THE OIL WORLD IN TURMOIL - JØRGEN JAHRE 1973-1976
- 12 January 2001 11:00
- 06 September 2011 12:19
The rising market which owners were enjoying at the end of 1972 continued into 1973 to benefit them - or at least those who were operating on the voyage market.
Optimism prevailed and this translated into shipyard orders for more, bigger and faster tankers. Speed of turnaround was the thing as the freight element rose to absorb a substantial percentage of the landed cost of crude oil.
Cheap oil was seen as powering a world economic revival - the supply of oil was believed to be unending and the price always low. New oil production in the British and the Norwegian sectors of the North Sea boosted the belief in infinite supply while the only concern was that Middle East production costs were so low that high-cost offshore production could not compete.
Suddenly in the Autumn of 1973 this energy bacchanalia came to an abrupt end, with the ‘Yom Kippur’ war between Israel and the Arab world, the anger of the Arabs, and the Arab League oil embargo slashing oil exports and multiplying the posted price of oil. The Arab oil producers came to realise that they had a potent weapon - control of oil supply - in their hands. Everyone in the industrialised world quickly came to hear of the Oil Producing and Exporting Countries, OPEC.
Britain suffered the double blow of a coal miners’ strike and power cuts and a reduction of the working week to three days. The United States found gasoline was in short supply and queues - lines - formed at gas stations - a privation never experienced before in modern America.
Similar problems were hitting INTERTANKO’s members. The demand for tanker transport suddenly collapsed. Oil companies who had also been building up their fleets had little enough work even for their own ships. Bunker fuel shot up in price and also became harder to obtain, and naturally the oil companies prioritised bunkering their own ships. So even where charters were to be had, independent owners had no certainty of obtaining the bunker fuel to prosecute the voyage.
The Arab League embargo ended in March 1974 but the demand for oil did not recover. Indeed it took some years to recover to 1973 levels, and of course has never reached the heady optimistic excesses which were the justification for the shipbuilding orders placed before the embargo hit. The tanker owning industry had locked itself into a chronic oversupply pattern which is still in evidence in some sectors over twenty years later.
Not all owners had enjoyed the 1973 boom - and nor, in the immediate term, did they suffer the following bust. Owners with ships on long term time charter continued to have troubles with the sliding dollar. INTERTANKO calculated that in five years up to 1973 the dollar had lost 25 percent of its value against the Norwegian krone - taken by INTERTANKO as a sample stable currency, and moreover one which many INTERTANKO members knew as the currency of much of their financial outgoings. Further attempts by INTERTANKO to get the oil companies to agree adjustments to charter rates to compensate for declining value of the hire were rebuffed, although the oils had in September 1973 - just before the price explosion - agreed another increase, of 11.9%, in posted prices from producer countries.
The currency instability worried INTERTANKO and its members as long term time charters are regularly the security and basis of incoming funds against which mortgages are raised to build or buy ships. INTERTANKO’s Documentary Committee tried to get acceptance for a freight clause linking charter freight rates to a basket of currencies rather than solely to the dubious Dollar.
The rise in bunker prices continued even when supply eased: the prices carried on bulleting upwards - they tripled in 1974. Ships designed for speed and with little regard to bunker economy were found to be almost unviable. A 500,000 DWT Ultra Large Crude Carrier - ULCC - delivered in 1976 could achieve nearly 16 knots but to do so consumed between 350 and 400 tons of bunker fuel a day. Optimum speeds for voyages dropped from 15 knots to in some cases as low as 10 knots. Charterers paid more attention to complete outturn of their abruptly more valuable cargo.
The Worldscale Association was exercised in keeping up with the changes. The bunker price multiplication of 1973 came too late to include in the 1974 edition of the Worldscale index, and this happened again in the next two years. Port charges rose as well, with Iran and Saudi Arabia again imposing retroactive increases. In Australia a levy of $1.00 per Net Registered Ton (NRT) of each ship delivering oil there was made to finance oil stockpiling and pollution response preparation. The size of the “Worldscale ship” was a 19,500 deadweight ton motor tanker.
New ships were delivered in 1974 in record numbers - 41.8 million deadweight tons - and efforts were put into negotiating cancellations of shipyard orders or conversion of tankers under order to other ship types. Even so the 1975 delivery figure was 44.8 million deadweight tons of tankers, even higher than the 1974 figure. The hangover of unwanted newbuilding deliveries from the riotous ordering party of 1972-73 was to last some years yet.
Freight rates more than halved in 1974, and INTERTANKO’s “State of the Industry” report for 1975 remarked that “the only encouraging thing one can say is that it can hardly get any worse”. Demand - the volume of oil to be carried - fell three years in a row, in 1973, 1974 and 1975. A series of twelve month timecharters of eight VLCCs to the oil giant Exxon in May 1975 were fixed at below operating costs.
To make matters worse for tanker owners, the Suez Canal reopened in June 1975, cutting the voyage times again.
Some INTERTANKO members pressed to revive the lay-up scheme. An attempt in 1974 was voted down but another move in 1975 gathered more force. However a clear practical obstacle barred the way. Freight rates were so low that there was little possibility of the tonnage that continued to trade making any worthwhile financial contribution to the ships in lay-up.
Although not adopting any ideas of lay-up schemes, INTERTANKO was active in helping owners to make their own arrangements to put ships into lay-up. In 1975 an INTERTANKO study search for possible lay-up sites produced a list of 45 sites in 25 countries and INTERTANKO was involved in settling regulations and requirements for safe lay-up - and incidentally to secure insurance rebates. Such considerations included secure mooring, firefighting provision, freeing the tanks of explosive gases, restricting the numbers of ships in a block of ships tied together, and salvage availability.
INTERTANKO also looked into alternative uses for idle tankers. Combination carriers had largely switched to the dry bulk trades. Stockpiling of oil in tankers used as floating storage was discussed with the International Energy Agency (IEA). 573 ships were in lay-up by the end of 1975, 47.8 million tons of oil carrying capacity - of which 25.8 million, 160 ships, were under seven years old.
Sparked by Erling Næss and Jørgen Jahre, INTERTANKO’s discussions about lay-up schemes led in a different direction: the creation, in December 1975 at a meeting in London, of the International Maritime Industry Forum (IMIF), which included oil company and shipping finance representatives, to work on solutions to the tanker industry’s crisis.
INTERTANKO now faced more serious challenges to the international nature of tanker shipping, from the United States Congress. A “flag discrimination” bill was tabled in 1973 in Congress reserving a minimum twenty percent quota of imported oil for carriage in American flag ships, escalating to twenty-five and thirty percent over two years. INTERTANKO co-operated with the Federation of American Controlled Shipping to lobby against this proposal.
In a statement to Congress’ Merchant Marine and Fisheries Committee, INTERTANKO said that “the growth of flag discrimination would in INTERTANKO’s opinion restrict the efficient movement of oil which for generations has been based upon free competition”. There was strong feeling in the United States on the issue and INTERTANKO had to warn its members with non American flag ships about threats of picketing in American ports.
The American flag quota bill passed through the Senate and the House of Representatives in 1974. The United States’ own Federal Energy Administration estimated the cost of the bill to the country at $1.15 per barrel, or $3,000 million by 1980. In October INTERTANKO’s Council sent a cable to President Gerald Ford expressing concern about the Bill. By the end of 1974 President Ford had failed to sign it into law and had, effectively, vetoed it.
The issue was not dead however and the American maritime unions continued in 1975 to press for flag preferences, but to no avail against the administration. Similar ideas cropped up in Australia where the Minister of Transport introduced a measure to reserve forty percent of oil imports to the national tanker fleet. The proposal was dropped however and INTERTANKO noted that “both decisions” - the American and the Australian - “clearly demonstrate responsible administrations’ policy to give priority to countering inflation and supporting free and open competition in world trade”.
1973 was also the year of adoption at the Intergovernmental Maritime Consultative Organisation, IMCO, of the Marine Pollution Convention, MARPOL. Whilst Torrey Canyon in 1967 was at that time the most notorious tanker wreck there had been, an accumulation of oil spill incidents which were widely attributed to tankers - they were held responsible for all oil found on holiday beaches - called for action.
In fact of course then as now most of the oil polluting the sea did not come from tankers, as a study by the Classification Society Det Norske Veritas showed. The study showed that in 1970, tankers contributed 28 percent to oil pollution at sea, exceeded by crankcase oil at 29.4 percent - a very early illustration of INTERTANKO’s campaign twenty years later highlighting the huge amount of oil pollution resulting from car sump oil dumped into the town drain.
INTERTANKO remarked in 1973 “pollution of the seas has intensified as technology has grown. However, on a global scale, shipping is not a great source of pollution”. The MARPOL Convention - which was not to come into effect for many years - required, amongst other things, that new tankers above certain sizes had to be built with segregated ballast tanks (SBT) - the ballast tanks, lines and pumps totally segregated from the cargo tanks, pumps and lines - to prevent cargo oil residues escaping into the sea at deballasting.
There were concerns that the slowdown in new ordering which took place following the events of 1973 would delay the widespread introduction of SBT. INTERTANKO considered whether existing ships could be converted to SBT and what these conversions might cost. Estimates made in 1975 showed figures ranging from one to three million dollars: money not available in the industry. Some owners were very alarmed at plans for the introduction of SBT and forecast dire consequences for the industry.
On the other hand, other owners began speculative ordering of new ships, for delivery ahead of the operative date for SBT and at contract prices lower than those for SBT tankers - a measure which prolonged the chronic oversupply situation.
INTERTANKO and other maritime bodies came up with other interim solutions, chief of which was clean ballast tanks (CBT) - distinguished from SBT in that the tanks used lines and pumps in common with the cargo tanks, and thus required less conversion work and costs - by a factor of ten: but not providing the same security against discharging oil-contaminated water.
Provision of separated ballast tanks was not of itself new - tankers had always had some segregated ballast spaces - but what was new was the increased capacity of ballast tanks, of some thirty percent of the ship’s displacement (deadweight - cargo carrying capacity; plus lightweight - ship’s own weight), involving cutting out cargo carrying (and thus freight earning) capacity - by some 10 to 15 percent. On the other hand, deleting these former cargo spaces would cut the total capacity - overcapacity - of the world fleet.
The question of the effect on period charters - regularly fixed by reference to cargo carrying capacity - of reduced capacity following SBT conversion was addressed by INTERTANKO, who relied on oil companies’ backing of SBT in the conferences before MARPOL and - in a comment of possibly unconscious humour mindful of the obdurate refusal of oil companies to help tanker owners over the declining dollar problem - also said that “owners’ understanding of oil companies’ problems in 1967/68 when closure of the Suez Canal created a tonnage shortage should be recalled”. Then, loadlines had been adjusted to increase cargo capacity. Earlier, in 1973, INTERTANKO had published an assessment of the costs of SBT, entitled “Certain Commercial Aspects”.
MARPOL 1973 was not the end of the IMCO debate and throughout this period IMCO debated further measures - now in its newly (1974) formed Marine Environment Protection Committee. INTERTANKO returned to the issue of provision of waste oil reception facilities in ports to prevent oil being dumped at sea. The Association put up suggestions for conversion and use of idle oil tankers as floating oily residue and dirty ballast reception facilities, particularly in problem areas like the Middle East Gulf.
Some countries however felt IMCO was moving too slowly and itched to introduce stronger measures. INTERTANKO warned against this in 1973 saying that “in the light of various local regulations it is of course most important that unification of acceptable international standards for pollution control be agreed upon”. Despite this a suggestion that the MARPOL Convention should limit coastal states’ right to impose different measures was defeated.
Once again it was the United States which was breaking ranks with MARPOL. In the state of Florida an Oil Spill and Pollution Act made Florida port calls prohibitively expensive. Florida’s Act conflicted with United States Federal legislation but on being appealed up to the Supreme Court was upheld. Japan too had gone further with a 1970 Marine Pollution Prevention Law - coming into effect in 1975 - requiring extra pollution prevention equipment.
The tanker industry introduced a voluntary agreement for MARPOL 1973 compliance pending enforcement. INTERTANKO played a role in securing compliance, and the commitment of charterers, by applying chartering conditions.
In 1974 a book called “Supership” written by Noel Mostert was published. This sensationalist book, highly critical of tanker operations, drew the ire of INTERTANKO who criticised the “inaccurate, outmoded and misleading reports on the operating practices of modern VLCCs” the book “partly” contained. INTERTANKO was urged by its members to boost public relations endeavours to defend the industry - a nettle the Association was to fail fully to grasp for some years. However Jørgen Jahre wrote to the international press to refute some of “Supership”’s charges.
In 1975 INTERTANKO’s newly-formed Technical Advisory Committee, addressing pollution prevention issues, concluded that “the tanker industry is constantly making efforts to eliminate oil pollution and improve safety. Within technical and economic boundaries independent tankers are favouring improvements, being also dependent upon support from charterers and other sectors within the industry.” In simpler words, charterers had to help in improving tanker operations by favouring good operators.
In 1974 IMCO passed the Safety of Life at Sea - SOLAS - Convention, a revision of the 1960 SOLAS Convention. The most important provision of SOLAS 1974 for tankers was the incorporation of inert gas systems to reduce fire and explosion risks - something that had already been gaining widespread voluntary adoption amongst progressive owners.
Documentary and charterparty and contract advice remained an important part of INTERTANKO’s work.INTERTANKO A small triumph was claimed in INTERTANKO when the Belgian oil company Petrofina sought INTERTANKO’s advice on the drafting of its new charter form Finavoy. INTERTANKO now had three Committees. The Technical Advisory Committee had four members and the Worldscale Committee had three. However the Documentary Committee had fourteen members - an indication of its relative popularity, workload and contemporary importance to INTERTANKO.
Over these years the Association’s membership grew to 160 million deadweight tons reaching a figure of 75% of eligible membership. Greek members had overtaken Norwegians in tonnage, amongst 44 Greek member companies. The international scope of the Executive Committee widened with the election to it of Ali Khasawneh of Kuwait Oil Tanker Company in 1974. The same year Mærsk McKinney Møller, a founding Vice Chairman, retired from the Executive Committee.
Jørgen Jahre had chaired INTERTANKO through a turbulent time. Possibly the bleakness of the 1975 landscape suggested that things had to get better or as INTERTANKO had said could “hardly get worse” but the 1975 Annual Report highlighted a statement of some optimism:
“As to the uncertain strength of the market forces, the economic recovery, well under way in the United States at the turn of the year, may be stronger than anticipated. Secondly, this recovery will be oil intensive as alternative energy sources are neither available nor sufficiently developed. Thirdly, long haul crudes imported into the United States may be higher than anticipated. Fourthly the emerging welfare and economic growth of developing nations will in due course increase demand for efficient transportation services. Admittedly, improved market conditions may be brought about earlier than anticipated if the sketched developments should turn in favour of private owners. However it would not seem wise to use these uncertainties as a basis for planning.”
Indeed it would not have been wise. There was a long way to go before this scenario worked to bring some prosperity to the tanker operating industry.