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Brazil Update: New

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Finance: Do Annual

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Offshore Market Report: JosĂŠ Aveggio

Chairman, Detroit Chile S.A.

Long-Term Energy Needs & Deepwater Drilling Keep OSV Market Afloat


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3

Contents 26 32 Executive Interview:

Case Study:

Detroit Chile S.A.

Hotel on the Chilean Patagonia.

A little-known company with an unusual name is making waves in more ways than one.

Executive Achievement

By tony munoz

8 | Peter Mantel

Deputy Managing Director, Transas Ltd.

by tony munoz

by Constantine G. Papavizas and Gerald A. Morrissey III

by David Grucza

16 | It Will Be Gas

42 | Offshore Market Report: Long-Term Energy Needs and Deepwater Drilling Will Keep OSV Market Afloat

56 | Brazil Update: New Contracts Boost Drillers, But Uncertainty Remains

by Michael J. Economides

By Karen Broyles

Upgrades and Downgrades

20 | Do Annual Reports Matter?

48 | Offshore Safety Takes Center Stage

If you don’t understand the chemistry, how will you know what product to use?

by Jack O’Connell

by Barbara Saunders

by Richard Carranza

Washington Insider

12 | National Offshore Energy Agenda Remains on Course by Larry Kiern

MarEx OP-ED

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38 | Are Alternative Energy Support Vessels Covered by the Jones Act?

Jose Aveggio Peirano, Chairman, Detroit Chile S.A.

52 | Meeting the Compliance Challenge: Practical Solutions for Conflicting Emissions-Control Requirements

by MarEx Staff

THE MARITIME EXECUTIVE

10.21

Volume 14, Edition 2

by barry parker

60 | Corrosion Control Chemistry

3/31/10 1:05:23 PM


Half Page Vert

1/18/10

3:29 PM

Page 1

publisher / Editor-in-Chief

Tony Munoz :: tonymunoz@maritime-executive.com Senior Editor

Jack O’Connell :: harvardjo@maritime-executive.com Staff Reporter

Caroline Stephenson :: cstephenson@maritime-executive.com Art Director

Evan Naylor :: enaylor@maritime-executive.com Assistant Art Director

Daniel Bastien :: dbastien@maritime-executive.com Senior Vice President, Sales & Marketing

Brett Keil :: bkeil@maritime-executive.com Advertising Sales Manager

Chris Clarke :: cclarke@maritime-executive.com Director of Sales - Asia

Philipho Yuan :: fyuan@maritime-executive.com Advertising Sales Manager: Scandinavia

Harald Husø :: hhuso@maritime-executive.com Director–Interactive Media

Al Cavell :: acavell@maritime-executive.com Internet Services Manager

Steven Gonzalez :: sgonzalez@maritime-executive.com Circulation Manager

Steven Appell :: sappell@maritime-executive.com

The Maritime Executive, LLC (ISSN 1096-2751) 3200 S. Andrews Avenue, Ste. 100 Fort Lauderdale, FL 33316 Telephone: +1 954 848 9955 Toll-Free: 866 884 9034 Fax: +1 954 848 9948 www.maritime-executive.com For subscriptions please visit www.maritime-executive.com The Maritime Executive (ISSN 1096-2751) is published bi-monthly by The Maritime Executive, LLC, 3200 S. Andrews Avenue, Suite 100, Fort Lauderdale, FL 33306, Tel. (866) 884-9034. SUBSCRIPTIONS: Domestic subscription rates are $36, per year. International subscription rates are $86, per year. Application to mail at periodicals postage rates is pending at Fort Lauderdale, FL and additional mailing offices. For single copies of the magazine or reprints of articles appearing in this magazine, contact The Maritime Executive at (866) 884-9034. COPYRIGHT: © Copyright 1996 by The Maritime Executive. All rights reserved. The Maritime Executive is fully protected by copyright law, and nothing that appears in it may be reproduced, wholly or in part, without written permission. We cannot be responsible for the claims of manufacturers in any of the items. Editorial manuscripts and photos will be handled with care but no liability is assumed for them. POSTMASTER: Please send address changes to The Maritime Executive, 3200 S. Andrews Avenue, Suite 100, Fort Lauderdale, FL 33316. Change of address notices should be sent promptly with old as well as new address and with ZIP code or postal zone. Allow 30 days for change of address.

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editorial

Energized!

Spring has sprung, and this edition of MarEx brings you up to speed on everything you need to know about the latest developments in the energy field and what they mean for your business. As the Obama Administration announced opening new offshore areas to oil drilling for the first time, recent Pew and Rasmussen reports concluded that 63 percent of the American people favor such a move. These waters are rich with the promise of future energy independence. More than just jobs and deficit reduction are at stake because the issue concerns a balanced energy policy. Barrels by the billions lay just offshore, and the new Obama plan will grant the oil industry access to vast oil resources on the Outer Continental Shelf. Although the Administration’s agenda favors alternative energy investments, the progress to date has been minimal. While Washington is now being proactive about opening offshore drilling, the U.S. still imports 60 percent of its oil consumption – equal to 4.35 billion barrels per year at a cost of $265 billion. But wait, says MarEx columnist Dr. Michael Economides, “It Will Be Gas,” as he anoints vast U.S. shale reserves as the energy panacea for the foreseeable future. Meanwhile, Washington Insider columnist Larry Kierns shares strategic points about Obama’s offshore drilling initiative as well as the Administration’s efforts to foster investments in alternative energy. He also discusses the EPA’s regulatory caps on greenhouse gases and congressional efforts to freeze EPA’s ability to regulate emissions. Two must-reads for inquiring minds. As corporations spend millions and invest thousands of man-hours producing annual reports, Senior Editor Jack O’Connell opines about whether they are actually worth the time and money and, more importantly, are they worth your time to read them? It’s a great article with enough Warren Buffett infusions to make any executive percolate at the wisdom of the grandfatherly icon. This is a fun read, so enjoy. Meanwhile, Constantine “Charlie” Papavizas and Gerald Morrissey III join the debate on whether lucrative alternative energy support vessels are covered under the Jones Act. If the words “swift,” “decisive,” and “government” enter your mind, remember that the feds are still trying to resolve oil-and-gas issues that first arose in 1976. The authors’ analysis is timely but with the caveat that, when the government is the final arbiter, the process can be painfully slow and arduous. Looking abroad, long-time contributor Barry Parker poses big questions about Brazil’s ability to finance expensive floaters and specialized vessels. The subsea salt logistics are formidable and the investment huge, and lurking in the background is the Brazilian regulatory regime. As our friends to the south strive to become big boys on the oil grid, Parker asks a lot of important questions that don’t seem to have a lot of concrete answers. The stakes in Brazil are high, and most Americans would rather send their energy dollars to Rio than Caracas. Meanwhile, Karen Broyles, a wellknown energy writer, takes MarEx readers on a global tour of deepwater drilling hotspots. As we follow the money around the world, it’s obvious there’s plenty of work to go around and, despite the current oversupply of OSVs, even their prospects look good. Yet the oil and maritime industries have bigger problems than fluctuating day rates and upstream profits because the thousand-pound gorilla in the room is safety. Marine industry icons like Larry Rigdon weigh in on this topic as does Hornbeck EVP and COO Carl Annessa. Author Barbara Saunders talked to a lot of people, including Callum Finlayson of Shell Exploration and Ken Wells of OMSA, and what article on safety would be complete without beaucoup statistics and the mention of a crew member’s right to impose a “Stop Work Authority”? Also in this edition are a fascinating profile of Peter Mantel of Transas and two excellent articles for the executive in the field. “Meeting the Compliance Challenge” by David Grucza, an executive with Tony Munoz can be contacted Siemens Industry Solutions, offers practical remedies for conflicting emission-control requirements. at tonymunoz@maritime-exec- And Richard Carranza, a chemical engineer, discusses corrosion-control chemistry with insights from utive.com with comments, input Jim Brown of International Paint and Nathan Henry of F.W. Gartner. Finally – the biggest energizer of all –Jose Aveggio Peirano, Chairman of Detroit Chile, graces our cover and talks about his wide array and questions on this editorial or any other piece in this maga- of maritime businesses, which encompass shipbuilding, tours of the Chilean Patagonia, and vessel operations in the Brazilian offshore – to name a few. We thank our readers for their support and know zine. The Maritime Executive welcomes your participation in they will enjoy another edition of MarEx with lots of “intellectual capital.” our editorial content. Mar Ex

Tony Munoz

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Editor-in-Chief

THE MARITIME EXECUTIVE

6

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EXECUTIVE ACHIEVEMENT

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ExecutiveAchievement By MarEx Staff

THE MARITIME EXECUTIVE

8

Deputy Managing Director, Transas Ltd. Setting the Standard in Navigational Software

Peter

Mantel

Transas Ltd. was founded in 1990 by Nikolay Lebedev, Viktor Godounov, Evgeny Komrakov, and Nikolay Mouzhikov. This group of Russian maritime professionals foresaw a future for electronic navigation tools not only within the maritime industry but for the aviation industry as well. They actually formed an earlier association in the late 1980s, but those were trying and uncertain times for the Russian people as Gorbachev introduced “Perestroika” (economic restructuring) and “Glasnost” (an element of political freedom). Revolutions began erupting in Eastern Europe, led by the Baltic Republics, as nonRussians throughout the Soviet Union demanded independence. On November 20, 1989, the Berlin Wall came tumbling down. Two years later Transas opened its Southampton office in the United Kingdom. This was their first effort outside of the Russian Federation, and marked the beginning of their “westernization” of the company, a way to deliver unique product to an industry struggling with efficient software solutions at the time. This office evolved into many global operations with the operational and manufacturing headquarters ultimately landing in Gothenberg, Sweden, for Transas Marine International, where it is currently positioned today.

Software Pioneers

The winds of change did not deter the partners of Transas. They recognized that neither the marine nor aviation industries had any electronic navigational products to speak of and those available were based on proprietary hardware and were extremely expensive. With their country in turmoil, the four Russian maritime

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officers looked beyond their borders to a global vision of developing and writing software solutions for navigation and simulation training. It was a time when personal computers (PCs) were becoming the business tool of choice in offices and corporations throughout the world, and Transas seized the opportunity and developed software products for off-the-shelf PCs. The company became a driving force for electronic solutions for the maritime and aviation industries, opening the global marketplace and winning top international customers. During the mid-1990s, as PCs became more affordable and Microsoft Windows made them easier to use, the maritime industry began preparing for STCW95, the new Standards of Training, Certification and Watchkeeping protocol that all mariners had to comply with in order to maintain their licenses. The new regulations had companies and mariners scrambling for solutions, and Transas stood ready with an affordable alternative delivered right to their customers’ PCs. Suddenly, training software was available for vessel operations, cargo handling, electronic navigation, or any other training requirement a customer deemed necessary.

Going Global

Peter Mantel, Deputy Managing Director and one of Transas’ six owners today, joined the company in 1993 and established its U.S. headquarters in Seattle the following year. Mantel recalls, “Here was this Russian company with an unbelievable software system for charts and simulation training. I knew I had to join them. So after I did, our U.S office began working with various commercial shipowners, shipyards and training instituions in the USA and Canada. The word quickly spread throughout the industry that Transas was a force to be reckoned with, as we were awarded a number of high profile contracts, ranging from commercial to government to leisure vessels. It was truly a fantastic situation. Many companies tried to protest the Transas awards, in various ways, due to our Russian roots, but the techonology and stability of the navigation product proved most efficient and consisitent. Today, we serve the western hemisphere with ECDIS systems manufactured in our Bothell, Washington facility.” By 1995 Transas had representative offices in the U.S., Germany, Sweden, Holland and France. The following year its electronic charts system was used by the crew of the MIR space orbital station, and its marine navigation system had been

3/28/10 4:20:12 PM


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EXECUTIVE ACHIEVEMENT

THE MARITIME EXECUTIVE

10

installed on 117 Swedish combat patrol boats. In 1997 the company’s St. Petersburg and Southampton offices were certified for ISO-9001 and ISO-9002, and the following year the organization received an honorary diploma from Lloyds for “outstanding and consistent contributions to training.” In 1999 Transas became the first company in the world to receive an international Electronic Chart Display and Information System (ECDIS) Type Approval Certificate. Meanwhile, the company was completing delivery of its breakthrough Vessel Traffic Management System (VTS) to major Russian and ex-USSR ports. By the end of the decade the company employed about 700 people worldwide and posted $45 million in annual sales. The dawn of a new century saw continued growth in both sales and prestige as the company built a worldwide reputation for developing important PC and full-mission simulation products for the maritime and aviation industries. It gained worldwide acclaim for its Hyundai-Transas Intelligent Bridge System and in 2007 installed the largest and most sophisticated full-mission simulator in North America at the Maritime Institute of Technology and Graduate Studies (MITAGS) in Linthicum, Maryland. Additionally, it provided ECDIS systems for the Indian Navy and a VTS system for Port Mombasa. The company provided fullmission simulators to the Royal New Zealand Navy, the Swedish Navy and the German University of Applied Sciences as well as to training centers in Korea, Indonesia, Taiwan and Poland. It also built a new training center for a Russian supplier of jet aircraft

and a full-suite of flight simulators and computer-based programs for the UTAir, Spark, Gazapromavia and Omsk flight training centers. Recently the company completed the National Vessel Traffic Management and Information System for the Republic of Cyprus and a National Coastal Surveillance System for the Republic of Malta. Five ports in Indonesia have been equipped with VTS systems, allowing them to become compliant with the International Ship and Port Security (ISPS) requirements. In 2010 the company announced a state-of-the-art VTS system for China’s Ministry of Transportation at its training center in Daxing County near Beijing, and it is currently working on VTS systems in Morocco for the ports of Agadir and Nador. From the vision of four mariners to a global enterprise supporting training centers, vessel operators like Maersk-Sealand and port authorities around the world, Transas today has demonstrated its ability to supply and support huge simulator complexes while still providing off-the-shelf software to small business entities with limited budgets. “Our company has grown to 1,300 employees and more than $200 million in annual sales, and we have continued to invest in the technology to maintain our strategic advantage over our competitors,” said Mantel. “We are focusing our efforts on customer service and improving internal processes to support all of our products. In a time when companies need to reduce costs while maintaining safe and reliable operations, many have acknowledged Transas as a worthy partner.” Mar Ex

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washington insider

Written by Larry Kiern, Winston & Strawn LLP

WashingtonInsider M arch / A p ri l 2 0 1 0

National Offshore Energy Agenda Remains on Course

THE MARITIME EXECUTIVE

12

A year ago this column reported dramatic change in America’s national energy policy. President Obama and the Democratic-controlled Congress exuberantly altered the direction of our national energy strategy toward renewable and alternative energy sources and away from America’s traditional preference for fossil fuels. In short, American’s energy policy was expressed principally in environmental, not energy, terms. Now press reports portray the majority as beleaguered by emboldened political opponents and a disaffected electorate blaming Democrats for the nation’s slow recovery from the high rate of unemployment. Leading electoral prognosticators have offered predictions of large political losses for congressional Democrats in the upcoming midterm elections. Against this backdrop, all other issues besides jobs are secondary. While the November 2008 election manifested a greater sense of environmental concern regarding climate change, that concern has been swamped by the more palpable pain inflicted by the rising tide of economic distress engulfing millions of Americans. The crushing loss of an estimated eight million jobs during the recession has refocused the electorate’s attention. Moreover, unemployment is a lagging economic indicator, so even though economists report that the recession officially ended in the third quarter of 2009, that fact provides cold comfort for Democrats these days.

Stimulus Plan Redux

A year ago the President and Congress used the national economic crisis to enact into law new national programs to promote alternative energy and spur investments in conservation. The American Recovery and Reinvestment Act aimed, among other things, to reduce America’s dependence on foreign oil principally by providing $80 billion for conservation and to promote the development of domes-

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tic renewable and alternative sources – biofuels, solar, wind, wave and tidal energy. One year later conservative critics pronounced the $787 billion stimulus plan a failure, highlighting its inability to prevent unemployment from rising above eight percent as initially projected by the Obama Administration. Additionally, critics argued that the stimulus wasted public funds and threatened our fiscal security. Notably, however, they have not targeted for cutting those projects that spur alternative energy, and there appears no serious effort to repeal these programs. To the contrary, supporters of the stimulus complain about the plan’s slow pace and potential benefits flowing to foreigners instead of Americans. For example, Senator Chuck Schumer (D-NY) recently demanded an end to federal stimulus funding for alternative energy projects benefiting foreign and not American workers and called for a “Buy American” mandate. Recognizing the importance of alternative energy projects and the critical need to provide long-term financial underwriting, a bipartisan group of coastal state senators introduced legislation on March 8, 2010 to extend to 2020 the favorable investment and production tax credits for offshore wind projects. They cited a study by the University of Delaware predicting that Atlantic Coast winds alone can generate 330 gigawatts of power, enough to replace 300 large coal plants and power nine states from Massachusetts to North Carolina. While uncertainty surrounds the Cape Wind offshore wind project off Massachusetts, many other projects are underway in less sensitive waters and with a surer regulatory process. Economists generally agree that the stimulus plan has helped America’s economic recovery, saved about two million jobs that otherwise would have been lost, and shortened the duration of the economic downturn. Despite all the negative criticism, the reality is that powerful political energy is building to enact

additional stimulus measures totaling over $150 billion and more tax cuts favored by conservative critics who have harped on the nation’s fiscal deficit. While it remains unclear what form the final new stimulus legislation will take, the differing Senate and House versions suggest compromise will be reached by including elements of each. The Senate proposal emphasizes tax breaks for business while the House proposal prefers direct spending on state and local governments and infrastructure. To gain the votes necessary to pass in the Senate, i.e., to attract Republican votes, it seems likely that more tax breaks for business will be adopted.

Greenhouse Gas Regulation

The most vigorous and concerted opposition to the Obama Administration’s energy policy concerns the increased costs likely to be assessed on the fossil fuel industry in the U.S. as a result of the proposed regulation of greenhouse gas emissions. That opposition, prominently led by the American Petroleum Institute, targets both legislative and executive branch proposals to regulate greenhouse gas emissions via increased fossil fuel costs. With the passage of over 15 months and the loss of the Democratic party’s 60vote supermajority in the Senate, it seems increasingly likely that President Obama’s ambitious domestic legislative agenda may be downsized. But the President doesn’t need new legislation for his greenhouse gas agenda. He can use Executive Branch power for that. The President’s proposal for comprehensive national health care reform narrowly passed the House and encountered determined resistance from its opponents, who pledged to “repeal and replace” it. Despite recent signs of progress, long-stalled financial regulatory reform likewise continues to encounter deeply determined opposition from key elements in the industry. In this highly charged election year, the ability of the Senate to cobble together a

3/31/10 1:09:37 PM


washington insider

The Audacity of Hope Confronts Political Reality starting in 2012. EPA estimates that measure alone will avoid almost one trillion metric tons of greenhouse-gas pollution in America. Importantly, EPA will not require any stationary source, e.g., power plants and petroleum refineries, to get a Clean Air Act permit to cover greenhouse gas emissions during 2010. EPA estimates phasing in requirements on large stationary sources only in 2011 and continuing gradually through 2013. Administrator Jackson also announced that EPA would likely raise the threshold for permitting “substantially higher than the 25,000-ton limit that EPA originally proposed” and added that “EPA does not intend to subject the smallest sources to . . . permitting for greenhousegas emissions any sooner than 2016,” thus reflecting the Administration’s pragmatic understanding of the short-term political, economic, and regulatory challenges of regulating greenhouse gases. Following the announcement, Members of Congress quickly introduced new legislation that would freeze for two years the EPA’s ability to regulate greenhouse gases

from large stationary sources and factories. Additionally, Senator Lisa Murkowsk (R-AK) and Representative Collin Peterson (D-MN) have spearheaded a resolution of disapproval aimed at overturning the EPA’s finding last December that greenhouse gases constitute a danger to public health and welfare, which is the agency’s predicate finding to exercising regulatory authority. But the support these legislative proposals have garnered appears insufficient to overturn a likely Presidential veto should either measure pass both the House and Senate in their current forms. Notwithstanding the hyperbole featured in advocacy advertising appearing in both print and electronic media, it is now plain that greenhouse gas regulation in the U.S. will not happen anytime soon, that it will be gradually implemented starting with light trucks and the largest stationary emitters, and that smaller sources will not face regulation for another six years at the earliest. Therefore the claim that such regulation will impair the nation’s recovery from the current downturn appears unsubstantiated.

13

THE MARITIME EXECUTIVE

The View from Here Is Magnificent

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simple majority, much less a filibusterproof, 60-vote margin in favor of capand-trade legislation passed by the House appears doubtful. Simply put, many Members find it politically damaging to place themselves in the position of being accused of raising energy costs while unemployment hovers at ten percent and underemployment at 17 percent. Consequently, Senator John Kerry’s (D-MA) protracted efforts to fashion a Senate version of cap-and-trade in response to the Housepassed bill has lost steam. Instead, reports from Capitol Hill suggest that the “three amigos” – Senators Kerry, Joe Lieberman (I-CT) and Lindsey Graham (R-SC) – have altered their approach to mirror that proposed by the Environmental Protection Agency (EPA): caps, but no trading. On February 22, 2010, EPA Administrator Lisa Jackson announced the agency’s estimated timeline for the imposition of regulatory caps on greenhouse gases. It will proceed piecemeal by first achieving greenhouse gas reductions through fuel-economy standards for light trucks,

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washington insider

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Obama Administration Announces Expanded Offshore Drilling

THE MARITIME EXECUTIVE

14

On February 10, 2009, Secretary of the Interior Ken Salazar announced a six-month extension of the March 2009 deadline for public comment provided by the Bush Administration. He explained that the offshore drilling plan deserved greater input from the public. Energy industry representatives decried the decision and advocated expedited drilling to spur job growth and energy independence. The last year witnessed public hearings and input from diverse interests, including coastal states and environmental groups. Finally, on March 31, 2010, the Obama Administration announced its decision to open certain new coastal waters of the U.S. for offshore drilling while blocking drilling in other waters considered environmentally sensitive. The Administration’s proposal is not surprising because it had repeatedly stated it would support environmentally responsible offshore drilling. For example, Secretary Salazar had backed the propos-

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als of Shell Oil to drill exploratory wells in Alaska’s Beaufort Sea and Chukchi Sea this summer and fall following Shell’s adoption of enhanced measures to protect the environment. The Secretary’s decision provoked withering criticism and a new legal challenge in federal court by Earthjustice, representing a phalanx of Alaska Native tribes and environmental advocates opposed to offshore drilling in Alaskan waters. Likewise, the new Administration proposal will face fierce opposition from opponents of offshore drilling, who will likely fight it in the courts and other political forums. The long-term outcome remains uncertain.

Steady As She Goes

Despite the growing political storm and fury fed by the approaching mid-term elections and rhetoric alleging extremism by the Obama Administration, the nation’s new energy agenda remains largely bipartisan, steady, and on course. No serious opposition has emerged to challenge the consensus view favoring the development of alterna-

tive energy sources. To the contrary, new proposals to bolster offshore wind projects further illustrate the bipartisan acknowledgment of their value to the nation. And while the offshore oil exploration industry remains frustrated with the Administration’s delay in opening more coastal waters to drilling, Secretary Salazar’s deliberate pace may turn out to be a long-term plus by better protecting the industry from collateral assaults by the opponents of offshore drilling, such as Mar Ex that actively underway in Alaska.

Larry Kiern is a partner at Winston & Strawn LLP, an international law firm of 900 lawyers. His practice concentrates on maritime issues, including legislative, regulatory, and litigation matters. Before joining Winston & Strawn, he was a Captain and law specialist in the U.S. Coast Guard who served as the Legislative Counsel and Deputy Chief of the Coast Guard’s Congressional Affairs Office.

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MarEx OP-ED:

It Will Be Gas

The emergence of shale gas in the U.S. has transformed the economics of global energy.

16

THE MARITIME EXECUTIVE

By Michael J. Economides

In November 2009 the International Energy Agency (IEA) in Paris released its World Energy Outlook (http://www. worldenergyoutlook.org). As usual it became fodder for outlandish press speculation like the story in the U.K.’s Guardian newspaper, which quoted unnamed sources claiming that the oil production forecasts were pumped up by yet more unnamed sinister Americans and others. This was done to hide what the Guardian and its sources really believe: the impending crash in oil supply. It was a ridiculous take in the first place and it belied a bona fide shocker in the IEA report: “The long-term global recoverable gas resource base is estimated at more than 850 Tcm [trillion cubic meters].” That translates to just over 30,000 trillion cubic feet (Tcf) of gas, which means that in just one year the IEA doubled its previous estimate of 400 Tcm. The enormous difference in the IEA estimates is almost entirely due to the addition of what for decades was labeled unconventional gas and is now better known as shale gas, arguably the shiniest recent success in the petroleum industry.

The Marcellus and Haynesville Shales

Shale gas in the U.S. went almost instantly from a practically invisible resource to massive reserves that challenge the largest conventional gas accumulations in the world. Greg Wrightstone of Texas Keystone compiled the evolution of published ultimate natural gas in the Marcellus Shale, a formation that spans almost the entire states of West Virginia and Pennsylvania. In the four years from 2005 to 2009, recoverable gas in the Marcellus Shale increased from about 1 Tcf to over 500 Tcf. There has never been such an enormous upgrade of reserves in such a short time in any reservoir of any kind in the history of the petroleum industry. Similarly, the Haynesville Shale straddling Texas and Louisiana is now estimated at 300 Tcf. These volumes put the Marcellus and Haynesville Shales at the number two and three positions of gas accumulations in the world, right behind the contiguous Iranian South Pars (yet to be exploited) and the Qatari North Fields, holding together more than 1,500 Tcf of gas.

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The evolution of shale gas is a direct result of the excellent deployment of technology. This includes the latest in drilling and geo-steering long horizontal wells as well as the spacing and placing of many large hydraulic fracturing treatments. While these technologies do not come to the level of the literally Space Age ones deployed in deep offshore oil reservoirs that brought the massive discoveries offshore Brazil and in the Gulf of Mexico over the last several years, both the new oil and gas discoveries make a mockery of the ever-present alarmism of “peak” oil and gas. But the surfeit of natural gas becomes all the more important because gas is poised to become the premier fuel of the world economy in the not-too-distant future, taking a large portion of market share from oil.

300 Years of Reserves?

There is a lot of gas in the world. The attached graphic done with information from the 2009 BP Statistical Review shows the ten countries with the largest natural gas reserves and gives a world total of largely conventional recoverable reserves at 6,534 Tcf, just 20 percent of the expected ultimate number from the IEA. At current world consumption levels of about 105 Tcf per year, proven reserves can provide for over 60 years. This to some is comforting and to others, remembering the IEA’s number, it is even more comforting, implying a supply that could last almost 300 years. If one simply fantasizes about any future contributions from the orders-of-magnitude-larger resource found in the form of natural gas hydrates, it is easy to see how natural gas is almost certain to evolve into the premier fuel of the world economy. The top three reserve holders – Russia, Iran and Qatar – are imposing, accounting for 53 percent of the total. But of the three only Qatar is doing really well in managing its reserves. Delivering more than 2.2 Tcf of natural gas annually, almost all in the form of LNG, Qatar is emerging as the Saudi Arabia of natural gas with substantial and readily available excess capacity over existing contracts.

3/28/10 4:20:33 PM


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and yet important issues is

Courtesy: Greg Wrightstone, Texas Keystone Inc.

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On board On shore Online

06

THE MARITIME EXECUTIVE

18

Iran, on the other hand, is a basket case. Despite the world’s the fact that now there is little overlap in the applications of second largest natural gas reserves, it is a net importer of gas, natural gas and oil. The developed world uses virtually no oil mostly from Turkmenistan. Anybody who thinks that sanctions in power generation and uses practically nothing but oil for do not work should just have a look at Iran. Unfortunately, the transportation. But with a “Btu parity” of 6 to 1 (i.e., 6 Mcf of ruling Iranian regime proves constantly that the strength of an gas equals the energy content of one barrel of oil), the current ideology is more powerful than the well-being of its people. $5 per Mcf price of gas translates to $30 per barrel of oil, a far Russia is yet another troubled situation. The country is both cry from the actual $80 oil price. Some smart people will soon the number one producer (23.5 Tcf per year) and number one recognize the obvious, and the step-leap in natural gas use will exporter (8.7 Tcf per year) of natural gas. With the difference happen when it contributes substantially as a transportation consumed inside the country and with a population of 140 milfuel, either directly in compressed natural gas (CNG) vehicles lion, Russia is using about 105 Mcf per capita per year. This is promoted recently by, among others, T. Boone Pickens, or inabout 30 percent more than the U.S., which consumes less than directly by electrifying the transportation system. The fact that 80 Mcf per capita per year. This is bad news for Russia since gas also emits less carbon dioxide than oil and far less than coal much of its consumption is very inefficient and is practically given for the same energy output is the icing on the cake, irrespective away by Gazprom, by far the world’s largest monopoly. of whether one believes in anthropogenic global climate change Gazprom and the vital commodity it controls have been or not. used internationally as a political tool of the state. Although The proliferation of LNG liquefaction and regasification Gazprom officially presents a dispute or deal with other facilities, the abundance of transporting vessels, and the countries as a purely business exercise, in fact the pricenormous new gas reserves from shale formations ing and transport are personally approved (some even have suggested the hitherto outraby the President of Russia and by the geous possibility for the United States of World Reserves 6,534 Tcf real power broker, the ubiquitous exporting LNG to Western Europe) Prime Minister and likely President will propel the world gas trade into again, Vladimir Putin. Gazprom’s a realm never imagined before. As natural gas is used by the for all other energy sources, the Kremlin as a central element fact that China, for example, derives of its foreign policy, whether less than three percent of its energy from with the former Soviet repubgas today will only add an exclamation point to lics or with Western Europe or future worldwide activities. In Tcf. BP Statistical Review 2009 China. Gazprom and natural Gas will emerge not too gas are godsends for Russia long from now as the premier The marcellus shale: how big is it? and are used to cover up gapfuel of the world economy. Date Agency or Author Recoverable (Tcf) ing deficiencies with massive This is as certain as nothing 2009 Hiscock & Barclay 516 influxes of cash from energyelse in our energy future. 2008 IOGA of NY 500 hungry neighboring countries. Mar Ex 2009 Engelder 489 They provide the vestiges of power that a dysfunctional Dr. Michael J. Economides is a 2008 DOE 262 economy and a highly corrupt Professor at the Cullen College 2007 Engelder & Lash 168 state could not otherwise of Engineering, University of 2008 NCI 34.2 muster. Houston, and Editor-in-Chief of 2006 USGS 31 the Energy Tribune. 2005 USGS 1.3 Price Disparity 2002 USGS 0.8 to 30.7 MarEx does not necessarily One of the least understood

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JackO’connell JACKO’CONNELL

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THE MARITIME EXECUTIVE

20

Do Annual Reports Matter? BERKSHIRE HATHAWAY INC.

I just finished reading Warren To the Shareholders of Berkshire Hathaway Inc. Buffett’s annual Shareholder Letter. It is Our gain in net worth during 2009 was $21.8 billion, which increased the per-share book value of both a gem, as usual, full of homespun wisdom our Class A and Class B stock by 19.8%. Over the last 45 years (that is, since present management and folksy humor. “Come by rail,” he took over) book value has grown from $19 to $84,487, a rate of 20.3% compounded annually.* quips at the end, inviting shareholders to Berkshire’s recent acquisition of Burlington Northern Santa Fe (BNSF) has added at least 65,000 attend the Berkshire Hathaway annual shareholders to the 500,000 or so already on our books. It’s important to Charlie Munger, my longmeeting and alluding to the company’s time partner, and me that all of our owners understand Berkshire’s operations, goals, limitations and recent acquisition of the Burlington culture. In each annual report, consequently, we restate the economic principles that guide us. This Northern Railway, its biggest deal ever. year these principles appear on pages 89-94 and I urge all of you – but particularly our new shareholdEarlier on he observes, in commenting ers – to read them. Berkshire has adhered to these principles for decades and will continue to do so long after I’m gone. on the financial crisis: “We’ve put a lot of money to work during the chaos of the In this letter we will also review some of the basics of our business, hoping to provide both a freshman last two years. It’s been an ideal period orientation session for our BNSF newcomers and a refresher course for Berkshire veterans. for investors. A climate of fear is their Excerpted from 2009 Chairman’s Letter (courtesy: Berkshire Hathaway) best friend. Those who invest only when commentators are upbeat end up paying letter becomes available, it’s covered in all that liquidity will be constantly a heavy price for meaningless reassurance.” How’s that for the most useful and the newspapers with reporters stumbling refreshed by a gusher of earnings over themselves to interpret the “Oracle of from our many and diverse busistraightforward investment advice you’ve ever heard? The letter is loaded with such Omaha’s��� latest bons mots: nesses. wisdom. »» We will never become dependent »» We make no attempt to woo Wall And don’t worry, you don’t have to be a on the kindness of strangers. TooStreet. Investors who buy and sell Berkshire shareholder to read it. It’s freely big-to-fail is not a fallback position based on media or analyst comavailable online (www.berkshirehathaway. at Berkshire. Instead, we will mentary are not for us. Instead we com) and is the most widely anticipated always arrange our affairs so that want partners who join us at Berkpronouncement of its kind. As soon as any requirements for cash we may shire because they wish to make a the company files its Form 10-K (huh? conceivably have will be dwarfed long-term investment in a business TTS_MaritimeExec_86x51 6:17 pm by Page 1 We’ll explain what that is later) 27/4/09 and the our own liquidity. Moreover, they themselves understand and

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JACKO’CONNELL

Companies spend millions and invest thousands of man-hours to turn out glitzy annual reports, but does anyone still read them? Why you should. fact that he writes it himself – all 18 pages and 13,000 words of it – something very few CEOs do. I know. I used to be the ghostwriter behind many a shareholder letter. But think about it: No one could possibly duplicate this voice, this authenticity, and Buffett wouldn’t let them try.

Best of the Best

Berkshire’s report is what annual reports are supposed to be: chockful of information about a company’s vision, strategy, products, people, and prospects for the future. What it did right and what it didn’t do right (well, very few companies other than Berkshire will admit this, despite the emphasis on transparency and full disclosure). Berkshire’s report is what

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because it’s one that follows policies with which they concur. »» We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble. I ask you, where else can you find wisdom and frankness of this kind? It’s like your grandfather talking to you – totally honest, totally credible, nothing but common sense. Even more remarkable is the

the Securities & Exchange Commission (SEC) had in mind when it mandated annual reports back in 1934, at a time when very few people owned stocks and those who did lost everything in the Great Depression. Today almost everyone owns stocks, either directly through investments or indirectly through their 401(k) and pension plans. Sadly, most investors don’t bother to read the reports that begin arriving in late March and continue through April and May. They throw them away or, more likely, opt for online delivery – a cost-saving gimmick pushed by companies trying to save money – and in the process miss out on the one opportunity each year to truly get to know what a company is all about. What follows is a quick-and-easy guide for the busy MarEx executive on how an annual report is structured, how to read it, and why you shouldn’t throw it in the wastebasket.

21

Nuts and Bolts

“The annual report is the only document that is read more times before it is printed THE MARITIME EXECUTIVE

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JACKO’CONNELL

THE MARITIME EXECUTIVE

22

than after” goes an old saying that, like most old sayings, is unfortunately true. The period from early January to midMarch is known in the trade as “annual report season,” when accountants, securities lawyers, and PR and IR people are generally not available for lunch or hockey games or drinks after work or any other diversionary activity. They are completely immersed in the details of the report – drafting, editing, checking, securing approvals, making last-minute changes and updates, arranging for printing and mailing. It’s a busy time. Annuals (shorthand for annual reports) are divided into two parts: the “front of the book” and the “back of the book.” The front of the book is easy to read and has all the fun stuff: Company Profile, Strategy/Mission/Vision, Chairman’s Letter, Financial Highlights, Products & Services, Community Involvement, etc. It’s where you learn what a company is and does. There are lots of eye-catching, four-color photos and easy-to-read charts and graphs. Maritime annuals usually

have fleet lists – an invaluable reference – along with color-coded maps showing areas of operation and trading routes. The photography is magazine-quality along with the layout and design. The pages are printed on heavy, glossy paper – think Cosmo or GQ. The best designers and photographers and graphic artists are hired, all in an effort to put the company’s best foot forward, and the results are usually impressive. The back of the book contains the financials and follows a format mandated by the SEC: Forward-Looking Statements, Management’s Discussion and Analysis of Earnings (MD&A), Consolidated Financial Statements (balance sheets; statements of income, shareholders’ equity, and cash flows), Notes to the Consolidated Financial Statements, and the Report of Independent Accountants. The most important of these is the MD&A. Here a company describes its businesses and sources of income, analyzes risk factors, compares operating results from the last two fiscal years,

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JACKO’CONNELL

24

which increased the per-share book value of both our Class A and Class B stock by 19.8%.” Wow, you did? “Over the last 45 years (that is, since present management took over, book value has grown from $19 to $84,487, a rate of 20.3% compounded annually.” Holy cow. Why didn’t somebody tell me back in 1965? Buffett gets right to the point. What’s important is the performance of the stock over the years – were his shareholders (including himself) adequately rewarded or not? Everything else is secondary. I also look at the cover. The cover conveys visually the theme of the entire book (and year), and it often states it right there: “Delivering Energy Now. Developing Energy for the Future” (Chevron); “Always at the Helm” (Paragon Shipping); “15 Years of Continuous Growth” (Tsakos Energy Navigation).

The “10-K Wrap” and Other Esoterica

THE MARITIME EXECUTIVE

The most common form of annual these days is the so-called “10-K wrap.” The

10-K is a legal document that all public companies must file within 60 or 75 days (depending on their size) of the close of their fiscal year (usually December 31). It summarizes, in text and numbers, the results of the year just ended (hence the “K” in 10-K). It is filed electronically with the SEC. Rather than excerpt portions of the 10-K for inclusion in its annual report to shareholders, some companies simply take the entire 10-K and “wrap” two or four or eight pages of colorful text and pictures and maps around it and – voilà – you’ve got a 10-K wrap. It’s economical and efficient and shows some respect for your shareholders – rather than just mailing out the barebones and off-putting 10-K by itself, a practice favored by too many companies these days. Maritime companies, because of their relatively small size and low visibility, tend to put a lot of time and effort into their annuals, which are among the best in the business. These companies get it. They understand that the annual is their single best marketing tool, not only for inves-

tors but for customers, suppliers, and (too often overlooked) employees as well. Annuals have a one-year shelf life – an eternity by advertising standards – and so can be used over and over at trade shows, investor conferences, customer and vendor meetings, employee interviews and orientation sessions, and – of course – at the annual meeting. If there’s one document that sums up your company better than any other, it’s the annual report. So there you have it – all the reasons why savvy MarEx investors should spend some time curled up with the annual reports of their favorite companies. They’re arriving in your mailbox right about now. MarEx

Jack O’Connell, the senior copy 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.

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DETROIT CHILE S.A.

MARCH/APRIL 2010

Case Study:

26

Detroit Chile S.A.

THE MARITIME EXECUTIVE

By Tony Munoz

A little-known company with an unusual name is making waves in more ways than one. Find out what makes Detroit Chile so special‌

VENEZUELA GUYANA SURINAME

FRENCH GUIANA

COLOMBIA ECUADOR Belem

Manaus

Fortaleza

Talara

Sao Goncalo

PERU Porto Velho

Trujillo

Cachimbo

Lima

Recife

BRAZIL Barreiras

BOLIVIA La Paz

Cuiaba Goiania

Sucre

Campinas

Sao Paulo

Curitiba

Asuncion

Porto Alegre

ARGENTINA

Santiago

Rosario URUGUAY

Buenos Aires

Montevideo

Neuquen Valdivia Puerto Montt

Puerto Chacabuco

Rio De Janeiro

Itajai

CHILE

Curanipe Talcahuano Concepcion

Comodoro Rivadavia

Port Stanley

MarEx-37-Detroit-Chile-CS-Int-032710.indd 26

Salvador

Belo Horizonte

PARAGUAY

Antofagasta

Brasilia

Detroit Chile is a remarkable maritime company whose business dynamics made this case study an easy choice. It is one of Chile’s top corporations, operating four very high-profile divisions: Engines, Shipbuilding, Marine and Harbor, and Tourism. Founded in 1949 by Raul Jaras Barros, a distributor of fuels and lubricants, it was appointed by General Motors (GM) to manufacture and distribute its Vauxhall vehicles in Chile. Today the company sells engines and provides maintenance services to the mining and marine industries, owns two shipyards and operates vessels in Chile and Brazil, manages a commercial port in southern Chile, and owns a catamaran tour company and four-star hotel in Patagonia. In 2002 the company purchased Estaleiro Brazil, a well-known shipyard in southern Brazil, which now operates as Detroit Brazil Ltd. Last year it announced plans to build and operate a large number of offshore vessels in the Brazilian offshore oil fields through its energy support division, Starnav Maritime Services, based in Rio de Janeiro.

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DETROIT CHILE S.A.

MARCH/APRIL 2010

27

Heavy-duty ore hauler at Chilean copper mine.

The Back Story

Catamaran touring the glaciers off Patagonia.

Detroit Chile was introduced to MarEx by EPD Brazil, a division of Electronic Power Design in Houston, which graced MarEx’s March/April 2008 cover. John Norwood and Kyle Dutton of EPD put us in touch with Sergio Camiruaga Espinola, Detroit Chile’s International Business Vice President, who lives in Chile but spends much of his time overseeing its Brazilian enterprises. An article on the oilfields in the Brazilian offshore is what we were really after, but our research on the parent company soon revealed a very large multidimensional organization that is one of the biggest maritime companies in South America. Not long after José Aveggio Peirano, Detroit Chile’s Chairman, agreed to be on the cover of this edition – on February 27, 2010 at 3:40 a.m. – an earthquake of magnitude 8.8 hit Chile

MarEx-37-Detroit-Chile-CS-Int-032710.indd 27

Detroit Brazil shipyard in Itajai, Brazil.

and devastated cities, destroyed infrastructure and killed 497 people. While we were concerned about the status of our edition, we couldn’t help but be alarmed for the people of Chile and our new business associates. Over the next few days we were unable to get in touch with Sergio Camiruaga, our primary contact at the company. Soon we found he was driving from Brazil across South America to his home in Santiago. As news reports out of Chile told of rioting and looting and martial law being imposed, we could only think of the worst-case secnario. We finally made contact with Sergio and offered him a future edition of the magazine in view of the situation in his country. But it was obvious he had already spoken with José Aveggio Peirano and they were determined to continue with the project. With the edition already behind schedule, we nervously agreed,

3/31/10 11:44:00 AM


DETROIT CHILE S.A.

MARCH/APRIL 2010

Four-star, 60-room Loberias del Sur Hotel on Puerto Chacabuco Bay.

THE MARITIME EXECUTIVE

28

although one thing was abundantly clear: This edition was certainly going to be a departure from the traditional process.

The Chilean Earthquake

The temblor lasted about two minutes and hit all six regions of the country. The epicenter was offshore from the Maule region, about 6.8 miles southwest of Curanipe and about 71 miles northeast of Chile’s second largest city, Concepcion. At least 500,000 homes were damaged and first reports indicated that 723 people had died, but officials finally put the death toll at 497. Buildings collapsed in Santiago; the airport was closed, and there were power outages throughout the region. In Valparaiso, a tsunami of 1.29 meters was reported and many cities in the Maule region were affected. Damage and fires were reported in Concepcion; and Talcahuano, the port city of Concepcion, was hit by a 7.68-meter tsunami that wreaked havoc on the port facilities. It was the strongest earthquake to hit Chile since the magnitude 9.5 Valdivia earthquake in 1960, which is the largest earthquake ever recorded. The 2010 quake was the strongest since the 2004 Indian Ocean quake and the seventh largest ever measured – 500 times more powerful than the earthquake that struck Haiti a month earlier.

The Evolution of a Company – and a Country

Chile has a market-oriented economy characterized by a high level of foreign trade and a reputation for stable financial institutions and sound fiscal policy that have given it the strongest sovereign bond rating in South America. Exports account for 40 percent of its GDP with commodities making up three-quarters of total exports. Copper alone provides the government with

Aiken del Sur Natural Park.

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one-third of its revenues. The country deepened its longstanding commitment to trade liberalization with the signing of a free-trade agreement with the U.S. in 2004. Chile has more bilateral trade agreements (57) than any other country. Over the past five years, foreign direct investment has quadrupled to some $17 billion. Last December, Chile became the 31st country and the first in South America to become a full member of the Organization for Economic Co-operation and Development (OECD). Detroit Chile’s history began with Don Raul Jaras Barros, who built Jaras S.A. to sell new engine units and market spare parts to the booming mining industry. When Jaras S.A. became the distributor for GM’s Vauxhall line of cars in Chile, it built an assembly plant which reached a production capacity of 2,000 vehicles in less than five years. But the car line failed, and Jaras SA turned its attention to GM’s industrial products as well as BF Goodrich tires. In 1985, the current stockholders purchased 52 percent of the company and concentrated its efforts on representing Detroit Diesel Corporation, a one-time GM subsidiary (hence the “Detroit” in Detroit Chile). By 1991, the shareholders acquired the remaining interest from Mr. Jaras. In 1996 the company went public and was listed on the Chilean stock exchange, where there are only 200 publicly traded companies. Last year the company’s shares returned 24 percent and have averaged a 20 percent return over the past 10 years. The company is a major supplier of engines and maintenance services to the heavy-duty truck fleets operating in Chile’s mines. There are three principal mining companies in the country. CODELCO (National Copper Corporation of Chile) is the state-owned mining company and has the world’s largest copper reserves. It produces about 11 percent of the world’s copper and its 118 million tons of reserves are sufficient to ensure 70 years of production at current rates. Antofagasta plc, a major conglomerate, owns three copper mines and runs an extensive railroad in the northern part of the country that connects to Bolivia. The company is traded on the London Stock Exchange and is a constituent of the FTSE 100. Minera Escondida owns two open-pit copper mines in the Atacama Desert, which currently produce 9.5 percent of the world’s output and 26 percent of Chilean production. Minera Escondida also represents the largest foreign investment in Chile with BHP Billiton owning 57.5 percent, Rio Tinto holding 30 percent, JECO (a Japanese consortium headed by Mitsubishi) with 10 percent, and International Finance Corp.,

3/31/10 11:46:17 AM


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MARCH/APRIL 2010

DETROIT CHILE S.A.

THE MARITIME EXECUTIVE

30

a World Bank subsidiary, the remaining 2.5 percent. Detroit Chile is also the largest supplier of marine engines in the country. Its marine and harbor division operates 272 vessels, including commercial fishing boats, oceanographic vessels, tugboats, supply vessels, specialty ships and patrol boats. The company’s shipyard in Puerto Montt is the most modern and efficient in the country. Port Montt grew from a local builder of fishing boats to a manufacturer of international class, high-speed catamarans and naval vessels for customers around the world. In 2003, both the engine and shipbuilding divisions attained ISO 9001:2000 certification. And in 2008 Detroit Chile received the prestigious Annual Safety Award from the Chilean Safety Association in recognition of its outstanding achievements in workplace injury prevention.

Tourism in the Chilean Patagonia

Detroit Chile is the largest tour operator in the Chilean Patagonia, a region encompassing the southernmost portion of South America. The name Patagonia itself comes from the word “patagon,” used by the 16th century conquistador and explorer Fernando Magellan to describe the native people whom his expedition thought to be giants. The Patagons were actually Tehuelches, a native tribe whose average height was 5’11” versus the average height of 5’1” for the Spaniards of the time. The company operates its modern catamarans through the Patagonian fjords, islands, glaciers, icebergs and spectacular mountains, as well as the Aiken del Sur Natural Park. It also owns and operates a four-star hotel, the Loberias del Sur Hotel, which has 60 rooms and is located on the beautiful Bay of Puerto Chacabuco.

Detroit Brazil and Starnav

When Detroit Chile purchased the Estelaleiro Brazil shipyard in Itajai in 2002, the huge discoveries of crude oil in the Brazilian offshore fields were still five years away. Under Detroit Chile’s management the yard has increased its lifting capacity and now offers modern shipbuilding techniques such as CAD/CAM, CNC, and oxy-plasma cutting. As the Brazilian oilfield discoveries made front-page news around the world, Detroit Brazil was strategically positioned to respond and got authorization from the Brazilian government to operate in the support vessel industry. Today, Starnav Maritime Services is planning to deploy 12 platform supply vessels (PSV) at 4,500

hp each, six line-handling boats and two multipurpose vessels to the Brazilian offshore, as well as dispatching two PSVs from Chile to work there. Petrobras estimates that production in Brazil could reach 3.9 million barrels per day by 2020, which would be an increase of 2 million bpd over current levels. According to government projections, Brazil’s proven reserves could rise from 14.4 billion barrels to 30 billion barrels by 2020, putting it in a league with such giants as Canada, Kazakhstan, Nigeria and Qatar. Petrobras recently announced a $200-220 billion investment for offshore oil production, which will include rigs, platforms, support vessels and drilling systems. But logistics and the long distance from the coast will present some serious challenges beyond the fact that the oil itself is more than four miles down, under freezing seas, and buried in rock and a heavy cap of salt. Nonetheless, Detroit Brazil and Starnav are ready, ramping up their shipbuilding and vessel operations to meet the new demand in Brazil.

A Winning Combination

As the subsalt oil fields of Brazil come on line, Detroit Brazil and Starnav are strategically positioned to grow and operate in some of the largest offshore fields in the world. Detroit Brazil’s investment in modernizing its shipyard in southern Brazil is already paying dividends as Petrobras hands out large contracts to national companies. In addition to 28 new drilling rigs scheduled for delivery starting in 2013 (see Barry Parker’s article elsewhere in this edition), Petrobras has a requirement for another 146 boats to be built, with preference given to Brazilian companies. As an authorized vessel operator and well-known shipbuilder, Starnav and Detroit Brazil will provide real dividends to their parent company in Chile. In Chile, José Aveggio Peirano and his organization continue to manage the nation’s largest shipyard and one of the top ports in the country. The company is a major transporter of salmon and trout for the commercial fishing industry as well as a recognized tour operator in scenic Patagonia. While mining still provides the lion’s share of revenue for the company, its marine operations are where it is investing its capital and efforts. The Brazilian offshore and Patagonia are a winning combination for Detroit Chile, and MarEx intends to stay in touch. Now you know why. MarEx

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3/31/10 11:50:09 AM


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MARCH/APRIL 2010

JOSé AVEGGIO PEIRANO

THE MARITIME EXECUTIVE

32

Executive Interview:

José Aveggio

Peirano Chairman, Detroit Chile S.A. By Tony Munoz

With the oil boom in Brazil and growing maritime opportunities in Chile, Jose Aveggio is quickly becoming a well-known figure in South America and beyond. Follow along as he shares his thoughts on growth and expansion in the tourism, mining and maritime segments of this dynamic, multidimensional organization.

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JOSé AVEGGIO PEIRANO

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THE MARITIME EXECUTIVE

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MARCH/APRIL 2010

The Naval Division – MarEx: Detroit Chile has a Operates two shipyards, one rich history working with Genin Puerto Montt on the Pacific eral Motors, BF Goodrich and Coast and one on the Atlantic Detroit Diesel as their repreFaced with this crisis, Mario Nunez, the Coast in the port of Itajai. The sentative in Chile. Please ofshipyards are engaged in the fer our readers a brief history company’s CFO and I proposed a bold construction and maintenance of the company. plan to revive the company. The company Aveggio: The Company was of tugs, port and ocean vessels, would implement a new strategy and founded in 1949 by Don Raúl catamaran fast ferries, transJaras Barros, who was dedicated port and pilot boats. Our most change its operations to become a service to marketing engines and spare recent project includes offshore provider instead of a sales organization. parts for a variety of industrial platform support vessels for the applications. By the end of the Brazilian market. This plan was accepted by the Jaras fam1970s, the company began The Division of Marine & ily. As a result, Jaras S.A. obtained new experiencing a series of financial Port Services – Dedicated to problems which led it to the passenger and freight transporrepresentation for other brands of engines brink of insolvency. In light of tation, boat rentals, and logistics and products, diversified into new areas the situation, the Jaras family services through Naviera Detroit called on its employees and exChile S.A. and Starnav Servicos of business, and significantly increased ecutives to inform them of their Maritimos Ltda. in Chile and the size of the company and the number decision to close the company Brazil, respectively. of workers. and declare bankruptcy. Faced The Tourism Division – Opwith this crisis, Mario Nunez, erates high-speed catamarans the company’s CFO and I procarrying passengers to the glaposed a bold plan to revive the ciers of southern Chile as well company. The company would as a hotel in the city of Puerto implement a new strategy and Chacabuco and an ecological change its operations to become park with over 300 acres, both a service provider instead of a in the Chilean Patagonia. sales organization. This plan was accepted by the Jaras family. As MarEx: In 1985 the current a result, Jaras S.A. obtained new shareholders purchased 52 representation for other brands percent of the stock from the of engines and products, diversioriginal owner, Raul Jaras, fied into new areas of business, and obtained the remaining and significantly increased the shares in 1991. How did they size of the company and the make the company one of the number of workers. largest in Chile? In 1989, the last of the memAveggio: Since taking the bers of the Jaras family retired leadership of the company we from the company, at which have implemented principles of time Mario Nunez, Jose Aveggio excellence which have become and other company executives the cornerstones of growth took full control. In 1996, after for the company in both Chile several years of sustained growth and consolidation in the naval and Brazil. Our ability to diversify is one of the primary factors and mining sectors, the company decided to change its name in our growth. The company now participates in segments as and go public. Late in 1996, it was listed on the Chilean stock diverse as mining, shipbuilding, navigation, transport, marketexchange as Detroit Chile S.A. and its shares began trading. ing and tourism. Another key factor is the quality of service Detroit Chile S.A. is structured and operated through four rendered, which has allowed us to form strategic partnerships divisions: with our clients, many of whom have been with us from the beThe Engines Division – Represents the sale and servicing of ginning. Finally, the teamwork of all our executives and officers, industrial engines for MTU-Detroit Diesel, Allison automatic who apply common objectives to each division, has allowed for transmissions, and Donaldson filters for the mining, transport, flexibility in adapting and remaining competitive in the global power generation and shipbuilding industries. markets of the world. Our adaptability has presented us with

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MARCH/APRIL 2010

JOSĂŠ AVEGGIO PEIRANO

THE MARITIME EXECUTIVE

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better business opportunities. MarEx: The Shipyard Division, MarEx: While the roots of the founded in 1990 and based company appear to be in the in the city of Puerto Montt, automotive industry, Chile is approximately 1000 kms from a maritime nation. When did Santiago, has employed the the company become involved vast knowledge of the parent with the marine industry? company in its shipbuilding Aveggio: In the beginning our and maintenance activities. contacts with the maritime Tell us more about this diviindustry were sporadic and sion and its capacity to build limited to technical service and world-class vessels. sales of motor units for smallAveggio: Twenty years ago we sized vessels. In the late 1980s took important steps towards we began seeking alternative diversification by building a opportunities for the installamodern shipyard in Puerto tion of our engines, and there Montt. This choice of venue were a number of them in the was key to further growth and, shipbuilding industry. At first it after 10 years, we were building was difficult because being in tugs and deepsea vessels for Twenty years ago we took important Santiago, we were very far from major shipowners around the the coast. Amazingly enough world. A major achievement steps towards diversification by building though, the first fishing vessel of the shipyard is the ability a modern shipyard in Puerto Montt. This was completely assembled at to harmonize the activities of our headquarters in Santiago shipbuilding along with the choice of venue was key to further growth and shipped to the Pacific coast repair service. Another highand, after 10 years, we were building tugs at a distance of 120 kms. Since light is our certification under building vessels in Santiago ISO 9001. Over the years we and deepsea vessels for major shipowners presented a major logistical developed a significant knowlaround the world. A major achievement challenge, we decided to build edge that has enabled us to the shipyard in the port city of develop niche products, and we of the shipyard is the ability to harmonize Puerto Montt. Puerto Montt have always favored vessels of the activities of shipbuilding along with later also served as the base for high added-value over volume. the repair service. Another highlight is our our logistical requirements for In general we have focused on the Chilean salmon industry, the development of workboats certification under ISO 9001. which is part of our Marine and of average size, ferries, pilot Port Services Division. boats, tug boats and aluminum catamarans. We have built more MarEx: The Engines Division than 100 vessels that have been supports mining operations in delivered to destinations such Chile. Tell us more about its as Australia, Nigeria, Mexico, activities. Panama, Venezuela, Peru and elsewhere. Aveggio: Mining is the main economic activity in Chile. Chile currently extracts more than 35 percent of global copper producMarEx: In 2002 the company purchased Estaleiro Brazil in tion. The sites are located along the Andes, and the high altitude the southern part of Brazil, which has built over 300 vessels and adverse climate requires high standards of safety and quality since 1960. Will this yard build vessels for Petrobras in growin all phases of the process. For over 30 years our Engines Diviing its offshore energy business? sion has been linked to the mining business, marketing various Aveggio: Yes, no doubt. Detroit Brazil Ltd. has become a major products and services including engines for heavy trucks, filter player in the Brazilian market by building well-constructed systems and electricity generation in the major mines, both open offshore vessels. The company has created a shipyard production pit and underground. We have a strategic partnership with major plan for platform support vessels, which will allow us to meet the mining companies by providing support services to their operaspecific needs of our customers in this segment. MarEx: Tell us about the Tourism Division, which provides tions 24 hours a day, 365 days a year. Our close tie with mining companies has allowed us to develop the various lines of repremodern catamaran services and a first-class hotel in the sentation by the company, including prestigious brands such as Chilean Patagonia. MTU, Allison, and Donaldson. Aveggio: We believe that tourism in the Chilean Patagonia

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JosĂŠ AVEGGIO PEIRANO

MARCH/APRIL 2010

will continue to be one of the activities where we will enjoy more economic growth in the decades ahead, so the projection is very optimistic. Our passengers are our best promotion because they return home awed by the beauty of the region. In general our passengers have a three-day stay in which the focus is mainly on navigating the glacier area on the catamaran, touring the unique beauty of the flora of the region and enjoying delicious local food. MarEx: Please explain the current services provided by Starnav Maritime Services, the Brazilian maritime division of your company. Will it bid on service contracts with Petrobras in the offshore fields?

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MARCH/APRIL 2010

JOSé AVEGGIO PEIRANO

THE MARITIME EXECUTIVE

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management team remains Aveggio: Starnav has been flexible in order to address authorized by the Brazilian government to operate in maritime change in the marketplace. support activities, including Starnav has been authorized by the BrazilWhat are some recent exoffshore and port support. This amples of this? ian government to operate in maritime subsidiary began its activities Aveggio: No doubt we have support activities, including offshore and in 2009 with a mission to serve to be flexible, but also very the Brazilian offshore oil market creative. As an example of this port support. This subsidiary began its with technically advanced we have designed our fleet to activities in 2009 with a mission to serve be “multi-purpose” in order to offshore vessels and high operational standards. The boats meet the requirements of difthe Brazilian offshore oil market with will be manned by well-trained ferent markets. Craft originally technically advanced offshore vessels crewmen committed to meeting used by Detroit in support of the demands of our customers the salmon industry are today and high operational standards. The boats and the company’s commitment already operating in other will be manned by well-trained crewmen to safety and the environment. segments of the international Starnav has initially projected maritime economy. committed to meeting the demands of a fleet of six line-handlers and MarEx: Detroit Chile has our customers and the company’s com12 PSV 4500s for its Brazilian won a number of awards for mitment to safety and the environment. operations and, in 2009, the employee training and safety first boats started operations. in the workplace. Please tell Starnav has initially projected a fleet of MarEx: The company has us more about these types six line-handlers and 12 PSV 4500s for its a fleet of cargo transportof programs. What would a ers that serve the salmon typical employee working at Brazilian operations and, in 2009, the first industry. What are the future Detroit Chile say about the boats started operations. prospects for this industry? company? Aveggio: The coast of southern Aveggio: The training of our Chile is ideal for developing workers is a fundamental aquaculture and, in particular, principle in the conduct of for producing species such as our company. The primary salmon and trout. Since its objective is to maintain the inception the salmon industry has moved quickly, creating greater health and high safety standards of our senior officers, staff and demand for support and logistics services. About ten years ago customers, all within a stable and friendly environment. we saw an opportunity to integrate our knowledge of shipbuilding Regarding what a typical employee would say, I think what and engine maintenance. We built a modern fleet for the salmon could best demonstrate their feeling is that Detroit is seen as a industry and now offer specialized transport for food, plants and family. If you were to visit any production facility or branch office harvests. The salmon industry has lots of challenges due to health in any city or country, you would find the same work philosophy, problems in the stock. The quality and technology of our equipguiding principles and commitment from our workers who have ment has enabled us to safeguard the stock during transport. been with us for many years. MarEx: How well are the company’s shares performing and MarEx: As the world watched in awe when the magnitude what are Detroit Chile’s unique competitive advantages? 8.8 earthquake hit Chile, many of the country’s ports were Aveggio: In 2009 the price of our shares provided a return of 24 closed. Your company manages commercial ports and tourpercent and over the past 10 years the average return has been ism complexes. What was done to get the infrastructure close to 20 percent annually. Our growth projections based on operational again? the strategies discussed above lead us to believe that Detroit will Aveggio: The last earthquake was an unfortunate event that continue to be an attractive investment alternative for people who mainly affected the south central region of Chile between the want to invest in the segments the company is involved in and Sixth and Eighth Regions. This is roughly between 200 and 500 who anticipate future growth in assets and profitability. kilometers south of Santiago. Fortunately, all our facilities are MarEx: Does Detroit Chile have plans for expanding its oplocated outside of this geographic area, and for this reason we were not affected by the earthquake. All of our ports and tourism erations into other markets and countries? infrastructure remained operational during these events. Aveggio: Today, Detroit is totally focused on its existing operations in Chile and strongly committed to the expansion plan that MarEx: Thanks and please accept our gratitude for helping has been delineated for Brazil. put this issue to bed under such difficult circumstances. We MarEx MarEx: As a leader in the maritime industry, Detroit Chile’s know our readers appreciate it too!

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Jones act

THE MARITIME EXECUTIVE

38

Are Alternative Energy Support Vessels Covered by the Jones Act?

By Constantine G. Papavizas and Gerald A. Morrissey III

Building vessels for offshore alternative energy projects in the U.S. is a promising market for domestic shipyards. Its potential depends in part on whether offshore projects are covered by the Jones Act, which requires vessels to be built in U.S. shipyards. Whether the Jones Act does in fact apply to offshore alternative energy projects is a question that has not yet been definitively answered. The alternative energy market could be lucrative because specialized vessels are needed both for wind turbine and other project installation and for life-of-theproject maintenance. Experts reported at a conference in March that approximately three dedicated maintenance vessels are needed for every 100-unit wind farm. Moreover, specialized installation vessels have been ordered for a reported 100 million euros ($136 million) each from Korea in the last few months. Many more are likely to be needed. The Jones Act and related laws require the use of U.S.-flag vessels – built in the United States and owned and operated by qualified U.S. citizens – for the carriage of merchandise and passengers between

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points in the U.S. A similar law governs dredging in U.S. waters. When the points are places in the U.S., like Houston and Tampa, and the movement is cargo or passengers, the application of the Jones Act is obvious. When the Jones Act is applied to other places and other activities, the answers are not always so clear. Just last year, for example, Customs and Border Protection (CBP) – which has the authority to determine what constitutes a Jones Act-covered activity – issued a general notice revoking a number of oil and gas-related rulings it had issued since 1976. The issue concerned whether a foreign-flag installation vessel could transport equipment from the U.S. as part of the installation process. The proposed modification proved very controversial and drew comments from many industry segments and Congress. CBP withdrew its proposal, leaving the law on the subject unsettled. If CBP and the industry are still sorting out oil and gas issues that first arose in 1976, we should not be surprised if there are some hiccups in dealing with alternative energy projects when no large-scale project has yet been built in U.S. waters.

A Review of the Legislation

The key statute when applying the Jones Act offshore is the Outer Continental Shelf Lands Act (OCSLA) of 1953. OCSLA grew out of a dispute in the 1940s between state governments and the federal government over jurisdiction over offshore resources brought on by offshore oil and gas exploration. Following a series of Supreme Court decisions in favor of the federal government, Congress in 1953 enacted the Submerged Lands Act (SLA), which granted coastal states exclusive rights over the seabed and fishing resources within their navigable waters – defined for most states as three nautical miles from the coast. SLA also affirmed, and reserved, the federal government’s exclusive control over the seabed on the U.S. outer continental shelf outside of navigable waters. OCSLA was enacted soon after to give the federal government, acting through the Minerals Management Service of the Department of the Interior, authority to lease seabed tracts for oil and gas exploration. OCSLA also extended federal law, including the Jones Act, to certain

4/1/10 10:54:50 AM


Jones act

Clarification is needed if U.S. shipyards are to build such vessels – and for the projects themselves to go forward. Left: KATI – Keppel AmFELS Turbine Installer jointly developed by Glosten Associates and Keppel AmFELS shipyard and designed to install three fully assembled 6-MW wind turbines in each cycle. Above: KATI in a Monopile installation configuration with the capability to install six 550-ton monopiles and six 250-ton transition pieces in a cycle.

few CBP rulings that have considered the topic have similarly found that OCSLA deals with mineral resources. Some have pointed hopefully to President Ronald Reagan’s March 1983 U.S. Exclusive Economic Zone (EEZ) Procla-

mation as providing the necessary Jones Act connection. The Proclamation itself seems to have some of the right words. It asserts U.S. sovereign rights over the seabed and subsoil for economic exploitation including the production of energy from

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THE MARITIME EXECUTIVE

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M arch / A p ri l 2 0 1 0

installations attached to the U.S. outer continental shelf. OCSLA, as amended in 1978, provides that it applies to “all installations and other devices permanently or temporarily attached to the seabed, which may be erected thereon for the purpose of exploring for, developing, or producing resources therefrom.” The definitions of many of those terms would lead one to believe that the resources to be developed are mineral resources only – not alternative energy projects. Courts have also viewed OCSLA as an oil and gas statute. And the

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Jones act

THE MARITIME EXECUTIVE

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water, currents and winds. But the Proclamation is not a law and disclaims any effect on U.S. law, including OCSLA. So it does not appear to provide the necessary jurisdictional nexus missing from OCSLA to apply the Jones Act to offshore alternative energy projects. CBP, for its part, has not applied any part of the Jones Act to the EEZ in the absence of express congressional legislation. As domestic alternative energy projects moved through early development stages, it became apparent that federal U.S. outer continental shelf management had limitations that needed to be addressed: most notably, the absence of federal authority to lease land for purposes other than oil, gas and minerals. In the Energy Policy Act of 2005, Congress addressed that problem by amending OCSLA to give the federal government clear leasing authority for offshore alternative energy projects. However, that leasing amendment does not appear to have changed the way OCSLA otherwise extends federal jurisdiction over the U.S. outer continental shelf. That leaves the application of the Jones Act to offshore alternative energy projects in limbo.

Possible Solutions

Matters can be clarified in several ways. Congress can revisit the jurisdictional issue and either amend OCSLA or the Jones Act to clear things up. As Congress has shown itself incapable of timely approving even so trivial a matter as new White House landscapers, it might be awhile before a legislative fix is enacted. CBP might also be able to clarify things – and generally can do so within a matter of weeks – but the agency has not yet been

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asked for any rulings, and those rulings might merely confirm that the application of the law is ambiguous. What happens after CBP rules also may be more interesting than what CBP says. If CBP finds that the Jones Act does not apply, Congress might still change the law to make clear the application of the Jones Act to offshore alternative energy projects. If that happens, developers of ongoing projects with commitments to foreign-built vessels will be in the awkward position of fighting to be grandfathered or otherwise exempted from the new law. This is not a recipe for progress. If CBP finds that the Jones Act does apply, this might result in orders of U.S. vessels. But it also might result in agitation for waivers or a legislated exemption since there is likely to be a lack of specialized vessels available, at least initially. Part of the problem is the way the Jones Act works. The Jones Act grants an absolute preference to U.S.-built vessels wherever it applies. There is no such thing as a de minimis movement of merchandise exempt from the Jones Act. And the Jones Act applies regardless of whether the price to build or use a U.S. vessel is higher than a foreign vessel. There is no “higher cost” exception to the Jones Act. The Jones Act can be waived, but only in the interests of national defense. This has occurred rarely over the last few decades, although the Jones Act was waived for certain product tankers during Hurricanes Katrina and Rita. A waiver was also granted in 2006 for the movement of a jack-up unit from Port Arthur, Texas to Cook Inlet, Alaska by a foreign-flag vessel. CBP has said on many occasions, however, that commercial expediency is not a basis for a Jones Act waiver.

Constantine G Papavizas and Gerald A. Morrissey III

Chicken or Egg?

The uncertainty is not likely to help either the Jones Act community or offshore alternative energy developers. Developers may be reluctant to order vessels from U.S. shipyards if there is any price premium unless it is confirmed that the Jones Act applies to alternative energy projects. Developers may be equally reluctant to commit to expensive charters of foreign vessels if it is possible that the Jones Act will be found to apply in midstream of the project’s development. This has all the earmarks of the proverbial chicken-and-egg problem, adding a new complication to offshore alternative energy projects that already have enough issues to contend with – including siting, environmental impact and cost-effectiveness. In a similar situation involving large launch barges for deepwater oil and gas projects, it took various industry participants years to reach a resolution. They would be well advised to address the alternative energy Jones Act issues earlier rather than later, particularly given the lead time for the construction of installation vessels if it is determined the Jones Act does, in fact, apply. MarEx Charlie Papavizas is a partner in the maritime practice group of the international law firm of Winston & Strawn LLP. Gerald Morrissey is an associate in that group.

4/1/10 10:55:05 AM

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offshore market report

Long-Term Energy Needs and Deepwater Drilling Will Keep OSV Market Afloat M arch / A p ri l 2 0 1 0

By Karen Broyles

THE MARITIME EXECUTIVE

42

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offshore market report

While uncertainty remains as to when global offshore supply vessel (OSV) markets will recover, owners are “cautiously optimistic” about the long-term prospects for their industry.

While the global economic downturn and weakened energy demand have done their part, the main culprit behind the weaker market for OSVs and other types of vessels is new vessel construction. The glut of newbuilds over the past decade is now being felt as global OSV markets are oversupplied, weakening day rates and utili-

MarEx_37.indd 43

Markets to Watch

Latin America OSV demand in Latin America continues to

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THE MARITIME EXECUTIVE

Supply-Demand Imbalance

zation. Since early 2000, more than 1,200 platform supply vessels (PSVs) and anchor handling towing supply vessels (AHTSs) have been added to the market with an additional 400+ expected this year alone, according to ODS-Petrodata (see Table 1). While some attrition is being seen as older vessels are retired, it is not nearly enough to offset the influx of newbuilds. A similar trend has occurred in the global subsea vessel fleet, with the number of vessels available outstripping demand and a huge influx of newbuilds expected in 2010 and beyond. The diving support vessel (DSV)/remotely operated vehicle (ROV) fleet worldwide currently has 116 newbuilds under various stages of construction and options in place for a further 19. If all these vessels are delivered, they will represent a 67 percent increase in the existing fleet. Demand is, however, expected to strengthen this year in response to higher volumes of deepwater field development work. Fortunately, the pace of newbuilding orders has slowed due primarily to the global financial crisis that has made cheap and easy financing for vessels harder to come by. Operators are also waiting to evaluate the effect the sudden glut of vessels will have on the market before proceeding with newbuild campaigns.

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A number of OSV owners reported that their operating results in late 2009 and early 2010 continue to reflect weakness in global OSV markets such as the North Sea, Gulf of Mexico and Asia with only a slight improvement expected this spring. Despite the bleak short-term outlook, demand for supply vessels is rising, and the long-term prognosis is good as oil and gas are expected to remain fundamentally important to global economic growth and sustainability for years to come. Additionally, companies such as GulfMark Offshore and Hornbeck Offshore report seeing signs that activity among international exploration and production (E&P) companies is starting to rise, including seismic activity, which could signal a potential recovery. Offshore fields are expected to remain an important source of oil and gas as production from existing fields declines. Given that much of the world’s untapped reserves remain in challenging deepwater environments, future E&P activity will continue to be focused offshore, providing ongoing work for OSV fleets.

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offshore market report

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Table 1: Global OSV Deliveries by Year

THE MARITIME EXECUTIVE

44

Year in Service 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total

AHT 6 7 3 2 9 12 17 21 17 16 12 122

AHTS PSV 28 26 17 28 32 48 42 60 32 40 67 53 70 69 89 68 120 95 187 98 265 152 949 737

DSV 1 1 3 1 0 1 2 2 5 5 23 44

ROV 4 9 13 6 4 7 8 10 17 17 45 140

Source: ODS-Petrodata

grow despite the weak world economy with Brazil and Mexico leading the way. In Brazil, OSV demand is expected to rise as Petrobras explores the country’s deepwater regions and foreign oil companies begin to get more involved again in exploration and production. Because Brazil is predominantly a deepwater market, requiring sophisticated technology and experience, and the government has given cabotage trading privileges to vessels built in Brazil, vessel owners who have fleets with deepwater capabilities and have invested in infrastructure in Brazil can expect to see significant market share growth. Currently, over half of Brazil’s OSV fleet is comprised of foreign-flagged vessels, and the government is stepping up efforts to encourage development of its domestic fleet. Long-term prospects in Mexico indicate a lucrative deepwater market, assuming Pemex ramps up its deepwater activity as expected. The eventual exploration and production of an estimated 30 billion barrels of hydrocarbon reserves will require deepwater OSVs from other regions or the construction of new vessels. Currently, most offshore activity in Mexico takes place in the very shallow Bay of Campeche. U.S. Gulf While the outlook for the jackup market in the U.S. Gulf’s shelf area looks bleak, the region’s deepwater market is in much better shape. With fewer jackups working and numerous vessel owners competing for the remaining work, shallow-water OSV day rates have suffered. At least two vessel companies in the U.S. Gulf have idled their entire domestic supply fleets, with vessels continuing to be laid up and some being put up for sale. Demand for deepwater supply vessels, on the other hand, remains strong. The consensus among vessel owners is that OSV markets will see a recovery by mid-2010. The prospects for small PSVs, however, look bad unless there is a significant change in U.S. natural gas prices. Asia-Pacific and Australia Offshore construction work in Asia-Pacific is expected to pick up this year after operators delayed programs in 2009, which indicates potential work for OSVs offshore Malaysia, Indonesia and Vietnam. China’s plans to develop its offshore reserves means ramping up pipeline and platform installation projects, and foreign vessels will be required to support the work there in the

MarEx_37.indd 44

Total 65 62 99 111 85 140 166 190 254 323 497 1,992

next few years. The Southeast Asian market is weak with delivered newbuilds struggling to secure term charters. Many vessels on order with Asian shipyards, mostly small to medium-sized AHTSs, are remaining in Asia after delivery as there are no contracts awaiting them, putting downward pressure on day rates and vessel sale prices. Offshore Australia shows the promise of additional work for OSVs and specialized vessels as Chevron and its partners forge ahead with plans to develop gas reserves from the Greater Gorgon area offshore Western Australia as well as other liquefied natural gas projects. Last month, Chevron announced an additional find in the Greater Gorgon region with the Yellowglen-1 discovery, indicating that more discoveries could be made with additional opportunities for OSV work. Australia’s geographical position has insulated it somewhat from the global financial crisis as a substantial percentage of its energy production is for domestic use. The number of drilling rigs in the Australian market remains substantial, and the buoyant spot market is fueling the demand for vessels. West Africa In West Africa, a number of major oil companies announced delays in drilling plans in 2009, and the potential for rigs to lie idle after completing contracts did little to reassure owners that the market would pick up. Vessels have been working on short-term charters, and the market has become more competitive among vessel owners who have vessels idle. Rig demand has, however, picked up of late, and recently successful exploration efforts indicate the region still holds tremendous promise for future exploration and production and potential work for vessel owners.

North Sea The North Sea OSV market continues to suffer from an oversupply of vessels, low day rates, and poor utilization. The spot market for large AHTS vessels is expected to remain volatile with several large and medium-size AHTSs expected to leave the market over the next six months. Meanwhile, newbuild vessels scheduled for delivery over the next two years add uncertainty to the supplydemand balance.

Follow the Money

OSV owners wondering where jobs will appear should look no further than the spending plans of offshore E&P companies. According to a recent report from Datamonitor (see Table 2), the global offshore drilling industry will stabilize this year but is unlikely to return to growth until 2011. Following a sharp decline in 2009 caused by flagging energy demand, global drilling activity (i.e., the number of wells drilled) is predicted to rise 12 percent in 2010-2014 compared with the previous five years while global spending is forecast to rise 33 percent over the same period. In Asia, spending will rise 24 percent over the next five years after a sharp decline in 2009. Well numbers could rise by nine percent, which bodes well for future OSV work. Asia has attracted the highest volume of drilling spending since 2005 when it overtook North America in spending for the first time. Around 60 percent of spending occurs in Southeast Asia, with the remainder split between China and India.

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offshore market report Table 2: Offshore E&P Spending by Region

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Source: Datamonitor

THE MARITIME EXECUTIVE

46

North America will attract the second highest volume of spending over the next five years, mostly directed at the Gulf of Mexico. A rise in spending of 30 percent is forecast over the period 2010 through 2014. Well numbers will increase by seven percent after exceptional lows last year. Africa, which recently surpassed Western Europe to become the #3 region for offshore spending, will continue to be a boom market. Nearly 75 percent of spending is directed primarily at Angola and Nigeria in West Africa, with Egypt attracting much of the remainder. “Africa has enjoyed rapid growth in deepwater spending which should continue over at least the next four years, despite a slowing of exploration activity in the older deepwater

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regions,” said Dr. Michael Smith, report author and consulting oil and gas advisor at Datamonitor. Western European spending is expected to rise only five percent with well numbers for the 2010-2014 period falling by eight percent. Latin America, the #5 region, is on a steady upward course following massive discoveries offshore Brazil and China’s growing appetite for the region’s energy resources. Eastern Europe and the former Soviet Union attract only a small share of offshore drilling expenditures due to their limited offshore areas outside of the Caspian Sea, Sakhalin Island, the Russian Arctic and the Black Sea. However, spending is forecast to rise a substantial 74 percent after a modest decline in 2009. Well numbers for the whole period could increase by nearly 55 percent. In the Middle East, where spending and well numbers for the whole period are projected to increase 63 percent and 40 percent, respectively, the Persian Gulf region will remain fundamental to supporting global oil and gas supplies, increasing output to satisfy rising demand. While OSV owners have had to endure a painful market in recent times, the forecast rise in global energy demand and the need to replenish dwindling reserves will keep E&P companies drilling for years to come, meaning OSV owners can look forward to an era of growing demand for their fleets. MarEx Karen Broyles is a reporter based in Houston. She is a former Senior News Editor for ODS-Petrodata.

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Offshore Safety

offshore safety

Takes Center Stage

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By Barbara Saunders

No longer an afterthought, safety and the offshore industry itself have come a long way from the “cowboy mentality” of the early days. And that’s a good thing for everyone concerned.

THE MARITIME EXECUTIVE

48

“Better safe than sorry” goes the old adage. That’s certainly the case when it comes to working offshore, where fires, leaks, blowouts, collapses, collisions, spills and other calamities can seriously injure workers, harm the ecology, and damage or destroy expensive oil and gas installations and vessels. To date, the 1988 Piper Alpha accident in the North Sea, with a death toll of 167, is rated as the deadliest offshore rig disaster ever. Ranking maritime accidents involving oil and petro-products is more challenging, of course. From giant tankers to smaller workboats to passenger vessels, there are thousands of sites where accidents can occur as well as other variables to consider, so the data are not directly comparable.

Bottom-Line Impact

Larry Rigdon, retired president and CEO of Rigdon Marine, an offshore supply vessel (OSV) company now owned by GulfMark Offshore, provided a bit of historical perspective, “This industry has only evolved since about 1954. In the early years, there was a cowboy mentality. Concern for safety was not high on the list.” Rigdon noted how the emphasis on offshore safety has stepped up tremendously since the 1980s when the exploration and production (E&P) companies began moving into deeper waters. He added that

MarEx_37.indd 48

if offshore supply vessel (OSV) companies have too high an accident rate, the E&P operator will often cut contracts or refuse to do business with them. Carl Annessa, Executive Vice President and Chief Operating Officer of Hornbeck Offshore, expressed concern that some companies might reduce the level of funding for safety in today’s difficult economic climate: “Safe work costs money and during the run-up that the industry enjoyed during the mid-2000s the funds were there to build the safety systems and train our people in them. I am fearful that the current climate of lower operating results and renewed emphasis on costcutting could lead to some degradation in the safety performance gains we have achieved. I am occasionally troubled by our customers paying lip service to safety while awarding contracts to vendors strictly on the basis of price, sometimes even hiring new start-up companies that don’t have the legacy costs of an established safety culture, let alone a time-tested performance record.”

Better-Than-Average Safety Record

Relative to many other industries, the E&P and OSV sectors of the petroleum industry have excellent safety ratings. The American Petroleum Institute last year

reported that, based on Bureau of Labor Statistics data, “In 2008 [the latest survey year], the rate of job-related, non-fatal injuries and illnesses was 2.8 per 100 fulltime workers, compared with a rate of 3.9 for the entire U.S. private sector. In the E&P sector, the year 2008 rate of nonfatal injuries and illnesses was 1.9 out of 100 workers, compared to 2.9 workers for the entire U.S. mining sector.” The latter represented a 13.6 percent decline for the upstream oil and gas sector since 1999. Separate reports, based on Minerals Management Service (MMS) and other data, show a steady decline in recordable and lost-time incidents for the offshore E&P sector. The record for the OSV segment is also good. According to Ken Wells, President of the Offshore Marine Service Association (OMSA), which represents OSV companies and their owners, “Working offshore comes with a lot of inherent risk. After all, we’re the last to leave in the face of a hurricane and the first to go back after it passes.” One key factor in reducing injuries, Wells noted, is the widespread use of job analysis, or planning out jobs in advance, “so everyone knows precisely what his or her responsibilities are. Through this approach they are able to identify ways to improve the operation.” Another key factor is the continuing search for

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Is Incident-Free Performance Possible? Many companies today are setting incident-free performance as their goal. Hornbeck Offshore’s Annessa spoke out about this: “I believe that the offshore industry must be in the principal leadership position amongst all heavy industries with regard to its emphasis on delivering incident-free performance. Generally, oil companies and service companies are aligned with regard to the significance that operational risk identification and job planning need to play in the execu-

tion of safe performance. Incident rates have dropped significantly in the last 10 years as a result. The goal of zero defect, incident-free performance has not been achieved. I believe there is some risk in accepting incredibly low incident rates as ‘as good as we can do,’ when in reality many parts of the industry are already demonstrating incident-free work. Rather than just rest on the ‘exceptional’ performance that we have seen develop in the last decade, the industry must continue to drive toward zero defects, particularly with regard to personal injury and environmental incidents.” Among the factors contributing to improved safety performance is the broad deployment of dynamic positioning (DP) control for service vessels. This minimizes the need to put men on deck to handle heavy tie-up lines in offshore cargohandling operations. The widespread use of DP has reduced fatigue in the pilot house during extended periods of offshore

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ronmental Systems (SEMS) mandatory. Industry officials said in a presentation last September that the rule uses overly prescriptive approaches to the four areas addressed: Hazard Analysis, Management of Change, Operating Procedures, and Mechanical Integrity. “MMS fails to recognize that our voluntary safety and environmental programs are effective,” stated an industry report. Many operators already have SEMS in place, it noted. The comment period on the proposed rule closed this past September. An MMS spokesperson said that there is no set time-period on publication of the final rule.

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ways to perform jobs more safely. Wells elaborated: “One example is the use of pre-slung cargo and preplanning in cargo operations. Wherever possible, cargo is arranged in advance so that it won’t break loose on deck and can be easily offloaded quickly and safely at an offshore facility. Another example is the emphasis on Stop Work Authority. This means that every member of the crew is given the responsibility of stopping any operation that does not seem safe. The fundamental principle of Stop Work Authority is ‘do it safely or not at all.’ That seems like a very simple concept, but remember that the maritime culture is based on hundreds of years of tradition in which mariners are told to obey orders from their superiors. Stop Work Authority turns that tradition on its ear by empowering everyone, from the captain down to the least experienced deckhand, to call a halt to operations if they do not appear safe.” There’s a strong economic incentive at work here. Downtime is especially costly offshore with day rates for rigs running between about $249,000 and $414,000, according to RigLogix, and entire projects costing in the tens to hundreds of millions of dollars. In the regulatory arena, operators are concerned about a pending proposed MMS rule that they think poses a tremendous paperwork burden and, for many companies, duplication of effort. The rule would essentially make Safety and Envi-

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THE MARITIME EXECUTIVE

50

shiphandling that formerly required vessel operators to spend long hours in demanding, high-concentration activity. Fatigue, of course, is a prime factor in accidents, and avoiding it is a primary concern. Annessa explained, “Most employers spend some time training their workforces to recognize the significance of resting when the shift is over rather than engaging in other activities such as TV-watching or playing video games during rest periods.” Other fatigue-reducing initiatives include even-time hitch schedules and holding the longest of the schedules to a 28-day cycle so that mariners are not exposed to prolonged calendar periods without leaving the vessel for nearly equal periods of time at home. Companies that have succeeded in implementing effective safety programs recognize that there is more involved than simply programs and technology and that they must get inside the heads of their employees. “Most companies that have implemented rigorous safety programs in the last 10-15 years and have audited

“First and Foremost, Do No Harm!”

implementation.

Shell’s safety mantra is a good guide for all of us. Intrigued, we asked Callum Finlayson, Regional Marine Manager for Shell Exploration and Production Company in New Orleans, for his further thoughts on the issue, His response follows.

Management systems can be very well-written but if they do not accurately reflect and mitigate risks they will be ineffective. Equally, it is vital to have effective implementation of systems that work in order to avoid placing an undue burden upon seafarers.

We consider these principles to be crucial to continued improvement in safety within the marine sector of the industry: 1. High standards of safety leadership at every level of the companies involved and relevant industry organizations.

Every company or industry initiative must stem from genuine care for the safety and well-being of each individual affected and the environment. Equally important, leaders at every level must engage with their people directly and on a regular basis to demonstrate care and commitment. 2. A risk-based approach to the development of management systems and their effective

them to determine their effectiveness recognize that safety is his or her personal responsibility and that it is not just the singular responsibility of the company they work for,” Annessa concluded. We

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3. Consistency in approach across the sector.

A set of agreed industry guidelines similar to the Northwest European Area Guidelines would be of great value in terms of standardizing requirements and setting clear, consistent expectations in marine operations. The recent development of the Offshore Vessel Inspection Database by the Oil Companies International Marine Forum (OCIMF) is also a significant step forward in ensuring consistency. The involvement of OCIMF together with the continued involvement of the Offshore Operators’ Committee, the International Association of Oil and Gas Producers, and the International Marine Contractors Association is essential to ensure continuous improvements within the sector.

couldn’t agree more.

MarEx

Barbara Saunders is a writer and editor with extensive knowledge of the oil and gas industry. She is based in Houston.

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emissions

THE MARITIME EXECUTIVE

52

Meeting the Compliance Challenge: Practical Solutions for Conflicting Emissions-Control Requirements Regulators are increasingly focused on the marine industry in the ongoing war against emissions of all kinds. As proof, the U.S. EPA has recently decided to apply Clean Air Act regulations to vessels operating in U.S. waters. Furthermore, regulators are stepping up enforcement and increasing fines. Aerial and satellite surveillance to track oil emissions are now commonplace. Last year the owners of the commercial cargo ship M/V Ocean Jade agreed “to pay $2.2 million in fines and serve four years probation for conspiring to falsify records and falsifying environmental compliance records,” according to a Department of Justice press release. The Ocean Jade was not alone: Later in the year the owners of the M/V Theotokos were fined $2.7 million for violations of the Act to Prevent Pollution from Ships, the Nonindigenous Aquatic Nuisance Prevention and Control Act, and the Ports and Waterways Safety Act – as well as making false statements. Additionally, public advocacy groups continue to pressure governments for tighter regulations and stricter enforcement. Further complicating matters is the fact that global, regional, national and sub-national regulations may differ and even

MarEx_37.indd 52

By David Grucza

contradict one another, thereby posing a challenge for global vessel owners and operators. For example, air requirements vary between Marpol Annex VI, the EU Marine Sulfur Directive, the U.S. Clean Air Act, and the State of California Air Resources Board. How can a vessel operating globally comply with contradictory regulations? In addition, prescriptive and descriptive regulations as well as a variety of technologies to tackle topics such as NOx and SOx emissions, ballast water, and biofouling present a dizzying array of choices and challenges for an executive. As a case in point, the recently adopted U.S./Canada ECA (Emission Control Area) prescribes a specific fuel blend, challenging an owner approaching the ECA’s navigable waters to not only find, buy and bunker a specific fuel but also to have engines capable of running on that fuel. Again, what should an owner of a vessel operating globally do? Some may argue operational measures represent the best approach. For example, a vessel could operate at a reduced speed, based on the rule-of-thumb that a 10 percent reduction in speed provides about a 23 percent gain in efficiency. Some vessels do

3/28/10 4:22:55 PM


emissions

The conflicting maze of regulations can be daunting for today’s owner/operators. Fortunately, there are technologies available to help you meet the challenge.

A new hull coating exemplifies one of these technologies. In addition to providing a more slippery surface to improve efficiency, proper hull coatings can reduce biocides and control fouling. The efficient hull surface reduces energy consumption by five to 10 percent. Reduced energy consumption translates to reduced emissions. In June 2009, the U.S. Office of Naval Research reported that “The Naval Surface Warfare Center at Carderock estimates that biofouling reduces vessel speed by up to 10 percent. Vessels can require as much as a 40 percent increase in fuel consumption to counter the added drag.“ Some emissions come from a particular part of the vessel and may require a targeted technical approach to resolve. An example is stern lube oil pollution, where conventional systems may leak oil lubricants into the sea. According to the IMO, a conservative estimate for stern lube oil pollution is 80 million liters per year

MarEx_37.indd 53

53

THE MARITIME EXECUTIVE

The Targeted Approach

M arch / a p ri l 2 0 1 0

so. According to a recent New York Times story, “By halving its top cruising speed over the last two years, Maersk cut fuel consumption on major routes by as much as 30 percent ...” Longerterm solutions include alternative power such as wind and solar, but are these really practical? An effective and efficient approach to coping with the challenges posed by the multitude of new, existing and conflicting regulations requires investigating readily available technologies that reduce emissions and adopting and deploying those that make sense.

(MEPC 58/INF.22, 1 August 2008). If the stern tube cavity pressure remains lower than the sea water pressure, a leak should not occur. However, from an operational point of view, water being introduced into the stern tube causes issues with propulsion equipment and additional cost to the operator. As a precaution, some operators use biodegradable lubricants instead of oil. Biodegradable oils are expensive and can require modification of existing vessel machinery. A third approach makes use of seawater as the lubricant; some cruise lines and some U.S. Navy vessels use a system from Thordon Bearings which uses seawater as the lubricant. All three measures suitably address stern lube oil emissions. Another area garnering much attention is airborne emissions from diesel exhausts. Of course, low-sulfur fuels can reduce sulfur emissions. However, these fuels require engine modifications such as adding an automated fuel changeover switch, adjusting engines, changing fuel nozzles or adding an SCR (Selective Catalytic Reduction) system. Additionally, burning a low-sulfur fuel requires the fuel to actually be available to bunker. A different tack pursues scrubbing the emissions, and companies like Krystallon offer a unique solution. Krystallon offers a system that scrubs sulfur particulates from the exhaust gas with seawater, and it operates on several vessels today. True, these removed particulates become a solid either to be carried back to shore or emitted back into the ocean. The resulting increase in ocean water sulfur levels, however, amounts to a miniscule less than 0.0006 percent.

The Holistic Approach

Rather than addressing a specific emission source, another effective way to cope with these issues is to use readily available technologies that holistically reduce energy consumption onboard the vessel. Less energy consumed means less energy generated. Less generation means less diesel fuel to be burned and therefore fewer emissions. A simple approach applies energy management techniques onboard the vessels. These techniques have been adopted on land for some time and include lighting retrofits, retrofitting to energy efficient motors, adding HVAC controls and applying adjustable speed drives in lieu of valves on pumps. Each technique reduces electrical power demand, which in turn reduces diesel fuel consumption and emissions. Another way to reduce overall consumption utilizes dieselelectric or hybrid propulsion. Depending upon a vessel’s operational profile, diesel-electric and hybrid propulsion can provide substantial reductions in fuel consumption and emissions compared to conventional mechanical propulsion. A dieselelectric system uses electric motors and adjustable speed drives to turn a propeller to achieve the desired vessel speed; a hybrid

3/31/10 3:26:54 PM


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emissions

THE MARITIME EXECUTIVE

54

propulsion system combines mechanical and electric propulsion systems in an integrated solution. In both cases, electricity comes from onboard diesel-generator sets. Based on the vessel load and operating requirements, not all diesel-gen sets need to be running, which reduces the amount of fuel used. Some shipowners have reported savings of 30-40 percent in annual fuel consumption from the reduced diesel usage. On-shore power, known as “cold ironing,” can also reduce a vessel’s need to operate its engines. The Princess Diamond and Princess Sapphire, for example, use on-shore power when docked in the ports of Seattle and Juneau. Shore power requires the proper electrical infrastructure on shore, the proper cabling, and the proper electrical infrastructure onboard to connect to the land-side as well as synchronize the onboard generation with the shore-side generation. Once the vessel properly and safely connects to the land-side power, it can shut down its diesel-generating sets and reduce exhaust gases, soot, fine dust and noise. The exhaust gases, however, can generate power when a vessel utilizes a waste heat recovery system. These systems exploit the heat from the exhaust gases to drive a turbine generator and can be augmented by excess steam from an exhaust gas boiler. The resulting electrical power can be used for auxiliary purposes onboard, thereby reducing the power generation from diesel-generator sets. Applied to the proper vessel, a waste heat recovery system can reduce energy usage by approximately 10 to 12 percent.

Meeting the Challenge

Waste heat recovery systems, hull coatings, diesel-electric and all the other techniques discussed represent some of the readily available technologies an owner can consider to minimize exposure to current and future emission-control regulations. Other technologies are available for such issues as ballast water management, vessel recycling and vessel decommissioning. Environmental compliance also entails establishing and maintaining key processes such as safety management systems, maintenance schedules, testing procedures, and accurate documentation to record and verify best practices. Combined with best-available technologies, the procedures start to form a comprehensive program to tackle emissions and compliance. In an era when regulators are becoming more aggressive and regulations more conflicting, owner/operators must first have a full grasp of the regulations themselves and then apply the appropriate technology across their fleets as one of several important methods to ensure environmental compliance. It’s a challenge that can be met. MarEx David Grucza is responsible for the Marine Solution Business in the US for Siemens Industry Solutions, a division of Siemens Industry, Inc. Marine Solutions provides electrical, automation and propulsion solutions and lifecycle services for ocean going vessels.

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M arch / A p ri l 2 0 1 0 THE MARITIME EXECUTIVE

56

Brazil Update:

New Contracts Boost Drillers, But Uncertainty Remains By Barry Parker

Despite massive offshore discoveries, Brazil’s cabotage laws complicate its ability to develop those reserves domestically. Where will the rigs come from? MarEx_37.indd 56

Offshore Brazil’s vibrancy turned dramatic in early March for Houston-based Diamond Offshore (NYSE: DO), which announced new Petrobras contracts on three floaters that will bring in an aggregate of $1.4 billion over the next decade. A fourth unit, originally slated for Petrobras work in the Gulf of Mexico, is being repositioned to offshore Brazil. With this commitment the Brazilian state-owned oil behemoth is only barely flexing its muscles. According to Tom Kellock, Senior Consultant in the Houston office of ODS-Petrodata, a leading offshore oil and gas consultancy, “These three contracts don’t

3/28/10 4:23:07 PM


Brazil Update

Spreading the Wealth

MarEx_37.indd 57

The Billion-Dollar Question

A bigger question, with answers that will unfold only over time, is whether Brazil can create a domestic capacity to build equipment to support its ambitious program of further exploration of the “subsalt” blocks, particularly in the Santos Basin, an area without an existing oil producing infrastructure. Recent discoveries in the Campos Basin (currently offshore Brazil’s biggest producing region, typically in mid-water depths, with good logistics systems already in place) have spotlighted an upstart local driller, OGX Petroleo e Gas Participacoes SA, linked to the billionaire Eike Batista’s EBX Group. Devon Energy, a U.S. independent E&P company in the midst of selling its offshore businesses to British Petroleum for $7 billion, has also been actively exploring in the Campos Basin. Devon recently announced a large find in the Itaipu prospect, in 4,400 feet of water, in a field about 80 miles off the coast from Vitoria, held jointly with Anadarko and SK Energy. Transocean’s drillship Deepwater Discovery, a fifth-generation unit with DP, is being used by Devon for its explorations in the Campos Basin, which include nearly three discoveries (including Itaipu) in two dozen presalt prospects. Requirements for building in Brazil are driving both financing and strategic moves, but the response has been guarded. OGX announced its intention to float a $5.6 billion Initial Public Offering (IPO) with a portion of the proceeds set for investment in a new shipyard in South Brazil. South Korean Hyundai, bringing know-how to the yard, had agreed to take a minority stake in the IPO. But by late March weak investor demand that affected a number of Brazilian issues had forced OGX to scale back the offering to $1.6 billion. Meanwhile, rival builder Samsung has already secured a 10 percent stake in the Atlantico Sul shipyard, formed by a consortium of local construction interests. Kellock, from ODS-Petrodata, added that: “All three tenders – for seven, two, and 17 floaters – have been put back to May, and there is quite a bit of uncertainty about what Petrobras is going to do. At this time, Brazil simply does not have the capacity to build

57

THE MARITIME EXECUTIVE

Petrobras’s largesse has also benefited a cadre of Brazilian-headquartered international construction giants, who won contracts awarded in 2008 and are presently building drillships in the Far East. These include Schahin, Odebrecht and Etesco – each of whom has secured complex structured financing arrangements for drillships under construction in South Korean yards. The financing includes export credit supports from South Korea and Norway (representing supplier credit). In a marquee deal, Etesco – along with Japanese partners – is spending $820 million for a rig to be delivered from Samsung in early 2012 for a Petrobras charter. Other drillship deals include funding from Norway’s Eksportfinans with credit guarantees from another Norwegian agency. According to ODS-Petrodata’s Kellock, who was just back from Rio de Janeiro when he spoke to MarEx: “Petrobras has now postponed the tender dates on 28 rigs planned to be built in Brazil. The first seven, all drillships, would be built locally with deliveries beginning in 2013, and would all be owned by Petrobras.” A second newbuild tender, for two additional semi-submersibles (to be put on three-year charters to Petrobras) is also in the mix. A larger chunk, 17 floaters (either drillships or semi-submersibles) would be built in Brazil, owned by Brazilian or international contractors, and put on ten-year charters to Petrobras. Morgan Stanley’s Slorer opined, “The slippage of Petrobras’s tender by 60 days may provide a backdrop for some unexpected tightness in the ultra-deepwater market in 2012 as Petrobras finds itself short of rigs.” If this scenario materializes, charters such as those inked with

Diamond will dominate the mix.

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satisfy all of Petrobras’s requirements. Based on the specs called for in tenders, they still have a need for additional units from the marketplace.” Morgan Stanley’s Ole Slorer, who runs its Oilfield Services, Drilling & Equipment research practice, noted in a recent report, “We may see as many as 80 rigs operating in Brazil by 2018.” For Diamond, with a fleet of 33 floaters (32 semi-submersibles and one drillship), Petrobras is a major customer. Indicative of the current ultra-deepwater (>7,500 feet) market, Diamond’s Ocean Valor, a semi-submersible with dynamic positioning, was awarded a three-year contract by Petrobras at a rate that works back to roughly $450K/day. Morgan Stanley characterized this fixture as “below expectations” but added that “Investors are shifting their focus from concerns over ultra-deepwater rates to the looming tightness in the ultra-deepwater market into 2012.” Diamond’s Ocean Clipper, a drillship with the capability to drill to 7,875 feet, has inked a five-year extension, commencing in 2011, on an existing Petrobras contract with rates described as in the “mid-$300K/day” region.

Photo by John Janik, CEO EPD Brazil & EPD Inc

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Brazil Update

THE MARITIME EXECUTIVE

58

these units.” Attitudes about building in Brazil vary. In a Transthe current system of concession awards. Legislative proposocean (NYSE: RIG) conference call in late February, CEO Steve als currently under review in the Brazilian Congress would have Newman was very guarded in his assessment of Brazil’s buildPetrobras play a leading role, including being the sole operator ing capabilities, telling analysts: “If you go back 20 years or so of the offshore subsalt fields where concessions have not already Brazil was one of the been awarded. Politics world’s leaders in ship aside, Petrobras, OGX construction. They are and other field operatrying to reactivate and tors must source rigs rebuild that. Now the in a competitive marexisting ship construcket. The larger backtion industry in Brazil drop is that day rates is – for all intents and for deepsea floaters purposes, in contemhave held up remarkplation of the kind of ably well in the marship we would be lookketplace. The big units ing to build – almost are also in demand in nonexistent. And so other regions, notably they are having to, in West Africa and even most cases, recreate offshore Argentina, that from scratch.” so there are plenty of Newman went on to other places for these point out that Brazil is high-end assets to find engaging in “a comwork. plex endeavor, which While Brazil’s future introduces significant is very bright, the path risks when you think toward it is far from about entering into an certain. The big playopportunity to build a ers all believe in the drillship in Brazil.” On continued potential of the delayed Petrobas the country’s offshore tender, Morgan oil. Devon’s $7 billion Stanley’s Slorer added, sale of its worldwide “Channel checks sugoffshore interests Ships that consume 15% less fuel? gest that local yards are (coming three months not ready to provide after its announcement ABB’s compact propulsion systems help cruise and cargo competitive bids.” of the Itaipu discovery vessels to save fuel, create more space on board and and two months after improve maneuverability. Our turbochargers are fitted to its $1.3 billion sale of What to Do? more than 50 percent of the world’s tankers and container ships, helping them burn fuel more efficiently and produce certain U.S. Gulf of The fortunes of both four times more power. On the high seas, we can help Mexico assets to MaeBrazilian and intereliminate tons of CO 2. Every single day. rsk) was at the high national contractors www.abb.com/energyefficiency Absolutely. end of its anticipated will depend on Brazil’s range and confirmed success in launching the strength of the yards that can build market. Even OGX, the sophisticated aswith its downsized sets needed to explore IPO, was able to fill in the subsalt regions. a portion of the slack Besides Diamond, by drawing on other, OceanRig – now private Batista comwholly owned by Drypanies for investment. But the vicissitudes of stock markets and ships (Nasdaq: DRYS) – is eyeing the Brazilian market. Oceanfinancing challenges generally may slow down ambitious plans for Rig has four ultra-deepwater drillships under construction in a massive shipbuilding industry in Brazil. Uncertainty remains, Korea for delivery in 2011-2013. Other players who could have because billionaire backers are a rare commodity. uncommitted deep and ultra-deepwater floaters for the region are MarEx Transocean, Ensco (NYSE: ESV), Seadrill (OSX: SDRL), Noble Energy (NYSE: NBL) and Pride International (NYSE: PDE). Barry Parker is a maritime consultant and frequent contributor to Lurking in the background are potential changes to Brazil’s MarEx. regulatory regime for the subsalt fields, changes which will replace

MarEx_37.indd 58

3/28/10 4:23:12 PM


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Corrosion control

M arch / A p ri l 2 0 1 0

Corrosion protection at newbuilding: A light coloured aluminium pure epoxy coating (Intergard 787) applied to erection joints.

THE MARITIME EXECUTIVE

60

Corrosion Control Chemistry

By Richard Carranza

Corrosion is an extremely important issue in the maritime industry. Corrosion-related losses experienced by businesses in the U.S. alone range into the billions of dollars. Knowing how to control corrosion depends first on understanding the chemistry involved. Once the chemistry is understood, then appropriate action can be taken to prevent corrosion from occurring in the first place.

Corrosion Chemistry

Corrosion is an electrochemical reaction. This means the mechanics of corrosion involve voltage, circuits, electron transfer, conduction, resistance, and more. Here are some helpful definitions: »» oxidation – the process of losing electrons. »» reduction – the process of gaining electrons. »» anode – the place where oxidation occurs. »» cathode – the place where reduction occurs. The most common type of corrosion is the process by which iron is turned into rust. In this case, electrons are transferred

MarEx_37.indd 60

among certain key substances: iron, oxygen, and water. The formation of rust requires both oxidation and reduction and is therefore called a “redox” reaction (“redox” is shorthand for reduction/oxidation). Figure 1 is a compact outline of the corrosion process as it pertains to rust. Remember that rusting requires three important components: water, oxygen, and iron. At one end of the strip, the iron is oxidized, forming Fe2+ and dissolving into the water solution. The electrons then flow through the metal to the cathode at the other end where pure oxygen is reduced to create hydroxide ions. A circuit is formed. The iron and hydroxide ions combine in the water phase to form a salt precipitate called iron(II) hydroxide – a precursor to rust. Iron(II) hydroxide is further oxidized to create iron(III) hydroxide, a precipitate also known as rust. Note in Figure 1 that the anode forms deep within the water layer, where dissolved oxygen is not very concentrated. This type of anode is called a “sacrificial anode” because the process of oxidation actually depletes the anode material. The cathode forms at the water’s edge where oxygen is rich and hydroxide is easily

3/28/10 4:23:15 PM


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M arch / A p ri l 2 0 1 0

formed. Thus the iron ion migrates towards the cathode to react with the hydroxide ion, thereby forming the rust precipitate at the cathode. This is a typical example of rust corrosion. Pitting is observed in the anode region where the iron is sacrificed, and the rust actually develops some distance way from the pitting, in the cathode region. Furthermore, salt water greatly enhances rusting because it contains dissolved ions like sodium and chloride. These electrolytes help the migration of iron and hydroxide ions, increasing the rate of corrosion. Pure (fresh) water has very Figure 1: Schematic overview of the corrosion process. few electrolytes; thus the corrosion rate is much slower. An interesting aside is that most people think pure water is a conductor of electricity when it is commercial considerations. In short, their demise can be traced actually an insulator. Electrolytes make water conductive since to concerns over applicator health and safety and recommendathe dissolved ions facilitate the transfer of electrons, helping the tions from the International Association of Classification Societies formation of an electrical circuit. to improve coatings inspection conditions, combined with the need to improve shipyard productivity and a growing operator reCorrosion Control quirement for better in-service performance with reduced future Understanding the mechanics of corrosion chemistry aids the maintenance.” decision process regarding corrosion abatement. Here are a few Tar-based coatings gave way to hydrocarbon resin coatings beof the most common – and effective – techniques. cause of the robust applications that resins provide. Brown notes, however, that even this is not enough: “An increasing number Coatings of shipyards and ship operators who had experienced their (i.e., Coatings are a very cost-effective way of controlling corrosion. resins’) limitations were demanding increased coatings productivThis is because coatings are usually organic materials that are esity and performance that could only be delivered by genuine pure sentially inert. They keep water and air away from the metal and epoxy systems – pure epoxy meaning that the product polymer is prevent any redox reactions. not modified with hydrocarbon resins, non-reactive dilutants or Coatings are not without their headaches, however, thanks plasticizers.” to changing regulations and standards. Jim Brown, Marketing Brown concludes by saying that the search for better coatings Development Manager for International Paint, a leading manucontinues via national and international regulation: “But there is facturer of high-performance coatings, states: “Initially, dark coal also another critical regulatory issue now acting on coatings suptar epoxies were favored for both economic and anticorrosive pliers and shipyards, driven by environmental demands to reduce performance reasons. However, over time, their popularity dithe use of volatile organic compounds (VOCs) in marine paints. minished due to a powerful combination of health and safety and The EU’s SED (Solvents Emissions Directive), for example, spe-

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Corrosion control

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THE MARITIME EXECUTIVE

62

Galvanizing Galvanizing is another well-established method of corrosion control. Galvanizing entails dipping iron in a bath of molten zinc. Zinc is more reactive than iron; thus zinc becomes the sacrificial anode while iron is transformed into the cathode. This is called “cathodic protection” since oxidation cannot occur at the cathode and the iron is protected. There is another way to galvanize iron which is more effective than the “hot dip” method. It is called “thermal spray.” This technique involves passing an inert gas and zinc powder through an electrical arc. The mixture is ionized and forms a plasma. The plasma jet is directed onto the iron surface and provides a coating. Nathan Henry, Marketing and Product Development Manager for F. W. Gartner, a leading thermal spray provider, comments: “It is similar to galvanizing but more expensive and more effective. Hot dip galvanizing generally has a very thin coating of zinc on the outside of the iron. Galvanizing is actually a series of layers of zinc/iron with a greater concentration of zinc as you build it up on the substrate. The zinc acts as a sacrificial anode: The zinc corrodes instead of the iron or steel to which it is applied. With

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thermal spray plasma, the spray applies 99.9 percent pure zinc throughout the layer thickness. Since it is the amount of zinc that affords the protection, thermal spray coatings outlast conventional hot dip galvanizing methods by a very wide margin – given equal coating thicknesses.” While plasma thermal spray may be more sexy, the real workhorse of the thermal spray methods is twin wire arc. This system sprays molten zinc instead of plasma. Henry explains: “The twin wire arc system uses two wires of pure zinc that are brought together as anode and cathode. Anywhere from 18 to 40 volts is applied across the wires, thereby creating an arc and melting the zinc. The molten zinc is carried onto the substrate by a high pressure jet of clean, dry air. On impact, the zinc cools and builds up a layer of zinc coating.” Marine applications of thermal spray coating include propellers, shafts, and rotating equipment. Other Methods Coatings and cathodic protection are the most common forms of corrosion control; however, other methods also exist. Here is a short list of additional techniques used in the maritime industry: »» cladding – adhering a less reactive metal to the surface of the iron to provide corrosion protection, copper/nickel cladding is popular in seawater environments. »» alloys – instead of using carbon steel, stainless steels are used, which are essentially mixtures of iron with varying amounts of chromium, molybdenum, manganese, nickel,

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Corrosion control

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An abrasion-resistant, aluminium pure epoxy coating (Intershield 300) in a sea water ballast tank on a bulk carrier after 13 years in service. Excellent condition and no corrosion.

THE MARITIME EXECUTIVE

and other materials. The stainless steel alloy forms a metal oxide at the metal’s surface, and this oxide is very resistant to corrosion.

»» variations on cathodic protection – this involves simply connecting the iron equipment to a block of magnesium using a copper wire. Magnesium is more reactive than the iron and thus serves as the sacrificial anode. Applications include protecting underground equipment where the iron and magnesium are both underground. Cathodic protection is also used on underwater equipment.

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Corrosion control is not an easy task. Because corrosion is a chemical process – specifically, an electrochemical reaction – it is important to understand the chemistry involved before choosing an appropriate abatement method. Which method to use will further depend on the specific application – hulls, propellers, pumps, shafts, etc. Choose wisely. MarEx Richard Carranza is a chemical engineer and marine consultant based in Montgomery, Texas.

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The Maritime Executive Magazine - March/April 2010