Comment on the Maritime News

January-March 2003

   OIL AND SHIPPING HAVE LESS INFLUENCE IN EUROPE THAN IN THE U.S.  The EU is in the process of eliminating all single-hull tankers from European waters by 2010, only six years from now.  By contrast, the influence of the oil and shipping industries in Washington ensured that the Oil Pollution Act of 1990 (OPA90) allowed them 25 years to do the same thing.  As a result, single-hull tankers looking for a market will still be trading to the U.S. after they can no longer trade to Europe.  Note also that OPA90 does not apply to tankers calling at LOOP or lightering in the Gulf, with the result that the largest single-hull tankers in the world still come to the U.S. daily and will continue so to do indefinitely.  OPA90 also doesn't apply to vessels under 5,000 GT and the Europeans will include small vessels in their phase-out.  Tim Colton, March 28, 2003.

   GD CONTINUED TO OUTPERFORM NG IN 2002.  The "big two" both published their results for 2002 on March 24.  The figures for their shipbuilding operations are summarized below.  The reason for the big jump in the NG figures in 2002 is that 2001 didn't include the full value of the acquisition of either Litton or Newport News.  There are no new surprises in the management discussion: GD was unhappy with the TOTE contract, NG with the Polar Tankers contract.  No revelations concerning the outcome of the American Classic Voyages fiasco, either: I guess we're never going to be told the full story.

Not much comment is needed.  GD is clearly doing better than NG - higher profit margin, higher revenue per employee, higher asset turnover.  It's interesting that NG has almost twice the assets per employee that GD has but still only generates about 72% of the revenue per employee.  And now NG is hurling more and more CapEx money at both Ingalls and Avondale, telling Mississippi legislators that it needs to do this to stay competitive with GD.  One of these years they may work out that it's not the facilities that are the problem, it's the management.  Tim Colton, March 27, 2003.

   INGALLS' UNIONS GOT A PRETTY GOOD DEAL.  Under the new four-year agreement between Ingalls Shipbuilding and its unions the current journeyman rate goes from $16.37 to $18.32 in three increments - $0.55 now, $0.65 after 16 months and $0.75 after a second 16 months.  In addition, every employee will get a single lump-sum payment of $3,000 now.  The health care plan has been improved in a number of ways, with increases in employee contributions that are equivalent to about $0.21 an hour now, another $0.21 after the first 16 months and another $0.16 after the second 16 months.

According to Census data, the average wage for the whole shipbuilding industry is now over $17.00, so this deal puts Ingalls just about at the average level.  But, Mississippi has the lowest cost of living of any state in the Union: shipyard workers in other regions might well expect to get paid more than those in Mississippi.  So does this contract create a problem for other unionized shipbuilders?  Tim Colton, March 15, 2003.

   HORIZON LINES' HORIZON SEEMS TO BE PRETTY CLOSE.  A discussion of the Carlyle Group's acquisition of CSX Lines can be found in the Position Papers section.  Click here.  Tim Colton, March 13, 2003, extensively amended March 14, 2003.

   TEXT OF MATSON ANNOUNCEMENT.  Following is the complete text of the memo dated February 28, 2003, "To All Matson Employees" from Jin Andresick, President, and Brad Mulholland, Vice Chairman, of Matson Navigation.  Tim Colton, March 12, 2003.

Operating Cost Factors Cause Matson to Reconsider Investment in New Vessels

During the mid to late 1990s Matson adopted a vessel operating practice called "continue to operate" (CTO), which, as the words suggest, was primarily a "stay the course" strategy until the company could justify a vessel replacement program.  The economic value of such a program had to overcome continuing lackluster performance of the Hawaii economy, ever increasing expenses across all segments without productivity offsets, and eroding profitability in the Hawaii service due to increased competition.  As a consequence of running older tonnage, Matson's Hawaii service levels gradually began to deteriorate and it was felt that Matson could no longer push off the use of new vessels.

Primarily because of price and delivery consideration, Matson selected Kvaerner Philadelphia Shipyard, Inc., (KPSI), to begin its fleet replacement program.  Even though this investment in two new ships was marginal from a financial perspective, after several months of presentations it was recommended to Matson's Board that we move forward with the understanding that alternatives of either vessel ownership and operation, or time charters, would remain open until delivery.

The cost model for the proposed operation of the Kvaerner vessels contained many assumptions, but justification was driven primarily by operating cost savings.  During a series of meetings with representatives of our offshore unions beginning in 2001, these assumptions were discussed; however, labor cost savings vital to the project were not achieved and the investment no longer can be financially justified.

Changes since the original cost model was developed have raised the labor costs even higher.  Clearly, the project to acquire and operate new ships is now even more uneconomic and can no longer be viewed as a reasonable investment.  The company has, therefore, determined that the ships are not affordable under the present cost model and has requested that Kvaerner seek another buyer.  This allows Matson the option to time-charter the ships, which lends itself to several, lower cost crewing options.

Matson cannot afford to make investments that do not return its cost of capital.  We will take all prudent steps to ensure that we best position our company for the future.  We will be communicating our efforts in this area to you as we proceed but wanted to share with you where we are at currently.  we appreciate your understanding as we position our company for the future.

   FELS FINANCES ANOTHER JACK-UP FOR ENSCO.  There's no doubt that FELS builds a fine jack-up: they are the world leader in this sector.  ENSCO's decision to buy from FELS must have been made easier, however, by the unusual financing provided by FELS.  The shipbuilder, or, presumably some related entity in the Keppel Group, will own 75% of the $105mm rig: ENSCO has until two years after delivery, i.e., about four years from now, to buy them out.  And if they need to take a bit longer, what would be the problem?

Given that FELS' parent, Keppel Group, is 51% owned by the Government of Singapore, does this arrangement constitute a subsidy?  It certainly un-levels the playing field: what other rigbuilder could offer a deal like this?  Tim Colton, March 7, 2003.

   TEXT OF THE CAPPS BILL.  Following is the complete text of H.R. 880, which would, among other things, accelerate the phase-out of single-hull tankers.  Tim Colton, March 6, 2003.

To amend title 46, United States Code, to accelerate to 2007 the application of the requirement that a tanker that carries oil in bulk as cargo must be equipped with a double hull, and for other purposes.

February 25, 2003

Mrs. CAPPS (for herself, Mr. FARR, Mr. ALLEN, Ms. SOLIS, Mr. BLUMENAUER, Mrs. DAVIS of California, Mr. BROWN of Ohio, Ms. WOOLSEY, Mr. SCHIFF, Mr. TOWNS, Mr. ENGEL, Mr. THOMPSON of California, Ms. NORTON, Ms. MCCARTHY of Missouri, Mr. SANDERS, Ms. LEE, Mr. STARK, and Mr. GRIJALVA) introduced the following bill; which was referred to the Committee on Transportation and Infrastructure, and in addition to the Committee on Ways and Means, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned

   WHAT'S AN X-CRAFT?  No, the Navy's not going to start building 3-man submarines.  Today's X-Craft is a 50-knot sealift ship that can cross the Atlantic if it slows down to 20 knots.  If you hadn't heard about it until this week's announcement of a $60mm contract award to Titan Corp. and Nichols Brother Boatbuilders, there's an effective short briefing on the ASNE web site - find it at  http://www.navalengineers.org/Sections/Flagship/xcraft.pdf .  Tim Colton, February 27, 2003.

   ENSCO'S OSV FLEET.  Listed below, by type and horsepower, is the OSV fleet that Tidewater just bought from ENSCO.  The average age of ENSCO's fleet is 20 years, so Tidewater just increased the average age of its fleet.  Why is Tidewater buying a bunch of old boats instead of building new ones, apart, of course, from the fact that, at less than $3mm each, these boats were cheap?  Tim Colton, February 20, 2003.

   THE NAVY'S NEW FYDP HAS AN UNREAL FEEL TO IT.  The Defense Department has made a big thing about how the new five-year development plan gets the build rate up to 7 ships a year.  Well yes, but.  Look at it:

First, the FY04 request is good: that's what's needed.  But then we start getting unreal next year already.  They aren't going to be ready to buy either DD(X) or LCS next year.  No way.  Anybody want to bet with me on this?  Now look at FY07: the new CVN and the new LHA both in the same year, plus two of those prodigiously expensive new SSNs as well three other ships?  That's totally unaffordable and it's never going to happen.  Finally, look at those two T-AOEs in FY09: it's not that they aren't needed but they have the smell of that AE that was in the out-years of the FYDP all through the 1980s but never made it to the left-hand column.  They are in there to boost the out-year numbers, so that DoD spokesman can claim to be in favor of increasing the level of naval shipbuilding.  Goodness, I'm getting cynical, but look at every single five-year plan for the past 25 years and you will see what I mean.  Tim Colton, February 13, 2003.

   READ THIS BOOK AND BUY STOCK IN BOTH KINDS OF ENERGY COMPANY.  Before you fill up the SUV or decide to push the thermostat up another degree or two, read "Hubbert's Peak", by Kenneth S. Deffeyes (Princeton University Press).  If Ariana Huffington's ludicrous posturing and all those environmentalists didn't get your attention, maybe this might.  It certainly got mine.  It's required reading, I think, especially on a cold winter's night, because those winter's nights may be going to get a lot colder unless you have a secret supply of alternative energy sources.  Deffeyes worked at Shell with King Hubbert, who predicted in 1956, much to the fury of the oil industry, that U.S. production of crude oil would peak in the early 1970s: it peaked in 1970.  Deffeyes now uses the same techniques to predict that world production of crude oil will peak some time in the next five years.  Think about that.  If he's right, the price of crude oil is shortly going to go through the roof and it's going to stay there for however long it takes us to come up with alternatives, i.e., either alternative energy sources or alternative lifestyles, if not both.  And, if he's right, this also raises all kinds of other interesting questions, which I'll let you think of yourselves, just in case General Ashcroft should decide that he doesn't like my tone.  Tim Colton, February 11, 2003.

   NORTHROP GRUMMAN SHIP SYSTEMS PLANNING MAJOR EXPANSION.  Click here to read the Sun-Herald's report of Northrop Grumman's justification to Mississippi legislators of its new $288mm expansion program at Ingalls.  This new program is in addition to the $300mm expansion program that they just completed.  Note that Northrop Grumman has also publicly assured Louisiana legislators that it is committed to investing "whatever it takes" to turn Avondale into a "cutting-edge" shipyard.  (If they really mean that, it will take a whole lot more than $288mm.)  NGSS seems to be planning investments on the assumption that (a) GD is going to go out of business, (b) there are new market opportunities coming along that nobody else knows about, and (c) there are thousands of skilled workers, supervisors, planners, etc, etc, in south Mississippi just sitting at home waiting for Ingalls to call.  Perhaps they should just wake up to the fact that they could produce a whole lot more with their existing facilities if they would just operate them efficiently.  Tim Colton, January 24, 2003.

   TEXT OF McCAIN-INOUYE DEBATE ON THE NCL WAIVER.  Click here to read the inspiring exchange between Senator McCain and Senator Inouye on the subject of Senator Inouye's outrageous amendment to let NCL into the PVSA trades in Hawaii.  The amendment passed the Senate but the bill isn't law yet and there's still time to kill it in Conference.  Tim Colton, January 24, 2003.

   NORWEGIAN CRUISE LINES LOOKING FOR BACK DOOR TO PVSA.  Section 211 of the Omnibus Appropriations Act of 2003, was inserted, we are told, by Senator Inouye, (D-Hawaii), on behalf of Norwegian Cruise Lines, a Malaysian-controlled company that pays no U.S. taxes.  The language would allow the two "Project America" ships, that NCL was allowed to buy really, really cheap and is completing in Europe, to be documented under the U.S. flag with a coastwise endorsement.  It also allows the introduction by the same owner of a third foreign-built cruise ship, restricts the three ships to the Hawaiian trades and protects them by specifically ruling out the possibility of any other foreign-built ships being introduced.  Outrageous.   Tim Colton, January 17, 2003.

   MSC PAYS $96 MILLION FOR FOUR 16-YEAR-OLD TANKERS.  The four tankers - Paul Buck, Samuel L. Cobb, Richard G. Matthiesen and Lawrence H. Gianella - were built by Tampa Shipyards and delivered in 1985 and 1986.  Together with a fifth ship, the Gus W. Darnell, they are known to MSC as the "Champion"-class tankers and to everyone else as the T-5 tankers.  They are 25,000-dwt, 16-knot, double-hull product carriers, designed to deliver fuel to overseas bases.  They are all on 20-year charters, so a decision on their future had to be made soon, and this is it.  Of course $24 million for a 16-year-old handy-size product carrier but it's almost certainly cheaper than negotiating an extension to the charter for another 10 years: the ships were built with double hulls even before OPA 90 was ever thought of, have been well maintained and should give good service to age 30 or even longer.  It is probably not cheaper than building new ships, but MSC is not permitted to do a 20-year charter today.  The only real question is what will happen to the fifth ship, which presumably MSC doesn't feel it needs. 

Historical note #1: These five ships were a part of the original Reagan Administration build-and-charter program that also produced the first 13 maritime prepositioning ships.  When the press discovered that the Navy had executed 20-year charters for 18 ships, which, when you added up the annual charter payments for all 18 ships for all 20 years, seemed to result in a positively astronomical total cost, they coined the term "rent-a-navy".  The Congress immediately got all defensive and changed the rules to what they are today: MSC cannot now charter ships for periods longer than five years, which results, of course, in much higher costs than long-term charters, but that's your Congress for you.

Historical note #2: When Tampa Shipyards won the competition for this contract, we all fell off our chairs.  Tampa had not built a self-propelled oceangoing ship since WWII (and hasn't since) and did not have the facilities.  Moreover, their price and schedule were unrealistic.  They can't do it, we all said.  But they did, and they did it on time and they made money.  An astonishing performance, masterminded by Ray Francis and Ralph Anselmi, but a true team effort by all concerned.  They subcontracted the engineering to J. J. Henry, the n/c lofting and production engineering to Cali, all five forebodies (bow + cargo block) to Avondale and all five superstructure blocks to Alabama.  They built the sterns themselves and joined the three pieces of each ship in dock #4.  And this was before we had CAD.

Economics note: The original shipyard contract price in 1983 for each of these ships was $58 million.   Their replacement cost today in a second-tier shipyard would be less than that.  How much less, I'm not sure, but definitely less.  This is great: U.S. shipyards are so much better than they used to be.  Unfortunately, the world market price for a tanker of this size 20 years ago was around $30 million and today it would be under $20 million.  Tim Colton, January 15, 2003.

   DOES THE NASSCO CONTRACT RESOLVE EXXONMOBIL'S PROBLEM?  Not so long ago, ExxonMobil had apparently turned its back on NASSCO and was looking at the feasibility of building its 2 (maybe 3) 100,000-dwt crude carriers in a second-tier shipyard.  The reason was supposedly a combination of NASSCO's high prices and full order-book.  Now ExxonMobil is back with NASSCO again, having contracted with NASSCO for the contract design and re-opened the door to a construction contract at the end of this year.  So what does this mean?

The first half of this is easy.  NASSCO (assisted, presumably, by Herbert Engineering) can clearly handle the design challenge.  But can they also build the ships in time to meet ExxonMobil's OPA90 dates?  NASSCO would need to build these ships in its graving dock, in which it is currently finishing up construction of the second big TOTE trailership, which is roughly six months behind schedule, and in which it will shortly start construction of a series of 4 (maybe 6) 185,000-dwt tankers for BP.   The delivery schedule for the BP tankers calls for the first one by the end of 2003, with the others at 12-month intervals.  This schedule must have slipped somewhat because of the delay with TOTE but also because of difficulties finalizing the design of the BP ship, but let's assume that NASSCO can recover the slippage, which it probably can.  This means that the fourth BP tanker will be delivered by the end of 2006.  If the ExxonMobil ships were to follow the fourth BP ship, NASSCO should be able to deliver the first one in the third quarter of 2007, the second in the second quarter of 2008 and the third in the first quarter of 2009.

Would this meet ExxonMobil's needs?  ExxonMobil is currently operating two crude carriers, the 210,000-dwt S/R Long Beach (formerly Exxon Long Beach) and the 92,000-dwt S/R Hinchinbrook (formerly Overseas Ohio), plus five product carriers that are not really suited to the TAPS trade.  [Remember that the 210,000-dwt S/R Mediterranean (formerly the Exxon Valdez), is banned from the trade.]  In addition, they recently chartered in the 191,000-dwt B.T. Alaska.  S/R Long Beach doesn't phase out under OPA90 until 2010, so she's not the problem.   S/R Hinchinbrook, however, has a phase-out date of 10/1/2005 and B.T. Alaska's is 3/14/2006.  This means that ExxonMobil will have a shortfall of capacity for about two years, if they don't get the first new ship until the late summer of 2007.  Unless, that is, NASSCO has some cunning plan to speed up its construction schedule.  This is why ExxonMobil would like to bring back the S/R Mediterranean, or, failing that, to get a waiver to use a foreign-built ship for a couple of years.

Meantime, what about BP's two option ships at NASSCO?  The new contract signals that these options are going to be allowed to expire, if they have not already done so.  The timing of the announcement of the new contract may in fact indicate that BP's options expired at the end of 2002.  Tim Colton, January 7, 2003.

   USCG INVITES COMMENTS ON MARITIME SECURITY PROPOSALS.  The USCG's proposals can be found at:

http://dms.dot.gov/search/searchResultsSimple.cfm?numberValue=14069&searchType=docket

Some of this make sense, some of it doesn't.  The cost estimates seem low to me.  Read the documents, comment on them, and go to the public hearings and engage in active discussion.  We're going to have to live with what comes out of this process.  Tim Colton, January 5, 2003.

   NEW YORK COLUMNIST JIMMY BRESLIN IS CONFUSED.  Bigotry and ignorance are not, it seems, confined to the South.  Read what he wrote at:

http://www.newsday.com/news/opinion/columnists/ny-nybres273062676dec27,0,2675581.column?coll=ny%2Dopinion%2Dcolumnists

Then read the response from the editor of the local paper at:

 http://www.sunherald.com/mld/thesunherald/news/editorial/4871275.htm

Which of these two guys is the responsible journalist?  Tim Colton, January 4, 2003.

   SOME NEW YEAR'S RESOLUTIONS FOR 2003.  Wouldn't it be great if:

• The Jones Act product carrier operators and the Maritime Administrator were to drop this line about new ship prices over $70 million being unaffordable.  They aren't unaffordable: you pass them on to the oil companies and the oil companies pass them on to the consumers.  In fact, $70 million for a 45,000-dwt product carrier is a lot cheaper than $200+ million for a 140,000-dwt crude carrier and it's also a lot cheaper in constant dollars than operators happily paid in the 1970s.

• The Maritime Administration were to attempt to comply with its statutory mandate to support a healthy shipbuilding industry by (a) dropping this nonsensical attempt to apply the cargo preference regulations to ship construction contracts and (b) doing its due diligence on Title XI applications more effectively (and thereby obviating any need for performance bonds).

• The Navy were to (a) buy the littoral combat ship from a second-tier shipbuilder, (b) change its contracting practices so as to encourage shipbuilders to cut rather than increase costs, (c) call for new designs that are actually smaller and simpler than their predecessors, and (d) stop complaining about not having enough money.

• The Congress were to stop micromanaging and set up the Title XI program as a revolving fund.

• The Transportation Security Administration were to realize that it doesn't matter how many billion dollars it spends: our transportation system cannot be 100% secure.  If the net result of the TSA's efforts is massive disruption of our international trade, the ultimate cost to the economy will be many times the TSA's budget, and the terrorists will have won without having to kill anybody.

• All the countless maritime industry associations and organizations and societies and unions and councils and alumni associations were to (a) stop bickering, (b) get together to decide what kind of maritime policy we really want, and (c) present a united front on Capitol Hill for as long as it takes to make this new maritime policy a reality.

Wishful thinking, I'm afraid, but we live in hope.  Happy New Year.  Tim Colton, January 1, 2003.

For comment on maritime news reported in earlier quarters, click on one of the following links:

Fourth Quarter of 2002

Third Quarter of 2002

Second Quarter of 2002

First Quarter of 2002

Fourth Quarter of  2001

If you have comments or questions, suggestions or complaints, please e-mail me.