The Maritime Executive - March April, 2011

Eric van den Adel: Mgn. Director, Imtech Marine

The Macondo Well:

What Really Happened

The OCS Tax Trap: Companies Beware
March/April 2011

Chairman & President, ClassNK

Volume 15, Edition 2

CO N T E N T S

MARCH/APRIL 2011

3

THE MARITIME EXECUTIVE

8 | Executive Achievement

Eric van den Adel
BY TONY MUNOZ

42

Managing Director, Imtech Marine 12 | Washington Insider

Making the Case for Offshore Drillers
BY BARRY PARKER

28 34
72

Offshore Exploration Stalls While Washington Wrangles and Energy Prices Rise
BY LARRY KIERN

46

ClassNK

Case Study:

Marine Coatings: The Smart Way to Save Money and Go Green
BY ROBERT C. SPICER

The world's biggest classification society is a leader in more ways than one.
BY TONY MUNOZ

16 | MarEx OP-ED

The Macondo Well: What Really Happened and Lessons Learned
BY PHIL RAE AND MICHAEL ECONOMIDES

54

Fuels & Lubes: Lean, Mean and Green
BY JACK O’CONNELL

Noboru Ueda

Executive Interview:

20 | Upgrades & Downgrades
BY JACK O’CONNELL

The Global Supply Chain: Who’s Hot, Who’s Not
24

62

Is LNG the Fuel of the Future?
BY ART GARCIA

ClassNK's leader wears many hats, which keeps him constantly challenged. He loves it.
BY TONY MUNOZ

The OSC Tax Trap: U.S. and Foreign Companies Beware!

70

BY JOSEPH T. GULANT AND JENNIFER L. BELL

Off the Shelf: Fire on the Horizon
BY TONY MUNOZ

Coatings Directory

PUBLISHER / EDITOR IN CHIEF Tony Munoz :: [email protected] SENIOR EDITOR Jack O’Connell :: [email protected] ASSISTANT EDITOR Nichole Williamson :: [email protected] ART DIRECTOR Evan Naylor :: [email protected] ASSISTANT ART DIRECTOR Daniel Bastien :: [email protected] SENIOR VICE PRESIDENT, SALES & MARKETING Brett Keil :: [email protected] ADVERTISING SALES MANAGER: ASIA Philipho Yuan :: [email protected] ADVERTISING SALES MANAGER: NORTH AMERICA Clive Bullard :: [email protected] ADVERTISING SALES MANAGER: NORTH AMERICA Scott Fairlee :: [email protected] ADVERTISING SALES MANAGER: WESTERN EUROPE John Gold :: [email protected]
MARCH/APRIL 2011

INTERACTIVE MEDIA MANAGER Carlos Dominicis :: [email protected] INTERNET SERVICES MANAGER Steven Gonzalez :: [email protected] CIRCULATION MANAGER Kristine Lowery :: [email protected]

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THE MARITIME EXECUTIVE

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EDITORIAL

Japan Earthquake and Tsunami –A Time of Reflection
When I was a young boy and dependent of an Air Force flight surgeon, our family lived just outside Tokyo. During our four years of living near Mount Fuji, my siblings and I assimilated to the culture and people quickly since we lived off-base in a Japanese neighborhood and attended a multicultural school in downtown Tokyo filled with foreigners, especially Europeans, and a few Asian kids too. These were remarkable times for an adolescent to formulate attitudes about the diversity of cultures and to learn other points of view. So, many decades later, having the opportunity to return to Tokyo and interview Noboru Ueda, Chairman and President of ClassNK, was not only a privilege but a journey down memory lane. While I have traveled on business to China, Singapore and Korea, returning to Japan was heartfelt because my father and my younger brother have both passed away in recent years, and this was an opportunity for reflection. Japan is an extremely beautiful country, and Tokyo is a very clean city because the Japanese respect their environment. When the March 11th 9.0 magnitude earthquake and subsequent tsunami laid waste to the Tohoku Region (six total prefectures, seven percent of Japan’s population) and more specifically to the four prefectures of Miyagi, Iwate, Fukushima and Ibaraki, which account for six percent of Japan’s total GDP, the world watched in awe and disbelief at the overwhelming forces of nature unleashed on the island nation. The devastation to homes and structures and the loss of life, estimated now at 28,000 people, are unfathomable; and their psychological impact on the Japanese people must be unnerving and downright traumatic due to their being surrounded by unpredictable seas and living in the “Ring of Fire.” Moreover, the crisis at the Fukushima Daiichi nuclear complex may continue to have very grave consequences for many years to come. While Japan is ranked fourth in nuclear megawatt output, the other thirty-one countries using nuclear energy will now have another benchmark to study about the consequences and long-term effects of a worst-case meltdown. The overwhelming financial impact of these events on an already stagnated economy could not have come at a worse time in terms of the global economy. Meanwhile, the destruction to the Tohoku Region is estimated to total around $310 billion, making it the most costly natural disaster in human history. While Japan has the world’s third largest economy behind the U.S. and China, its debt is about 200 percent of its $5.07 trillion GDP – much higher than the U.S. or most other developed nations. Fortunately, most of the debt is owned by the Japanese people and Japanese businesses, who stand ready and willing to invest in the rebuilding process. In addition, the Bank of Japan has already pumped about $250 billion of liquidity into the economy, and the country can count on other major monetary stimulus initiatives to support its recovery. Since Japan has not been a significant engine of global or Asian growth for quite some time, the tragic events will have limited impact on the global economy. There will, however, be disruptions to the global supply chain in the automotive, telecommunications and consumer electronics sectors. The cost of this great misfortune for Japan will be calculated in numerous economic losses, but with about one-half million people homeless and the Tohoku Region struggling to get basic services back, it will be necessary for the country to adjust and allow other regions of the country to shore up GDP output. We are confident the Japanese people will persevere as they always have in times of crisis and eventually recover from this unprecedented natural disaster, and we in the U.S. and elsewhere around the globe stand ready to help in any way we can. And so we are honored to be able to feature ClassNK in this edition of MarEx as our small way of paying tribute to the Japanese people and their ongoing spirit of achievement and endurance.
While in Tokyo I had the opportunity to meet one of the pioneers of ATB systems, thanks to Richard Bludworth of Bludworth Marine, whose company formed an historic partnership with Taisei Engineering in 2010. I met with Takeo Yamaguchi, the renowned engineer whose designs in the early 1960s forever changed tug-and-barge working relationships. Since the early 1970s, Taisei’s revolutionary designs for tug-barge connecting couplers have equipped over 245 ATB units worldwide. I thank Mr. Yamaguchi and Ky Sadakuni, Taisei, Vice President, for their hospitality and graciousness. Mar Ex

MARCH/APRIL 2011

Tony Munoz
Editor-in-Chief

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To read our coverage on the Copenhagen Shipping Exchange, please visit: www.maritime-executive. com/article/cshe To read a book review on Fire on the Horizon, please visit: www.maritime-executive. com/article/horizon

CPHSE

THE MARITIME EXECUTIVE

Mr. Yamaguchi and Tony Munoz.

FINAL NOTE

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ExecutiveAchievement
MARCH/APRIL 2011

8

THE MARITIME EXECUTIVE

By Tony Munoz

van den Adel
MARINE  BUSINESS  EXCHANGE
www.marinebusinessexchange.com

Eric

Managing Director, Imtech Marine

T

 

he founding companies of Imtech go back to 1860, and last year the company celebrated its 150th anniversary. Imtech, a technical services provider, is organized in independent divisions each serving either a specific country or specific group of technologies in specific markets. Imtech Marine is the most international of the divisions with 73 offices in 23 countries and is composed of individual companies such as Imtech Marine & Offshore, Imtech Marine Germany, Radio Holland Group, Van Berge Henegouwen, Imtech Schiffbau-/ Dockbautechnik, Royal Dirkzwager and Elkon. Under the leadership of Managing Director Eric van den Adel, Imtech Marine has organized itself in six regions worldwide to manage both projects and services businesses in the most efficient way and is expanding its offices in Asia Pacific, India, the Mediterranean and South America. At the same time existing

EXECUTIVE ACHIEVEMENT

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offices will grow into full-service hubs by expanding their current portfolio with competencies such as electrical systems, information and communications technology and heating, ventilation and air conditioning (HVAC). Eric van den Adel is an accountant by trade and spent ten years at Ernst & Young and then a few years with a smaller accounting firm and then went off to a family owned company serving the truck automotive industry, where he also worked for 10 years. He was hired by Imtech in 2002 as its Director, Finance and Control, and became the Managing Director of the company in 2009. After becoming Managing Director, van den Adel initiated a very ambitious business plan to grow the company to 1 billion euros by 2015. The company’s “Vision 2015” is essentially to grow its services business into lifecycle-focused partnerships with its customers. Van den Adel says the company will use Radio Holland’s renowned global network of service stations to strengthen Imtech’s network. Within its existing offices, Imtech will add its other core competencies. It will also strengthen its outfitting centers in China, the Singapore region and Turkey as well as review new opportunities in Canada, the Middle East and Brazil. What van den Adel wants to provide is efficient and smart technological solutions for newbuild ships and refit projects as well as high-quality services for ships in operation, and he believes

by being very close to his clients Imtech can listen very carefully to their needs and jointly decide on the best newbuild and services strategy to enable optimal use of the customers’ fleets. In order to be one of the top maritime players in the world, Imtech must remain an independent supplier, he says. And while not immediately striving to be the biggest in the industry, van den Adel made it clear he intends on Imtech being the best, delivering high-quality, on-time, competitively priced solutions. “We will achieve this through a lifecycle-based approach,” van den Adel said. “We have the skills in-house, from the initial conceptual design through engineering, installation, commissioning and subsequent full lifecycle service. And we see a strong demand in marine market approach to the lifetime of a vessel’s technical solutions while reducing the overall costs.” One of the primary approaches of being a value-added, strategic partner with clients, he says, is being able to balance the benefits, costs and risks over the vessel’s entire lifespan. And van den Adel is leading the company further into “greener” pastures, in green-related technologies such as electrical propulsion, energy efficient HVAC systems, LED-based lighting concepts, shore power facilities and optimal routing. Additionally, Imtech has developed simulation techniques to demonstrate the contribution of the green technologies to overall savings. “More and more,” he said. “We are being selected to be a partner in the next generation

THE MARITIME EXECUTIVE

MARCH/APRIL 2011

EXECUTIVE ACHIEVEMENT

van den Adel
of our customers’ green fleets.” He cites green projects that the company has been involved with such as the Rainbow Warrior III of Greenpeace, and PlanetSolar, the cruise vessels of Celebrity Cruises and Norwegian Cruise Lines, Borealis, DEME Breughel, and Jascon 18 and 35. Meanwhile, Imtech has made great strides in becoming a leading services provider in its five primary markets: naval vessels, offshore (construction vessels, workboats and platforms) yachts, cruise ships and cargo vessels. We asked him about the yachting industry because MarEx is based in one of the largest markets in the world in Fort Lauderdale. And while the company provides the traditional services of electrical systems including propulsion, automation, HVAC and navigation and communications, it also provides high-end audio-video and ICT solutions. Imtech is one of the leading suppliers in the industry and works amongst others with the major yards in the Netherlands and Germany and has dedicated service stations in Antibes and Fort Lauderdale. As pollution initiatives of IMO and the USCG are impacting

commercial shipping, shipowners are faced with huge investments in order to meet compliance. We asked van den Adel about Imtech’s role in assisting vessel operators, and he said, “Commercial shipping will have a dominant role in the future of the world’s trade. As such, I believe that commercial shipping will grow significantly. On the other hand, I believe that also this sector should realize its impact on the environment and the future of Planet Earth. It will require significant investments, but the industry should combine efforts to contribute to the necessary reduction of overall emissions. I sincerely believe it can be done and I also feel it must be done; we owe that to our next generations. It clearly worked for the automotive industry, where the joined forces have been able to reduce emissions very substantially, so why should it not work in the marine industry. We at Imtech will contribute to this and will develop green consultancy skills where we can actively advise and support our customer to green the fleet at reasonable cost.” Mar Ex

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MARCH/APRIL 2011 THE MARITIME EXECUTIVE

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WASHINGTON INSIDER
Written by Larry Kiern, Winston & Strawn LLP

WashingtonInsider
INCE THEIR HISTORIC GAINS IN THE

Offshore Exploration Stalls While Washington Wrangles and Energy Prices Rise
MARCH/APRIL 2011

S

12

congressional midterm elections, the emboldened Republican congressional leadership has pushed its top goals of cutting federal spending and rolling back “job killing” regulations. But this preoccupation appears increasingly quaint. A rapidly emerging challenge, oil prices topping $100 a barrel and gasoline at $5 a gallon, has captured Americans’ attention. Fears grow that these factors will stall the economic recovery. And development of America’s bountiful domestic offshore oil and gas reserves languishes in the wake of the Deepwater Horizon incident.

THE MARITIME EXECUTIVE

The American People Rank Jobs First

Recent polling data suggest that Americans rank job growth as their most important priority by a wide margin. Deficit reduction remains secondary. Not surprisingly, this ranking reflects basic lessons of American political history, which teaches that the populace typically focuses on palpable economic needs first. This dynamic tends to favor President Obama’s apparent strategy. He placed his political bet on the immediate self-interest of the electorate rather than long-term fiscal risks. Moreover, the rhetoric of the Republican leadership rings hollow to many observers because it concentrates its budget-cutting proposals on only the

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non-security, discretionary sliver of the budget. Mitch Daniels, Republican Governor of Indiana and a potential presidential candidate, described the budget wrangling as “comic” because it only concerns “nickels and dimes.” Critics find it difficult to reconcile doomsday rhetoric, e.g., “We are broke,” with cuts aimed largely at programs favored by Democrats, such as Headstart, Pell Grants, Planned Parenthood, and the Corporation for Public Broadcasting. Additionally, legislative policy riders to appropriations bills, e.g., barring greenhouse gas regulation, further expose the ideological roots of the Republican agenda. Chronic high unemployment and underemployment will cause most Americans to have little patience for refighting old ideological battles. They are more interested in job creation first. And by pressing ideological issues in the current economic environment the Republican congressional leadership risks appearing disconnected. The president appears to have oriented his 2012 re-election prospects on the turnout of his base and the perception of swing voters that job prospects are improving. Obama’s position resembles the difficult economic conditions that President Ronald Reagan found himself in as he planned his reelection bid in 1984. Unemployment remained stubbornly high during Reagan’s first term, peaking near 10 percent. As the 1984 primary campaigns launched, unemployment still hovered near eight percent. Yet Reagan projected optimism, employing the famous campaign slogan, “Morning in America.” Although unemployment remained above

seven percent on Election Day, Reagan was reelected by a landslide, largely because the electorate perceived and experienced real improvement. Obama has studied the Reagan presidency. He likewise employs the rhetoric of hope and has implemented policies to jumpstart the economy. The 2010 Tax Relief Act negotiated with Senate Republican Leader Mitch McConnell manifested his preference for immediate economic stimulus over his campaign promise to end the Bush tax cuts. Obama will likely continue to resist the non-security, discretionary cuts proposed by Republicans while proposing alternative cuts Republicans disfavor like farm and oil industry subsidies. Meanwhile, the united Republican opposition echoes a simple message, “We’re broke,” and is determined to satisfy the budget-cutting appetite of its conservative base. Emboldened Republican freshmen rejected less ambitious budget-cutting proposals made by the senior Republican appropriators in the House. But history suggests the Republican congressional leadership will ultimately accept less ambitious cuts and blame President Obama

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WASHINGTON INSIDER
and the Democratic-led Senate for its inability to fulfill the campaign promise to cut $100 billion in spending this year. It will then likely urge its base to unite to defeat President Obama and Democratic senators in 2012. uncertain. The Administration recognizes its limited ability to combat rising oil prices, which is a global phenomenon. If the increase persists, it will likely release oil from the nation’s Strategic Petroleum Reserve. It will also work with its allies to foster a stable outcome in those countries of the Middle East facing acute instability, especially Libya. While it may be tragic for Moammar Gaddafi to maintain power, in the short term that outcome might improve oil price stability. The Administration also continues to promote alternative energy resources and conservation, the hallmarks of its energy policy. The 2010 Tax Relief Act included key provisions sustaining the Administration’s alternative energy incentives originally enacted in the stimulus legislation of 2009. But this policy affords no short-term relief from oil price rises. And Administration critics point to a projected decline in U.S. domestic oil production, which House Energy Chairman Fred Upton (RMI) blamed on Administration policies “to lock away our vast energy resources.”

The Deepwater Horizon

Rising Oil Price Redux

14

Beyond this Beltway drama, gasoline prices have soared ten percent in a month, reaching nearly $5 a gallon in some California markets. The increases erode the benefit of recent tax cuts and hurt the economic recovery. If this story line sounds hauntingly familiar, it’s because it is. Experts opine that the price increases result from increasing demand from emerging markets, e.g., China and India, political instability in the Middle East, and speculation in the commodity markets. Japan’s nuclear accidents will also likely cause oil prices to rise. The Federal Reserve has predicted that Middle East instability is likely temporary, supplies are steady, and oil prices will likely ease. But the future remains highly

A year ago this column reported that the nation’s offshore energy agenda remained on course, reflecting a bipartisan consensus favoring more offshore oil and gas exploration. Then, on April 20, 2010, the Deepwater Horizon tragedy destroyed that consensus. Obama reversed his earlier decision of March 2010 to expand offshore oil exploration in U.S. coastal waters, thereby effectively putting plans for new offshore leases on hold indefinitely. On May 28 the Administration announced a six-month moratorium on offshore oil drilling operations of new and then-permitted deepwater wells. This suspension of activity dealt a serious blow to the offshore industry, which quickly challenged the moratorium in federal district court in New Orleans and won what proved to be an academic victory. On June 22, U.S. District Court Judge Martin Feldman granted the industry a preliminary injunction, which as a practical matter ruled that the moratorium was likely “arbitrary and capricious.”

THE MARITIME EXECUTIVE

MARCH/APRIL 2011

THE FULL PICTURE

Unemployment and $5 gas are what concern most Americans, not spending cuts.
According to Judge Feldman, “What seems clear is that the federal government has been pressed by what happened on the Deepwater Horizon into an otherwise sweeping confirmation that all Gulf deepwater drilling activities put us all in a universal threat of irreparable harm. . . . The blanket moratorium . . . seems to assume that because one rig failed and although no one yet fully knows why, all companies and rigs drilling new wells over 500 feet deep also universally present an imminent danger.” The Administration remained unbowed by the court’s critique and its preliminary injunction. Following its failed appeal to the Fifth Circuit U.S. Court of Appeals, it swiftly issued a second moratorium on July 12, which it effectively maintained until October 12 when it formally ended the moratorium of its own volition. On February 2 of this year, Judge Feldman held the Administration in contempt of court for its “defiance” of the court’s order. Industry critics of the Administration maintained that the decision to lift the second moratorium actually left a de facto moratorium in place which they styled a “permitorium.” They charge it eliminated thousands of high-paying American jobs, stifled domestic oil production, and left America more vulnerable to political instability in the Middle East. One offshore drilling venture, Century Exploration New Orleans, Inc., recently sued the federal government in the U.S. Court of Federal Claims in Washington, D.C., charging that the government’s new offshore drilling “regulatory morass” rendered its “lease bargain illusory.” It alleged the new “worst case discharge” rule promulgated by the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) “made it economically impractical . . . to obtain a bond necessary to demonstrate sufficient oil spill financial responsibility.” On March 1, over 100 Members of Congress dispatched a letter to President Obama urging him to order BOEMRE “to immediately hasten the approval of permits.” The next day BOEMRE issued its first new deepwater permit since the Deepwater Horizon incident. More than six deepwater applications currently pend before the agency, and an industry

WASHINGTON INSIDER

spokesman said 33 new projects could Congressional Republicans, Senate start if the agency grants permits. Yet Democrats and the president are wranBOEMRE’s approval doesn’t guarantee gling over domestic budget cuts unlikely drilling will proceed, as illustrated by the to affect the nation’s long-term deficit. recent decision of Shell Oil to abandon Unfortunately, none of this maneuvering its exploratory drilling in Arctic waters will likely provide relief from the risks to this year following revocation of its clean America presented by rising oil prices and air permits by the Environmental Appeals the stalled offshore oil industry, which Board in Washington, D.C. continues to suffer mightily in the afterThe president dismissed his critics, asmath of Deepwater Horizon. Mar Ex serting that “We are encouraging offshore exploration and production . . . responLarry Kiern is a partsibly.” The Administration staunchly ner at Winston & Strawn reaffirmed its position that the previous LLP, an international law system of rapidly issuing offshore drilling firm of 900 lawyers. His permits, up to 10 per week, has ended. practice concentrates on Approval of the first permit occurred maritime issues, includonly after Noble Energy met new safety ing legislative, regulatory, and environmental rules and reportedly and litigation matters. because it proffered a proven system for Before joining Winston & Strawn, he was a capping a well blowout and handling a Captain and law specialist in the U.S. Coast worst case discharge. The system is based Guard who served as the Legislative Counon the one eventually put in place in the sel and Deputy Chief of the Coast Guard’s response to Deepwater Horizon. Congressional Affairs Office. BOEMRE’s stance is no surprise. Obama has never been a favorite of the offshore industry, which is largely concentrated in states he did not carry in 2008 and likely will not carry in 2012. To be sure, major offshore industry states like Texas, Louisiana and potentially Alaska are unlikely paths for the president’s re-election strategy. Instead, the Administration understands that the gravest political mistake it could make would be to permit a new deepwater project only to witness another catastrophe www.wilhelmsen.com/technicalsolutions like Deepwater Horizon for which the president would then be held directly responsible.

The Wrong Issue

15

MARCH/APRIL 2011 THE MARITIME EXECUTIVE

OPED ECONOMIDES

16

THE MARITIME EXECUTIVE

MARCH/APRIL 2011

O

N THE EVENING OF APRIL 20, 2010, THE CREW ABOARD THE Transocean semisubmersible drilling rig Deepwater Horizon was at work in the Gulf of Mexico, making preparations to temporarily abandon the well they had been drilling for the past 73 days in a prospect called Mississippi Canyon 252. The well had been drilled in water over a mile deep, and its total depth from the surface was over 18,000 feet. It was the first well to be drilled in this prospect, also known as Macondo, by a consortium of three oil companies, headed-up by multinational BP. The previous night, the final steel casing – a so-called production long string – had been cemented in place, and the crew had tested the outcome of that cement job only a few hours earlier to confirm the well’s integrity with a series of pressure tests. Such tests are routinely performed to ensure there are no leaks and critically to ensure that the well does not flow when the heavy mud, used to control the well while drilling, is removed. At around 2140 hours that night mud suddenly began erupting from the well, pouring over the drill floor and quickly shooting up above the height of the derrick. It was driven by hydrocarbon gas that had leaked into the well unnoticed and was rapidly expanding as it approached the surface. Too late, the crew realized the well was out of control. They took steps to try to contain it and divert the erupting gas, but their actions were to no avail. Within minutes the gas had spilled over the rig, reached the engine room and ignited, causing the first of two catastrophic explosions. Those explosions and their aftermath killed 11 men, damaged vital hydraulic control lines and ultimately caused the sinking of the Deepwater Horizon. The crew was unable to close the blowout preventer (BOP) on the seabed or to disconnect the rig from the well, the last desper-

OPED ECONOMIDES

The Macondo Well: What Really Happened
and Lessons Learned
By Phil Rae and Michael Economides
ably uncemented annulus (the space between the outside of the production long string and the oil/gas-bearing rock formations). This undetected loss of mud resulted in under-displacement of the heavyweight spacer and led to otherwise inexplicable pressure and flow anomalies during the negative test, induced by U-tubing and other phenomena, including flow from the well. The resulting approximately 700 psi differential pressure, which was noted but has never been officially explained, persisted throughout the negative test, confusing the crew. It caused U-tubing of fluids, due to hydrostatic differentials, decoupling the fluid column in the kill line from the surface and rendering the pressure gauge there ineffective. The partial evacuation of the kill line then allowed heavyweight spacer to flow into the lower
MARCH/APRIL 2011

ate measure to save it from disaster. The resulting blowout lasted 87 days, spilling nearly five million barrels of oil into the Gulf of Mexico, demonizing BP, the biggest U.S. domestic oil and gas producer since 2001, and precipitating a public backlash against the entire oil and gas industry. Indeed, the public and political hysteria that ensued bordered on circus, spurred on by sensationalist media and self-serving politicians. Even the U.S. president wanted to “know whose ass to kick.” An unsupportable and, in fact, unsustainable government moratorium on deepwater drilling was partially lifted in October. The first permit to drill was finally granted on February 28, 2011 in tacit recognition of the reality that deepwater production now accounts for 30 percent of U.S. domestic oil production and, of necessity, that share will continue to grow.

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THE MARITIME EXECUTIVE

Despite the furor, the finger-pointing and investigative hearings, no satisfactory official explanation emerged for several reported events immediately prior to the blowout that appeared to defy the laws of physics. Particularly puzzling was the lack of an adequate explanation for the pressure and flow anomalies during the socalled negative test, the critical and final check to ensure the well was secure and could be circulated to seawater. Even the most extensive analyses done on the disaster yet, BP’s own Deepwater Horizon Accident Investigation Report and the National Commission Report to the President, which largely relied on BP’s analysis, made wrong assumptions and drew various erroneous conclusions by misinterpreting key events. Careful analysis of these and other data widely available in the public domain, including official investigation transcripts, however, provides the only logical explanation. In fact, it provides not just an explanation for the anomalies but also a unique insight into the genesis of the blowout.

ANOMALIES

Many individual factors almost certainly came into play and contributed to the disaster, but one final critical factor set the whole train of events in motion, sealing the fate of the Deepwater Horizon that day. That critical step was the high rate displacement of drilling mud by an unusually large volume of high-viscosity, heavyweight spacer (a water-based fluid used to displace the oil-based drilling mud from the well), followed by seawater, in preparation for the negative test and, ultimately, well suspension. During the pumping and displacement of this heavyweight spacer, a breach in pressure integrity at the casing shoe resulted in the undetected loss of about 80 barrels of drilling mud into the prob-

CRITICAL FAILURE

www.wilhelmsen.com/technicalsolutions

OPED ECONOMIDES
end of the kill line when the well was shut in, rendering the line useless for pressure and flow monitoring for the duration of the negative test. The flow of heavy spacer into the kill line left the line with a combined hydrostatic pressure that was in equilibrium with formation pressure acting in the wellbore. Hence, later in the test when the kill line was left open, there was no flow from it, despite a 1400 psi differential pressure between it and the drill pipe surface pressure.
MARCH/APRIL 2011

18

This hypothesis neatly explains all the salient anomalies during the negative test and provides new interpretations to one or two key events, in particular the much reported, and generally accepted, belief in a leak in the annular BOP at the start of the negative test. In fact, there actually never was any leak. This mistaken, but widely-accepted, belief in a leak conveniently provided a possible (but incorrect) explanation for an unexpected pressure rise on the drill pipe during the test. In fact, the pressure rise came about because the well was flowing. Exactly why the well breached at the shoe during the displacement of the mud with viscous spacer and seawater remains a

THE PHANTOM LEAK

mystery. Momentum changes may have caused some transient overpressure at the bottom of the well; or it may simply have been that the well’s pressure integrity, as determined in the positive test, was unreliable. Whatever the cause, on this occasion pressures that the well had successfully contained previously under static conditions proved too much. Something gave way, and the well lost fluid through the shoe track. This loss went unnoticed because at that same time the crew was busy with other operations. According to the BP Report, the trip tank was being cleaned so flow rate data during this time was considered unreliable. This breach at the shoe and the unnoticed and unsuspected loss of a significant volume of mud, at a time when the well had already demonstrated positive pressure integrity, was the event that was ultimately to cause disaster. Anomalies that would have raised concerns in an open hole were explained away by other suggestions and ideas in a well that was lined with steel pipe, cemented and already positively pressure tested. The rest, as they say, is history.

The E&P industry, strategically essential and crucial to our modern way of life, is a human enterprise and fallible like any other.

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THE MARITIME EXECUTIVE

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OPED ECONOMIDES
Yet it has an overall enviable safety record considering the number of wells drilled each year and the vast quantities of hydrocarbons produced. Like every other business, it learns by experience. Further improvements can and must be made in training people, and it should be mandatory that critical procedures like the negative test are supported by clear and concise documentation that fully explains the rationale for the procedure and the criteria for acceptance. Anomalous results should mandate a temporary halt in operations to allow consultation with experts rather than relying on anecdotal explanations and unsupported hypotheses. A simple phone call made that fateful Tuesday evening last April would almost certainly have averted disaster. Well-construction plans still need to maintain the operational flexibility to make essential changes when faced with unexpected pressures or other events. However, critical decisions, e.g., to run a long string versus a liner or to use foamed cement rather than something more conventional, should always involve consultation with relevant technical experts and a clear understanding of the implications of such decisions. It is worth noting that despite all the money spent investigating the disaster and all the academic and industry gurus consulted, nobody has commented on the unequivocal technical inappropriateness of running a production long string in a deepwater well, like Macondo, with the potential for gas migration. The premature removal of several thousands of pounds/ square inch of riser hydrostatic pressure, implicit when running a long string and hanging-off the casing immediately after cement placement, practically guarantees gas invasion of the annulus in such wells. This is of far greater significance than any popular, misguided notion that a long string was chosen to save money. Undoubtedly, new safeguards and tighter legislation will be introduced to minimize the risk of any similar catastrophe occurring in the future, but some of these measures will increase costs without necessarily improving safety. As the Deepwater Horizon saga confirms, things can still go wrong, not necessarily because of efforts to cut corners or reduce costs, as the media and politicians alike have repeatedly trumpeted, but because components can fail unexpectedly and human beings can make mistakes. Air travel provides us with ample evidence of this. In the past 10 years there have been, on average, 29 accidents and 775 deaths every year in commercial civil aviation, and the main causes were pilot error (50 percent) and mechanical failure (22 percent). Such statistics will not stop us from flying and, despite the outcry, the Deepwater Horizon disaster will not put an end to deepwater drilling and production. Hopefully, however, the lessons learned from it will amount to more than just political grandstanding and will help us avoid such accidents in the future. Mar Ex

Phil Rae is the co-author of The Energy Imperative. He is also
an internationally recognized expert on well completions with extensive industry experience. Michael Economides is a professor at the University of Houston and the Editor-in-Chief of the Energy Tribune.

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MARCH/APRIL 2011 THE MARITIME EXECUTIVE

www.wilhelmsen.com/technicalsolutions

20

Upgrades Downgrades L

The Global Supply Chain: Who’s Hot, Who’s Not
By Jack O’Connell

ast month I attended a transportation conference in Miami sponsored by a major investment firm and came away enlightened. I mean, here I thought the whole industry revolved around shipping – ocean shipping and inland transportation – and in many ways it does. After all, about 90 percent of global commerce travels by ship. But what happens when it reaches port? How do all those containers and bulk cargoes and petroleum liquids reach their final destination? And so I discovered the fascinating world of “intermodal,” a buzz word on everybody’s lips these days, and found out what all those trains and planes and trucks do. And more importantly, how they’re doing. My eyes were immediately opened by the UPS presentation. “Big Brown” had a record year in 2010 and expects even better results this year. Huh? 2010 was a disaster for most maritime companies, and 2011 doesn’t look much better. Yet here was the world’s biggest package delivery company, with operations in 220 countries, saying things couldn’t be better. So that right away got my attention. Here’s something else that got my attention: a video showing how UPS has expanded its business with Toshiba, a long-time customer, by dedicating 10,000 feet of warehouse space in its Louisville facility to fixing Toshiba laptops. That’s right. UPS is in the computer repair business. Instead of shipping the laptop from the customer to the Toshiba repair facility and back again, UPS fixes the computer itself and does it all in one central location, reducing the average time from initial customer pickup to final delivery of the fixed product from three weeks to four or five days. How’s that for innovation? The upbeat theme continued with a presentation by Union Pacific, the U.S.’s largest railroad. UP carried 1.5 million containers last year, about 14 percent of the total market. That’s intermodal in action. Its major routes for containers are Los Angeles to Chicago and Chicago to Dallas. So when all those boxes arrive from China at LA/Long Beach, a good number of them are loaded onto flatbed cars for the 2,100-mile journey by rail to Chicago. Most of the others go by truck, and we’ll get to that in a minute. Like UPS, UP had a record year in 2010 and expects to do even better in 2011. In addition to intermodal, its major drivers include coal from the Powder River Basin in Wyoming, autos and auto parts, and lumber. A fascinating part of its business has to do with shale drilling – you know, all those shale deposits of natural gas – and even oil – that are now accessible because of horizontal drilling technology? Well, each deep well can require as many as 100 rail

cars of something called “frac sand,” which apparently works the same way as drilling mud does in conventional wells. Frac sand is a big product for UP along with the drill pipe and rocks for road construction leading to the well. As if that wasn’t enough, UP expects container loadings from Asia to increase 10 percent this year. Incidentally, those double-stacked container trains you see if you’re lucky enough to live close to a major trunk line? They average 154 cars in length, about a mile and a half.

If there was one overwhelming message that emerged from the conference, it was this: Happy days are here again. Demand is picking up across the board. Supplies are tight. Carriers have a modicum of pricing power for the first time in a long time. “I’m turning down 1,000 loads a week,” boasted one West Coast trucking company owner. Capacity is constrained not only on trucks but on the rails and airfreight as well. The one notable exception to this rosy scenario? Ocean shipping, where there is a massive oversupply of vessels, rates are falling, and moods are glum. Why the disconnect? That’s an excellent question, and that’s why it makes sense to look at the other modes for possible answers. Let’s start with airfreight. It costs twenty times as much to ship by air as it does by ship. And yet this is the fastest growing segment of the global supply chain. Why? Because companies are

COMMON THEMES

Planes and boats and trains… and trucks? Yup. They’re all part of one big interrelated system. Guess which one is flying highest?
putting more and more emphasis on “just in time” delivery and maintaining lean inventories to keep costs down. “Taking costs out of the operating system” was, in fact, a common refrain among all shippers. But airfreight occupies a special niche. Only two to three percent of all cargo goes by air – mainly high-tech items, pharmaceuticals, perishable foods and the like – and Asia represents half the market. Capacity is tight. Older planes are being retired at a faster rate than new ones are being built. Delays in delivery of Boeing’s new 747-8 (“Seven four seven dash eight”) have further exacerbated the capacity problem. Compare this to the situation in ocean shipping, where there is excess capacity everywhere you look. Atlas Air (Nasdaq: AAWW) is a typical company. It operates mainly 747-400 SFs (Special Freight) and is awaiting delivery of its first 747-8s. Two of its 747-400s are chartered to SonAir, which transports oil workers from Houston to Luanda, Angola, three times a week – the so-called “Houston Express.” Private charter services such as SonAir can be very profitable. Atlas Air also does a lot of business with the military and with governments around the world, another common denominator of the business. Whenever there’s an emergency or a need for fast delivery anywhere in the world, airfreight is the mode of choice. Trucking is also booming, for many of the same reasons as airfreight, including the emphasis on just-in-time delivery. It’s a $500 billion business in the U.S., and it’s highly fragmented. The biggest player is Phoenix, Arizona-based Swift Transportation (the name comes from the Swift meatpacking business, its first customer), whose $2.5 billion in revenues represents less than one percent of the market. The company went public last year and its shares (Nasdaq: SWFT) are in demand. It operates 15,000 tractors and has a lucrative cross-border business with Mexico. Its average haul is 444 miles (deliberately short to keep drivers fresh and alert), and average weekly revenue per tractor is approximately $3,000. Swift was one of the few companies to talk about values and how it keeps its eye on the “wildly important goal” – two factors that have no doubt contributed to its success.

JACKO’CONNELL

MARCH/APRIL 2011

There are issues, of course, as in any industry. One is the high cost of fuel, which shows no indication of abating. This affects vessel operators, air carriers and truckers in particular, where fuel can account for more than 50 percent of total operating costs. Rails are less affected. This can be offset to some extent by imposing fuel surcharges, but customers will stand for only so much, and a number of smaller carriers in the trucking industry have thrown in the towel recently as a result of cash-flow pressures due to rising fuel costs. Another complicating factor is emission-control regulations mandating the use of higher-cost, low-sulfur fuels and/ or the installation of expensive scrubbing and other equipment. This is a variable that won’t go away as governments – and the general public – become increasingly concerned about the growing volume of emissions of greenhouse gases and volatile organic compounds and their impact on the environment. Safety is another concern, requiring constant monitoring and training – not to mention added expense – for carriers. Perhaps the biggest issue of all is a shortage of qualified personnel, especially in the marine and trucking industries. Readers of this publication are familiar with the difficulties of crewing vessels and how, in a cyclical business like shipping, it’s hard to get back those mariners who left during the last downcycle. The lack of qualified drivers in the trucking industry is an analogous problem, and the turnover is even higher. According to one investment bank report, average driver pay in for-hire fleets (as opposed

SPEED BUMPS

21

THE MARITIME EXECUTIVE

JACKO’CONNELL
to captive fleets) last year was $47,000 with turnover of 50 to 100 percent. If you have to replace at least half your drivers every year, you’ve got a problem! Raising the average pay to $55,000 would cut the turnover figure in half, and a further raise to $64,000 would cut it in half again. Not-for-hire (captive) fleets, for example, pay just that – an average of $64,000 per year for their drivers, and the turnover rate is a manageable 10 to 15 percent. So these are expensive tradeoffs, largely dependent on what the market will bear. Driver turnover is also a major reason why trucking companies invest so much money in driver-ed programs, health benefits and the like. container traffic on inland arteries. In Europe, where 50 percent of containers are transported by ship, the geography is different, with more navigable rivers that can accommodate large freighters and more big cities located on navigable rivers. He reluctantly conceded that America had a long way to go to make the dream of America’s Marine Highway – at least for containers – a reality. Kirby is an interesting company in more ways than one. A voracious consolidator, it recently announced its intention to acquire K-Sea Transportation, an operator of tank barges and towboats in the coastwise trade of refined petroleum products along the U.S. East, West and Gulf Coasts, as well as Alaska and Hawaii. The $600 million acquisition is a logical extension of Kirby’s inland tank barge business, in which it is already the country’s largest operator, and nicely complements its other two businesses – bunkering and diesel engine services. The company is well worth a look. So there you have it. Air, water, highway and rail – all rolled into one neat package. In case you missed it, the answer to the question posed in the subtitle is, of course, airfreight. But you already knew that, right? MarEx

22

One of the most interesting presentations came from Kirby Corporation (NYSE: KEX), the big inland barge and bunkering company. Its long-time CEO, Joe Pyne, is a noted advocate of America’s Marine Highway – inland waterways – as an alternative to clogged highways and pollution-belching semis. Given the well-known rule of thumb that one barge has the carrying capacity of 50 rail cars or 160 trucks, why isn’t more cargo moving on the water? When I asked Pyne that question, he pointed out that one of Kirby’s subsidiaries, Osprey Line, is the preeminent mover of containers on barges, connecting Houston, Lake Charles, Memphis, Chicago and Pascagoula, among other river ports. He noted that the absence of adequate terminal and offloading facilities at many ports was an inhibiting factor to the growth of

INLAND WATERWAYS

MARCH/APRIL 2011

Jack O’Connell, the senior editor of this magazine and a former
maritime executive, is a private investor who may own shares in some of the companies mentioned in his columns. The views expressed in this column are his and his alone and are not in any way to be construed as investment advice.

THE MARITIME EXECUTIVE

TAX TRAP

24

THE MARITIME EXECUTIVE

The OCS Tax Trap: U.S. AND FOREIGN COMPANIES BEWARE! I
Joseph T. Gulant and Jennifer L. Bell.

By Joseph T. Gulant and Jennifer L. Bell

MARCH/APRIL 2011

n the aftermath of Hurricane Katrina and the Deepwater Horizon spill, an increasing number of foreign vessels and businesses have engaged in construction and repair activity on the U.S. Outer Continental Shelf (OCS) in the Gulf of Mexico. In response, the Internal Revenue Service (Service) has fired a shot across the bow of these businesses in an attempt to eliminate perceived competitive advantages (i.e., lower tax rates) over U.S.-owned businesses. Pursuant to a new Service Directive, the Service is aggressively increasing its enforcement activities with respect to foreign taxpayers engaged in certain activities on the OCS. The results are often unanticipated and counter-intuitive, and the Service has identified the following categories of foreign taxpayers as engaged in activities related to the exploration for, or exploitation of, natural resources on the OCS (Covered Activities) that it believes fall into the U.S. tax net: » contractors that perform services on the OCS (such as testing, drilling, repair and salvage work); » vessel operators that transport supplies and personnel between U.S. ports and locations on the OCS; and » owners and/or operators of foreign-registered vessels that time or bareboat charter vessels to persons that are engaged in Covered Activities. The purpose of this article is to alert vessel owners and operators, foreign contractors, foreign service providers, and other foreign entities conducting business on the OCS that they may unwittingly be subjecting their businesses to taxation in the U.S.

For U.S. federal income tax purposes, the OCS is generally treated as geographically within the U.S. to the extent that the activities on the OCS relate to Covered Activities. The Service has applied an expansive view of the scope of these rules, and the Service is likely to take the position that even activities that are only tangentially related to the exploration and exploitation of natural resources (e.g., oil pipeline repairs, use of vessels for transportation or other construction support services, oil platform construction and engineering-related activities, etc.) may be subject to U.S. tax. A foreign corporation that derives income from transporting cargo and crew to locations on the OCS (to the extent that such activities are Covered Activities) may derive U.S.-source income if the transportation begins and ends within the U.S. As a result, the

INCOME TAX CONSIDERATIONS

TAX TRAP

Stepped-up IRS enforcement activity on the U.S. Outer Continental Shelf spells potential trouble for foreign vessel operators and service providers.
foreign corporation may be subject to U.S. federal income tax at a flat rate of 30 percent of the gross amount of its U.S.-source passive investment income (in the absence of a reduction or exemption pursuant to a comprehensive income tax treaty (Treaty) that is not effectively connected with a trade or business in the U.S. As discussed in greater detail below, the foreign corporation will likely also be subject to income tax withholding. Alternatively, the foreign corporation may be engaged in a U.S. trade or business, provided its activities are regular and continuous; consequently, it may be subject to tax in the U.S. on its net income and may have U.S. tax return filing obligations. If the foreign corporation does not file its U.S. tax return, it will generally be denied otherwise allowable deductions for expenses related to the generation of that income (i.e., vessel depreciation and amortization deductions, operating expenses, etc.). In addition, a second tax at a 30 percent rate would generally be imposed upon the net income of the foreign corporation in the U.S. (the branch profits tax) which is not reinvested in assets in the U.S. A foreign corporation that charters vessels on either a time or bareboat charter basis also generally derives income from activities within the scope of these rules for the period of time during which the vessels are engaged in Covered Activities. It is the Service’s position that revenue from time and bareboat charters should be characterized as rental income and, therefore, should be sourced for federal income tax purposes based on where the vessel is used. It is also the Service’s view that such income should be U.S. source income for the period of time during which the activities are performed domestically and/or on the OCS since the OCS is treated as part of the U.S. for these purposes. Both time charterers and bareboat charterers must keep potential U.S. income taxes in mind when negotiating the terms of their charters. For example, it may be appropriate for such entities to negotiate tax gross-up provisions in their leasing arrangements to cover the potential incidence of U.S. taxation and thereby preserve their anticipated after-tax economic returns from the leases. respect to foreign entities operating on the OCS does not only fall on foreign corporations. Because the U.S. would have a host of administrative and jurisdictional issues involved in chasing foreign corporations for taxes, the Internal Revenue Code (Code) requires certain U.S. taxpayers to withhold tax on payments made to foreign corporations. In general, if a vessel is utilized in connection with purely domestic transport, the U.S. company that hires and pays a foreign corporation would have an obligation to withhold tax at a 30 percent rate on the gross amount of payments made to non-U.S. vessel owners (in the absence of an available Treaty reduction or exemption), and such U.S. company could be held liable for the tax in the event of a failure to withhold. For example, in the case of a time charter or bareboat charter, a time or bareboat charterer would be responsible to withhold U.S. income tax at the 30 percent rate on lease or rental payments made to the vessel owner/ operator (in which case the time or bareboat charterer would be liable for a failure to withhold). However, a U.S. company is generally not required to withhold such amounts if such vessel owner/operator provides to the U.S. company certain IRS Forms which evidence either (a) an exemption from taxation under an applicable Treaty (Form W-8BEN), or (b) an exemption from withholding based on the fact that the income is “effectively connected with a U.S. trade or business” (ECI) (Form W-8ECI). It should be noted that generally no withholding payments are required with respect to certain types of shipping-related income if a vessel is utilized in international transport, but purely domestic transport is not subject to this taxing regime.

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MARCH/APRIL 2011 THE MARITIME EXECUTIVE

It is vital to understand that the incidence of taxation with

INCOME TAX WITHHOLDING CONSIDERATIONS

An employer of a foreign individual that may wittingly or unwittingly become a U.S. tax resident as a result of work performed in the OCS over an extended period may also be liable for certain U.S. employment taxes. If an employee performing services on the OCS is treated as a U.S. resident alien for U.S. federal tax purposes (e.g., by reason of extended presence on the OCS), this individual may be subject to U.S. income tax on income from all sources, including sources outside the U.S., at the same rates and in the same manner as a

EMPLOYMENT TAX CONSIDERATIONS

TAX TRAP

26

U.S. citizen. Regardless of residency status, wages of a foreign employee with respect to services performed on the OCS may also become subject to tax in the U.S., and an employer may have an obligation to withhold such taxes from the employee’s wages. In addition, other service-providing entities (e.g., construction and engineering companies) operating on the OCS would generally also be subject to tax in the U.S. on their ECI, and their employees may become subject to U.S. tax on their wages as well. An employer and/or a foreign employee may also be subject to employment taxes under the Federal Insurance Contributions Act (FICA) and/or the Federal Unemployment Tax Act (FUTA). Under FICA, an employer is generally required to withhold Social Security taxes from wages paid to an employee during the year, and the employer must also match the amount of tax withheld from the employee’s wages. In addition, FUTA generally imposes a tax on any employer who paid at least $1,500 in wages during any calendar quarter in the current or preceding calendar year. An employer subject to either income tax withholding or Social Security taxes, or both, is generally required to file a quarterly federal tax return or, if eligible, an annual return.

raised by the above-mentioned rules are likely to become much more than a theoretical concern. In fact, the Service has already begun contacting certain foreign companies with respect to these issues, and its activity is likely to increase as a result of the creation of an OCS Task Force. U.S. and foreign companies engaged in activities related to the exploration for, or exploitation of, natural resources on the OCS would be well advised to have their operations reviewed to determine whether they are in compliance with these onerous and counter-intuitive tax provisions. MarEx

MARCH/APRIL 2011

Joseph T. Gulant is a partner at Blank Rome LLP and the practice group leader of the Business Tax Group. Jennifer L. Bell is a tax associate in the New York office of Blank Rome LLP. This article is prepared and published for informational purposes only and should not be construed as legal advice.
To ensure compliance with IRS Circular 230, you are hereby notified that any discussion of federal tax issues in this article is not intended or written to be used, and it cannot be used by any person for the purpose of: (A) avoiding penalties that may be imposed on them under the Code, and (B) promoting, marketing or recommending to another party any transaction or matter addressed herein. This disclosure is made in accordance with the rules of Treasury Department Circular 230 governing standards of practice before the Service.

In light of the recent sabre-rattling by the Service relative to tax enforcement activities with respect to Covered Activities and the related uptick in U.S. protectionist tax policies, the tax risks
THE MARITIME EXECUTIVE

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Closeness to the market, and an innovative mind-set has secured PG a strong position in its core markets. In all senses the company is now set for further growth - in an even stronger setting than before PG-MACS - the next generation below deck cargo handling solution - has proven its performance in the toughest environment Latest addition to the "PG-MACS Fleet" is DOFs MV Skandi Gamma - HN 738 at STX which went into operations mid feb 2011 Four "MACS-vessels" are sailing, and there are another four to be delivered in 2011 Drill Cutting transportation below deck, athmospheric, flexible tank clusters for wet and dry bulk, and extremely high capacities for Recovered Oil are hallmarks of this novel, w.w. patented solution PG-Hyde Ballast Water Treatment Systems have proven exceptionally well suited for OSVs, during its initial market introduction Through its modular design, and flexible lay-out options Hyde GUARDIAN BWTS offer competitive solutions in combination with PGs vast experience with maritime installations. Among the first IMO Type Approved systems, and based on the most efficient technologies, the Hyde modules have won market shares at high pace in International as well as Domestic markets. More than 100 installations secured, and first fleet agreements signed confirm competitiveness and trust to products and partners Skidded units, or modularized to fit the most space-limited footprints at retrofitting ships

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CLASSNK:
NOW IN ITS 112TH YEAR AND THE LARGEST CLASSIFICATION SOCIETY IN THE WORLD, CLASSNK IS A LEADER IN MORE WAYS THAN ONE.
BY TONY MUNOZ

CLASSNK

THE MARITIME EXECUTIVE

MARCH/APRIL 2011

8

HEN NEED NECESSITATES ACTION, good things usually happen. And so it was when Japan required oversight of its growing commercial shipping and shipbuilding industries. Teikoku Kaiji Kyokai (the Imperial Marine Association) was created in Tokyo in November of 1899 to assist the nation in developing regulations for its burgeoning maritime industry. The new organization’s primary function was to promote the industry while at the same time developing rules and regulations for the safe building and operation of ships. By 1920 the company had classed its first vessel, Kwanan Maru. In 1926 the society’s class notation, NS*, was formally registered with the Institute of London Underwriters, which amounted to recognition of TKK as an active classification society, and by 1929 the society had reached over one million gross tons under class.

CLASSNK

THE FOUNDATION OF CLASS
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MARCH/APRIL 2011 THE MARITIME EXECUTIVE

By the end of World War II, however, virtually all of Japan’s commercial ships and shipbuilding industry had been destroyed. In 1946 the society was relaunched under its current name, Nippon Kaiji Kyokai, and as the shipping industry in Japan slowly recovered ClassNK was called upon to survey the plethora of new vessel types being built in the aftermath of the war. By 1962 the company had opened offices in London and New York, and the emerging phoenix began to spread its wings with more than 70 locations including representation in every major port in the world. Today, ClassNK is the world’s largest classification society and has approximately 20 percent of the world’s commercial fleet on its registry. With more than 110 exclusive surveyor offices around the globe, the company goes about its business of

surveying, auditing, consulting and registering ship management systems, such as ISO 9001/4001 certification, and issuing material and equipment approvals 24 hours a day. Imagine the magnitude of an organization that works with over 100 flag states and classes more than 180 million gross tons with an average age of 10.2 years versus the global average of 22 years! Additionally, ClassNK has been leading the way with new initiatives in corporate social responsibility and in the use of new technologies to reduce marine pollution, ship emissions and ecosystem destruction. Further, the company created a Practical Promotion Division to coordinate and oversee strategic research and development throughout the organization, manage R&D work by different departments, and develop new technologies for the maritime industry and other interested parties.

CLASSNK

THE RIGHT HORSE FOR THE RIGHT COURSE
Noboru Ueda became ClassNK’s Chairman and President on March 1, 2008. He ascended to the position from within the ranks of the organization, which is rare due to the position’s normally being a political appointment. But Ueda’s vast experience provided ClassNK with the right leadership at the right time as the maritime industry was becoming the focus of global environmental issues. With a lifetime of working in the trenches, Ueda had a clear understanding of the numerous changes impacting the industry, and he set out to ensure ClassNK’s leadership, a process that included his own appointment as Chairman of the industry’s oversight organization, the International Association of Classification Societies (IACS), in 2010. Last year Ueda announced that ClassNK would commit 2.2 billion yen ($25 million) in research and funding as part

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THE MARITIME EXECUTIVE

MARCH/APRIL 2011

of its participation in national R&D programs to reduce greenhouse gases, representing more than 25 percent of the project’s total budget of 8.5 billion yen ($95 million) through 2012. Ueda made it clear that ClassNK and other societies must go beyond compliance goals for reducing maritime emissions and commit to the larger endeavor of funding and developing practical technologies to achieve a more meaningful reduction of atmospheric pollution from ships. Additionally, Ueda had a robust environmental agenda for his company, including solutions for problems arising from ballast water discharges, oil spills caused by ship casualties, the depletion of fishing resources, marine pollution from sources on land, and the physical destruction of the marine habitat.

PERFORMANCE STANDARDS BY CLASSNK
In response to the increasing demand for environmentally friendly ships, ClassNK has developed more realistic performance evaluation standards for ship designs prior to construction. Ships are normally evaluated during sea trials and usually in calm ocean conditions. While two ships may have the same efficiencies noted during the trials, they can be substantially different when operating in the real world of ever-changing currents, winds and

CLASSNK

31 waves. Further, there are operational differences of weather, trading routes and loading conditions, which make it difficult to measure ship performance once it has entered daily operations. Taking a page from the automotive industry, which uses multiple modes of environmental and operational conditions, ClassNK, in conjunction with the Japan Ship Technology Research Association, the National Maritime Research Institute and other interested parties, has developed a more realistic performance evaluation for ships through its new 10 Mode Performance Index. Currently these guidelines have only been applied to containerships and vehicle carriers. The Performance Index, which is a combination of theoretical calculations and practical tank tests capable of replicating a ship’s performance in sea conditions during the design stage, will be expanded to other vessels in the near future. In 2009 the Society reorganized the manner in which research and development was carried out within the company, foreseeing that it could be accomplished more effectively and efficiently by integrating departments engaged in similar activities. The key areas of the new streamlined endeavor are: R&D directed at classification and technical consultation services (rule development and related software, etc.) Practical R&D to provide solutions in the short-term to client/industry needs (damage prevention, etc.) R&D in new areas and fields (marine environmental preservation technologies, etc.), and Fundamental R&D (new and improved technologies, etc.).

MARCH/APRIL 2011 THE MARITIME EXECUTIVE

PRIMESHIP = “TOTAL SHIP CARE”
ClassNK has a wealth of technical and scientific data within the organization. In its continuing effort to provide the industry with the most up-to-date software available, it has upgraded, enhanced and organized this abundance of information into a program called PrimeShip. The concept of “Total Ship Care,” which is the premise of PrimeShip, allows ClassNK to ensure the safety and reliability of a vessel throughout its lifecycle – from inception, design and construction to operation, management and maintenance, until it is finally scrapped.

CLASSNK

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J ARCH/APRIL 2011 MA N U A R Y / F E B R U A R Y 2 0 1 1

As computers and software applications advanced, so did the scientific information collected, and new services were offered capitalizing on the various R&D activities and related technical advances. Today, PrimeShip consists of four groups and fourteen services. The primary groups are: Hull Group, which includes IPCA (Integrated System for Ship Performance Capability, NAPA Manager (Naval Architect Package), Hull Rules (ship designer structural requirements in accordance with IACS common structural rules), and Hull DSA (Direct Strength Assessment System). Machinery Group, which includes Shaft (Shaft Alignment Analysis Program), Crank (Crankshaft Stress Calculation Service) and Torres (Shaft Torsional Vibration Analysis Service). Operation Group, which includes ETAS (Emergency Technical Support Service), Chemisys (Integrated Database Service for Chemical Products), BulkCargo (carriage of dangerous substances and solid bulk cargoes), and Inventory (managing inventory of toxic substances for ship recycling per Ship Recycling Convention). Maintenance Group, which includes Hullcare (managing huge volumes of maintenance information and survey data), CAP (certifying the condition of aging vessels beyond the scope of regular classification and statutory regulations), and OAS (fuel oil and stern lubricant analysis). Today’s PrimeShip program has been based on years of scientific study and analysis. But new services will continue to be

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Ueda has made his position clear about ensuring that IACS will be an active partner with IMO and other international bodies in finding solutions to greenhouse gas emissions, fostering better communications about the role of class societies in addressing issues of global maritime safety, and offering industry-wide strategies on environmental issues related to shipping activities.

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MARCH/APRIL 2011

offered pursuant to the R&D activities, which are ongoing. While the aim of ClassNK’s sophisticated programs is to provide ship designers, shipbuilders, owners and managers with critical information for the overall safety of their ships, it also contributes to the safety of personnel and the marine environment.

CLASSNK’S LEADERSHIP IN INTERNATIONAL AFFAIRS
The recent announcement that the combined tonnage of Panamanian-flagged vessels under the society’s register had broken the 100-million-gross-ton barrier (the first time in history any flag state had registered this amount of tonnage with a single class society) once again emphasized the ever-growing need for a class society to ensure that its organization functions at the highest level of global maritime standards. In this regard, ClassNK is a leader, as demonstrated by its relation to the International Maritime Organization (IMO), the division of the United Nations responsible for global maritime affairs. IMO’s agenda is to develop and ratify conventions and resolutions related to ship safety, environmental protection and maritime security. ClassNK participates in IMO via both IACS, which has observer status and acts as a technical adviser to IMO, and by representing the Japanese government as its delegate. Additionally, it dispatches researchers and maritime experts to meetings of the Assembly and Council as well as the Maritime Safety Committee (MSC) and the Marine Environment Protection Committee (MEPC) and their respective subcommittees. Thus it was only appropriate that last year Noboru Ueda was appointed Chairman of IACS. After all, ClassNK was one of the

seven founding members of IACS in 1968, and IACS has worked closely with the IMO and other international organizations on standards for safety and quality within the classification sector. Ueda has made his position clear about ensuring that IACS will be an active partner with IMO and other international bodies in finding solutions to greenhouse gas emissions, fostering better communications about the role of class societies in addressing issues of global maritime safety, and offering industry-wide strategies on environmental issues related to shipping activities. Ueda had previously served as Chairman of the Association of Asian Classification Societies (ACS), which had been meeting informally since 1993. During its Annual Meeting in February 2010, the Association – with Ueda’s guidance – finally formalized and adopted its charter and appointed a successor. As ninety percent of the total tonnage constructed by shipyards emerges from Asia, as well as most marine cargoes and personnel, Ueda’s participation ensured that ClassNK would have a voice in the foundation of this important Asian organization. As the largest classification society in the world, ClassNK’s leadership role in the shipping and shipbuilding communities of Asia is unquestionable and vital due to the region’s dominance in maritime affairs. With the society now in its 112th year, its global political influence, generational expertise on scientific technical data, and leadership in contemporary environmental issues will mark its course for decades to come. Well done, ClassNK!
MarEx

Tony Munoz is Publisher and Editor-in-Chief of The Maritime Executive.

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MARCH/APRIL 2011

UEDA
CHAIRMAN & PRESIDENT, CLASSNK
SETTING THE AGENDA FOR THE WORLD’S LARGEST CLASSIFICATION SOCIETY AND THE INDUSTRY AS A WHOLE, KEEPS NOBORU UEDA BUSY AND CHALLENGED. HE LOVES IT. BY TONY MUNOZ

THE MARITIME EXECUTIVE

NOBORU

NOBORUUEDA
At the end of January we had 7,372 ships on our register totaling 180.4 million gross tons or about 20 percent of all ocean-going commercial tonnage.

MarEx: ClassNK was founded in 1899 to establish regulations for shipbuilding and shipping in Japan. How many vessels are registered with the company today? Ueda: At the end of January we had 7,372 ships on our register totaling 180.4 million gross tons or about 20 percent of all ocean-going commercial tonnage. MarEx: A significant amount of your registered tonnage is non-Japanese. Where are your key overseas offices and what countries are most supportive of the company’s services? Ueda: Since establishing our first overseas offices in 1962 in New York and London, we have steadily grown to become ever more international. Greek owners, for example, account for some 10 percent of our total tonnage, and we are also proud to be chosen as the class provider for many of America’s leading owners. In addition to Japan, we are the leading society in many Asian countries like India, Thailand and Indonesia and in European countries such as Turkey. On the shipbuilding

sions. The use of LSFO will be the practical reality for the vast majority of ships operating in ECAs (Emission Control Areas). The biggest challenge for owners in the short term will be the problems associated with LSFO – namely, poor combustibility – and this is an area where we have been working closely with our customers to provide workable solutions. The greatest challenge for our industry will not be SOx emissions but reducing CO2 (carbon dioxide) emissions and we believe this is the area where we can make the biggest contribution. In much the same way that Japan has taken a leadership role in GHG emission reduction via the Kyoto Protocol and the development of the EEDI (Energy Efficient Design Index) at the IMO, we hope to be a trigger for change in the shipping industry with regard to CO2 emissions. EEDI is one of the best ways to reduce CO2 because it helps reduce fuel consumption. So by improving ship efficiency we can not only reduce CO2 emissions but also reduce costs for owners. I firmly believe that we will see a green revolution in shipping over the next decade as EEDI comes into

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side, there are ships being built to NK class all over the world, including Asia (China, Korea, Vietnam, the Philippines, Malaysia, Indonesia, India), Europe (Bulgaria, Turkey), and South America (Argentina, Mexico, Paraguay). Our activities are truly global in scope. MarEx: One of the major challenges facing shipowners today is greenhouse gas (GHG) emissions. What is your organization doing to assist vessel owners in meeting this challenge? Ueda: It’s important to distinguish between different kinds of emissions. SOx (sulfur oxide) emissions, for example, are being targeted because they are a health hazard, but this can be addressed by the use of LSFO (low-sulfur fuel oil) as we have already seen in California. There has been a large amount of discussion about the use of LNG and scrubbing technology, but these are at best long-term solutions to address SOx emis-

effect. The next generation of ships will be the most environmentally friendly vessels ever. We’ve committed more than $25 million toward research to reduce GHG emissions, and we intend to play a central role in that effort. MarEx: What is ClassNK’s PrimeShip product? Ueda: PrimeShip is a suite of software services that covers every aspect of the ship from the design stage through operations, including support for ships involved in casualties. In order to prevent marine pollution from casualties, we offer a program called PrimeShip ETAS, which stands for Emergency Technical Assistance Service. We have almost 1,100 ships currently utilizing this service, including every type of oil carrier from small product tankers to VLCCs. While the service was developed with tankers in mind (in accordance with MARPOL regulations), there is increasing interest from bulk carrier owners as well, and bulk carriers now make up almost 10 percent of the

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ships registered for ETAS. Beyond marine pollution, one of the areas where we will be expanding the PrimeShip system is emission control. We’re about to finish development on our new PrimeShip-Green/EEOI software, which will be released in April. PrimeShip-Green/EEOI will make it easy for shipowners to benchmark their ship’s emissions and implement operational changes to reduce fuel costs and CO2 emissions. MarEx: Do all nations recognize ClassNK certification? Ueda: We are currently authorized to undertake surveys on behalf of 101 flag administrations around the world, including all of the world’s leading flag states. We are very customeroriented, and if a shipowner wants to use a flag that has not authorized ClassNK yet, we are more than happy to approach the flag state for recognition. In fact, we are actually involved in that process right now at the request of an owner. The hurdle for new recognition is not technical but political, such as U.S. mutual recognition laws. MarEx: Regarding common structural rules (CSR), what safety benefits come from combining rules for tankers and bulk carriers? Ueda: You have to remember that before CSR each class society had its own set of rules that had been developed completely independently of each other. So, for example, if you had two rules that had a similar outcome, the equation used to determine that outcome may have been completely different. With CSR, the International Association of Classification Societies (IACS) carried out a thorough review and revision of rules based on the technical expertise of each member society, and the result is a far more rational and transparent schema. There is no doubt in my mind that CSR has helped usher in an era of greater safety. At ClassNK, we had actually completed an extensive revision of our rules in light of new technology and practices when CSR was first being discussed, and our rules and guidelines for bulk carriers became the central part of CSR for Bulk Carriers. On the safety side, not only is CSR more rational, it also benefits from a greater amount of scrutiny. The previous practice was that each class society’s technical committee would examine the rules, but now every rule change is checked by the technical committee of every IACS member. CSR has also been a huge benefit for shipbuilders: For the first time there is a single set of rules for the hull structures of tankers and bulk carriers. This process will take a further step forward when we complete the

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We run extensive training programs for all surveyors, including long-term training in Japan several times throughout their careers…Last year we trained more than 100 surveyors from almost 29 countries at our head office in Tokyo…
Harmonized Structural Rules, which will be submitted to the IMO later this year. MarEx: How has technology developed by ClassNK’s Research Institute, established in 1955, advanced the industry? Ueda: ClassNK was actually the first society to introduce the use of large-scale computers for analysis. We’ve also been a leader in the application of new analytical technologies and the development of software based on those technologies. For example, we developed a system called NASTASS for the hull structures of bulk carriers, oil tankers and container carriers. This software in turn allowed us to develop new guidelines for structural assessment, which have been included in CSR and our PrimeShip-Hull software series, which is used by ship designers throughout Asia. We’ve also independently developed new software for calculating tonnage and ship performance called PrimeShip-IPCA, as well as a module for the design software NAPA, which is used by ship designers around the world to carry out the complex IPCA calculations within the NAPA system itself. We currently use both of these software systems to help shipyards and designers improve the performance of their vessels. MarEx: Which of the Institute’s discoveries have had the greatest impact on the shipping industry? Ueda: ClassNK has a long history of conducting research for the protection of life and the maritime environment and to benefit the industry. For example, based on our research we were able to develop a more rational and transparent method for assessing the strength of bulk carrier, oil tanker and container ship hull structures. Another area where we have made a huge contribution is the development of guidelines and class notations for new materials such as fatigue-resistant steels, corrosion-resistant steels, and high-tensile steels. The guidelines are what make the practical application of new materials possible, so in that way the rule development process directly supports the development of our industry. We’ve also helped develop revolutionary designs such as the non-ballast ship, which proved it was possible to have a commercial vessel that could operate safely without the use of ballast water. MarEx: Both the IMO and IACS have called for increased supervision and training of surveyors. What is ClassNK doing to ensure that its surveyors meet the highest standards? Ueda: We run extensive training programs for all surveyors, including longterm training in Japan several times throughout their careers and ongoing on-thejob training in their regions. Last year we trained more than 100 surveyors from almost 29 countries at our head office in Tokyo,

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NOBORUUEDA

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and the average length of their training was 51 days. It’s an incredibly intensive process, but the quality of our surveyors is the foundation of our services, so it’s worth every expense. MarEx: ClassNK has close ties with the World Maritime University in Malmo, Sweden and donates scholarships, equipment and technical expertise. Why is it so important for ClassNK to support organizations like WMU? Are there concerns about a future shortage of qualified surveyors? Ueda: The training of maritime specialists is of course a huge problem for the entire industry, and that is why we support WMU. In addition, at the behest of many of our clients we established the ClassNK Academy Program last year, which offers courses in everything from maritime regulations to hull repair and even tanker management. In line with our nonprofit mission of serving the maritime industry, we consider the ClassNK Academy a service and not a profit center. What limited fees we charge are only to cover the rental of the venue and so on. The program has been incredibly popular and, since we began it last year, we have conducted courses for more than 5,000 maritime professionals. To further support maritime education, we established the NK Award, which recognizes the scholarship of students engaged in cutting-edge research at leading maritime universities. We have implemented this award at 13 institutions in four countries (China, Korea, India and Bangladesh) and are considering further expansion. MarEx: You are now the Chairman of the IACS. What will be your focus and key agenda items? Ueda: I have three main goals: Provide technical leadership to the global maritime community, including the IMO; ensure that IACS rulings reflect the needs and views of the entire maritime industry and not just some geographic regions; and ensure a

While we have taken part in a number of incredible projects over the past several years, I would have to say I am most proud of ClassNK’s commitment to reduce maritime GHG emissions. Class societies are in a unique position to contribute to industry-wide changes with regard to CO2 emissions. We have a huge responsibility to the maritime industry, and I am very proud of our leadership on this issue.

successful transition to a new, more transparent structure for IACS. As key agenda items, there are two major challenges. The first is developing the new Harmonized CSR and ensuring its compliance with IMO’s Goal-Based Standards (GBS). As you aware, the CSR for tankers and the CSR for bulk carriers were developed independently of each other, but since their creation we have been working to harmonize the two sets of rules. We hope to have the Harmonized CSR completed this year. More importantly, the Harmonized CSR will be entirely GBS-compliant and ready for submission to the IMO by the 2013 deadline agreed to at last year’s Marine Safety Committee meeting. Harmonization has been a long and difficult process, but the end is finally in sight. The second challenge is GHG reduction. While class societies need to be leaders in this fight, we cannot act alone. It will be necessary to work with every sector of the industry to make GHG reduction a reality. At last December’s meeting in London between the IACS Council and high-level representatives from across the maritime industry, an IACS/Industry Joint Working Group was established to resolve the outstanding practical issues in using the IMO Ship EEDI for newbuildings. This was an incredibly important achievement that will help speed the implementation of EEDI. MarEx: What recent projects

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MARCH/APRIL 2011

are you most proud of? Ueda: While we have taken part in a number of incredible projects over the past several years, I would have to say I am most proud of ClassNK’s commitment to reduce maritime GHG emissions. Class societies are in a unique position to contribute to industry-wide changes with regard to CO2 emissions. We have a huge responsibility to the maritime industry, and I am very proud of our leadership on this issue. MarEx

Making the Case for
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THE MARITIME EXECUTIVE

O

il drilling is attracting more and more attention from the investment community. Dahlman Rose (DR), a New York investment bank specializing in maritime and natural resource companies, has now begun coverage of the drilling and oil service sectors. In their opening report, analysts Jim Crandall and Omar Nokta talk about “A Long Upcycle Ahead.” One overarching statistic dominates DR’s view – some $490 billion is expected to be spent throughout the world this year on oil exploration and production (E&P), up 12 percent from last year. Importantly, higher oil prices – above $100/barrel – have little impact on Crandall and Nokta’s thinking: “We have found a lot less sensitivity in E&P spending internationally to changes in oil prices than in North America.” It’s the high end of the drilling market (the “E” in E&P) that’s in the midst of a boomlet. Another Wall Street analyst who follows the sector, James West of Barclays Capital, recently published a report titled “The Offshore Rig Construction Cycle Has Firmly Taken Hold.” The title says it all. West pegs levels of fresh ordering since the beginning of 4Q 2010 at 12 floaters and 18 jackups with buyers holding a comparable number of options for additional rigs.

Excitement on Wall Street

Bankers in the financial markets have been working feverishly. February saw the announcement of an $8.6 billion merger with Ensco PLC (best known for its high-specification jackups) set to acquire Pride International, which made a big bet on ultra-deep (>7,500-ft. capability) drillships several years ago. This was not a distress deal: Most analysts who reviewed it said that Ensco paid a very full price for Pride’s units. An explicit facet of Pride’s strategy has been its focus on Petrobras and specifically its ultra-deepwater activities in the U.S. Gulf of Mexico, a capability lacking in Ensco’s portfolio. Within two weeks of the Ensco PLC/Pride announcement, Seadrill – the large driller linked to Norwegian tycoon John Fredriksen – began spinning off its “harsh environment” rig fleet into a separate company. Creating the new entity, to be called North Atlantic Drilling, will free up needed balance sheet capacity for Seadrill, which has played a big role in the new ordering binge described by Barclays’ Jim West. Following recent orders for two ultra-deepwater drillships at around $600 million each and four jackups at around $200 million each, Seadrill now has nine rigs under construction and options on eight more. Investors want in.

Offshore Drillers
Despite the Deepwater Horizon disaster, the future for these companies looks sunny and bright, says our columnist.
By Barry Parker
According to Seadrill, its institutional sale of equity, which raised $425 million for 25 percent of North Atlantic, was massively oversubscribed. Another driller, Norwegian-based Aker Drilling ASA, completed a $635 million IPO at the end of February and wasted no time in paying off its existing bond debt and placing an order for two 12,000-ft.-capable, ultra-deepwater drillships to be delivered from Daewoo in 4Q 2013 at an all-in cost of around $600 million each. complicated deal, the drillships will be built at a cost of $662 million each by a new holding company, Sete Brasil, owned partly by Petrobras and partly by a group of Brazilian institutional investors. Debt financing will be sourced from the Brazilian Development
MARCH/APRIL 2011

Keeping the Yards Busy

The yards producing the high-specification equipment are also benefiting. Singapore’s Keppel Corporation, the parent of Keppel FELS, has joined the ranks of locally hot stocks, and snippets of news from January and February show why. Maersk Drilling announced an order for two ultra-harsh-environment jackups priced around $300 million each and suitable for drilling in water depths of 150 meters in the North Sea. By early March, the rumor mill had Gazprom (the large Russian energy producer) in discussions with Maersk about a possible order of Arctic-suitable jackups. The Maersk order with Keppel FELS came within weeks of Transocean’s booking a pair of high-spec (albeit for benign conditions) jackups at the $200 million price point. Unlike the many speculative orders for drilling equipment, Transocean’s new units will both deliver into five-year contracts with a Chevron subsidiary in Thailand. Meanwhile, Ensco PLC announced an order from the same yard for two harsh-environment jackups capable of drilling to 400-ft. depths) at roughly $220 million each. Another driller targeting the jack-up sector, Discovery Offshore, was tied to an order at the Keppel yard for two harsh-environment jackups worth around $210 million each. Typically, options on additional units are attached to the primary orders.

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An additional bright spot for construction has been Brazil, where Petrobras has now awarded contracts on seven drillships, the first of 28 to be built at the Estaleiro Atlantico Sul (EAS) yard, which is owned by a group of Brazilian construction companies with participation from South Korea’s Samsung Heavy Industries. In a

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Bank (BNDES), commercial banks, and export credit agencies where foreign components are integrated into the construction. Showing the attractiveness of the sector, investors in Sete Brasil were already publicly discussing the potential for an IPO in 2015 after the first drillship delivers to Petrobras. Petrobras is now producing roughly 2.5 million barrels/day and expects to ramp production up above 4.0 million barrels/day by 2020. The EAS-built drillships will be chartered to Petrobras at rates between $430,000 and $475,000/day. A major uncertainty is the ultimate number of drillships needed by Petrobras and the timing of their deliveries. For companies like Transocean and Ensco, construction delays in Brazil would be good for business. They could lead to more expensive charter-ins of high-end equipment. The DR analysts summarized the situation in Brazil by saying, “Outside of the majors, we see the strongest growth in Latin America, driven of course by the massive spending plans of Petrobras.”

The Good and the Bad

44

The actual earnings of the listed drillers will, of course, be heavily influenced by the rate environment. Like asset values themselves, rates are well below their highs of 2007/8, when drillships capable of working in 10,000-ft. waters achieved day rates in excess of $600,000. Yet day rates for ultra-deepwater equipment never reached the “doom and gloom” lows of under $400,000/ day predicted in the dark days of early 2009. And certainly the

resumption of permitting for deepwater drilling in the U.S. Gulf should provide an additional fillip for the sector. Noble Energy received the first go-ahead under the new regulatory regime and will employ Ensco PLC’s dynamically positioned semisubmersible Ensco 8501 to open up a well that it had started just prior to the Deepwater Horizon disaster and was subsequently forced to wind down because of the moratorium. In a late February charter, Noble Corporation (the driller, separate from Noble Energy) agreed to charter its 12,000-ft-capable semisubmersible Noble Jim Day to Shell for $485,000/day, subject to permitting issues being resolved, for exploratory drilling in the U.S. Gulf. But the market is bifurcated. To paraphrase Dickens, it is the worst of times for some participants while others are enjoying the best of times described by Barclay’s and DR. At the lower end of the market, Seahawk Drilling, an owner of shallow-water, lowspec jackups in the Gulf of Mexico, threw in the towel in February and voluntarily filed for Chapter 11 bankruptcy in conjunction with the sale of its assets to competitor Hercules Offshore. Seahawk was a victim of bad timing with a clutch of rigs coming off charter several months before the Deepwater Horizon explosion and the subsequent drill permitting debacle. Strategically, Seahawk’s fortunes had been tied to the Mexican national oil company, Pemex, whose appetite for new tenders has continued to disappoint. Its latest fleet list reveals that 11 mat-supported jackups, suitable for drilling in the GOM, are cold-stacked. Indicative of the angst among owners of low-specification equip-

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ment, Transocean, the league leader with 71 deepwater rigs and 66 jackups, announced that it was taking an “impairment” charge of $1.01 billion on its standard jackups. Such charges reflect reductions in asset values that management views as permanent.

FPSOs, Equipment Makers and More

Floating Production, Storage and Offloading units (FPSOs) continue to play an important role in the production of oil and gas in deeper waters where pipeline infrastructures do not exist. FPSO solutions, where oil offloads into shuttle tankers, have been integral to serving offshore Brazil and West Africa. A marquee project in Ghana saw production commence in the Jubilee Field, operated by UK-based Tullow Petroleum and served by Modec’s FPSO Kwame Nkrumah MV21, a conversion from a VLCC. With 1.6 million barrels of storage capacity, the unit can process more than 120,000 barrels/day of oil, which is then stored for export in Suezmax tankers. For U.S. waters, the talk of more FPSOs in addition to BW Offshore’s BW Pioneer to serve areas beyond the Petrobrasoperated Chinook and Cascade fields seems to have waned. Peter Lovie, a Houston-based FPSO and shuttle tanker expert, commented that “BP's Tiber and Shell's Stones prospects in the deep remote GOM could be candidates, but neither operator has confirmed that.” Lovie worked with Devon Petroleum, which sold its 50 percent stake in the Cascade field to Petrobras. He added, “Today there are no FPSO projects on the horizon in the GOM,

and shuttle tanker prospects have likewise withered.” He contrasted this situation with mid-2007 when “There were multiple well-qualified contractors available and interested in providing FPSOs for the unique GOM requirements of deepwater and disconnectability.” For investors looking at the drilling business, equipment suppliers are also seeing the positive side of the construction pickup. Barclays’ Jim West cites National Oilwell Varco, the leading provider of top drives, hoisting and pipe-handling components, and Cameron International, a leading maker of blowout preventers, as beneficiaries of all the activity, much of which is occurring in waters far removed from Houston, where both of these suppliers are based. With oil prices poised to remain at or above $100/barrel, the outlook for the deepwater drillers and equipment and service providers is looking bright as long as the higher prices are driven by sentiment rather than more-enduring supply disruptions. DR comments that “Turmoil in the Middle East/North Africa is not positive for long-term stock performance and would cause us to reevaluate our position if it spread.” Aside from offshore Egypt and Libya, however, historical precedent suggests that tumult onshore might actually be conducive to additional exploration and production offshore, far from the fighting. You be the judge. MarEx

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Barry Parker is a frequent contributor to The Maritime Executive.
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MARCH/APRIL 2011

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An Ecospeed-coated hull reverts to pristine condition when the fouling is cleaned off.

Hempel: another job well done.

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arine structures exist in one of the harshest environments on earth. Their exposure to sea salt, mechanical damage, biological fouling, and deterioration from the sun and wind requires the development of coating systems that will protect the investment of the owner, meet the needs of operators, and look good – all at an economical price. It’s a tall order, and that’s why you should read this article. A wise investment in the right coating can go a long way toward ensuring the integrity of your vessel and will actually save you money over the long haul. It can also reduce your environmental footprint by lowering fuel consumption and thus the volume of emissions. Now for some background: Paints made their earliest appearance about 30,000 years ago with early cave-dweller drawings, and the first recorded paint mill in America was established in Boston around 1700 by Thomas Child. In 1867, D.R. Averill of Ohio patented the first prepared or "ready mixed" paints in the U.S., according to the American Coatings Association (ACA). ACA defines marine paints and coatings as those applied to commercial and military ships in both salt and freshwater. In this article, the terms “coating” and “paint” are used interchangeably; and the structures may be fixed or floating, such as offshore oil rigs, ships and recreational vessels. Since marine coatings are designed with particular properties to best protect and preserve the surfaces to which they are applied, there are various types depending on the area of application – interior, open deck or underwater.

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The Smart Way to Save Money and Go Green
and marine paints. In the marine industry, coatings of various types are routinely applied to interiors and exteriors with a significant focus of late on underwater hull bodies. Ecospeed®, a product of Antwerp-based Hydrex Subsea Industries, is a protective coating made from a vinyl ester resin base with glass platelets. According to Hydrex’s founder, Boud van Rompay, it is the only homogenous coating that provides both hull protection and mechanical antifouling properties. In glassflake lining technology, glass flakes are incorporated into a matrix of a tough carrier resin applied in the form of a liquid coating and cured to create a tough, glass-like product, forming a powerful bond with a host of diverse substrates. This proven industrial technique has now been adapted for marine use. After the curing process is complete and the vessel put back in service, the coating is conditioned by use into an exceptionally smooth finish with hull roughness brought down to less than 20 microns. The result is a more efficient hull, and hence substantial fuel savings can be achieved. Ecospeed’s® properties prevent fouling penetration, making the cleaning process extremely easy underwater or with high-pressure tools in drydock. A significant advantage, according to the manufacturer, is that cleaning can be repeated during the vessel’s lifespan without causing damage or deterioration to the coating surface characteristics. Ecospeed® is promoted as a once-in-a-lifetime investment with an expected lifespan of 25 years if maintained properly. That can add up to big savings.
THE MARITIME EXECUTIVE

The various types of coatings available in the industry are typically defined as (1) industrial coatings, which are applied at the time of manufacture, (2) architectural coatings, which are used for decorative purposes, and (3) special purpose coatings, which are divided into the following major sub-segments: automotive refinish coatings, aerosol coatings (which are largely for consumers),

CHOOSE YOUR WEAPON

One of the most challenging and significant developments in marine coatings recently has been the ban on tributyltin (TBT) compounds, which served as the standard antifouling coating for more than 40 years. With the IMO’s ban on the production and sale of coatings incorporating TBT, their presence was eventu-

CORROSION PROTECTION, FUEL SAVINGS AND LONG LIFE

MARINE COATINGS

MARCH/APRIL 2011

Hydrex diver cleaning an Ecospeed-coated hull using Hydrex underwater cleaning equipment.

48

ally eliminated, and copper-based coatings began taking their place. Concerns about the buildup of dissolved metals in bays and basins, however, soon drove the industry to explore other options. The result has been various innovative solutions that do not contain biocide elements. In addition to the need to protect hull structures from corrosion and find alternatives to TBT, the recent increase in fuel prices has driven manufacturers to develop coatings that reduce hull drag and thus the amount of fuel consumed in propulsion. According to Jim Brown of International Paint, a world leader in marine coatings,

Hempel coatings: serious muscle.

THE MARITIME EXECUTIVE

YOUR RELIABLE PARTNER IN SHIP, RIG & CREW MANAGEMENT

Founded in 1993, Lowland International NV is an international shipping company. We provide services for parties in the shipping and offshore industry involved in third-party technical ship management and ship operation. Lowland International NV operates on behalf of the ship and offshore owners and maintains a large pool of seafarers from 20 different countries. In several countries, Lowland International supports schools that are specialized in the education of Marine Officers. We serve a specific market for exacting clients. From our offices across 20 countries, we work to fulfill owners’ high expectations globally. With the regulations of the MLC coming into force in 2012, Lowland International NV is ready to provide the shipping and offshore industry with high quality services. To contact us, please visit our website: www.lowland.com Lowland International NV Lireweg 14 2153 PH Nieuw-Vennep The Netherlands P.O. Box 3036 2130 KA Hoofddorp The Netherlands T +31 (0)88 557 01 01 F +31 (0)88 557 01 50 E [email protected] St. Maarten Office Welfare Drive 16, unit #10 Cole Bay St. Maarten Mobile +599 587 992 E [email protected]

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MARINE COATINGS

MARCH/APRIL 2011

Application of PPG SigmaGlide 790 Tiecoat in drydock.

Application of International Paint's new Biocidal Antifouling Range.

50

the company was very active during 2010 in the introduction of new products. Shipbuilders and owners now have more choices to protect their assets and lower both fuel costs and volatile organic compound (VOC) emissions. Continued research and development, particularly in the area of adhesion mechanics, has resulted in the latest innovation to complement International’s line of Intersleek products. Intersleek 7180 Linkcoat, introduced last September, now allows access to fluoropolymer-based Intersleek 900 and silicone-based Intersleek 700 foul-release technology without the need and expense of full underwater hull blast cleaning.

Norwegian-based Jotun Marine Coatings, another big global player, recently announced the launch of Hull Performance Solutions (HPS), a revolutionary new concept which guarantees significant reductions in fuel consumption. An innovative combination of its SeaQuantum X200 antifouling product, service and performance monitoring allows HPS to measure hull performance over time and offer a unique money-back guarantee. “HPS represents a genuine game-changer in the marine coatings segment,” says Geir Boe, Vice President, Marine Coatings. Jotun is the industry’s first marine coatings manufacturer to back fuel reduction claims with a guarantee, based on verifiable results. Jotun uses sensors to capture information from different data points, which calculate fuel savings over time. “Jotun, compared to other technologies, will provide substantial fuel savings. We claim a 10.5 percent fuel saving, and either we deliver on high performance or we return the additional investment in SeaQuantum X200. That's how confident we are,” stated Morten Eikenes, Ph.D., Concept Development Director for HPS. Denmark-based Hempel A/S is another significant player in the marine coatings marketplace and has reported reductions in fuel consumption after application of HEMPASIL X3 aboard Holland America Line’s Zaandam and Prinsendam. The application of a full coat not only saved the company money but reduced CO2 emissions as well. Hempel states that HEMPASIL X3 is the only fouling-release system that is effective down to eight knots, which makes it an excellent choice fo r cruise liners. Cost issues have made life more challenging of late for coatings manufacturers. The recent recession led to a decline in demand for maintenance and repair coatings, yet raw material costs have been rising. “We have attempted to minimize the impact on our customers for as long as possible by leveraging our buying power and driving internal cost-saving measures,” stated Paul Westcott, Commercial Director of Marine & Protective Coatings for International Paint. PPG’s Jacques de Coninck, Director, Global Marine Coatings, noted that demand in the last year was still in line with expectations in the newbuild segment, primarily driven by the existing order book. “Demand still depends on the region with the largest newbuilding demand in Asia-Pacific. In North America there is a growing demand in the inland market as more financing becomes available,” he added. In the U.S., the paints and coatings industry employs over 348,900 people and product shipments by U.S. producers total

THE MARITIME EXECUTIVE

DREW MARINE
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MARINE COATINGS

52

THE MARITIME EXECUTIVE

MARCH/APRIL 2011

International Paint coating on Sevilla Knutsen.

about $22.5 billion. The U.S. exports about $1.6 billion in paint and coating products annually with exports to China valued at $60 million. In the marine industry, leaders such as International Paint continue to provide value to owners. Norwegian Sun’s Intersleek hull coating recently marked its 10-year anniversary in service. Norwegian Sun was first coated at newbuilding with fuel-saving Intersleek silicone foul-release coating and has since traveled more than 800,000 nautical miles with only minor touch-ups. Recent research findings from Professor James Corbett show that technology can considerably reduce emissions and bunker fuel costs and that International’s Fluoropolymer Foul Release Hull Coating saves an average of nine percent on CO2 emissions. More than 400 vessels in the commercial fleet currently use Fluoropolymer Foul Release technology for marine applications, making it one of the most widely used eco-efficiency technologies in the shipping industry. If similar fuel efficiency results were realized by all tanker and bulk cargo vessels in the commercial fleet, annual fuel oil expenditures could be reduced by $4.4 to $8.8 billion per year, according to the report.

For years the paint and coatings industry has aggressively sought to make products in an environmentally conscious way without compromising performance. The pressures of market demands and regulatory requirements have contributed to reductions in both hazardous pollutants and VOC emissions. PPG Protective

GOING GREEN

& Marine Coatings considers it an obligation and responsibility to wholeheartedly support new regulations, and their underwater hull coatings are designed to reduce hull roughness and contribute to fuel savings and CO2 reduction. Its packaging, such as in the recently launched SIGMADUR ONE product, a single-pack urethane polyester finish coat developed for onboard maintenance by the vessel’s crew, is unique. The one-pack properties make it user-friendly, reduce waste and improve efficiency. “PPG Protective and Marine Coatings continues to develop and bring coatings to market that meet the requirements of yards, owners and operators while complying with the latest regulations and standards,” stated Jacques de Coninck. According to Hydrex Subsea’s van Rompay, the history of marine coatings continues to be newly written. He believes it’s important to build an industrial underwater hull maintenance network that will provide ultra-fast and efficient services to shipowners on a global basis. “Regulation is too slow to produce the necessary change while pollution continues to increase at a dramatically high level,” he noted. “At Hydrex Subsea, innovative technologies like Ecospeed® are one way to keep ahead of the curve.” We couldn’t agree more. MarEx

Robert C. Spicer is a former cruise line executive and Chief
Engineering Officer in the U.S. Merchant Marine. He is currently working toward a Doctor of Education degree in Organizational Learning and may be reached at [email protected].

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FUELS&LUBES

54

THE MARITIME EXECUTIVE

MARCH/APRIL 2011

Lean, Mean and Green
By Jack O’Connell
ARPOL Annex VI changed everything. The new protocol regulating airborne emissions from ships signaled formal recognition by the IMO that the maritime industry bore some responsibility for the global proliferation of greenhouse gases and that it had an obligation to help reduce them. No more indiscriminate burning of heavy fuel oil to the detriment of the planet! No sir. Not unless you have an exhaust gas scrubber installed to get rid of those nasty fumes. Annex VI took effect in May 2005 and was ratified by the U.S. three years later with an effective date of January 8, 2009 for all U.S. vessels and foreign-flag vessels over 400 gross tons operating in U.S. waters. Compliance is obtained through the issuance of an International Air Pollution Prevention Certificate (IAPPC), which certifies that a vessel meets MARPOL requirements for ozone-depleting substances, nitrogen oxides, sulfur oxides, volatile organic compounds, shipboard incineration and fuel oil quality. Separate (and more stringent) requirements apply to Emission Control Areas (ECAs), of which there are currently two – the Baltic and North Seas. A third (North America, meaning Canada and the U.S., including Alaska and Hawaii) goes into effect in August 2012. Further complicating matters are local requirements for certain EU ports and states like California, which can be tougher even than the ECAs themselves. Life isn’t easy these days for global marine operators!

M

FUELS&LUBES

High-tech lubricants and low-sulfur fuels are making life easier for owners struggling to comply with strict new emissions protocols.
Targeting NOx and SOx
Of primary concern for shipowners are emissions of nitrogen (NOx) and sulfur (SOx) oxides. From a baseline known as Tier I, Annex VI mandates that NOx emissions be reduced by 20 percent effective the first of this year (Tier II) and by a whopping 80 percent for ECAs by 2016 (Tier III). Engine makers have been quick to respond to the challenge, and marine engines meeting Tier II compliance requirements have been available for several years. Tier III is the bigger challenge, and companies like Wärtsilä and ABB Turbocharging – to name two – are working on a range of technologies which, singly or in combination, will be capable of meeting Tier III requirements. Since approximately 75 percent of the output of a diesel or gas engine is attributable to the effect of turbocharging, ABB’s developmental Power2 twostage turbocharging system shows particular promise. The system relies on two turbochargers of different sizes working in tandem to enhance performance and reduce emissions. The other part of the power equation is valve control management (VCM), which allows variation of both valve timing and valve lift. Effective VCM can further reduce emissions and improve fuel economy. The biggest challenge of all comes with SOx reduction. The current standard requires maximum sulfur content for fuel of 4.5 percent. That drops to 3.5 percent next year and to a proposed 0.5 percent maximum by January 1, 2020. For ECAs, the current standard is 1.0 percent with a reduction to 0.1 percent by January 1, 2015. As Ravi Mehta, Director of Business Development for Det Norske Veritas (Americas) explains, “There are three basic solutions: You can either switch to low-sulfur fuel, which entails substantially higher fuel costs and modifications to piping systems to segregate different fuels and enable fuel changeovers; install an exhaust gas scrubber, which maintains your current fuel costs – you can continue to burn heavy fuel oil – but requires available onboard installation space and a significant capital investment to purchase approved equipment; or switch to LNG fuel, which is the cleanest form of energy and can significantly lower fuel costs. LNG, however, requires a large capital investment and massive storage space onboard to accommodate the fuel tanks.” (For a fuller discussion of LNG and its possibilities, see Art Garcia’s article elsewhere in this issue.) Mehta points out that the average sulfur content in fuel in ships operating today is 2.7 percent, well within the range required by next year. fuel mixtures. According to Peter Pilon, President & CEO of Kittewake Americas, a leading global provider of monitoring and testing solutions, “All of these side effects can cause a loss of power and even shutdown, as we have seen off California in recent years.” To combat low viscosity and reduced lubricity, Pilon recommends tungsten carbide-coated fuel injection pumps, or a fuel pump lubrication system. “To help keep the viscosity above the minimum specified value, installing a fuel cooler at the fuel injection pumps can keep the fuel temperature below 40oC and ensure a gradual changeover to prevent thermal shock,” he adds. Both Pilon and DNV’s Mehta emphasize the importance of good recordkeeping and maintaining bunker samples – both of which are IMO-mandated. “Fuel samples must be retained onboard for a minimum of 12 months and until the fuel is substantially consumed,” notes Mehta, “and bunker delivery notes must be available for inspection and retained onboard for three years.” Simply collecting and storing the samples properly can be a challenge in itself. Pilon points out that “Suppliers of sampling equipment, such as Kittiwake’s Bunker Sampling Storage Systems, provide abridged versions of the IMO guidelines with instructions and advice, making it much easier for the crew to sample correctly.” Monitoring and fuel testing are also key to avoiding problems. Onboard testing, for example, provides immediate results and ensures, prior to the changeover, that the fuel will not cause problems. “Kittiwake’s sampling services and those from the likes of FOBAS and DNV provide both test results and thorough analysis,” stated Pilon. “Should problems arise, they are on hand to provide detailed technical support that is often beyond the capabilities of a hard-pressed marine superintendent.” Vessels entering and exiting ECAs must also maintain written procedures documenting how fuel changeovers are accomplished. Changeovers often take longer than expected to accomplish – up to five hours and more – and ship captains should
MARCH/APRIL 2011

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THE MARITIME EXECUTIVE

The Challenges of Low-Sulfur Fuel

Switching to low-sulfur fuel, however, has its own set of problems, not to mention its high cost and limited availability. These include so-called “bad fuel,” potential engine and fuel system damage, low viscosity, reduced lubricity and incompatibility of

FUELS&LUBES
Concerned about fuel economy? Try slow steaming or variable speed propulsion to cut down on fuel consumption and maximize efficiency. The less fuel you burn, the fewer emissions you give off, and the more money you save. Today’s next-generation diesel engines are far more efficient than their predecessors, burning less fuel and doing it more cleanly. Diesel-electric propulsion is another proven method of lowering power usage and fuel consumption and, thus, emissions. Lubricants play a major role in maximizing efficiency and reducing engine wear and tear. Castrol Marine, for example, markets a full line of biodegradable and marine lubricants designed to enhance performance, minimize engine stresses and achieve measurable cost efficiencies. Because low-sulfur fuels require lubricants with lower alkalinity or base numbers (BN), the lubricants have to complement the fuel in terms of their ability to neutralize acidic species formed during combustion. Castrol offers a range of BNs in both its TLX Plus trunk piston engine oil product line and its Cyltech crosshead engine lubricant family. These lubes are specially formulated to maintain optimum viscosity and deal with the most severe demands of highly loaded

MARCH/APRIL 2011

56

make proper provision for this. DNV’s Vessel Petroleum Service assists in the development of changeover procedures and endorses changeover calculations. DNV even offers an ECA Survival Kit for those who are thoroughly confused! Kittewake’s Pilon adds that, for safety reasons, any fuel switching should be completed before entering ports or ECAs. Optimizing Engine Performance – Marine Lubricants Being green doesn’t mean you have to sacrifice performance.

THE MARITIME EXECUTIVE

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FUELS&LUBES

Thruster using Mobilgear's new fully synthetic SHC MT 68 gear oil.

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engines with low oil consumption rates, a characteristic of today’s modern engines. All of the major oil companies offer a full line of marine lubricants. Fairfax, Virginia-based ExxonMobil recently announced the introduction of Mobilgear SHC MT 68, a fully synthetic, extreme pressure marine gear oil formulated to optimize the performance of equipment operating under extreme conditions. “Today’s marine thrusters are operating under higher temperatures and under more stress,” stated Shaara Blome, Global Marketing Manager

for ExxonMobil Marine Lubricants. “Mobilgear SHC MT 68’s balanced formulation is specially engineered to meet these challenges, helping our customers optimize equipment performance, reduce oil consumption, extend oil drain intervals and reduce maintenance costs.” Total Lubmarine’s Talusia Universal cylinder lube oil is the first to work with both high and low-sulfur heavy fuel oils, saving the shipowner the expense of changing marine lubricants when switching fuels and entering ECAs. “One must admit that lubricants have not always been at the top of the priority list for shipowners,” observed Patrick Havil, Global Marketing Manager at Total Lubmarine. “When the North American ECA comes into force in 2012, it will affect 50 percent of maritime traffic. And the

THE MARITIME EXECUTIVE

MARCH/APRIL 2011

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FUELS&LUBES

MARCH/APRIL 2011

60

issue of which lubricant to use will be absolutely vital.” Cleveland, Ohio-based Terresolve Technologies produces a full line of environmentally safe, readily biodegradable, non-sheening and nontoxic lubricants for the maritime industry under the brand name EnviroLogic®. The high lubricity level of Terresolve’s products reduces friction and wear, which keeps equipment operating cooler and longer. “We have maritime applications running for over nine years without a changeout of fluids,” stated Terresolve CEO Mark Miller. “By increasing overhaul interval time by even one year, a vessel can save tens of thousands, if not hundreds of thousands of dollars.” Miller adds that Terresolve’s readily biodegradable lubes (meaning they will break down over 90 percent within 28 days) do not leave a sheen on the water if spilled, a feature that sharply reduces or even eliminates the risk that a company will have to pay the environmental fines or cleanup costs associated with a spill.

Putting It All Together

All of these products and procedures are designed to provide peace of mind to anxious shipowners and, more importantly, secure the all-important IAPP Certification for their vessels, allowing them to operate freely anywhere in the world. But some-

times it isn’t as simple as that. The interpretation and application of regulations can vary from one port to another, and from one country to another. Achieving certification in your home port is the key, and that is not always a slam dunk. At a conference in Miami last month, Paul Bates, Chief of Inspections for the U.S. Coast Guard, Sector Miami, offered good practical advice and emphasized the importance of getting to know your local OCMI (Officer in Charge of Marine Inspection). Their names can be found on the USCG’s Homeport page (homeport.uscg.mil) along with other essential information for vessel operators. Bates also encouraged operators to ask questions and appeal rulings if they did not agree with them. In an ideal world, as DNV’s Ravi Mehta only half-facetiously pointed out, all ships would run on LNG and be ballast-free, and DNV has in fact demonstrated the feasibility of such a vessel. Until then, however, shipowners must resort to expediencies like low-sulfur fuel, exhaust gas scrubbers, next-generation diesel engines, and high-tech lubricants to meet their performance and environmental requirements. It’s not easy being lean, mean and green, but it’s well worth the effort. MarEx

THE MARITIME EXECUTIVE

Jack O’Connell is Senior Editor of The Maritime Executive.

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Gulf Provider - SSV
Year Built Fuel Cabins / Berths 1979 161,162 gals. 4/13

Gulf Quest - DP1 MSV
Year Built Dimensions (L x B x D) Liquid Mud Deck Space (L x W) Deck Cargo Cabins / Berths 2009 170 ft. x 36 ft. x 12 ft. 2,500 BBLS 110 ft. x 30 ft. 360 LT 2/5

Miss Hayley - DP1 MSV
Year Built Dimensions (L x B x D) Liquid Mud Deck Space (L x W) Deck Cargo Cabins / Berths 2006 170 ft. x 36 ft. x 12 ft. 2,120 BBLS 110 ft. x 30 ft. 500 LT 3/10

Gulf Pride - MSV
Year Built Dimensions (L x B x D) Liquid Mud Deck Space (L x W) Deck Cargo Cabins / Berths 1999 150 ft. x 36 ft. x 11 ft. 1,195 BBLS 75 ft. x 30 ft. 365 LT 5/16

Maximum / Cruising Speed 12 / 10 Knots

Maximum / Cruising Speed 12 / 10 Knots

Maximum / Cruising Speed 12 / 10 Knots

Maximum / Cruising Speed 12 / 10 Knots

Master Everett - DP1 OSV
Year Built Dimensions (L x B x D) Liquid Mud Dry Bulk (L x W) Deck Space (L x W) Deck Cargo Cabins / Berths 2008 225 ft. x 48 ft. x 16 ft. 6,000 BBLS 6000 cu. ft. 159 ft. x 41 ft. 1,200 LT 5/16

Gulf Wind - OSV
Year Built Dimensions (L x B x D) Liquid Mud Dry Bulk (L x W) Deck Space (L x W) Deck Cargo Cabins / Berths 1984 180 ft. x 40 ft. x 14 ft. 1,585 BBLS 4,000 cu. ft. 115 ft. x 30 ft. 600 LT 7/19

Gulf Sun - OSV
Year Built Dimensions (L x B x D) Liquid Mud Dry Bulk (L x W) Deck Space (L x W) Deck Cargo Cabins / Berths 1975 (stacked in ‘97) 235 ft. x 40 ft. x 17 ft. 2,750 Bbls 11,646 cu. ft. 155 ft. x 32 ft. 1,400 LT 6/17

Gulf Service - SSV
Year Built Fuel Cabins / Berths 1977 158,717 gals. 7/24

Maximum / Cruising Speed 12 / 10 Knots

Maximum / Cruising Speed 12 / 10 Knots

Maximum / Cruising Speed 12 / 10 Knots

Maximum / Cruising Speed 1 2/13

Gulf Storm - DP1 FSV
Year Built Dimensions (L x B x D) Deck Space (L x W) Fuel Water Cabins / Berths 2009 175 ft. x 30 ft. x 14 ft. 100 ft. x 25 ft. 27,200 gals. 34,800 gals. 4/7

Gulf Fury - DP1 FSV
Year Built Dimensions (L x B x D) Deck Space (L x W) Fuel Water Cabins / Berths 2009 175 ft. x 30 ft. x 14 ft. 100 ft. x 25 ft. 27,200 gals. 34,800 gals. 4/7

Miss Emma Jo - DP1 MSV
Year Built Dimensions (L x B x D) Liquid Mud Deck Space (L x W) Deck Cargo Cabins / Berths 2006 170 ft. x 36 ft. x 12 ft. 2,500 BBLS 110 ft. x 30 ft. 360 LT 3/10

ERT Larry Moore - MSV
Year Built Dimensions (L x B x D) Liquid Mud Deck Space (L x W) Deck Cargo Cabins / Berths 1994 150 ft. x 36 ft. x 11 ft. 1,195 BBLS 85 ft. x 30 ft. 365 LT 5/18

Maximum / Cruising Speed 34 / 31 Knots

Maximum / Cruising Speed 34 / 31 Knots

Maximum / Cruising Speed 12 / 10 Knots

Maximum / Cruising Speed 12 / 10 Knots

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Year Built Dimensions (L x B x D) Deck Space (L x W) Fuel Water Cabins / Berths 1985 145 ft. x 28 ft. x 11 ft. 82 ft. x 24 ft. 12,000 gals. 20,000 gals. 3/5

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Maximum / Cruising Speed 24 / 20 Knots

FUEL OF THE FUTURE

IS LNG THE FUEL OF THE FUTURE?
By Art Garcia
MARCH/APRIL 2011

62

THE MARITIME EXECUTIVE

The economic and environmental benefits of LNG-fueled vessels are compelling – and surprisingly affordable.

Telephone - (757) 873-6800 Facsimile - (757) 873-3632 Toll Free - 1 855-873-6800

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MARCH/APRIL 2011

Five ferries in Norway are powered by Rolls-Royce Bergen gas engines and have amassed some 25,000 operating hours.

L

ike most major industries, transportation contributes to the growing global problem of airborne emissions, fouling the air and resulting in major health problems in the U.S. and around the world. In the maritime sector, a big rebound in shipbuilding is expected with international ordering of new ships projected to jump 35 to 80 percent over the next several years, largely to replace aging tankers. More vessels means more air pollution, unless companies design newbuilds and convert existing vessels to reduce pollutant emissions. What’s the best solution to this global problem as operators face continued tightening of emission regulations that begin taking effect in the U.S. and Canada in August of next year? Many marine veterans and experts argue it’s liquefied natural gas (LNG).

THE MARITIME EXECUTIVE

U.S. shipping in 2008 emitted 3.6 million tons of nitrogen oxides (NOx), 2.1 million tons of sulfur oxides (SOx) and 127 million tons of CO2, reports Det Norske Veritas (DNV), the Norwegian classification company, in its February report entitled “Greener Shipping in North America.” The marine NOx emissions, it

THE EMISSIONS’ CHALLENGE

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FUEL OF THE FUTURE
Emission Control Areas (ECAs) last year, and ECAs will be introduced in the U.S. and Canada beginning in August of next year. There’s talk of extending ECAs to Mexico, Japan and the Mediterranean Sea. “By 2020, there will be a number of areas where shipping is going to be trading within ECA areas,” predicts Kenneth Vareide, Director of Operations for DNV’s North American maritime operation in Houston.

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The IMO requires that, beginning August 2012 in the North American ECAs, fuel LNG has been selected as the fuel, and Rolls-Royce is to supply the complete propulsion system including the gas engine, for this unusual vessel that will carry feed to fish farms along the coast of Norway. sulfur content be cut to below 1.0 percent said, are comparable to the emissions from more than 200 million and further reduced to below 0.1 percent beginning January 1, cars and the CO2 emissions to those from 24 million autos. The 2015. To comply, ships must either change fuel quality or fuel journal Environmental Science and Technology warns the global type or clean the exhaust gas to a corresponding emission level. marine sector could be responsible for 60,000 deaths annually. After 2016, NOx emissions from newbuildings must be reduced In just the U.S., estimates the Environmental Protection Agency, by approximately 75 percent. The European Union has already shipping is responsible for between 8,100 and 21,000 premature introduced 0.1 percent sulfur as a maximum level for a ship’s fuel deaths and 8.9 million cases of acute respiratory symptoms. when in ports and on inland waterways. With the broad backing of local and regional regulatory agenEmissions reduction requirements are being implemented cies around the world, the International Maritime Organization gradually and will be in full force by 2015 and 2016, “leaving (IMO) is toughening environmental requirements for the entire shipowners a limited number of options for modifications to their industry. The North and Baltic seas were designated as special ships so as to continue trading in North America,” said DNV’s

NORTH AMERICAN ECAs

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MARCH/APRIL 2011

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FUEL OF THE FUTURE
Vareide. Shipowners and operators “basically have three options to choose from – switch to low-sulfur fuel within the ECA areas, install scrubbers to remove the sulfur from the exhaust gas, or switch to LNG as fuel,” he added. What do the ECA requirements mean for coastal shipping? DNV’s report concludes the short answer is that shipowners “need to do something to their existing fleet of ships to comply. This is a ticket to trade in the future. Leaning back, closing their eyes, hoping this will pass is the surest way out of business.” The long-term answer, it emphasizes, is to turn to LNG-fueled engines as “the best option.” Heavy fuel oil is not an option. Alternatives have to be introduced, and LNG is the “obvious choice” to satisfy future ECA requirements, particularly for short sea shipping. “LNG is here to stay, and short sea shipping is the most obvious place to start,” noted Tor Svensen, DNV’s President. cargo ships and high-speed ferries. Washington State Ferries (WSF) in Seattle sails 21 ferries, soon to be 22, burning a No. 2 diesel on 15 of the craft and a B-5 bio-diesel blend on the others. “We’re very interested in exploring the LNG option, perhaps on our new construction and maybe on a retrofit, but we’re in the very early stages of exploring that option and the challenges associated with it,” said Paul Brodeur, Director of Vessel Maintenance, Preservation and Engineering for the agency. “We’re in the fairly early stages of investigating the feasibility and practically of using LNG in this country, given that we’re 10 years behind the Europeans.” Norway, with the largest fleet of LNG-fueled ships in the world, has a number of new LNG vessels coming online. Six of those in service are car ferries, the others passenger ferries and offshore supply vessels. A study commissioned by WSF found that LNG use is “both practical and cost-effective.” It said that although the capital cost of the LNG engines and tanks is high versus conventional diesel equipment, the fuel cost savings are estimated at $870,000 a year based on 2010 prices. For pure gas propulsion engines, NOx emissions would be reduced at least 90 percent and particulate matter and SOx emissions would be virtually eliminated, while CO2 would be trimmed by approximately 20 percent. Brodeur said WSF, which carries 23 million passengers a year, sees LNG as “a path forward, not only for cost savings, with fuel costs the way they are, but also for green aspects, the emission benefits that come with gas. But there are some challenges,” he admitted, “regulatory for one, and also public perception of LNG, which is a really tough sell, with safety the number one consideration.” WSF plans to “get out ahead early” and educate people within and outside the organization. “I hope we can get some good momentum behind the issue because I believe LNG is the fuel of the future and you’re not dependent on crude oil and the crude oil spikes that we’re currently seeing in the market place,” he said. “It’s exciting.”

MARCH/APRIL 2011

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Proponents of LNG note that more than 20 vessels in operation in Norway have proven the technical feasibility of LNG as a fuel. The first ship with LNG propulsion was a ro-ro passenger ferry launched in 2001 to meet a requirement of the Norwegian government that a specific ferry route be operated by a gas-fueled ship. Next came an offshore supply vessel, followed by several more ferries and supply ships and three Norwegian Coast Guard patrol vessels. Current order books for ships running on LNG include ro-ro and passenger vessels, liquid bulk tankers, special-

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Indeed, but is LNG, as Brodeur contends, really the “fuel of the future?” DNV maintains the technical feasibility of LNG is proven by the more than 20 ships in operation in Norway. And Wartsila, Rolls-Royce, MAN Diesel and Mitsubishi Heavy Industries produce gas-fueled engines currently available on the market. Rolls-Royce will provide natural gas engines and main azimuth thrusters for a double-ended passenger/vehicle ferry for Norwegian operator Fjord 1. It will be the world’s largest gas-engine ferry. Five ferries powered by Rolls-Royce gas engines fueled with LNG already operate these services. Nor Lines, operator of a fleet of liner vessels that serve ports in northern Europe and Russia, turned to Rolls-Royce for its planned fleet renewal program that’s based on efficient vessels that meet current and future needs with a minimum impact on the environment. The ro-ro vessels operate in ECAs, so exhaust emissions are of prime importance. The company has signed on with Rolls-Royce for ship design and its gas-engine technology. The lean burn engine reduces CO2 by about 22 percent, said Rolls-Royce, and NOx by more than 90 percent compared with liquid-fuel engines, while sulfur oxides and particulates are negligible. Robert Loseth, Rolls-Royce Senior Vice President for Merchant Propulsion and Engines in Oslo, Norway, believes “An

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FUEL OF THE FUTURE
Age of LNG is going to happen. That’s why we have invested in developing engines for burning LNG or gas from LNG.” The company has manufactured 500 LNG engines, primarily for the land-based market, and 24 LNG engines are running on ships, mainly ferries. About 16 engines are in the order book, half ferries and half cargo vessels. A second-generation natural gas engine is being manufactured for two transport vessels for Bergen, Norway-based Sea Cargo. In 2009, Rolls-Royce invested £864 million in research and development, two-thirds of which was to improve the environmental aspects of its products, in particular emissions’ reduction. Captain Kevin Coyne, Executive Vice President of the Americas for Germanischer Lloyd classification society in Houston, “definitely” sees LNG as tomorrow’s fuel for the maritime industry, saying “It makes sense on many fronts, first on an environmental front. Just the pollutants’ reduction alone is worth the change to LNG. When you look at the availability, there will be more LNG available in the future on a volume basis,” although some innovative technologies will have to be employed. “We’re converting a small bulk carrier right now for dual-fuel usage,” said Coyne, who’s responsible for maritime and environmental compliance at GL. His company is working with Wartsila on conversion of a bulk carrier vessel to run on heavy fuel oil or compressed natural gas. He expects “more progressive” companies to look closely at dual fuel because that can be done with some existing engines. GL has developed prototype designs for a gas-fueled bulk carrier and has a design for a gas-fueled coastal container ship. For storage, the design calls for a dedicated place in either the cargo block for a container ship or bulk carrier or on the deck for a tanker. “It’s almost like a container rack that can be fitted and locked onto the deck,” he explained. “You’d have these modules fueled ashore and then brought to the ship. It’s almost like putting batteries in and taking batteries out.”

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An LNG-fueled propulsion plant might add about $3.6 million to the cost of a typical domestic cargo ship. But over the operating life of the vessel, at today’s gas rates, LNG fuel would save more than $4 million over scrubbers and $12 million for low-sulfur fuel, reported Vareide of DNV. “LNG is particularly attractive for vessels with a fixed trading pattern, which should fit well with the biggest segments – ferries, offshore support vessels and tug/ push boats,” he said. “Besides, much of the coastal trade in the U.S. is fixed in its trade pattern and we have been in contact with several companies that are considering LNG for newbuildings and conversions.” “If you’re looking at a vessel for construction from 2015 on and you’re not really seriously looking at gas,” added Coyne, “you’re making a mistake.” Take note, MarEx readers. MarEx

PAY ME NOW, OR PAY ME LATER

MARCH/APRIL 2011

Art Garcia is a West Coast-based correspondent for The Maritime Executive.

THE MARITIME EXECUTIVE

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Maritime Operational

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ire on the Horizon is a fast-paced story about the Transocean workers who would eventually be at the center of the greatest oil-related disaster in U.S. history. As Americans painfully watched 4.9 million barrels of oil gush from the failed blowout preventer for months, killing thousands of birds, endangered turtles and dolphin and devastating hundreds of miles of wetlands along the Gulf Coast, BP’s media incompetent CEO, Tony Hayward, and his top executives simply disintegrated before our eyes as they paraded “Junk Shot” and “Top Kill” as solutions for the ecological nightmare. Meanwhile, Gulf Coast communities and industries slid closer and closer into economic crisis from both the actual spill and the federal government’s halting of drilling operations in the Gulf of Mexico. Humanizing this great American tragedy is the essence of Konrad and Shroder’s work. From his early years at SUNY Maritime to moving rigs out of shipyards in Korea to the decks of the Deepwater Horizon hovering 5,000 feet above Macondo 252, one of the richest oil finds in the Gulf of Mexico, Konrad’s ability to dissect the lives of mariners and rig workers is a powerful resource in moving the book forward to its ultimate crescendo. Macondo had been a troublesome well to drill and was over budget. Decisions by BP to begin cutting corners, end drilling operations and cement the wellhead only made matters worse and further exasperate the helpless reader. Konrad and Shroder do a masterful job in creating anxiety and concern for the doomed rig workers even though the outcome is already known. On April 20, 2010, at 2145 hours on Block 252 of the Mississippi Canyon, all hell breaks loose as loud hissing and methane gases overcome the rig. Suddenly, explosions rock the platform as terrified workers begin to realize the frightening reality that Macondo is a blowout. As the explosions continue and thick black smoke fills every escape route, the accounts of confusion and fear are overwhelming. Soon men are jumping in the water thinking they had made it, only to discover that their skin was on fire from the flaming oily seas. Many men were saved that day, but eleven men died. The authors skillfully remind us that the Deepwater Horizon workers were just ordinary people with families and that rig jobs allowed them a better life. They also remind us that companies are in the business of making money and have their own agenda. Fire on the Horizon is a must-read and can be found in bookstores everywhere. MarEx

THE MARITIME EXECUTIVE

MARCH/APRIL 2011

John Konrad is a veteran oil rig captain and former employee
of the Deepwater Horizon’s owner, Transocean. He is also the founder of gCaptain.com, the maritime industry’s leading blog. A graduate of SUNY Maritime, he lives with his wife and children in Morro Bay, California.

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BIC Alliance: One-stop shop helps your company grow B
IC Alliance’s mission is “to connect people in business and industry with one another for the betterment of all” and in a business setting, better usually means growth. When a company looks to grow, it can do so in three ways: an aggressive marketing plan, hiring the right people, and acquiring businesses (or obtaining capital for expansion). BIC Alliance Founder and CEO Earl Heard and his partner Thomas Brinsko have developed a unique business model to help businesses accomplish all of these growth opportunities with the BIC Alliance family of companies. BIC Magazine There are many great vertical energy publications that reach individual sectors of indus-

try. Business & Industry Connection (BIC) Magazine — the Western Hemisphere’s largest multi-industry energy publication — is uniquely directional, covering the refining/ petrochemical, drilling and exploration, pipeline, marine, terminal, pulp and paper, power generation and heavy construction industries. Companies who want to reach key decision makers in the downstream, upstream and midstream markets can do so by utilizing BIC Magazine and the value-added services it offers. Departments in the publication cover industry concerns such as safety, maintenance, purchasing and the environment. BIC is also featured online in its entirety at www.bical liance.com and is accessed worldwide. BIC Recruiting Since the division’s first placement in 1999, BIC Recruiting’s focus is on sales and marketing management, general management with P&L expertise and mid- and senior-level sales executives. By working with its investment banking affiliate, BIC Recruiting has expertise in the placement of C-level executives for employers in existing as well as new positions where mergers and acquisitions have occurred. BIC Alliance has an extensive network of more than 25,000 contacts that allows it to fill a variety of positions throughout industry. The network is used as a starting point for a proactive targeted search for the best candi-

dates for a particular position. BIC Recruiting conducts screening and reference checks, arranges interviews and provides any necessary candidate assessment tools that allow the employer to assure a good fit will occur for both employer and candidate. Lastly, through partnerships with other recruiters, BIC Recruiting also has expertise in placement of marketing, operations, engineering, environmental, health and safety professionals. IVS Investment Banking IVS Investment Banking (IVS) allows BIC Alliance companies to be a one-stop shop not only for marketing and talent acquisition but also for merger and acquisition matchmaking, investment banking and recapitalization. IVS has seen a number of large deals to completion since its inception, celebrating 14 years of merger and acquisition intermediary services in 2011. IVS counts TIMEC’s acquisition of HRI and Wingate Partners’ recapitalization with USA Environment among its successes. IVS also served as intermediary in a joint venture with Petrochemical Services Inc. (PSI) and Tradebe Group. Through relationships and interest from strategic buyers such as BIC Alliance members and the limited universe of private equity groups, IVS is able to run a “dual-path” when representing sellers, maximizing value for its clients. If you are interested in learning more about a BIC Alliance marketing campaign, BIC Magazine, BIC Recruiting or IVS Investment Banking, visit www.bicalliance. com or contact Thomas Brinsko at (281) 538-9996 or [email protected] or contact Earl Heard at (800) 460-4242 or [email protected].

IVS Investment Banking’s Thomas Brinsko, far left, and John Zapalac, far right, visit with, from left, Dennis Turnipseed of Total Safety; Jimmy Foret, owner of Wholesale Radio; David E. Fanta, CEO of Total Safety; Chad Knight of Wholesale Radio and Steven Cowan of Total Safety. IVS Investment Banking was the exclusive advisor to Wholesale Radio Rental when it was acquired by Total Safety in 2009.

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COATINGS DIRECTORY
BIPACCO COATINGS
At Bipacco Coatings, we're maritime paint experts. From our low VOC Captain's Choice water reducible enamels, to our safety-conscious Eco-Tred barge coat, we craft quality paint and coatings for freshwater and bluewater use. We also distribute Jotun products, making us a top one-stop supplier for all your marine protective needs.

ePAINT COMPANY
ePaint Company specialized in eco-friendly solutions for biofouling control. ePaint antifouling coatings are copper-free and safer for our environment. Founded in 1991 to market environmentally friendly coatings, the Massachusetts-based company manufactures protective coatings for the marine marketplace. For additional information visit us on the web, www.epaint.com.

Bipacco Coatings, LLC T: +1 573 885 2506 F: +1 573 885 2565 [email protected] www.bipacco.com
MARCH/APRIL 2011

ePaint Company T: +1 (508) 540-4412 F: +1 (508) 495-3210 Toll Free: +1 (800) 258-5998 www.epaint.com

HEMPEL USA , INC.
Hempel (USA), Inc. develops and produces high standard coatings with the same consistently high quality since it was established in 1915. Our network of stock points, Coating Advisors and Sales Professionals are strategically placed in the country to ensure that we are always able to satisfy our customers with the optimum quality and service.

INTERNATIONAL PAINT LTD.
International Paint Ltd is the worlds largest marine coatings manufacturer. We deliver proven performance in service whilst representing value for money. With 17 manufacturing plants, operations in 60 countries and over 500 delivery points worldwide, we believe we are the most reliable marine coatings supplier in the world.

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Hempel (USA), Inc. T: +1 936 523 6000 F: +1 936 523 6073 [email protected] www.hempel.us
THE MARITIME EXECUTIVE

International Paint Ltd. T: +44 (0) 191 401 2192 F: +44 (0) 191 495 2003 www.international-marine.com

MASCOAT PRODUCTS
Mascoat Products manufactures Mascoat Marine-DTM Thermal Insulating Coating and Mascoat Sound Control-dB Sound Damping Coating. Both coatings are spray-applied, allowing for easy application to complicated geometrical surfaces. Both coatings can be used standalone or in conjunction with conventional insulation. They are the only insulating/damping coatings to have all major marine approvals.

NACE INTERNATIONAL
NACE International is the largest worldwide association dedicated to protecting people, assets, and the environment from the effects of corrosion. NACE provides resources to the marine industry to support infrastructure sustainability and asset preservation through technical training and certification programs, conferences, and industry standards, reports, and publications.

Mascoat Products T: +1 800 769 0233 www.mascoat.com

NACE International T: +1 281 228 6223 fi[email protected] www.nace.org

SHERWIN WILLIAMS
Sherwin-Williams Protective & Marine Coatings delivers smarter asset protection to the Americas with a broad line of high-performance coatings, comprehensive technical service and the industry’s largest distribution system. Sherwin-Williams provides environmentally responsible and cost-effective coatings solutions for applications where extreme corrosion, abrasion and chemical attack are present.

SSPC
SSPC is recognized as the leading society in protective coatings. Its surface preparation and coatings standards have guided the use of coatings worldwide since 1950. Coatings professionals rely on SSPC for a wide array of training and certification programs. Current SSPC membership includes 8,000+ coatings professionals and 750+ industry-related companies.

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