims that companies increase profits through manageable “just in time” services. The ability to shorten deliveries and avoid longer in-warehouse cycles and inventories translates into lower prices for consumers and reduced costs for companies. It wasn’t that long ago that Port Everglades handled mostly South American tramps and Caribbean transshipments. Today, the list of global steamship lines has doubled and ships from China, the Far East, Europe and the Americas pass through the complex. In fact, during the port’s last fiscal year ending September 30, it handled 950,000 twentyfoot-equivalent units (TEUs). Allen shakes his head in mock lament saying, “Since the fiscal year-end, we’ve added Antillean Marine Lines, Maruba Line and CMA CGM as new services, which would have put us over my goal of one million TEUs for the year. But we are grateful for growth and will achieve the mark this year.”
case study : port everglades The port will bring another 40 acres into cargo terminal production next year. Allen also points out that the present terminals will receive additional investments in items such as new gantry cranes and improvements for higher container-stacking operations. In Port Everglades, union and non-union workers band together to move cargoes through the complex, and carriers can opt for union or non-union terminals. In fact, King Ocean’s “Seastar Terminal” employs hybrid dock services, which include the International Longshoremen’s Association (ILA) Union and nonunion yard operations. “The ILA understands that there is plenty of work for everyone at the port. As part of our economic study, which derived from our Master/Vision Plan and statewide analysis assessing petroleum products, general cargoes and passengers, it was made evident that we supported over 188,000 jobs in the state,” Allen said. “Within the county, we support 28,000 jobs directly and indirectly. The interaction the ILA has with our port, which also supports non-union workers, is indicative of how flexible and competitive they’ve become in a revenue-rich environment.” A prime example of the ILA becoming an “open-market” competitor is the decision by Antillean Marine Lines to move from a nonunion terminal in Miami, where it had resided for over 50 years, to Port Everglades Terminals LLC, a unionized marine terminal in Port Everglades. The union simply presented a competitive bid and won the business. Allen believes the union’s spirited flexibility is a primary reason East Coast ports are in a growth mode. The nation remembers when the West Coast union shut down Los Angeles and Long Beach by walking off the job and stranding billions of dollars of cargo. The federal government and mediators swarmed in to resolve the strike, but the U.S. economy suffered greatly at the hands of a few thousand workers. It was much like being held hostage by OPEC in 1973, and the steamship companies began looking for alternative routes and laissez-faire ports. Allen says that Port Everglades has benefited from shipping companies seeking less onerous environments for international distribution. Today, Port Everglades is the number one containerized cargo port in Florida and number 11 in the nation, in addition to being one of the top three ports in the world for cruise line passengers. Last year the port moved over 123 million barrels of refined petroleum products delivered by 732 tank ship calls. In fact, the
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case study : port everglades jet fuel used at Palm Beach International Airport, Miami International Airport and Fort Lauderdale-Hollywood International Airport is shipped through Port Everglades. Both Miami’s and Fort Lauderdale’s jet fuel is delivered by pipeline from the port. “Last year we handled almost 500,000 barrels of bio-diesel,” Allen offers. “In fact, some of our terminals are adding the ability to handle ethanol. The port intends to put a strategic emphasis on alternative fuels as part of an overall community commitment to environmental protection.” Phil Allen is excited about the future and enjoys working at a port complex with such diversity. To ensure cruise passengers coming to Port Everglades have the most enjoyable experience possible, customer service representatives at all the terminals are instructed to basically “hold the passenger’s hand.” If the taxis are backing up or a porter is not there to assist with baggage, a port representative will step in to assist and solve the problem. In fact, with the support of the ILA and the port’s franchised stevedores, the port just put 650 porters through a program called “SUNsational” training, which is the customer relations program the Greater Fort Lauderdale Convention & Visitors Bureau uses for taxi drivers
and hotel workers. Allen points out that the porters are usually the first people a cruise line passenger comes in contact with, and it just has to be a friendly experience. In the meantime, the local residents better get used to the influx of millions of people from around the world wanting to cruise the Caribbean and Panama Canal, because Allen’s primary mission is to make Port Everglades the number one cruise port on the
planet while moving up the ranks as a premium cargo complex as well. Port Everglades is blessed with easy access to the ocean for more efficient and faster port calls for commercial vessels. But the white sandy beaches, swaying palms, warm blue ocean and firstclass tourist amenities will continue to draw travelers from around the globe. And, to tell the truth, that’s why we locals live here! MarEx
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executive interview
Phillip C. Allen,
Director of Port Everglades
Phillip C. Allen has served as Port Director for Port Everglades Department of Broward County since January 2006. Prior to that, he was Interim Port Director in 2001 and 2002. Responsible for overseeing the port’s $117 million operating budget, he also headed the 1994 transition of the former Port Authority into a department of county government. Before joining the port, he served as Chief Financial Officer of Broward County for almost 20 years. MarEx: Today, Port Everglades is one of the largest cruise line ports in the world. What is the primary reason the port has grown into a preferred passenger hub for the industry? Allen: It is really a toss-up between “great location” and “customer service.” Port Everglades is centrally located to the Bahamas, Caribbean and Central America, which are all hot-spot travel destinations. Not to mention that South Florida is a vacation paradise unto itself with an increasing number of travelers extending their cruise vacations to spend more time in Greater Fort Lauderdale either before or after they sail. We also pride ourselves on providing outstanding customer service. Port Everglades has two full-time Cruise Services Managers who are onsite and ready to provide hands-on assistance to cruise line operations staff every time a ship comes into port.
MarEx: In 2009 Royal Caribbean Lines’ Genesis Class ships, which will be the largest cruise ships in the world, will use Port Everglades as their “homeport” for the Caribbean passenger season. First, how many passengers does each ship carry? And what was the main reason the port was chosen over Miami? Allen: Each of Royal Caribbean’s Genesis ships can accommodate between 5,400 and 6,000 guests. They will be 40 percent larger than the cruise line’s Freedom Class ships, which are already considered the largest cruise ships in the world. We believe that Royal Caribbean selected Port Everglades to debut their Genesis Project because our marketing and operations teams demonstrated that we are willing to make the necessary refinements to provide the cruise line and its passengers with the most enjoyable and
By Tony Munoz
30
efficient port services available. We are committed to the Genesis experience as are the executives at RCL. MarEx: What is the port’s current annual passenger throughput? In 2009, with the Genesis Class “ports of call,” will Port Everglades overtake Miami as the largest cruise port in the world? Allen: In Fiscal Year 2007 (ending September 30, 2007), a total of 3.4 million passengers moved through Port Everglades embarking and disembarking on approximately 1,850 sailings. Of those, nearly 2.7 million were sailing on multi-day ships, which is a 9.4 percent increase over the prior year. The first of the 220,000-gross-registered-ton Genesis ships is scheduled to begin sailing year-round from Port Everglades in the fall of 2009, with the second sister-ship to begin year-round sailings
executive
one year later. Each Project Genesis ship is projected to generate approximately 584,000 passenger movements annually at Port Everglades. By all estimates, Port Everglades should surpass the Port of Miami for the ranking of “Number One Cruise Port in the World” by 2011 after both ships have been sailing for a full year. Along with sister-brands Celebrity Cruises and Azamara Cruises, Royal Caribbean International will generate approximately 17 million passenger movements (embarking and disembarking) at Port Everglades during the first 10-year term of the contract. MarEx: A few years ago the port had a “mas-
a governmental photo ID and a cruise ticket. There is further screening at the cruise terminal where luggage is scanned and passengers pass through metal detectors like they do at the airport. Passengers encounter a multitude of law enforcement agencies once inside the terminals including the Broward Sheriff’s Office, U.S. Customs and Border Protection and the U.S. Department of Agriculture making inspections in the terminals. The U.S. Coast Guard also safeguards the waterways and makes certain all landside and waterside infrastructure meet security criteria. And, most importantly, the cruise lines have their
Each Project Genesis ship is projected to generate approximately 584,000 passenger movements annually…Port Everglades should surpass the Port of Miami for the ranking of “Number One Cruise Port in the World” by 2011 after both ships have been sailing for a full year. ter plan” that included a passenger mono rail from Fort Lauderdale-Hollywood International Airport to the cruise terminals and megapassenger complexes within the port. Is this program still on track? What impact has 9/11 security had on those plans? Allen: The Intermodal Center and People Mover project is in the second study phase. This means that the planners and consultants have researched various alternatives that stretch the gamut from an above-ground light rail service to a dedicated roadway for buses. All the alternatives have positive benefits and are designed to meet post-9/11 security standards, but some are more costly than others. Ultimately it will be up to the Broward County Board of County Commissioners to determine whether we pursue one of the suggested alternatives or try to improve existing transportation methods. MarEx: Obviously, the security in a cargo port is going to be much different than in a passenger port. Have there been enormous complexities associated with passenger security? What is the largest number of passengers the port has handled in one day? Allen: Passenger security is multi-layered. The first or outer layer is at our entrance gates where everyone entering the port must show
own security protocol. When Port Everglades set the world record for the highest number of cruise passengers to ever travel through a cruise port in a single day – more than 47,000 – we coordinated security efforts through all our law enforcement partners to ensure smooth sailing for all our guests. MarEx: Explain, within the confines of public knowledge, the security measures of managing cargo trucks, port workers and thousands of passengers passing through the port at the same time. Allen: The key to a successful security program is to maintain open communications between all law enforcement agencies and our tenants and port customers. The American Association of Port Authorities awarded a prestigious communications award to Port Everglades for its security awareness initiatives. The port’s campaign includes an eNewsletter, signage, flyers, hand-outs and industry meetings to discuss issues directly related to the customers’ lines of business. The Broward Sheriff’s Office, which is contracted to provide security at Port Everglades, is considered part of the staff, and officers attend weekly port staff meetings where concerns about balancing security with customer service are discussed openly.
interview
MarEx: How many cruise lines call the port, and how many passenger berths does the port maintain? Allen: Fifteen cruise lines call at Port Everglades, including two daily lines. The port has 11 full-time cruise terminals and one parttime terminal that is used periodically on busy cruise days. MarEx: With the Genesis Class being built at 220,000 tons, will the port be dredged? Allen: Cruise ships do not have a deep draft, and therefore dredging is not needed for cruise ships berthing at Port Everglades. However, Port Everglades is working with the Army Corps of Engineers to explore opportunities to widen and deepen the entrance channel and Intracoastal Waterway to accommodate larger cargo ships. MarEx: The port recently released its financial report to the media, which described new financial, tonnage and passenger benchmarks. Please provide us with an abbreviated version of the report. Allen: Total revenue for Port Everglades increased by 4.6 percent from $107.6 million in FY2006 to $112.5 million in FY2007. The port’s cruise, containerized cargo and petroleum business sectors made up approximately 74 percent of the port’s total revenue; other waterborne commerce including cruise passenger parking generated approximately 6 percent, and land-based commerce such as real estate and Foreign-Trade Zone #25 generated nearly 20 percent. Net assets grew by 22 percent, driven in large part by the 51 percent increase in net income of $14 million before capital contributions. The net income generated by the port is a revenue source for the planned capital improvements specified in the port’s Master/ Vision Plan. It reduces the amount of funds needed by external debt funding and results in lower overall interest costs and a healthy financial position. Not only did FY2007 represent a strong performance year but, coupled with the recent adoption of a new Master/Vision Plan, it becomes a new foundation for future growth. MarEx: How many jobs does the port support in the community? Directly and indirectly? Allen: Broward County’s Port Everglades generates approximately $17 billion worth of business activity and approximately 188,000 jobs (direct, indirect and induced) statewide that produce personal income of $6.4 billion, according to a new study by nationally recognized maritime research company Martin Associates. The study found that the port supthe maritime executive
31
executive
interview
ports approximately 11,000 direct jobs that produce personal income of $394 million.  The average annual salary for a person whose job is directly related to Port Everglades is $35,910. The majority of the statewide jobs, approximately 160,000, are related-user jobs, which are associated with manufacturing and distribution firms meeting product demands of various national and international consumers.  Port Everglades ranks as the 11th busiest containerized cargo port in the U.S. and is completing its fifth consecutive year of growth for containerized cargo. Local businesses receive approximately $2 billion in sales revenue from providing services to the cruise and cargo businesses operating from Port Everglades. Statewide, the cargo activity at Port Everglades, which includes containers, bulk, break-bulk and petroleum, created an additional $14.8 billion of economic output related to exporters and importers. The majority of this activity is associated with the port’s containerized cargo throughput. The cruise and cargo activities at Port Everglades also generate more than $589 million in state and local tax revenue, according to the study. MarEx: Your governing board, the Broward County Board of County Commissioners,
recently approved a new 20-Year Master/ Vision Plan for Port Everglades. What are the highlights? Allen: I’ll count them off for you: ■■Reconfiguration of berths to accommodate larger cruise, cargo and petroleum ships. ■■Construction of an intermodal container transfer facility (ICTF) to link to the existing
Florida rail system and reduce truck traffic on the roadways. â– â– Addition of an aggregate facility to import crushed rock. â– â– Replacement of the majority of bulkhead infrastructure within a 20-year period. â– â– Expansion of cruise terminals to allow for the new generation of mega-cruise ships.
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the maritime executive
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interview
■■ Carving out the Broward County Convention Center from the secure area of the Port. A bypass road will be added to allow convention attendees to access the Convention Center without having to go through a security gate. ■■ Implementation of roadway improvements to make traffic flow in the port jurisdictional area more efficient. ■■ Maintaining a safe habitat for the abundant manatee population that migrates to Port Everglades each winter. ■■ Improving the functionality of the sensitive environment in Westlake Park, including the mangroves, sea grass and wetlands that support the park’s wildlife. ■■ Implementation of a “Green Port Program” to manage the port environment through integrated decision-making with port operations, tenants, customers and the general public. MarEx: Let’s talk cargo. How many shipping lines call the port and name the trade lanes served? Allen: More than 20 shipping lines call Port Everglades, which is just two miles from the Atlantic trade lane and feeds directly into the Caribbean and Latin America. MarEx: How many commercial berths does
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the port maintain? Does the port have available property for expansion and, if so, what increased throughput will be gained? Allen: The port’s 32 berths currently available are divided among the seaport’s three areas of operation – Southport, Midport and Northport. Total berthing space measures 25,222 lineal feet (7,622 meters). Currently in Southport, where the majority of Port Everglades’ container terminals are located, the 40-acre Phase VIII parcel is being developed with pavement, drainage and lighting to make way for more container terminal area. Port Everglades is also somewhat unique in that, whenever possible, we try to use berths for both cargo and cruise operations, which enhances our efficiency. MarEx: Port Everglades provides many essential products for the communities of South Florida, including refined petroleum products. Please explain how petroleum moving through the port impacts the region. Allen: In addition to produce from Latin America such as bananas from Costa Rica and various fruit from Chile, and apparel, building materials and electronics from China, Port Everglades is the regional seaport for 11 petroleum terminal operators. These private operators supply gasoline, jet fuel, fuel oil, diesel
fuel, propane, aviation gasoline and asphalt to 12 counties in South Florida, serving a market of 6.8 million people. Petroleum products moving through Port Everglades’ docks account for nearly 40 percent of all Florida’s transportation fuels. In addition, jet fuel moving through the port is supplied to three international airports in the region. MarEx: In the final analysis, how is Port Everglades positioned for the 21st Century in terms of growth and becoming one of the most important commercial ports in the United States? Allen: It is an exciting time to be part of the growth at Port Everglades. Broward County commissioners recognize that along with this growth comes the responsibility of finding a balance between financial stability, capital development, environmental stewardship and security operations. We know this is achievable. The new Port Everglades Master/Vision Plan plots a course for how we can expand and enhance existing facilities in the most economical and efficient manner while staying true to reaching that delicate balance. We are all committed to ensuring a sustainable economic engine at Port Everglades. MarEx
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34 the maritime executive
executive
interview
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Big Things on the Horizon? CEO Chuck Raymond Is Bullish on Short Sea Shipping – and Horizon Lines Defining Short Sea Shipping: Beyond Buzzwords If last year truly marked the revival of the “short sea shipping” concept in the United States, then some of that credit can be placed squarely on the shoulders of Chuck Raymond, President and CEO of Horizon Lines. As the U.S. Maritime Administration (MARAD) and Maritime Administrator Sean Connaughton began to talk up the pressing need to make “America’s Marine Highway” a reality, there was real excitement in the maritime community for the first time in many years. But making short sea shipping a viable concept – long after it was first conceived as an idea – will take more than idle talk. Perhaps that’s where Chuck Raymond and Horizon Lines come in. Fresh off its recent acquisition of a new company, Aero Logistics, Horizon Lines appears to be poised to take advantage of the new synergies presented by this nascent partnership. The deal is more than an exciting move with an exciting company. Chuck Raymond explains, “The logistics opportunities out there are just huge. Globally, that translates to over a trillion dollars.” Raymond insists that today’s logistics opportunities are spread over the many types of functions that logistics companies are focused on – truck and rail, contract logistics and/or freight forwarding. “There aren’t many companies out there that do all of these things,” he continues, “and I’m not saying that we are going to do that – but we are going to invest in a way that allows us to find the ‘profit zones.’” 36 the maritime executive
In terms of Aero Logistics and perhaps other acquisitions, Horizon Lines eventually hopes to create a more complete intermodal link and thereby complete the supply chain. But even without its new acquisition, Raymond insists that Horizon is already positioned to do just that: “We have a pretty good-sized logistics company inside of Horizon today. When you add up all that we do in terms of purchasing truck services and rail services for our vessel customers, that’s probably a $160-to-$170 million core base right there. Then Aero is a $40-million base company. And then you take our information technology at Horizon Services Group, where we are building systems and implementing them for commercial interests as well as government entities. You add all of that up and that’s a $220-million core business that we can further build on.” In the end, Horizon’s strategy involves using free cash to obtain new capabilities and from there creating what Raymond calls an “economy of scale.” It is likely that no one is watching the activities of Horizon closer than MARAD’s Connaughton, because America’s Marine Highway or short sea shipping or whatever you want to call it is about connecting the ships to the trucks and eventually taking the cargo off the road and back onto a maritime platform. Chuck Raymond is, above all things, pragmatic about the possibility of making short sea shipping anything more than a play on words. “First of all,” he says, “when people began talking about short sea shipping seven
By Joseph Keefe
or eight years ago, there was confusion as to what it truly was. Like any other business, the first thing you have to do is identify your market and then segment your market – and that has not happened as of yet in terms of short sea shipping, to the best of my knowledge. I have encouraged the Maritime Administration and the DOT to spend some resources to define that market.”
America’s Marine Highway: The Horizon Model According to Raymond, there are three separate and distinct opportunities when it comes to short sea shipping. And not everyone is going to be happy with his analysis. Raymond advocates, for starters, moving the ubiquitous 53-foot trailers off the highways. He readily admits, however, that this will be a difficult thing to do with existing domestic marine assets: “Our facilities aren’t geared for that; ships are not available that are equipped for it and, finally, the risk capital just isn’t there to make it happen right now.” Couching the argument in terms of ridding the highways of unnecessary traffic, Horizon’s CEO maintains that the logical solution is to move freight from the highways to the waterways. But he concedes, “The solution is not at hand right now. We also don’t have the government programs in place to back up that risk capital for someone looking to solve the problem. That will change, and it will change for one simple reason: citizens are going to vote the trucks into the right-hand-lanes; they’re
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going to have them out of the school zones, stop them from running during peak commuter times.” He points to a similar evolution on the railways and says that this is eventually going to happen on the highways as well. Raymond’s second market or “opportunity,” as he calls it, is marine containers. “I’m talking about the international ISO marine containers that are moving in and out of this country by ship. Many of these are moving along I-95, I-10, I-5 and other coastal highways and creating congestion. There is an ability to move a lot of that freight – and many of the empties as well – on vessels. Now, we do have those ships. Our company has three of them – and I’ve talked about this before – we’re getting ready to put them into service.” In order to make this happen, though, he says that reforms in the Harbor Maintenance Tax have to be achieved. He calls the tax “the disincentive to use the marine highways.” Today, freight moves into U.S ports by vessel and then goes out the gates to the intermodal connectors and congests the highways and railways extending up and down the three American coastlines. Using smaller feeder vessels, Horizon hopes to take that freight and put it onto another marine vehicle and evacuate it out of the marine facility quickly and then on to its ultimate destination. Raymond says the model is especially applicable on the U.S. East Coast, where deepwater ports are the exception rather than the rule. Depths of 50 feet are rare, and most places are still doing government studies to dredge down. Horizon’s CEO insists, “Even if they can get it done, it is going to be a huge, huge investment by the country in terms of infrastructure. Personally, I think that we have other infrastructure needs in this country to attend to other than to dig every harbor on the Atlantic Coast down to 60 feet. I just don’t see that. So the new generation of container ships is going to go into places like New York and Portsmouth, Virginia and then feed cargo up and down the coast from those hub sites. That’s the second market: the international marine container.” Chuck Raymond talks of a third, less visible market as well. He’s talking about passenger ferries: long- and short-distance passenger ferries that by and large do not exist in the United States. Raymond envisions marine platforms fitted with a relatively simple shipto-land interface. Unlike the smaller ferries commonly seen on the U.S. East Coast today, these boats would run on a very tight schedule: not 15 miles across a river but 700 or 800 miles and with higher speeds and more
efficient propulsion. He laments, “It’ll be just a huge investment and I just don’t see anyone stepping up to that. The studies say that where it has been successful – Greece, the Scandinavian countries, for example – about 75 percent of the revenues come from passengers. It’ll be like the ‘auto-train’ on water, if you will.” He could be on to something. And one place where, in fact, it has been highly successful in the United States is on the Bridgeport, Connecticut to Port Jefferson, Long Island ferry where literally thousands of trucks have been removed from the congested I-95 corridor over the past few years.
Less Talk, More Action Horizon’s plans are simple. Chuck Raymond explains, “We’ll start out by moving those marine containers first. We have the ships; we have the marine facilities and it doesn’t require anything unusual. We have depreciated assets, so if we can’t make that work with those combinations, then the whole issue of waterborne commerce as an alternative to moving cargo on the highways is something we ought to quit talking about. So, three points: the government needs to do more in the way of sponsoring market studies to show what is out there and what the issues are; two, identify that market and segment it; three, if you recognize that there is an opportunity out there, then put the right programs in place to facilitate it happening, which is the role of government.” One way to facilitate action will be to reform the Harbor Maintenance Tax. Accord-
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Horizon Lines CEO Chuck Raymond
ing to Raymond, maintenance dredging of harbors in the 331 ports of the United States is accomplished via an assessment on cargo coming into the United States from foreign locations. A very small tax is assessed against the beneficial cargo owner by U.S. Customs. That money goes into the Harbor Maintenance Fund. Unfortunately, when cargo is moved into the port of New York, for example, a harbor maintenance tax is paid; but if it is moved again to Boston, the fee is paid once more. Cargo shipped up to Boston via rail or truck doesn’t incur that second tax. On the import side, there is little argument – or doubt – that it will stay. Bob Kunkel, Chairman of the Short Sea Shipping Cooperative Program, told MarEx in January, “We need to eliminate the ‘double dip’ aspect of that tax.” As MarEx went to press with this edition, bills in both the Senate and House were in committee, being marked up.
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Horizon’s Domestic Fleet: Also Delivering in International Markets Horizon’s 21-ship fleet is entirely U.S.flagged and, naturally, Chuck Raymond is a big proponent of the Jones Act. With five new ships, including the recently delivered Horizon Hunter, Horizon Lines is one of the nation’s leading domestic ocean shipping and integrated logistics companies comprised of two primary operating subsidiaries. Horizon Lines, LLC operates a fleet of 21 U.S.-flag containerships and five port terminals linking the continental United States with Alaska, Hawaii, Guam, Micronesia and Puerto Rico. Horizon Logistics, LLC offers customized logistics solutions to shippers from a suite of transportation and distribution management services designed by Aero Logistics, information technology developed by Horizon Services Group and intermodal trucking and warehousing services provided by Sea-Logix. Horizon’s five recent fleet additions have been in service since late May, running in a 35-day roundtrip rotation between Tacoma, Oakland, Hawaii, Guam and Yantian, China, massmaritime50isl 8/16/07 10:12 AM Page 1 Hong Kong and Kaohsiung, Taiwan, and back. The international piece of that business is an
interesting one for Horizon Lines. Chuck Raymond explains, “We chose to wholesale our space in those markets. We entered into a longterm agreement with Maersk back in 1999 and that agreement continues today. Every couple of years, we sit down and make sure we’ve got it right. In fact, we just renegotiated it again last year. So what we do now is use the vessel capacity westbound ourselves, and eastbound we wholesale the slots to Maersk. They buy the slots from us, eastbound from Asia to the U.S., every week. It’s a very good arrangement for us. We don’t need to have the infrastructure in China, the sales force, the operations personnel, or our own equipment. We do all of that through and with Maersk.” He also says, “So while we’ve capped the upside, we’ve also capped the downside.”
Eyes on the Prize: The Short Sea Shipping Intermodal Solution With the international side of the equation seemingly in good shape for Horizon, Chuck Raymond naturally turns his attention back to his quest to invigorate short sea shipping. And here is where the conversation got interesting. Horizon competes with Trailer Bridge in at least one market – the Puerto Rican trade
– where Trailer Bridge bases an enormous amount of what it does with the 53-foot container on the premise that the 53-footer is the over-the-road choice right now. The company maintains that it gets more into the container, which is consequently more efficient and better for the environment because more freight is moved by a single, ecologically enhanced truck engine. But Horizon isn’t buying into the 53-foot argument. Instead, the 40-foot container and the lesser-known or understood 45-footer are its weapons of choice. A 45-foot box is really a 40-footer with two-and-a-half feet added on both ends and an additional set of corner posts and corner castings. These units can be locked in either way and, according to Chuck Raymond, can be stowed in a hatch built for 40-footers or put in a hatch for 45-footers. Raymond explains, “Most ships today have enough room between the hatches to be able to store them that way. We have an incredible amount of 45-foot capacity on our ships. Probably 25 percent of our vessel capacity is 45-footers.” Beyond this, the Horizon business model relies so much on the 45-footer because it is the right-size box to both cube and weigh out the box. Raymond says simply, “You want to be full and down
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when you go to sea. Same concept here. And you have to comply with federal and state highway laws. Many times, with the 53-footer, we find that the box is frequently not cubed out or weighed out.” Economics aside, Raymond concedes that
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and other gases when you could be putting 40 or 50 of these boxes on a train, well, there’s no comparison. Or on a barge or a ship.” For certain cargoes, the 53-footer is probably king. If you are loading diapers into a 53-footer, then that’s probably a pretty good
Horizon isn’t buying into the 53-foot argument. Instead, the 40-foot container and the lesser-known or understood 45-footer are its weapons of choice. from a trucking standpoint the 53-footer can be very efficient relative to smaller boxes. He also counters, “The railroads don’t want them. They want to double stack and the weights won’t allow for that. Consequently, the rates on a trailer by rail are very high, and they are going to go higher. Trucks are going to serve 200 to 300 miles around a port. After that, you are talking rail. So your 53-footers are okay for short haul, but not long haul. The ecological argument for the 53-footer is just plain wrong. Using a truck to haul one of these things, spewing out CO2
cubic stow and weight plan. But if you are trying to load tin plate or beer, then it is likely that the box will weigh out well before it cubes out. Raymond asserts, “The 53-footer is not a universally accepted box – they don’t accept them in Europe or anywhere else. And there’s a reason for that: you don’t have the infrastructure, bridge clearances, lane turns or highways to support that overseas. And there are no 53-foot reefers. I don’t get it, frankly. It sounds good, but in practice it’s just not efficient.” In October he substantiated the argu-
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ment by putting his money where his mouth was and purchasing 1,200 new 45-foot shipping containers. In fact, Horizon has ordered 2,200 new dry containers, including the new 45-foot dry containers and 600 new 40-foot high-cube boxes, since the beginning of 2007.
Managing the Future: Roots and Experience Leading the Way Today’s Horizon Lines is focused on two primary areas: managing and improving the Jones Act business to a “best-in-class” status, and growing an enviable logistics capability for its customers and shareholders. Raymond claims that Horizon will accomplish this through its only modestly leveraged position and with the guidance of a strong Board of Directors that includes industry veteran Norman Mineta (former Secretary of Transportation for many years) and Admiral Vern Clarke (former Chief of Naval Operations). Raymond gushes, “Half of those on our Board of Directors qualify as financial experts under the SEC rules, and 75 percent of them have served as public company CEOs. That board covers the broad spectrum of military logistics, government and private sector knowledge. So I’m thrilled about where the company is right now.”
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In the end, Horizon’s roots in the domestic marine transportation market are deep. In the past, it managed Ready Reserve vessels for MARAD, and today it is in year three of a seven-year contract to manage seven ships for the Navy through the Military Sealift Command. There’s every reason to believe Horizon will continue to remain involved. Raymond explains, “As far as MSC is concerned, as a domestic carrier we can’t participate. On the international routes, we can. As billets open up there, we’re going to be looking at opportunities. All of our ships are participants in the VISA (Voluntary Intermodal Sealift Agreement) with the U.S. Transportation Command. Additionally, we have been installing information protocols with U.S. Customs and Border Protection in terms of security arrangements. We don’t talk much about it, but we are active in that way as well.” Chuck Raymond has been Chairman of the Board of Directors of Horizon Lines for about a year. As with any newer enterprise that also entails an initial public offering (IPO), there are ups and downs on the journey. Raymond, nevertheless, is candid about where they’ve been and where they hope to go next. “We had to take the components of the company that formed the basis for Horizon Lines, when we split them out, and shrink down some of the management costs, etc. We’ve gone through two helpings of private equity – taking out money and leveraging the company – and we needed to be financed with public funds and manage our own cash going forward. And I think that’s the biggest difference. We’ve made the transition, successfully, from being imbedded in a large transportation conglomerate to being a true, independent, publicly traded, very successful transportation company.” Horizon’s ship management people, by and large, come from Sea-Land where they managed as many as one hundred ships before Horizon was split out. Along the way, Horizon has built more than a few and converted a few more. Beyond this, Raymond cites extremely detailed plans on how Horizon is going to refurbish and/or replace its fleet going forward. Says Raymond, “It will involve technology transfer between U.S. and foreign shipyards. We will be advocates of Title XI loan guarantees, and we’ll be talking about that in more depth after the first of the year. We want more of a homogenized fleet. Right now, we’re operating a number of different platforms including C-6s, C-8s, SL-18s, C-9 (LASH) and D-7s. We’ve got all kinds of different shapes and sizes of ships. Imagine the training, docu 40 the maritime executive
mentation, spare parts requirements and the varied knowledge of the crews!”
A Critical Juncture While Raymond remains bullish on the future of Horizon Lines and, perhaps more importantly, the future of American participation in the worldwide commerce game, he also knows that much of this will hinge on legislative reforms currently under consideration by Congress. As such, he says, “We’d like to operate Horizon Lines going forward as much more of a Southwest Air group. One or two kinds of engines with similar speeds and capacity, allowing U.S. shipyards to build a standardized class of vessel, and letting us take advantage of the economy of scale there. That will also make U.S. shipyards more efficient, and that expertise in turn helps the military with its building requirements. I believe we can build ships in the U.S. and build good ships, but we’ve got to do it the right way.” In late December, Horizon’s prospects in at least one aspect of its trading patterns brightened considerably when the tax committees in Congress chose to strike the Puerto Rico tonnage tax repeal language from the Technical Corrections Act legislation passed by Congress. The original intention of the tonnage tax election as an alternative to the corporate income tax was to encourage investment and job creation. That tonnage tax – in effect since 2004 – reduced the tax burden on U.S.flag carriers in the Puerto Rico trade and ultimately enhanced Horizon’s ability to explore the initiating of short sea shipping operations on the East Coast of the United States. Still pending are measures to reform the Harbor Maintenance Tax and the continued funding of the Title XI shipbuilding program. Passage
of either or both would potentially provide a significant boost to any coastwise operator and provide broad incentives – and not just to Horizon Lines – for many players to begin to compete in the short sea arena. In advance of any additional good news, specifics about Horizon’s future short sea shipping plans are scarce. But the value of the service would be undeniable to international carriers looking to move their cargoes in a more cost-efficient manner once that cargo reaches its first U.S. deepwater port. Absent the Harbor Maintenance Tax on the short sea legs, most industry observers say that Jones Act shippers could realistically compete with trucks and railroads along the same routes. And the potential removal of literally thousands of trucks from the coastal interstate highway system has to be sweet music to the ears of MARAD Administrator Sean Connaughton and his boss, highway guru and Secretary of Transportation Mary E. Peters. With the cost of highway construction and dredging to achieve deeper port access both skyrocketing, the time for short sea shipping is finally here. Realizing the dream will be a far more difficult goal than conceptualizing how to do it, however. When Horizon Lines, Inc. releases its results for the 2007 fourth quarter before the opening of the market on Friday, February 1, 2008, this edition of MarEx will have already gone to press. What it discloses then is probably less important to the big picture of developing the real “American Marine Highway” than what Congress is also contemplating during the same time frame. Chuck Raymond will play a big role in both matters. How all of that plays out will ultimately affect American commerce for decades to come. MarEx
criminal
enforcement
Environmental Criminal Enforcement
A Record-Setting Year in Review, Troubling Trends and Future Opportunities By Jeanne M. Grasso and Gregory F. Linsin
Overview Criminal enforcement of environmental laws has evolved significantly over the last 15 years with the maritime industry becoming a prime target. This evolution has not only taken place in cases involving intentional MARPOL violations, but criminal investigations have also become a predictable component of the response to significant maritime casualties involving oil spills. This is not news to maritime-industry watchers, though 2007 was a banner year for enforcement actions, including several precedent-setting prosecutions. In criminal maritime cases, companies and individuals are prosecuted not only for the underlying substantive environmental violations but also for post-incident conduct involving false statements and obstruction of justice. The substantive environmental crimes range from misdemeanors, based on negligence or strict liability, to felonies, premised on evidence of knowing conduct. In almost all of the maritime environmental prosecutions, the focus is on those crewmembers, shoreside managers and companies responsible for the illegal discharges or for the falsification of the ship’s records to conceal such discharges. The vessel owner or operator can be found criminally liable if the employee who committed the violation was acting within the scope of his authority and believed he was acting, even in part, for the benefit of the company. Corporate criminal liability can attach even where the employee acted in contravention of company policies. Shoreside corporate officers with managerial authority over the activities giving rise to the violation can also be held liable if they had actual knowledge (or avoided knowledge) of the criminal activity and failed to prevent it from occurring. These theories of liability put corporate officers and senior managers at risk of criminal liability should violations occur.
2007 – The Year in Review Criminal Prosecutions Based on Intentional Conduct Despite scores of prosecutions and hun 42 the maritime executive
dreds of millions of dollars in criminal fines, plus multiple prison sentences levied against shoreside and shipboard employees over the last 15 years, intentional MARPOL violations continue at a record-setting pace. In 2007, a record 34 new cases alleging intentional MARPOL violations were filed; there were at least 15 separate convictions of companies for MARPOL offenses and numerous convictions of individuals involved in those cases. The sentences imposed often resulted in prison terms for individual defendants, and criminal penalties levied in 2007 alone exceeded $64 million dollars. Several of the 2007 cases were precedent-setting. Overseas Shipholding Group, Inc. paid the highest criminal fine ever for MARPOL violations – $37 million for violations involving 12 vessels in six jurisdictions. Petraia Maritime Ltd. was the first company convicted after a jury trial and was sentenced to pay $525,000 for MARPOL violations. Ionia Management was convicted a second time after a jury trial and was fined $4.9 million. Shortly after this second conviction, Ionia was cited for violating the terms of its probation when it failed to install specialized dischargemonitoring equipment aboard one of its ships in advance of calling on a U.S. port. In another first, Rowan Industries pled guilty to three felony counts and paid a $9 million criminal fine in connection with the discharge of pollutants from a Mobile Offshore Drilling Unit operating on the Outer Continental Shelf. And finally, Athenian Sea Carriers was the first company to be acquitted after a jury trial, along with a chief engineer and second engineer.
Criminal Prosecutions Based on Negligence and Strict Liability Although not premised on environmental offenses, two recent cases continued a related trend of charging violations of the Seaman’s Manslaughter Statute, a felony offense based on simple negligence, in the wake of marine casualties involving fatalities. These two cases charged violations under the same statute, but the results were dramatically different. In United States v. Schröder, the indict-
ment stemmed from an incident where the Zim Mexico III allided with a shoreside crane as the ship was deberthing. The allision caused the crane to collapse, resulting in the death of a dockside electrician. The Master of the vessel was charged with violating the Seaman’s Manslaughter Statute. The government contended that the Master was negligent because he failed to advise the pilot that the ship’s bow thruster had previously malfunctioned and failed to arrange for an assist tug. The Master was found guilty and the judge, concluding that the Master was a flight risk, ordered him to report to jail. At sentencing, after the Master had spent four months in jail, the judge stated “[w]hile I certainly do not discount the terrible consequences that have resulted from this negligence, what he has been convicted of is really a civil offense.” She sentenced him to time served and ordered his immediate release from prison. The prosecution in United States v. Oba produced a very different result. As the charter fishing boat Sydney Mae II was returning from a fishing trip off the Oregon coast with four passengers aboard, sea conditions deteriorated. The Coast Guard established a restricted zone around the mouth of the Umpqua River and prohibited uninspected vessels from crossing the Umpqua River Bar. Although he was advised that the bar was hazardous and that he should not attempt to cross it, the captain approached the mouth of the Umpqua River. The boat was struck by a large wave and began to break apart. The captain was the only one wearing a life jacket, and three of the four passengers perished. The captain was charged with three counts under the Seaman’s Manslaughter Statute and ultimately pled guilty. At sentencing, the judge found that the captain acted recklessly in entering the restricted zone and in failing to ensure that his passengers were wearing life jackets. As a result, the judge departed upwardly from the federal sentencing guidelines and sentenced the captain to six years in prison. An appeal of the sentence is currently pending before the 9th Circuit.
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Most disconcerting, however, for the maritime industry during 2007 was the Selendang Ayu prosecution, a troubling use of criminal sanctions in the aftermath of an oil spill. Prior to 2007, the federal government had filed criminal charges in connection with only four marine casualties resulting in major oil spills – United States v. Exxon; United States v. Rivera (T/B Morris J. Berman); United States v. Eklof Marine Corp., Inc., and United States v. Bouchard Transportation Company. In each of these cases the government either proved at trial or required the defendant to acknowledge in a plea agreement that the discharge of oil was the proximate result of the defendant’s negligence, constituting a misdemeanor offense under the Clean Water Act (“CWA”). Although certain of these earlier cases also included strict liability charges, until this past year no criminal prosecution had ever been brought for an oil spill event based solely on strict liability offenses. In United States v. IMC Shipping Co. Pte. Ltd., the operator of the Selendang Ayu pled guilty to three strict liability offenses in connection with the oil spill that resulted when the bulk carrier ran aground and sank off the north coast of Unalaska Island. The grounding
occurred after three days of repeated attempts by the crew to restart the ship’s main engine, halt the vessel’s drift by use of its anchors, and attach a tow line to the ship so it could be pulled further out to sea. In the plea agreement, although the government states that it believed it could have charged a negligent violation of the CWA, IMC “disputes that the grounding . . . was the result of any negligence on the part of IMC or any of its affiliates or agents.” Despite this factual dispute and despite commending IMC for its cooperation, IMC was required to pay a $10 million criminal fine for two violations of the Refuse Act (discharging soybean cargo and bunker fuel) and one violation of the Migratory Bird Treaty Act (killing hundreds of migratory birds).
What to Expect In the Future? Enforcement Trends Likely to Intensify Beyond the statistics noted above, several other recent developments indicate that the rate of criminal enforcement actions involving the maritime industry will likely continue to increase. One such development is the increasing level of communication among port States concerning suspected MARPOL violations.
enforcement
For example, the OSG prosecution referenced previously was initiated after the Coast Guard received a referral from Transport Canada indicating that the records aboard one of OSG’s ships revealed improper disposal of bilge water. That tip eventually resulted in the multi-district criminal prosecution involving guilty pleas to 33 felony violations. Additionally, in the Ionia prosecution this year, the government introduced testimony from a representative of the Netherlands Royal Military Police regarding an earlier MARPOL violation involving a different Ionia‑managed vessel in Dutch waters. Enforcement successes such as these, coupled with the increasing attention being paid to the broader issue of vessel pollution enforcement by key port States, is likely to intensify coordination among cognizant law enforcement agencies from the major port States. This past year, as the Canada Shipping Act, 2001 came into effect, Canada joined a growing list of countries that have enacted new legislation to enhance their enforcement capabilities against vessel-source pollution and to increase the penalties for violations. In a ruling last fall, the European Court of Justice annulled the Council Framework Decision 2005/667/JHA both on procedural grounds and because it
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criminal
enforcement
sought to legislate the type and level of criminal sanctions for ship-source pollution. The future of the Framework Decision remains uncertain, though, pending a ruling by the Court of Justice on a related challenge brought by INTERTANKO and others based on international law principles. Meanwhile, in a ground-breaking decision, a French court has found the cargo owner, the classification society, and the vessel owner and manager in the Erika case criminally liable and civilly responsible based on a finding that their inadequate vetting of the vessel constituted an “error of imprudence.” On another front, the international regulation of air emissions from ships is gathering momentum. Annex VI of MARPOL, which sets international standards for nitrogen and sulphur oxides emissions from ships, entered into force in 2005, and implementing legislation is expected to be enacted in the United States later this year. In a related development, the EPA has issued proposed regulations which would impose stringent exhaust emission standards for marine diesel engines on U.S.-flag and foreign-flag ships, generally consistent with Annex VI. The California Air Resources Board has adopted its own regulations governing air emissions from vessels. Although the CARB regulations have been challenged on preemption grounds, they are currently in effect pending a ruling from the 9th Circuit. These regulatory initiatives regarding air emissions from ships all have ship certification and detailed record-keeping requirements, documentation that will certainly be scrutinized closely by interested port States.
Steps to Reduce Risks of Enforcement Actions One of the lessons to be learned from the recent criminal maritime prosecutions is that the effective implementation of an Environmental Compliance Plan (“ECP”) can reduce the likelihood of port-State detentions, including criminal investigations and prosecutions, for environmental violations. Over the past decade, scores of companies convicted of MARPOL violations have been required to implement court-monitored ECPs as a condition of their probation. These ECPs, covering hundreds of ships, have typically involved comprehensive third‑party auditing of environmental compliance practices aboard the ships. It is telling that, despite this intensive scrutiny, only two companies (Boyang (Busan) Ltd. and Ionia Management) were found to have committed new environmental violations while on probation. This record suggests that 44 the maritime executive
the implementation of a robust ECP, one that incorporates elements of managerial oversight and independent verification, can improve the culture of compliance within a maritime company and reduce the risks associated with non-compliance. In a development that holds promise for reducing the incidence of criminal referrals, the Coast Guard recently issued its Voluntary Disclosure Policy (the “Policy”), which is designed to “encourag[e] regulated entities to voluntarily discover, disclose, correct, and prevent violations of Federal environmental requirements.” The Policy is modeled closely on environmental disclosure policies issued previously by the DOJ (1991) and by the EPA (2000). It is designed to create incentives for self-policing and to help regulated companies avoid criminal enforcement actions if they discover non-compliances through internal auditing procedures and voluntarily disclose the results. To qualify for participation in the Policy and potentially gain the benefit of a Coast Guard decision not to refer a disclosed non-compliance to the DOJ, a company must be able to document that it has previously implemented a Compliance Management System (“CMS”) involving clear compliance policies, the assignment of responsibility for overseeing compliance, mechanisms for assuring that compliance policies are being carried out, training programs and personnel policies designed to foster compliance, and the adoption of procedures for the correction of violations. If a company identifies a violation through the operation of its CMS and decides to disclose it, the Coast Guard will consider a series of factors in deciding whether to decline to refer the matter to the DOJ. These factors include: whether the violation was discovered voluntarily; whether it was disclosed promptly, i.e., within 21 days; whether the company is taking steps to correct the violation, and whether the company cooperates with any follow-up investigation by the Coast Guard. While the Policy does not guarantee that a disclosed violation will not be referred to the DOJ, it represents an opportunity for vessel owners and operators to work more constructively with the Coast Guard to improve compliance. The elements of a qualifying CMS under the Policy are similar to the recommended practices in the new Shipping Industry Guidance on Environmental Compliance recently issued by the International Chamber of Shipping and the International Shipping Federation. The underlying message of
the Guidance is that a company can achieve enhanced compliance, and thus reduce the risk of enforcement actions, if it is prepared to manage its environmental obligations more actively and utilize appropriate mechanisms to verify environmental compliance.
Conclusion The government has broad discretion in determining whether to pursue criminal sanctions. The risk of criminal prosecution exists under various criminal statutes for any person or entity that the government concludes has knowingly or negligently violated the law. However, the policies that shape the exercise of prosecutorial discretion state that good faith efforts by a company to improve compliance before a violation is detected or a spill occurs will be recognized as a mitigating factor. Thus, it is prudent for vessel owners and operators to evaluate their environmental compliance status, both shoreside and shipboard, and consider implementing a CMS in accordance with the Policy. The exercise of the Coast Guard’s referral authority and the exercise of prosecutorial discretion are driven by the facts of the case, the perceived seriousness of the violation, and the extent of the prior efforts of the company to reduce non-compliance. By investing in the development and implementation of a CMS, a maritime company can reduce the overall risk of non-compliance and, in the event a violation is uncovered, be in a position to benefit from the opportunity afforded by this new disclosure policy. MarEx Gregory F. Linsin, Partner at Blank Rome LLP, brings over 25 years of experience as a federal prosecutor. He concentrates his practice on environmental criminal litigation and compliance counseling. He can be reached at 202.772.5813 or Linsin@BlankRome.com. Jeanne Grasso, Partner at Blank Rome LLP, focuses her practice on maritime, environmental, and transportation law for domestic and international clients. Ms. Grasso counsels owners and operators of vessels, cargo owners, and facilities, including manufacturing facilities, both marine side and inland. She can be reached at 202.772.5927 or Grasso@BlankRome.com.
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prevention, not reaction
SAFETY: The Unified and Uniform Approach American Maritime Safety Leads Through Prevention, Not Reaction In the summer of 1987 a loose consortium of deep-sea vessel operators got together to discuss the way forward in achieving a simple but critical goal: facilitating maritime industry compliance with Department of Transportation (DOT), United States Coast Guard (USCG) and international regulations and protocols. This seminal event resulted in what is now known as American Maritime Safety (AMS), Inc., a nonprofit trade association. The product of that early meeting is perhaps not remarkable in any particular way. That it occurred almost two years prior to the Exxon Valdez grounding certainly is. Established at the end of 1987, the entity was officially incorporated in early May 1988 and received its federal tax-exempt status in June 1988. It was the combined efforts of the Maritime Overseas Corporation (now OSG), Transoceanic Cable (Tyco), OMI, Sea-Land and Puerto Rican Marine that formed the early basis for what is now the largest nonprofit
maritime safety, prevention and education organization in the world. Later on, Crowley and Matson signed up. In the beginning, however, it was container giant Sea-Land who led the way, providing the driving force in the creation of the fledgling group. And although the original intent of the coalition was to keep it relatively small and focused on the deep-sea market, the AMS scope of influence extends today into virtually every facet of the maritime industry. Without a doubt, the economy of scale desired by the original founders in terms of all things relating to “safety” has been reached and in fact exceeded on a spectacularly exponential, rather than linear, scale. It all sounds good. Promoting “safety” is a concept that virtually everyone gives lip service to, but many fail to achieve in any meaningful way. What AMS has done, however, to transform the industry, which has always been recognized as one of the most dangerous on
By Joseph Keefe
the planet, is remarkable. The organization that has never solicited a single piece of business now administers – among many other things – a chemical testing program for a large segment of the U.S.-flag, deep-sea, Great Lakes, and tug and barge industries. This includes a pre-employment screening program for over 40,000 seafarers and a random chemical database that covers over 1,000 vessels pursuant to U.S. Coast Guard regulation, 46 CFR part 16, Section 16.230.
Education and Prevention Driving Compliance, Not the Other Way Around The primary goal of AMS is to facilitate maritime industry compliance with DOT and U.S. Coast Guard regulations. In the beginning, worries over compliance with mounting onerous regulatory requirements simply demanded a uniform, custom approach to the
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46 the maritime executive
prevention, not reaction problem. AMS provided that service with an approach that ensured that requirements were fulfilled each time, on time and, more importantly, in the correct fashion. Since then, AMS has evolved into so much more than that. In 1987, Louis Meltz was just one of a thousand young lawyers fresh from school when, as he says tongue-in-cheek, “I was in the wrong place at the wrong time.” Tapped to investigate and analyze the needs of a group of shipping companies, he couldn’t know then what was to follow. Nevertheless, he set about his appointed tasks, flying all over the country to meet with various regulatory personnel to discuss the issues. His travels even took him to Rotterdam during that early time, and through these efforts the seeds of the AMS way of doing things were sown. Meltz, now the President of AMS, freely admits, “I knew nothing at the time.” But Meltz did know the law. He and his colleagues immediately recognized the risks involved with marine transportation and began to implement a system of mitigating those risks. Somewhere along the way, the goal of simply meeting regulatory requirements became a “risk management” exercise. And AMS became very good at being risk managers.
While some in the industry look upon risk management as a function of insurance or even reinsurance, the AMS consortium began to define risk for its members in terms of education, prevention and, yes, representation. Louis Meltz explains much better than that, however: “A company with the right programs in place can mitigate and perhaps even eliminate damages. We call this a ‘preventative’ rather than a ‘reactive’ approach.” Ultimately, this and a low-profile approach to its mission have served the consortium well. Probably the most obvious physical manifestation of AMS can be seen through its more than 3,000 agents located throughout the United States, who can be counted on to board vessels and administer various regulatory requirements – including drug and alcohol testing – upon notification of a vessel casualty. Testing requirements, which can specify compliance within two hours of a casualty, have little room for error. But AMS members have never incurred a single arrest for non-compliance during the almost twenty years that AMS has provided service. When Exxon joined in 1995, the energy giant – to its ultimate credit – recognized the good being accomplished at AMS. More than
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Louis Meltz, President, American Maritime Safety
ten years later, that same trade organization caters to a wide variety of clients, over 400 in total. The deep-sea market still makes up the bulk (60%) of the AMS portfolio, but it has been joined by tug and barge operators (30%), Great Lakes operators (5%) and a handful of “Mom and Pop” marine concerns (5%). AMS memberships range from basic participation
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prevention, not reaction to a full “bells and whistles” treatment. All of them, regardless of their size or type of membership, receive the same uniform approach to risk mitigation. Anyone who has seen a recent AMS e-bulletin can’t help but be impressed by the depth of the client base as well as the breadth of material regularly being taught to company personnel. Whether it is “USCG Regulatory Training” at Reinauer or perhaps “Drug and Alcohol Training” at Marine Transport Lines, the scope of education being pushed by the AMS agenda is formidable. For this reason alone, the virtually unstained record of AMS clients is not surprising. Like Louis Meltz, the employees now know the law and, because they do, compliance is a secondary concern when prevention is the name of the game.
changes to the maritime regulatory climate, the yoke of compliance is not likely to get any lighter in the immediate future. And there are new challenges. The need to educate mariners and shipping operations people about issues such as discrimination, sexual harassment and general sensitivity training has finally reached the wheelhouse, thirty years after it swept through the boardroom. A crude and ribald ship’s Master is no longer the status quo on board most ships: he’s a serious liability. Coalition members are now looking for AMS to be in the forefront of new educational
efforts to protect their members against new liabilities and risk. Bob Miller is an attorney with Ocean Shipholdings, Inc. In the fourteen years he’s been employed at this long-time ship operator, Miller has depended on Louis Meltz and AMS to guide him through the regulatory labyrinth. He calls AMS “the gold standard in developing a very effective corporate drug and alcohol testing program.” Ocean Shipholdings was one of the earlier additions to the AMS fold. For Miller, the association has simplified the headaches associated with training, testing and the
More Than Advocacy: AMS Tackles a New Millennium Fraught With New Challenges As the twentieth anniversary of the inception of AMS approaches, the temptation for someone like Louis Meltz might be to put on the brakes and look back at past successes. But even Meltz knows that as tough as the past two decades have been in terms of
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prevention, not reaction database necessary to conduct all of that in an efficient manner. Although the size of AMS has changed over the years, he says service has not. “I’ve seen AMS grow by leaps and bounds, but I have always been able to pick up the telephone and call Louis. If he doesn’t pick up, he gets back to me in short order.” The AMS advantage is more than training and testing, however. Recently, and as ExxonMobil was preparing to plead its case regarding damage awards relating to the Exxon Valdez before the United States Supreme Court, AMS stood behind its member company and filed an amicus curiae (“friend of the court”) brief in the United States Supreme Court. The brief was in support of the position that punitive damages should not be assessed against a vessel operator/owner based on its determination not to exceed mandatory U.S. Coast Guard chemical testing requirements. In its role as a nonprofit trade organization, the advocacy that perhaps can only come from the strength of the AMS legal team shows still another side to the value of this unique organization.
No Room for Error When the Cosco Busan struck the Bay Bridge in San Francisco Bay last November,
industry executives were reminded not only that there is little room for error in the movement of cargo on the water, but also that there is even less leeway when it comes to the mandatory drug and alcohol testing requirements in the wake of such an event. Even as the media and industry critics assailed the alleged poor performance by local Coast Guard response teams, lost in all the criticism was the fact that it is the ship operator’s primary responsibility to ensure that testing is performed in a speedy and competent fashion. As the investigations continue, there are questions as to whether the owners of the vessel properly ensured that members of the ship’s crew were tested for drugs within 32 hours after the ship hit the bridge, as required by federal regulations. In the aftermath of the allision, the AMS team is fielding a flurry of new inquiries about its services, especially from international-flag operators. In the distant past, AMS catered to a primarily U.S.-flag clientele, but that is predictably beginning to change. As the risks associated with the transport of cargo in U.S. waters increase and become more sharply focused, more attention is correctly being paid by operators of flags of convenience to the
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complicated task of ensuring compliance with all federal regulations. To do otherwise potentially risks higher P&I premiums or, worse, loss of that coverage altogether. Today’s AMS deals directly with a wide range of players in the maritime industry, from the unions and ship operators to the U.S. Coast Guard and the regulatory advisory groups that help formulate policy. The AMS relationship with the Ship Operations Cooperative Program (SOCP) is just one example of that hands-on industry interaction. Later this year, at the AMS Annual Membership Meeting, AMS will celebrate its 20th anniversary of providing service to its member clients. The meeting will feature input from the U.S. Coast Guard and other policy makers. Perhaps the most important feature of AMS annual meetings is the exchange of information that takes place between member companies. It will be a crowded room. But there will always be room in Lou Meltz’s world for another company looking to achieve excellence in compliance. On the other hand, there is no room for error in the way AMS delivers on that promise. Just ask any member operator who has had to depend on it for any reason MarEx over the past twenty years.
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zero discharge
Zero Discharge: The Gold Standard in Black Water AJT/Agrimond’s Dragonfly Water Treatment System Virtually Eliminates Marine Wastewater By MarEx Staff The business of marine transportation is not necessarily known for its cutting-edge technologies and leading-edge breakthroughs in problem-solving. More often than not, improvements in how vessels operate, move cargo and otherwise advance the science of shipping tend to evolve from other sectors of business and are then eventually adapted for marine use. This metric is changing rapidly, however. American shipbuilding icon Boysie Bollinger last year told MarEx that “In the last five years, the application of technology within shipbuilding has been phenomenal.” Assuming this to be true and in an age when operating “green” is more than just a passing fad, nowhere has this been more important than in the area of environmental compliance. As an environmental issue, the treatment of sewage and so-called “black water” has been a headache for ship operators for as long as there has been the science to measure the impact of discharging untreated waste into the ocean and inland rivers. For this reason, the installation and use of marine sanitation devices (MSDs) have been mandated by regulatory authorities for decades. According to the U.S. Environmental Protection Agency (EPA), as of January 30, 1980, if a vessel has an installed toilet (technically referred to as a “marine sanitation device”), it must be one of three types. Figure 1 outlines the features and operating parameters of the three standard types of MSDs:
Closing the Overboard Valve Forever Until now, the treatment of on-board sewage fell into one of three categories, as described in Figure 1. All of these solutions had one thing in common: Eventually, and regardless of how it was treated, the black water had to be pumped off the vessel. All of that may be about to change, however. The successful installation on not one, but two large marine vessels of a wastewater system that reclaims 100 percent of all shipboard black water is about to set the marine industry on its ear. First retrofitted onto the Florida-based, paddle-wheel vessel Indian River Queen (IRQ) in early 2006, the AJT/ Agrimond Marine Dragonfly Water Treatment System has been in constant operation ever since. Remarkably, the vessel has not needed a pumpout or discharge from its black water system. The Marine Dragonfly System allows the vessel to continuously reuse wastewater, after treatment, to flush toilets and urinals. That it does so without the use of chemicals or other toxic substances makes it all the more remarkable.
How It Works AJT/Agrimond’s patented and protected Dragonfly Water Treatment System utilizes thirty different species of specialty biological bacteria, which allow for the fast consump-
Figure 1: Types of Marine Sanitation Devices (MSDs) ■■ Type I MSDs rely on maceration and disinfection for treatment of the waste prior to its discharge into the water. ■■ Type II MSDs are similar to Type I; however, Type II devices provide an advanced form of the same type of treatment and discharge wastes with lower fecal coliform counts and reduced suspended solids. ■■ Type III MSDs are commonly called holding tanks because the sewage flushed from the marine head is deposited into a tank containing deodorizers and other chemi 50 the maritime executive
cals. The contents of the holding tank are stored until it can be properly emptied at a shore-side pumpout facility. (Type III MSDs can be equipped with a discharge option, usually called a Y-valve, which allows the boater to direct the sewage from the head either into the holding tank or directly overboard. Discharging the contents directly overboard is legal only outside U.S. territorial waters, which is three or more miles from shore.) Source: EPA
tion and breakdown of waste material. The reclamation and disinfection of the water are done using oxygen and ozone to “zap” the consumed material. No chlorine, bleach or other chemical materials are used in the process. The result is a crystal clear, odorfree product, suitable for reuse in the vessel’s toilets. While the system has qualified as an MSD III device, Argimond’s CEO and President, Alfredo Teran, eventually hopes to have a new classification created to reflect the introduction of his technology to the marine markets. Because the existing Coast Guard regulations presuppose eventual “discharge,” the AJT/Agrimond system doesn’t strictly fit into any of the existing categories.
Proven Performance With a total capacity of 260 passengers and crew, probably the biggest operating headache for the touring party/cruise vessel IRQ was the need to pump out black water between voyages. With that requirement now eliminated, the vessel’s owners are free to operate on a schedule that is unshackled by the need to move the boat to the pumpout station and the time and expense required to evacuate the ship’s wastewater. In simple terms, time is money on the water on any marine platform, but in few places is this adage more true than in the cruise markets. Emboldened by its success on the smaller paddle-wheel vessel, Agrimond clearly has its eyes on the bigger prize. The installation of the Marine Dragonfly System onto the world’s largest gambling ship, the Ambassador II, has heralded the unique system’s arrival in mainstream marine markets. The Sterling Casinooperated vessel boasts a capacity of more than 1,700 passengers, and Agrimond’s treatment system is designed to process up to 10,000 gallons of black water daily. Using the existing holding tank arrangement, the new reclamation system was installed in a tight area of just 120 square feet. That system has been in continuous operation since August of 2007.
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the environment, these rules are also That AJT/Agrimond is an assobeing challenged. Way out in front of ciate member of the Passenger Vesthat, AJT/Agrimond has developed sel Association (PVA) speaks vola wastewater system that not only umes as to where it is likely headed promises to close the overboard valve with its innovative product. Ed forever but may also influence the Welch, the Legislative Director for reclassification of marine sanitation PVA in Washington, stopped short devices as we now know them. This of endorsing the product but did technology, born from proven shoresay, “The Dragonfly System appears side applications, can cost as much to be a great concept that seems as $200,000 to retrofit onto large vesBlack Water Sample Disinfected Wastewater Treated Fresh Water to work. As an association, we are sels, but AJT/Agrimond’s Alfredo very interested in it because of the increased can easily reach legal discharge zones and Teran says that, in time, an economy of scale regulatory scrutiny and the proliferation of utilize traditional MSD devices, the growing through multiple installations can reduce that domestic ‘no-discharge’ zones. Certainly, public scrutiny of virtually every environmencost measurably. Agrimond’s system looks very promising.” tal aspect of the cruise industry may someday Where other new equipment promises to The market represented by PVA is large and push them to consider the attractive “zero“reduce” stack emissions, “largely eliminate” growing quickly. Agrimond’s early success discharge” option offered by the Dragonfly invasive species, or control hydrocarbon dismay very well translate into sustained busiSystem. The traditional oceangoing tanker, charge in terms of “maximum ppm,” Alfredo ness in this sector of the marine industry. The container and freight markets will be a toughTeran proposes to seal shut the discharge company is now working on a variation of the er sell. With just 15 or 20 mariners on board valve for at least one aspect of the marine vesMarine Dragonfly System for processing sovessels that spend large tracts of time outside sel environmental footprint forever. The “zero called “gray” water as well. territorial waters, the black water issue is less discharge” option isn’t coming; it is here. RegThe installation of the Dragonfly System problematic – at least for now. ulatory recognition of this fact cannot be far onto the 12,000-GRT Ambassador II potenThe regulations governing marine sanitabehind. What comes next is anybody’s guess. tially opens other doors for AJT/Agrimond. tion devices and the handling of shipboard Although the booming, large international flag black and gray water are approaching 30 years Visit Agrimond on the Web at MarEx cruise markets are populated by vessels that in force and, like everything else related to www.agrimond.com.
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Treatment up to 60 persons (black water) and 25 persons (black and gray) The largest unit treats 1,796 gallons (6,800 liters) per day Eliminates storage, handling and purchasing of hazardous chemicals Easy to install, operate and service Operates on-demand, instantaneous on-off operation Certifications: – International Maritime Organization (IMO) Resolution MEPC.2 (VI) – United States Coast Guard (USCG) Type Test Certified 33 CFR 59 – China Classification Society No. NYT02610001 – Russian Maritime Register of Shipping No. 97.143.009 – Bureau Veritas (BV) Type Certification to Directive (MED) 96/98/EC
United States 1110 Industrial Blvd Sugar Land, TX 77478 Tel 1 281 240 6770 Fax 1 281 240 6762 sales@severntrentdenora.com
52 the maritime executive
Europe Via Bistolfi, 35 20134 Milano, Italy Tel 39 02 2129 2452 Fax 39 02 2129 2451 seaclor@severntrentdenora.it
Asia/Pacific 15 Scotts Road, #03-02 Thong Teck Building Singapore 228218 Tel 65 6737 9565 Ext. 103 Fax 65 6887 5026 vpalma@severntrentdenora.com.sg
CLEAN WATER. CLEAR CONSCIENCE.
www.severntrentdenora.com
ending invasive species
Ending Invasive Species: Relief in Sight? By Joseph Keefe
U.S. Coast Guard Inches Toward a Defined Standard As Industry Waits in the Wings The unintentional introduction of aquatic, non-indigenous nuisance species into coastal waters is primarily thought to be a function of the large volumes of ballast water handled by oceangoing vessels. Agencies such as the International Maritime Organization (IMO), United States Coast Guard (USCG) and state governments are currently fighting the problem by mandating ballast water exchange in the open ocean or utilizing ballast water treatment systems. The final solution for ending the insidious problem of invasive species as it applies to marine ballast may be just around the corner. For people who have heard this before – and as far back as the summer of 2002 – these words may very well ring hollow. After all, the USCG and its international counterparts at IMO have been promising relief for the better part of a decade. The good news is that real progress is being made on the regulatory side of the equation. When a definable standard is finally introduced, industry is clearly ready to benchmark any number of solutions against that standard.
Meanwhile, Back at (U.S. Coast Guard) Headquarters… It is, apparently, a good time to beat up on the government. The USCG’s (apparent) lack of progress in defining a standard upon which technology can be applied to solve the problem of invasive species is an easy place to start. To be fair, there are many layers to this onion. While anxious shipowners and eager equipment manufacturers probably don’t care what the holdup is, it is a fact that the primary delay involves the environmental reviews required by the system. When Michigan lawmakers jumped the gun with their own localized statutes regarding ballast handling to combat invasive species, they achieved little except to balkanize a complicated process. In the rush to eradicate one set of pests, local laws failed to consider the ramifications of six or seven ships simultane-
ously discharging – for example – hundreds of thousands of tons of deoxygenated water into a small harbor. Add to the mix other variables such as chlorine, UV, ozone and every other treatment program now under consideration, and the environmental impact of these solutions alone has rightly given many pause. So it is that the process, at least here in the United States, is undergoing the necessary EIA and NEPA reviews required by the system. Dr. Rich Everett of the USCG’s Environmental Testing Division told MarEx in January, “We are coming to the end of that process.” He added, “These are necessary steps, required by the system. Procedures need to be followed and there are good reasons to do just that.” In the wake of that process, perhaps the most far-reaching ever attempted by the USCG, a solution may finally be at hand. According to Everett and his boss, Bivan Patnaik, the timeline includes the issuance of a NEPA document (Draft Programmatic Environmental Impact Statement). This will be published within weeks of MarEx going to press for this edition and will be followed by a 60-day comment period. Patnaik added, “As a ballpark estimate for when the proposed standard will be published, the best I can offer is that I am hopeful it will publish sometime in 2008. The Unified Regulatory Agenda, which is a semiannual publication in the Federal Register, will be published in June 2008. This agenda will list regulations (including the standard) and their dates for publication. When this is published, the USCG can give more definitive answers on the publication date of the standard.” On the other side of the pond, the IMO now has a standard, but that benchmark is not yet in force, nor has it been ratified by all necessary members. Rich Everett stated, “The IMO may be ahead in terms of establishing a standard, but the levels of scrutiny contained in that standard are different. The U.S. Coast Guard evaluations include that standard as well as a host of other considerations.” And it
is likely that the final USCG standard will be a much tougher bar to clear. Hence, like OPA 90, the road to eventual global compliance (again) leads through Washington, not London.
Nuts and Bolts The performance of technologies designed to treat ballast water intended for discharge in U.S. waters must first be evaluated and approved by the USCG. Only then can these emerging technologies be used in lieu of ballast water exchange. Anyone foolish enough to install equipment without first obtaining this approval – and it is not yet here – risks flushing as much as $1 million down the drain if their choice is not among the final, approved technologies. The USCG is using two programs to evaluate treatment technologies: the Shipboard Technology Evaluation Program (STEP) and the Environmental Protection Agency’s (EPA) Environmental Technology Verification (ETV) program. STEP was implemented to promote the development of effective ballast water treatment technologies by incorporating the approved vessel into an experimental system and offering incentives for the development and use of experimental treatment technologies. Any vessel accepted into STEP will be considered to have an equivalent ballast management system in compliance with federal regulations for the life of the treatment equipment or the life of the vessel, whichever is shorter. Vessels accepted to STEP after the establishment of discharge standards will be granted equivalency status to the ballast water discharge standards for ten years. Currently, there are four applications for the STEP process. Dr. Everett declined to identify those parties, but he did say that the eventual completion of these application evaluations, like the standard establishment process itself, was near. The other evaluation system is the EPA’s ETV program. Located in Key West, FL, it is being used in partnership with the USCG. This program is a tool – not necessarily an the maritime executive
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ending invasive species approval process – to create and evaluate standardized testing procedures for use in determining if ballast water treatment systems are working effectively. Rich Everett says that the initial testing of one ballast treatment system is complete. He declined to say when that report would be issued. He did say, however, “We are finishing comments on that report now. The primary purpose of the test was to perform a pilot test of the procedure. We needed a product to plug into the test specification and procedure.”
Severn Trent De Nora: Pushing to the Head of the Line? As it turns out, a company named Severn Trent De Nora, LLC and its BalPure® system was the first to be selected for the ETV program in Key West. Bids were solicited and eventually received from six companies for inclusion in the project in 2005. Using what Rich Everett says was a “carefully selected set of criteria,” Severn Trent was eventually chosen because “they were the best system to validate the testing facility.” The final report on this procedure will eventually include a vetting of the facility’s testing system as well as the success of the Severn Trent system itself. As a precursor to all of that, Severn Trent’s Manager of Technology, Rudy Matousek, confirmed to MarEx in late January that its BalPure® system was in the queue for approval and inclusion in the USCG’s STEP program. With an original application submitted in June of last year, the company has since made two revised submittals, the most recent in January 2008. Matousek adds, “We hope to receive notification of acceptance into the STEP program during the next three months.” According to Matousek, the BalPure® system generates biocides; meters and analyzes the residual level of both biocides and neutralizing agents prior to discharge or de-ballast operations, and logs the performance of the overall ballast water treatment system for
presentation to authorities. Severn Trent bills its particular solution to the invasive species problem as an effective, economical and highcapacity device to treat ballast water with no adverse effects on the environment. The BalPure® system, utilized both during ballasting operations to disinfect incoming seawater and during de-ballasting operations, received a U.S. patent in October of 2007. First installed on an oceangoing product tanker in January, the BalPure® system can be installed with minimal invasiveness, making it compatible with existing vessel pumping and piping configurations. Severn Trent declined to disclose the name of the vessel or its operator. Also according to Severn Trent, third-party testing of the BalPure® system has confirmed effluent quality that meets proposed IMO ballast water standards. Matousek
BalPure® system
adds, “Due to the situation with the USCG we have been unable to make application to the IMO. We are negotiating with a European IMO member state to submit our technology in 2008.” Severn Trent De Nora, LLC is no stranger to the world of industrial water treatment applications. The joint venture draws upon the strength of Severn Trent Services of Fort Washington, PA and Gruppo De Nora in Milan, Italy. The firm also offers other techni-
cal solutions with a range of products that extends to marine wastewater treatment applications and the seawater disinfection needs of power generation and desalination facilities, coastal industry, offshore oil and gas facilities, general marine, the cruise vessel industry and navies worldwide.
Greenship BV: A New Twist on an Old Problem There is no end to the different ways that various manufacturers approach the issue of fighting invasive species in ballast water. While some focus only on the killing part of their ballast treatment system, a firm called Greenship BV says that “separation” is an equally important part. Greenship says that the cleaner the water, the better the killing device will perform. Its Sedimentor has a very high separation grade and removes almost 100 percent of 20 micron particles and 80 percent of 10 micron particles. Beyond this, says Greenship’s Johann van der Geest, “It also reduces the oxygen in ballast water by 30 percent. Our high performance Sedimentor separator has been installed on board a Chemgas Shipping BV tank vessel which had sediment problems. It has sailed with our equipment for a few months and the results are very good.” This system is upgradeable to a ballast water treatment system. The Greenship approach to a relatively new problem stems from its attention to one that is age-old. Because many tons of mud and sediment can build up over time in a ship’s ballast tanks when suspended solids are pumped into tanks and then settle out, mud in the ballast tanks causes ships to consume more fuel than necessary and reduces cargo deadweight capacity. Sediment also increases the wear and tear on ballast piping and can cause corrosion and coating damage in ballast tanks. With no moving parts, the Greenship system removes sediment during intake of ballast water, during which time the removed sediment is dis-
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ending invasive species
First step in Ballast Water Management System and main component in Sediment Removal System.
charged immediately. The 30 percent reduction of oxygen results in less corrosion. The costs inherent in all of that are incalculable, especially over the breadth of a large fleet of vessels. Greenship BV promises “a very attractive pay-back time and lower operational and maintenance costs.” If true, the concept makes a lot of sense. Thus far, testing of the Greenship BV ballast water treatment system has been based on IMO guidelines. Its first ballast water treatment system was operational in January of 2006 and the testing of that system is ongoing. Shoreside, says Johann van der Geest, “Biological performance testing was finalized and approved by Lloyds in October 2007.” Beyond this, vessels choosing today to install only the Sedimentor system can economically upgrade to the ballast water treatment system with ease. Greenship’s approach to the problem of invasive species is a two-step process. After the Sedimentor removes oxygen and sediment from the ballast water, the Termanox electrolytic cell then decimates bacteria and organisms. Together with the Sedimentor, the
electrolytic cell, which was especially engineered for this specific application, achieves a theoretical killing rate of 99.99 percent. The “killing efficiency” of this electrolytic process is based on the electrolysis of the sodium chloride contained in seawater. According to Greenship, the electrolytic cell produces sodium hypochlorite. After processing the sodium hypochlorite, the water returns to its original structure. Greenship promises no long-term negative effects for the environment – thus addressing a significant concern of regulators.
Moving Closer to the Solution As previously reported in the September 2007 issue of The Maritime Executive – and before that in the first quarter of 2003 – these and many other methods of abatement for invasive species in ballast water are moving toward possible approval by international regulatory bodies. Thousands of vessels plying the world’s oceans are going to need a ballast water treatment system in the near future. Which one they choose will depend on many variables, including the “staying power” of the companies attempting to bring forward viable technologies
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in an agonizingly slow regulatory climate. The methods being used to attack invasive species in ballast are many. The options being considered by regulatory bodies include: ■■ Mechanical methods, including filtration and separation; ■■ Chemical treatment methods (biocides, chlorine, etc.); ■■ Physical treatment methods such as sterilization (ozone, electric currents, UV light and heat); ■■ Various combinations of these methods. While all of these possibilities currently require significant further research effort, it is clear that a solution is at hand. But the regulatory dance is not over. At the conclusion of the USCG process, U.S. standards – now thought to be the world’s strictest – will then have to be married with those being pushed by the IMO. Shipowners and manufacturers alike risk financial heartache by relying on one to the exclusion of the other. The folly of unilateral application of laws in this effort has already been laid bare to the bone by the downturn in the export of raw materials from Michigan in the wake of that state’s effort to circumvent the regulatory process. In reality, we are just getting started. The establishment of a standard will be followed by a period of testing and approvals. For a few lucky companies, the real prize is one worth staying in the game to achieve. MarEx
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Crossword by Myles Mellor Across 1. Organization founded in 1987 to improve maritime adherence to DOT and UCSG and international regulations and protocols 3. Requirement for all maritime companies to improve safety and reduce environmental damage 9. Trouble 11. Japanese fish 13. Common to freeways and shipping traffic 14. Shortened form of 13 across 15. Vital for navigation 17. Check, in chess 19. Melds together 21. Grave 22. Type of shipping that has future potential (goes with 30 across) 23. Jazz king? 25. Mena locale 26. Time segment, briefly 27. Have title 28. Dry or had followers? 30. See 22 across 32. Get underway, with off 35. Practices 37. Necessary to any investment 39. Inside prefix 41. Oil tankers to ___ tankers? 56 the maritime executive
42. Boston to the US for example 43. A tide can do it 44. Split 47. Trademark, abbr. 49. Shipping company convicted in 2007 of violations of 56 across regulations 51. Goal 53. Ship initials 56. Pollution prevention convention 57. DNA cousin 58. Surprise, surprise! 60. Violent tropical storm 61. Inflexible Down 1. Act of colliding 2. Bay Bridge locale 3. It spilled in 2 down 4. McKinley, for example 5. Another type of pilot? 6. Transportation companies 7. It gets weighed 8. Shoreline 10. Dover’s state 12. Helmsman’s business 16. A ship, familiarly 18. Major communications center 20. Shudder
24. FP followers 26. Fooled 29. Qualifying essential for participation in the Voluntary Disclosure Policy of the Coast Guard 30. Sail 31. A very long time 33. One before a vowel 34. Titans’ locale 36. Type of tanker 38. Fourth largest economy in the world 40. DryShips ticker symbol 44. Galley director 45. Threat at sea 46. Ask for money 48. U.S. Maritime Administration 50. Means of signaling 52. __ the money 54. Atmosphere 55. Tanker’s frequent cargo 59. Hello!
Crossword solution to be published in a future online edition of the MarEx e-newsletter. The first five persons who submit a correct, completed puzzle will receive a one-year subscription to The Maritime Executive.