Cost-Cutting Shipowners Compromise Tanker Safety

Safety fears are spreading through the tanker markets with oil companies increasingly concerned that the pool of owners with high-quality tonnage they can do business with is shrinking as dire earnings see maintenance checks slip.

Tankers’ failure to pass vetting procedures implemented by oil companies is now so severe that oil customers are beginning to question whether they can trust owners when it comes to the quality of their fleets.
Concern has been slowly but surely building in the market over the last 12 months, with many brokers expecting that owners will be unable to stump up the cash for regular safety checks.

In an exclusive interview with Lloyd’s List, Maersk Tankers chief commercial officer Klaus Rud Sejling blamed rising safety risks on the soaring price of bunker fuel, by far the biggest expense for shipowners.

The sheer scale of deficiencies found by oil companies during ship vetting means that far more vettings are carried out than actual vessels ultimately fixed.

This is an extra administrative burden for the oil companies, who are spending more time and expense trying to find a ship that meets the required standard.

“Some of the oil majors are really starting to get concerned,” said Mr Sejling. “The list of shipowners they can do business with is reducing because of safety concerns.”

Poor earnings in the tanker sector are likely to increase those safety risks and cause further vetting headaches for oil companies.

“If you’re making $6,000 per day, then you don’t have money for your daily running costs, unless you have money stacked away, then something has to give. You can not stop paying salary to crew, so maintenance is the obvious thing to go. This will ultimately lead to an increased safety and environmental risk and our customers know this,” Mr Sejling said.

“I know from talking to our customers that none of them believe that the current level of earnings among shipowners is sustainable, and there are no customers who have an interest in maintaining this extremely low level.”

Mr Sejling said there was an urgent need for tanker owners and oil companies to discuss the problem of high fuel costs and work out a solution as low freight rates threaten to put owners out of business.

He pointed to the containership sector as an example within shipping that has a fuel adjustment mechanism in place to soften the blow of rising fuel prices; lines implement surcharges to help cover increasing costs.

Maersk has not yet come up with a mechanism to allow tanker owners to cope with rising bunker prices but the company is adamant that the solution has to fall outside the traditional Worldscale pricing system.

In the past during stronger markets, when bunker prices rose, owners could negotiate Worldscale rates up to factor in increased fuel costs.

However, with severe overcapacity crippling charter markets and competition between the large number of owners operating in the spot market building intensely, some companies will always undercut their peers to secure business, giving oil companies little incentive to increase the freight offered.

Worldscale was “completely out of line with reality” when it came to compensating owners for bunker prices that rise after the Worldscale flat rate is set in January, Mr Sejling said.

Hedging bunkers is not the answer to the problem. The fact that bunkers have more than doubled in five years means that owners are unlikely to benefit from a forward hedge. Also, owners only hedge a small part of their bunker requirements because hedging is speculative.

The urgency is driven by present high bunker costs, which for 380 cst fuel in Fujairah was $741.50 per tonne on Friday, according to Greek shipbroker Optima, up from $680 at the start of the year.

Despite poor freight rates and high bunkers resulting in a loss for Maersk Tankers in 2011, the company is still interested in buying secondhand vessels.

But Mr Sejling would not be drawn on whether this meant buying vessels from beleaguered Copenhagen tanker rival Torm.

“We don’t exclude anyone,” he said. “We’re looking for the right vessel at the right price so who owns it is less important. It does look like more vessels are being offered on the secondhand market from Torm and other owners.”

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