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Battling The Spill Effect

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[OIL, OIL EVERYWHERE: The Exxon Valdez oil spill in 1989 has eventually led to phasing out of singlehull ships globally (AP) At four minutes past midnight on 24 March 1989, oil tanker Exxon Valdez ran aground in Alaska after it moved out of the shipping lanes to avoid icebergs. The impact punctured its hull — a ship’s outer shell that remains partially submerged in the sea — disgorging approximately 10.9 million gallons of its 53 million gallon crude oil cargo into the sea. The spill, widely acknowledged as the worst in terms of environmental impact (though 34th in terms of quantity of oil spilled), affected over 1,100 miles of coastline in Alaska, hurt several endangered species in the region’s fragile ecosystem, impacted the livelihood of hundreds of people inhabiting the coastline, required cleanup efforts involving thousands of volunteers over three years, and eventually had ExxonMobil shelling out hundreds of millions of dollars in compensation. Twenty years later, almost to the day, a similar accident, but a different outcome. On 6 March 2009, Norwegian tanker SKS Satilla was hit by a lost rig — blown away by a hurricane in September 2008 — near Texas, US, puncturing its hull. As the ship began to sink from the weight of the sea water rushing in, the captain dropped anchor and offloaded the cargo of 130,000 tonnes (40 million gallons) of crude oil into other ships, avoiding a Valdez-like disaster. Despite his gallant efforts, though, the hero that day was not the captain. It was, in fact, the ship. SKS Satilla was a double-hull ship, which means it had two outer shells instead of one, with ballast water in between. The impact of the hit punctured SKS Satilla’s outer hull and damaged it severely, but the inner hull was untouched, allowing the oil to remain on the ship. The Valdez, on the other hand, had only one hull, which once punctured left no place for the oil to go but into the sea. Like Satilla, 79 per cent of all oil tankers criss-crossing the globe are now of double-hull design. In fact, since 1994 all tankers were built as double-hulled ships. After the Valdez spill prompted the US government to pass the Oil Pollution Act of 1990, and more such accidents forced Europe to pass similar legislation, the International Maritime Organization (IMO), the shipping division of the United Nations, initially set 5 April 2005 as the deadline for all single-hull tankers to be phased out, extending it later to 31 March 2010. Additionally, IMO also required all tankers more than 25 years old to be phased out. More than 150 countries, including India, are signatories to this order. Net sales, net profit figures in Rs crore; *After stock adjustments (in FY08) Source: Capitalineplus, CMIE Now, with less than 11 months to go for the deadline, Indian shipping companies are scurrying to phase out all their single-hull ships. But it is tough going. Between them, companies such as Shipping Corporation of India (SCI), Great Eastern (GE) Shipping and Mercator Lines own 27 single-hull ships (18, 7 and 2, respectively). The companies could either add a second hull to these ships, or dispose them of and buy new double-hull ships. Both options are expensive, and money is hard to come by in today’s economic environment. Two Is Better Than One The first question that begs to be asked is: why didn’t Indian companies take action earlier, given that this has been in the offing for a while? “In boom time, most shipping companies avoided replacement of fleet for want of time (most shipyards were booked for years in advance) and flogged their existing fleets,” says Nikhil Gupta, joint secretary of Ship Recycling Industries Association of India (SRIA). Indian tankers are used across the globe by energy companies mainly to transport crude oil from the place of extraction to a refinery, and also take the refined product to the place of consumption. With many refineries situated in Asia, crude oil finds its way to places such as Singapore and India. Domestically, companies such as Indian Oil Corporation (IOC), Reliance and Essar import crude oil for which ships are hired on long-term contracts. Adding a second hull to some of Indian companies’ existing single-hull ships is one option, but it “requires a lot of steel renewal”, says K.S. Nair, director of bulk carriers and tankers at SCI. According to V. Ashok, director and CFO of Essar Shipping and Logistics, it takes three months and $12-14 million to convert a VLCC (very large crude carrier) single-hull tanker, the largest category of tankers. {mospagebreak} Of course, it makes no sense converting ships that are nearly 25 years old, since they will need to be phased out in any case. For example, M.T. Premvati and M.T. Sadanand of Mercator Lines and GE Shipping’s Jag Lakshya and Jag Lamha are already at the end of the tether (20-23 years old). So, the only option is to scrap them and buy new double-hull tankers, which, naturally, is much more expensive. A new VLCC today costs around $126 million (though the price has come down from $160 million a few months ago). The cheapest tanker, a 50,000-tonne deadweight Handymax (it can carry maximum 50,000 tonnes of cargo safely), comes for $42 million. * Carrying oil, LPG or chemical products; **To be phased out by 31 March 2010, as per IMO rules Source: companies/reports Of course, if a company scraps an older ship, it gets paid for that, too, from the shipbreaking companies. Typically from a VLCC, 30,000 to 40,000 tonnes of steel can be recovered, which can fetch — at $250 per tonne — around $7.5-$10 million. SRIA’s Gupta here points out that the scrapping is most likely to be done in Bangladesh, since India’s Supreme Court, in a September 2007 ruling, banned tankers that were not gas free (ships that do not have ‘Gas free for Hot Work’ certificates) to be broken up in the country. “Bangladesh doesn’t have such rules,” says Gupta. “This could make a difference of $25 per tonne.” The Financing Knot Apart from having to replace single-hull ships, Indian shipping companies have also firmed up plans to expand their fleets over the next two-three years. SCI has plans for 29 new ships (this includes replacements for its 18 single-hull ships) at Rs 6,500 crore; and GE Shipping, 10 ships for Rs 3,000 crore. Essar Shipping and Varun Shipping do not have plans to buy new ships at present. In terms of immediate buys, SCI plans to buy one VLCC and two MR product tankers, which would cost approximately $240 million (Rs 1,200 crore), and GE Shipping plans to buy two LR1 product tankers ($60 million each) and two Suezmax tankers ($76 million each), at a total spend of Rs 1,360 crore. What might work partially in their favour are their cash levels, a part of which could be used to fund expansion plans — as on 31 March 2008, SCI had Rs 2,091 crore of cash, followed by GE Shipping (Rs 1,236 crore), Mercator Lines (Rs 853 crore), Essar Shipping (Rs 308 crore) and Varun Shipping (Rs 70 crore). At least for SCI, next year’s buys appear under control, though GE Shipping’s situation looks a bit tight. For future buys, however, they will need to leverage their net worths — Rs 5,632 crore for SCI and Rs 4,309 crore for GE Shipping — to take on more debt, which theoretically they can because their debt-equity ratios are pretty low (see ‘So Far So Good’ on page 47). Looks good, but there is a catch: credit lines have completely dried up. “Indian banks were unwilling to lend even in the past and now even foreign banks prefer to wait and watch,” says SCI’s Nair. Foreign banks on an average charge 11 per cent per annum interest for dollar loans and 14 per cent per annum for rupee loans. But with the recession on in full swing, even these rates are just on paper, and the banks have closed their fists. The desperate shipping companies are now asking the government for soft loans. Companies that go ahead with their plans then have the challenge of earning sufficient revenues to service the loans. Take Varun Shipping, which is done with major expansions, but has ended up with the highest debt-equity ratio in the industry of 2.4. “Our biggest challenge is to deploy our newly acquired anchor handling tugs and towing supply vessels,” says Yudhishthir D. Khatau, vice-chairman and managing director of Varun Shipping. That is because business is down. The Baltic Clean Tanker Freight Index, which tracks the transport of oil products such as petrol and diesel, is down 56 per cent in the past one year. One year time charter rate of a VLCC with 310,000-tonne capacity has come down almost 35 per cent from $73,413 a day in 2008 to $54,727 today. Hiring rates of VLCCs have taken a steeper correction than relatively smaller sized tankers such as Suezmax, Panamax or Handymax. “At current hiring rates, we are just about recovering costs,” says Essar’s Ashok. Consequently, margins, which were very high in FY08, are beginning to come under tremendous pressure. UNCERTAIN TIMES (Pic by Satheesh Nair) Indian ship building companies are grappling with problems of their own. Typically, India’s ship builders do small-scale manufacturing jobs such as offshore vessels and rigs for the oil exploration business, patrol vessels and interceptor vessels for the Indian Coast Guard. With L&T building its first shipyard at Ennore, Tamil Nadu — with facilities to make VLCCs — things could change. On the face of it, with their order books comfortably bulging, things could not be better for ship builders. For instance, ABG Shipyard’s order book is a handsome Rs 11,000 crore and Bharati Shipyard’s Rs 5,000 crore, but some of these orders could get cancelled or deferred, thanks to the economic crisis. There is a bigger problem, though. In 2002, the government announced a subsidy of 30 per cent of the sale price for certain vessels sold to Indian firms, and for all ships sold to foreign firms, for the next five years. These subsidies — Rs 5,100 crore to be given over the next few years to the industry — effectively allowed companies to offer a 30 per cent discount to buyers. But the five-year period ended in August 2007, and since the subsidy was not extended, India’s ship builders have lost their pricing power, and the orders have dwindled. “Shipyards globally are given subsidies,” says P.C. Kapoor, MD, Bharati Shipyard. “And our govern-ment needs to continue the subsidies.” Margins of shipping companies also typically go up once the ships are fully written down (depreciation costs become negligible). (See ‘Sailing Into The Sunset’ on page 49.) Once new ships come in and older ones are phased out, that advantage will be lost. Besides, companies such as GE Shipping (which also trades in ships) and Essar Shipping (which made money by selling ships in boom times) have to look for alternative ways to boost their earnings. The immediate problem, though, is that of the phasing out of single-hull tankers, a problem that SCI and GE Shipping are most seized with. Under current credit conditions, they appear to be in no position to replace their entire single-hull fleets of 18 and seven ships, respectively, by March 2010. Sources in the two companies say, on condition of anonymity, that they plan to approach the government for permission to continue to ply single-hull ships in local waters post the deadline. Clearly, though, that would be in contravention of IMO’s rules. The companies need to do better than that, else they will have to face stormy seas once the deadline is past. With inputs from Sreevalsan Menon muthukumar dot kailasan at abp dot in (Businessworld Issue Dated 12-18 May 2009)